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Electricity networks

Background to the report

Electricity networks take electricity from the power plants where it is generated, to homes and businesses where it is used. Each transmission or distribution network company (network company) serves a different region. To prevent network companies from overcharging their customers, and to ensure they provide a good service, their earnings are regulated by Ofgem, a non-ministerial government department sponsored by the Department for Business, Energy & Industrial Strategy (BEIS). Ofgem does this through price controls, which are multi-year regulatory settlements that provide network companies with allowances for their costs, and targets for performance. BEIS has overall responsibility for energy policy and ensuring the UK meets legislated targets for reducing carbon emissions.

Network companies have a crucial role to play to support carbon emissions reductions in the energy sector and the wider economy. By 2050, the overall amount of electricity flowing through electricity networks may need to double, to displace carbon-emitting fuels for transport and heating buildings. Growth in the overall demand for electricity and displacement of carbon-emitting fuels by renewables means that new investment is needed to upgrade electricity networks. While upgrading networks has traditionally meant reinforcing them with new cabling and substations, new technology such as battery storage may offer lower-cost methods of upgrading them. Using this technology will require significant changes to the way network companies operate.

Content and scope of the report

This report examines how effectively Ofgem is using RIIO (an acronym for ‘Revenue = Incentives + Innovation + Outputs’) electricity transmission and distribution network price controls to protect the interests of consumers and achieve the government’s climate change goals. It also comments on the strategic challenges BEIS and Ofgem will face in ensuring electricity networks enable the achievement of government’s climate change goals.

Conclusion on value for money

Under Ofgem’s current regulatory framework, electricity network companies have provided a good service, but it has cost consumers more than it should have. It is now clear that targets were set too low, budgets too high, and the impact of these decisions was compounded by Ofgem extending the regulatory period from five years to eight. In some cases, Ofgem did not use the best information available to it at the time: on financing costs, for example, where better use of evidence could have saved consumers at least £800 million. To Ofgem’s credit, it has sought to learn lessons from these experiences and design the next regulatory period differently.

Electricity networks now have a crucial role to play in helping the UK reach net zero emissions by enabling the system needed for low-carbon heat and transport. An intelligent approach to this transition could spare consumers from significant extra costs: this is illustrated by recent research which estimated that using flexible technology could help to reduce the cumulative electricity system costs, including increasing electricity system capacity, by between £17 billion and £40 billion by 2050. To maximise electricity networks’ value for money in future, Ofgem must ensure it sets stretching targets for network companies in the next regulatory period, while building enough flexibility into the price controls to respond to unexpected developments. The government must help to clarify future network requirements by bringing forward further policies for decarbonising heat and transport. And BEIS will need to ensure that the energy market is governed in a way that provides enough strategic coordination of its many actors.

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Over £50 million for clean energy projects across Africa

The UK has invested millions in clean technology across Africa, to support the continent’s growing energy needs.

  • over £50 million invested in innovative, clean technology as the UK works with African countries to develop sustainable energy sources, providing thousands of people with clean energy
  • UK will share expertise in green finance and science and innovation to develop solar farms and battery storage projects
  • African energy demand is set to rise 60% by 2040 – clean energy will be central in powering Africa’s growing economies and increasing access to electricity

Green energy supply in Africa is set for a major boost after the UK government announced winners of an investment package for the continent’s clean energy infrastructure at the African Investment Summit today.

Solar farms in Kenya, geothermal power stations in Ethiopia and clean energy storage across sub-Saharan Africa will receive funding and see leading UK scientists and financial experts working with their African counterparts to realise the continent’s huge potential for renewable energy.

With African energy demand set to rise by 60% by 2040, UK experts will help deliver green solutions for the continent’s growing energy needs, bringing clean energy to thousands of people and creating jobs and increased prosperity.

Business and Energy Secretary Andrea Leadsom said:

Our world-leading scientists and financial experts will work hand in hand with African nations to support their quest for energy security, powering new industries and jobs across the continent with a diverse mix of energy sources while promoting economic growth.

Speaking at the summit, Ms Leadsom emphasised the opportunity for many African countries to leapfrog coal power to cleaner forms of energy but stressed that more needed to be done to unlock investment.

A world-leader in reducing carbon emissions at home, today’s investment in global clean energy comes after the Prime Minister, Boris Johnson, announced the £1 billion ‘Ayrton Fund’ for British scientists last Autumn to help developing nations reduce reliance on fossil fuels and reduce their carbon emissions.

As part of the initiatives announced today, the UK will support African countries with the technical skills and expertise they need in order to attract investment in renewable projects, getting innovative projects like wind and solar farms up and running. Close collaboration with African countries will be key as the UK gears up to host the UN climate talks (COP26) later this year.

UK funded projects in Africa include winners of the Energy Catalyst Competition, which has seen solar plants, energy storage batteries and hydro-power built in countries such as Botswana and Kenya; a £10 million programme which matches UK based green finance experts with project developers from developing countries to facilitate investment in clean energy projects; and the Nigeria 2050 calculator, a modelling tool designed by UK scientists to support the Nigerian government’s sustainable development planning.

Kenya is also set to benefit from a £30 million government investment in affordable energy-efficient housing which will see the construction of 10,000 low-carbon homes for rent and sale. This will support the creation of new jobs in Kenya’s green construction industry and help tackle climate change.

Over 50% of the UK’s energy production came from renewable sources last year, and with London’s expertise as the global hub for green finance, the UK is best placed to be Africa’s leading partner and help it harness its wealth of renewable sources as it moves away from coal power.

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Electric shock: Could Brexit scar Britain’s energy landscape?

Britain’s exit from the EU, which will finally happen on Friday (31 January), has sparked fears of disruption to its electricity market, from higher bills to supply issues and stalled de-carbonisation efforts.

Britain depends on the European Union for much of its electricity supply.

Its own generation fell in 2018 by 1.6%, according to the latest available statistics.

This reduction stems from the gradual shutdown of coal-fired power plants, which is yet to be fully compensated by a rise in wind power.

Imports of electricity and gas have increased in response, predominantly from France, the Netherlands and Ireland, which now account for almost 40% of Britain’s energy consumption.

Britain’s imminent departure from the 28-member EU and its single electricity market therefore represents a risk for an already fragile network, which suffered a big blackout in August.

It will continue to benefit from existing arrangements during a post-Brexit transition phase, while it seeks a new agreement on everything from energy to security cooperation with Brussels.

But it is not clear if these talks will entirely resolve the issue.

British industry regulator Ofgem has said “alternative trading arrangements will need to be developed”, without giving further details.

It insists that whatever deal is struck, it does not “expect Brexit to interrupt the flows of electricity and gas”.

But at times of peak demand, Britain may find itself at the back of the line for electricity.

“EU countries could get preference,” Weijie Mak, of research company Aurora, told AFP.

As with other areas such as finance, agreeing so-called equivalence on things like CO2 emission rules – so countries who produce cleaner and more expensive electricity are not disadvantaged – will be key.

Price rise?

Uncertainty over equivalence and the possible return of tariffs or quotas if trade negotiations falter has left some sceptical that nothing will change post-Brexit.

“The electricity trade will become more expensive,” said Joseph Dutton, policy advisor at climate change think tank E3G. “It could mean higher bills for consumers.”

Trading in electricity across the Channel is currently based on an auction system, which could be upset by Britain’s EU departure.

Eurelectric, the association representing the industry at the European level, sees it as a “lose-lose situation” because of “less efficient gas and power trading”.

The hazy picture has seen the French government put on hold several interconnector projects aimed at better linking the electric power grids of Britain and the continent.

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OVO completes acquisition of SSE Energy Services

Today (15 January), OVO Energy has completed its acquisition of supplier SSE’s GB household energy business.

The acquisition was first announced in September, and approved by the Competition and Markets Authority (CMA) in December.

The move will see OVO become the second largest supplier in the UK, with five million customers. It said that gaining SSE’s smart technology and exceptional talent in the form of its 8000 staff will help to accelerate OVO’s strategy to bring clean affordable energy to more households.

OVO bought SSE Energy Services for £500 million, which comprises of £400 million in cash and £100 million loan notes. These loan notes will be issued by a member of the OVO group, have an annual interest rate of 13.25% payable in kind and will be due in 2029 if they have not been repaid earlier.

The transaction will be subject to a deduction of £59m reflecting debt-like items, SSE announced, including SSE Energy Services’ accruals in respect of the Capacity Market Mechanism.

Stephen Fitzpatrick, CEO and founder of OVO said that this marks the end of one chapter for OVO but “more importantly, the beginning of the next one together with SSE Energy Services”.

“We have an integration plan that leaders from both companies have collaborated on since September. There is a lot of work to do to bring the two businesses together, but we have a really strong combination of great talent, technology and customer centricity that will enable us to succeed.

“SSE’s history of excellence at scale combined with OVO’s innovative technology and our Plan Zero commitments mean that together, as one team, we can bring millions more people with us on our journey towards zero carbon living.”

OVO was formed in 2009, and has since grown to become the largest independent supplier in the UK. It has committed to eliminating its customer’s household emissions and fit five million homes with flexible, clean energy technologies as part of a wide-ranging carbon-cutting initiative dubbed ‘Plan Zero’ it announced in 2019.

It has continued to grow over the last year, investing in clean energy marketplace Renewable Exchange and energy technology start-up firm Electron. It also announced a partnership with automotive giant Mitsubishi motors last December.

OVO also claims that it installed the world’s first domestic vehicle-to-grid charger in a customer’s home.

The CMA launched an investigation into the company’s acquisition of SSE Energy Services in October, to ensure that it would not lessen competition in the UK.

Alistair Phillips-Davies, CEO of SSE said: “We are very pleased to have completed this transaction, which we firmly believe is the best outcome for the business, its customers and its employees.

“The sale is in line with our clear strategy, centred on developing, operating and owning renewable energy and electricity network assets, along with growing businesses complementary to this core.

“SSE enters the new decade as a more focused group, even better positioned to lead the low carbon transformation required to achieve the UK’s vital net zero commitment in the years to come.”

In a blog post today, Philips-Davies said that SSE’s strategic focus had shifted to developing, building and maintaining low carbon assets.

He continued: “For SSE, our core purpose in the years ahead is clear. We are providing the energy needed today while building a better world of energy for tomorrow.”

The company has struggled in recent years, with a loss of profit of £284.6m in 2018. It has started to bounce back, with its interim results statement in November reporting a 14% increase to adjusted operating profit.

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Sadiq Khan launches his own green energy company – London Power

Sadiq Khan has launched his own green energy company, claiming it will save the average household £300-a-year on bills.

The mayor of London today unveiled London Power, in conjunction with Octopus Energy, as a part of his Energy for Londoners programme.

Read more: New Octopus Energy tarif aims to slash the charging cost of electric cars

The company – which will only be available in London – will act as a non-profit company, with all profit “reinvested into community projects”.

The service will be provided by Octopus Energy and will rely on 100 per cent renewable energy.

Khan said the new energy provider would be within the cheapest 10 per cent of similar tariffs in the market and would save the average household £300 on bills.

“It is a disgrace that many Londoners pay too much to heat and light their homes, with more than a million living in fuel poverty,” he said.

“For the first time we have a fair, affordable, green energy company specially designed for Londoners.”

London Power enters a market that is already home to 64 active suppliers, according to Ofgem.

The energy market watchdog’s 2019 report on the energy market found 53 per cent of consumers had never switched energy companies.

However, the figure for London – where energy prices are among the most expensive in the country – is not known.

Peter Earl, head of energy at Compare the Market, said he welcomed the extra competitio, but that it may be difficult to attract new customers.

“It’s an industry challenge to activate the large section of people who have never changed their energy company,” he said.

“[Khan’s] got an offering that should be attractive to people, but it’s not going to be easy.”

The formation of London Power won plaudits from green energy advocacy groups the Renewable Energy Agency (REA) and National Energy Action.

REA chief executive Nina Skorupska said: “By adopting this model, City Hall has shown themselves to be one of the pioneers in the move towards a Net Zero UK.”

Caroline Russell, Green Party leader in the London Assembly, on the other hand said Khan’s plans did not go far enough.

She said the mayor should have set up the company without the help of Octopus Energy so City Hall could have greater power over the company’s energy resources.

Read more: Sadiq Khan has increased press office spending by 26 per cent in four years

“I’ve argued with him to set up a fully-licensed company – which means wholly owned byLondon – to get the best benefits for Londoners,” she said.

“The mayor seems cautious that there will be any profits to be reinvested, but a company owned and run by the Mayor would be able to support investment in green technologies and create green jobs.

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Energy users save £1 billion on bills in 2019

11 million customers have saved as much as £1 billion on their energy bills in 2019, according to new data to mark the first anniversary of the government’s energy price cap

  • government’s energy price cap safeguards 11 million people, often the most vulnerable and elderly, from overpaying on their gas and electricity
  • combined saving of as much as £1 billion on energy bills in the first year of the price cap
  • new data also shows 4.4 million electricity and 3.6 million gas customers switched supplier in first 9 months of 2019, saving even more

11 million customers have saved as much as £1 billion on their energy bills in 2019, according to new data to mark the first anniversary of the government’s energy price cap.

Research has shown that the cap has saved families on default energy tariffs around £75 to £100 on dual fuel bills this year. This comes as the government pledges to build on the success of the price cap and do more to lower energy bills including by investing £9.2 billion in the energy efficiency of homes, schools and hospitals and giving the Competition and Markets Authority (CMA) enhanced powers to tackle consumer rip-offs and bad business practices.

However, with around 60 suppliers now competing in the retail energy market, consumers who switch can still make the biggest savings. Around 4.4 million electricity customers switched supplier in the 9 months to September 2019. Around 3.6 million gas customers switched. Typical households would have saved an average of around £290 on their bills if moving to one of the cheapest deals.

In order to shield those least likely to shop around – including the elderly and most vulnerable – from being charged extra on their dual fuel bills the government introduced the energy price cap on 1 January 2019.

Minister of State for Business, Energy and Clean Growth, Kwasi Kwarteng, said:

Our bold action to ensure all consumers pay a fair price for their energy is making a real difference to the budgets of up to 11 million households and driving increased competition and innovation in the market which will help keep bills down.

Record numbers of customers have also decided to switch suppliers this year saving themselves an average of around £290 on their bills.

Chief Executive of Ofgem Dermot Nolan said:

The price caps give consumers who are on default deals peace of mind that they pay a fair price for their energy. Ofgem set the cap at a level which required suppliers to cut energy bills by around £1 billion.

Consumers can save more money this winter by shopping around for a better deal. While the cap remains in place, Ofgem will continue to work with government and industry to put in place reforms to get the energy market working for more consumers.

Notes to editors

Research by the Competition and Markets Authority has shown that consumers had been overpaying the ‘Big Six’ energy companies some £1.4 billion a year.

The price cap, continuing through 2020, is set by energy watchdog Ofgem, which review it every 6 months to reflect changes in the cost of supplying energy. This ensures those who do not shop around, often elderly and low-income households, are protected from paying over the odds.

The latest ceiling was set by Ofgem at £1,179 per year for a typical dual fuel bill paid by direct debit.

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Recession Fears Cap Oil Prices In 2020

Overall, I expect that oil and other commodity prices will remain low in 2020. These low oil prices will adversely affect oil production and several other parts of the economy. As a result, a strong tendency toward recession can be expected. The extent of recessionary influences will vary from country to country. Financial factors, not discussed in these forecasts, are likely also to play a role.

The following are pieces of my energy forecast for 2020:

[1] Oil prices can be expected to remain generally low in 2020. There may be an occasional spike to $80 or $90 per barrel, but average prices in 2020 are likely to be at or below the 2019 level.

Oil prices can temporarily spike because of inadequate supply or fear of war. However, to keep oil prices up, there needs to be an increase in “demand” for finished goods and services made with commodities. Workers need to be able to afford to purchase more goods such as new homes, cars, and cell phones. Governments need to be able to afford to purchase new goods such as paved roads and school buildings.

At this point, the world economy is struggling with a lack of affordability in finished goods and services. This lack of affordability is what causes oil and other commodity prices to tend to fall, rather than to rise. Lack of affordability comes when too many would-be buyers have low wages or no income at all. Wage disparity tends to rise with globalization. It also tends to rise with increased specialization. A few highly trained workers earn high wages, but many others are left with low wages or no job at all.

It is the fact that we do not have a way of making the affordability of finished goods rise which leads me to believe that oil prices will remain low. Raising minimum wages tends to encourage more mechanization of processes and thus tends to lower total employment. Interest rates cannot be brought much lower, nor can the terms of loans be extended much longer. If such changes were available, they would enhance affordability and thus help prevent low commodity prices and recession.

[2] World oil production seems likely to fall by 1% or more in 2020 because of low oil prices.

The highest single quarter of world oil production was the fourth quarter of 2018. Oil production has been falling since this peak quarter.

To examine what is happening, the production shown in Figure 3 can be divided into that by the United States, OPEC, and “All Other.”

OPEC’s oil production bobs up and down. In general, its production is lower when oil prices are low, and higher when oil prices are high. (This shouldn’t be a surprise.) Recently, its production has been lower in response to low prices. Effective January 1, 2020, OPEC plans to reduce its production by another 500,000 barrels per day.

Figure 4 shows that oil production of the United States rose in response to high prices in the 2010 to 2013 period. It dipped in response to low oil prices in 2015 and 2016. When oil prices rose in 2017 and 2018, its production again rose. Production in 2019 seems to have risen less rapidly. Recent monthly and weekly EIA data confirm the flatter US oil production growth pattern in 2019.

Putting the pieces together, I estimate that world oil production (including natural gas liquids) for 2019 will be about 0.5% lower than that of 2018. Since world population is rising by about 1.1% per year, per capita oil production is falling faster, about 1.6% per year.

A self-organizing networked economy seems to distribute oil shortages through lack of affordability. Thus, for example, they might be expected to affect the economy through lower auto sales and through less international trade related to automobile production. International trade, of course, requires the use of oil, since ships and airplanes use oil products for fuel.

If prices stay low in 2020, both the oil production of the United States and OPEC will likely be adversely affected, bringing 2020 oil production down even further. I would expect that even without a major recession, world oil supply might be expected to fall by 1% in 2020, relative to 2019. If a major recession occurs, oil prices could fall further (perhaps to $30 per barrel), and oil production would likely fall lower. Laid off workers don’t need to drive to work!

[3] In theory, the 2019 and 2020 decreases in world oil production might be the beginning of “world peak oil.” 

If oil prices cannot be brought back up again after 2020, world oil production is likely to drop precipitously. Even the “All Other” group in Figure 4 would be likely to reduce their production, if there is no chance of making a profit.

The big question is whether the affordability of finished goods and services can be raised in the future. Such an increase would tend to raise the price of all commodities, including oil.

[4] The implosion of the recycling business is part of what is causing today’s low oil prices. The effects of the recycling implosion can be expected to continue into 2020.

With the rise in oil prices in the 2002-2008 period, there came the opportunity for a new growth industry: recycling. Unfortunately, as oil prices started to fall from their lofty heights, the business model behind recycling started to make less and less sense. Effective January 1, 2018, China stopped nearly all of its paper and plastic recycling. Other Asian nations, including India, have been following suit.

When recycling efforts were reduced, many people working in the recycling industry lost their jobs. By coincidence or not, auto purchases in China began to fall at exactly the same time as recycling stopped. Of course, when fewer automobiles are sold, demand for oil to make and operate automobiles tends to fall. This has been part of what is pushing world oil prices down.Related: Why Pirates Are Giving Up On Oil

Sending materials to Asia for recycling made economic sense when oil prices were high. Once prices dropped, China was faced with dismantling a fairly large, no longer economic, industry. Other countries have followed suit, and their automobile sales have also fallen.

Companies operating ships that transport manufactured goods to high-income countries were adversely affected by the loss of recycling. When material for recycling was available, it could be used to fill otherwise-empty containers returning from high-income countries. Fees for transporting materials to be recycled indirectly made the cost of shipping goods manufactured in China and India a little lower than they otherwise would be, if containers needed to be shipped back empty. All of these effects have helped reduce demand for oil. Indirectly, these effects tend to reduce oil prices.

The recycling industry has not yet shrunk back to the size that the economics would suggest is needed if oil prices remain low. There may be a few kinds of recycling that work (well-sorted materials, recycled near where the materials have been gathered, for example), but it probably does not make sense to send separate trucks through neighborhoods to pick up poorly sorted materials. Some materials may better be burned or placed in landfills.

We are not yet through the unwind of recycling. Even the recycling of materials such as aluminum cans is affected by oil prices. A March, 2019, WSJ article talks about a “glut of used cans” because some markets now prefer to use newly produced aluminum.

[5] The growth of the electric car industry can be expected to slow substantially in 2020, as it becomes increasingly apparent that oil prices are likely to stay low for a long period. 

Electric cars are expensive in two ways:

1. In building the cars initially, and

2. In building and maintaining all of the charging stations required if more than a few elite workers with charging facilities in their garages are to use the vehicles.

Once it is clear that oil prices cannot rise indefinitely, the need for all of the extra costs of electric vehicles becomes very iffy. In light of the changing view of the economics of the situation, China has discontinued its electric vehicle (EV) subsidies, as of January 1, 2020. Prior to the change, China was the world’s largest seller of electric vehicles. Year over year EV sales in China dropped by 45.6% in October 2019 and 45.7% in November 2019. The big drop in China’s EV sales has had a follow-on effect of sharply lower lithium prices.

In the US, Tesla has recently been the largest seller of EVs. The subsidy for Tesla is disappearing in 2020 because it has sold over 200,000 vehicles. This is likely to adversely affect the growth of EV sales in the US in 2020.

The area of the world that seems to have a significant chance of a major uptick in EV sales in 2020 is Europe. This increase is possible because governments there are still giving sizable subsidies to buyers of such cars. If, in future years, these subsidies become too great a burden for European governments, EV sales are likely to lag there as well.

[6] Ocean-going ships are required to use fuels that cause less pollution as of January 2020. This change will have a positive environmental impact, but it will lead to additional costs that are impossible to pass on to buyers of shipping services. The net impact will be to push the world economy in the direction of recession.

If ocean-going ships use less polluting fuels, this will raise costs somewhere along the line. In the simplest cases, ocean-going vessels will purchase diesel fuel rather than lower, more polluting, grades of fuel. Refineries will need to charge more for the diesel fuel, if they are to cover the cost of removing sulfur and other pollutants.

The “catch” is that the buyers of finished goods and services cannot really afford more expensive finished goods. They cut back in their demand for automobiles, homes, cell phones and paved roads if oil prices rise. This reduction in demand is what pushes commodity prices, including oil prices, down.

Evidence that shipowners cannot really pass the higher refining costs along comes from the fact that the prices that shippers are able to charge for shipping seems to be falling, rather than rising. One January article says, “The Baltic Exchange’s main sea freight index touched its lowest level in eight months on Friday, weighed down by weak demand across all segments. The Index posted its biggest one day percentage drop since January 2014, in the previous session.”

So higher costs for shippers have been greeted by lower prices for the cost of shipping. It will partly be shipowners who suffer from the lower sales margin. They will operate fewer ships and lay off workers. But part of the problem will be passed on to the rest of the economy, pushing it toward recession and lower oil prices.

[7] Expect increasingly warlike behavior by governments in 2020, for the primary purpose of increasing oil prices.

Oil producers around the world need higher prices than recently have been available. This is why the US seems to be tapering its growth in shale oil production. Middle Eastern countries need higher oil prices in order to be able to collect enough taxes on oil revenue to provide jobs and to subsidize food purchases for citizens.

With the US, as well as Middle Eastern countries, wanting higher oil prices, it is no wonder that warlike behavior takes place. If, somehow, a country can get control of more oil, that is simply an added benefit.

[8] The year 2020 is likely to bring transmission line concerns to the wind and solar industries. In some areas, this will lead to cutbacks in added wind and solar.

A recent industry news item was titled, Renewables ‘hit a wall’ in saturated Upper Midwest Grid. Most of the material that is published regarding the cost of wind and solar omits the cost of new transmission lines to support wind and solar. In some cases, additional transmission lines are not really required for the first additions of wind and solar generation; it is only when more wind and solar are added that it becomes a problem. The linked article talks about projects being withdrawn until new transmission lines can be added in an area that includes Minnesota, Iowa, parts of the Dakotas and western Wisconsin. Adding transmission lines may take several years.

A related issue that has come up recently is the awareness that, at least in dry areas, transmission lines cause fires. Getting permission to site new transmission lines has been a longstanding problem. When the problem of fires is added to the list of concerns, delays in getting the approval of new transmission lines are likely to be longer, and the cost of new transmission lines is likely to rise higher.

The overlooked transmission line issue, once it is understood, is likely to reduce the interest in replacing other generation with wind and solar.

[9] Countries that are exporters of crude oil are likely to find themselves in increasingly dire financial straits in 2020, as oil prices stay low for longer. Rebellions may arise. Governments may even be overthrown.

Oil exporters often obtain the vast majority of their revenue from the taxation of receipts related to oil exports. If prices stay low in 2020, exporters will find their tax revenues inadequate to maintain current programs for the welfare of their people, such as programs providing jobs and food subsidies. Some of this lost revenue may be offset by increased borrowing. In many cases, programs will need to be cut back. Needless to say, cutbacks are likely to lead to unhappiness and rebellions by citizens.

The problem of rebellions and overthrown governments also can be expected to occur when exporters of other commodities find their prices too low. An example is Chile, an exporter of copper and lithium. Both of these products have recently suffered from low export prices. These low prices no doubt play a major part in the protests taking place in Chile. If more tax revenue from the sales of exports were available, there would be no difficulty in satisfying protesters’ demands related to poverty, inequality, and an overly high cost of living.

We can expect more of these kinds of rebellions and uprisings, the longer oil and other commodity prices stay too low for commodity producers.

Conclusion

I have not tried to tell the whole economic story for 2020; even the energy portion is concerning. A networked self-organizing system, such as the world economy, operates in ways that are far different from what simple “common sense” would suggest. Things that seem to be wonderful in the eyes of consumers, such as low oil prices and low commodity prices, may have dark sides that are recessionary in nature. Producers need high prices to produce commodities, but these high commodity prices lead to finished goods and services that are too expensive for many consumers to afford.

There probably cannot be a “one-size-fits-all” forecast for the world economy. Some parts of the world will likely fare better than others. It is possible that a collapse of one or more parts of the world economy will allow other parts to continue. Such a situation occurred in 1991, when the central government of the Soviet Union collapsed after an extended period of low oil prices.

It is easy to think that the future is entirely bleak, but we cannot entirely understand the workings of a self-organizing networked economy. The economy tends to have more redundancy than we would expect. Furthermore, things that seem to be terrible often do not turn out as badly as expected. Things that seem to be wonderful often do not turn out as favorably as expected. Thus, we really don’t know what the future holds. We need to keep watching the signs and adjust our views as more information unfolds.

 

Rachel Reeves comments on Government response

Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy (BEIS) Committee has commented today on the publication of the Government’s response to the Committee report on Carbon Capture Usage and Storage and on the new administration’s overall approach to achieving net zero carbon emissions by 2050.

Given the Government’s ‘disappointing’ response on Carbon Capture Usage and Storage (CCUS), which ‘appears to row back from statements made by former Ministers’, the Chair has also written to the Minister Kwasi Kwarteng with a series of questions seeking to establish the Government’s policy direction on CCUS.

Chair’s comments

Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy (BEIS) Committee said:

“The Secretary of State is happy to reiterate the Government’s commitment to net-zero by 2050 but fails to give any sense that her Government is dedicated to the urgent actions necessary to achieve it.

“It’s easy to set a target. The harder challenge is putting in place the measures needed to get to net-zero by 2050. Unfortunately, the Secretary of State’s letter gives little confidence that the Government has a clear idea of the policies it wants to pursue to make UK net-zero carbon emissions a reality. Given the UK is hosting COP26 next year, it’s important that we provide international leadership by getting our act together at home on climate change policy.

“It’s encouraging that the Treasury’s review will look at the benefits, as well as the costs, of net zero. Ending the UK’s contribution to climate change has the potential for major health and environmental benefits. It is also crucial the Treasury examines where costs will fall, how the transition can be funded, and how to manage the impacts on bill-payers, motorists and carbon-intensive industries.”

“The Minister’s response to our Carbon Capture Usage and Storage report is very disappointing and sits in contrast to the initial enthusiasm to our findings displayed by the previous Minister, Claire Perry. The Government’s response barely engages with the specific recommendations of our report and it is worrying that the Government now appears to be rowing back on previous commitments. This must be concerning for industry and investors and I hope the Government will rethink its approach and come forward with a clearer indication of what it is doing to ensure CCUS technology is able to deliver on its potential.”

In July, Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy (BEIS) Committee wrote to Rt Hon Andrea Leadsom, the then new Secretary of State for DBEIS, to press for action on a series of policy fronts such as electric vehicles, carbon capture usage and storage, and energy efficiency, to ramp up UK efforts to meet future carbon budgets and the net-zero 2050 target.

In April, the BEIS Committee published its report, Carbon capture usage and storage: third time lucky? The report urged the Government to give a clear policy direction to ensure the UK was able to seize the industrial and decarbonisation benefits of carbon capture usage and storage (CCUS). The report noted that although the UK has one of the most favourable environments globally for CCUS the technology had suffered 15 years of turbulent policy support, including the cancellation of two major competitions at a late stage. No commercial-scale plant for CCUS has yet been constructed in the UK.

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UK–EU power links vital

While politically the UK may soon be decoupled from the EU, it is busy building power grid links with mainland Europe. And some say it should build more, creating offshore wind hubs and network systems to help with green power balancing, exports and imports. For example, the planned 1.4 GW HVDC Viking inter-connector between Denmark and Lincolnshire will pass through or near some big offshore wind farms. And more are on the horizon.

National Grid has done comparative connection studies for the proposed 1.6 GW Eurolink to the Netherlands and 1.5 GW Nautilus link to Belgium (completion expected by around 2025 and 2027, respectively) with the proposed Sizewell C nuclear plant area in mind, but also local offshore wind projects. Some say the UK should be looking to build many tens of gigawatts of offshore wind in the mid-North Sea and also offshore connection hubs, like the artificial island proposed for Dogger Bank, almost 100 miles out from Hull.

Grid upgrade needed

Certainly, the resource is vast, and the study of European grid issues (PDF) produced by ENTSO-E, the European Network of Transmission System Operators for Electricity, sees the UK as one of the key hubs in the network. The ENTSO-E study of EU grid issues up to 2040 updates its 2016 “Ten Year Network Development Plan” (TYNPD). It says that there will be a need for increased transmission capacity in some places, both internally and to other countries, to make the system work in 2040. This is largely due to the increasing levels and use of renewables to supply all areas of the European grid; the report says that up to 75% of the total demand of renewable energy will be reached by 2040, so that “European countries will more than ever need to rely on each other through cross-border exchanges”.

Physical connector links with the EU energy system could mean having to comply with internal EU energy market rules

Dave Elliott

However, interestingly, it suggests that there will be different balances in net supply across the EU. From ENTSO-E’s studies, it looks like NW wind, offshore especially, dominates, with a lot of surplus power shifted east at times. Much of that will presumably be from the North Sea. But it will be variable, so there will be technical, regulatory and market challenges to ensure stability, with increased system flexibility. And a need for new grids.

ENTSO-E says that, overall, the benefits of the expanded network far outweigh the necessary efforts that will need to be mobilized for its realization: “A lack of new investments by 2040 would hinder the development of the integrated energy market and would lead to a lack of competitiveness.In turn, this would increase prices on electricity markets leading to higher bills for consumers. By 2040, the ‘No Grid’ extra bill (€43 billion a year in the average case) would be largely above the expected cost of the new grid (€150 bn in total in the TYNDP 2016 plus internal reinforcements, 25% discount rate)”. A lack of investments would also affect the stability of the overall grid and could, in some regions, “threaten the continued access to electricity which also has a cost for society”. And finally, in all the scenarios the organization looked at, “without grid extension, Europe will not meet its climate targets”.

UK benefits

The UK has to be part of this, if only for parochial reasons. It will have a lot of surplus renewable power to export at times, as the renewable capacity builds up to 40, 50 and 60 GW, more than enough much of the time to meet the country’s needs (summer night-time demand is around 20 GW, peak winter demand under 60 GW).  At times though, when UK renewable availability is low and demand high, it may need some top-ups via the grid interconnectors. That said, the exports are likely to dominate, so the UK would be a net earner of substantial income, assuming the surplus can be sold at reasonable prices. That would help offset the cost of building up renewables, and the links can also clearly help with balancing. As the climate policy think tank E3G said earlier this year, the UK government must continue to work closely with the EU to develop cross-border power grid interconnections after Brexit, if it is to ensure the lowest-cost decarbonization pathway. More linking of the UK to EU power grids could help boost its energy security and flexibility as renewables grow.

Last year, interconnectors provided 6% of UK power supply, via the four existing links, making the UK a net importer of power across these links. However, as I noted in my last post, its wind potential is very large, so that pattern should change as more renewables are installed in the UK. Indeed it already has, with the UK being a net exporter to France for much of this year. The government currently plans to have at least 9 GW more grid link capacity. However, the ability to trade profitably depends on many factors — not just the availability of capacity and grid links, but also demand patterns, prices, the regulatory framework and wider policy context. The E3G paper warned that leaving the EU will “severely reduce” the UK’s ability to influence EU energy policy in line with its interests, which may make reaping the full benefits of greater inter-links harder. It could render the UK a rule-taker from the EU in some respects, as physical connector links with the EU energy system could mean having to comply with internal EU energy market rules, such as those covering energy, environment, state aid and competition. Sounds like a familiar issue…

The UK has some of the key resources needed for the emerging Europe-wide grid system (including its vast offshore wind resource) and the power engineering and marine technology expertise (including for offshore wind and undersea links). It may not like the EU single power market any more, but it may nevertheless need to get into it. At least that is the logic of the energy system. Political logic may be different, although it is perhaps worrying that, reportedly, Ireland is looking to a new 500 mile under-sea HVDC power link to France, and the EU market, by-passing the UK, with some funding from the EU.  It may also be worrying that, post-Brexit,  the UK will presumably miss out on EU funding for grid development – like the €800 m available  under the Connecting Europe programme for interconnectors. That’s supporting some of the already-planned and agreed UK links, but the UK may not be eligible for more after Brexit. So it’s all a bit uncertain and a bit of a mess, whereas the need for links is getting ever clearer and UK green power capacity is building up — offering an export potential.

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North Sea gas pioneer makes case for UK to maintain output

NORTH Sea-focused Cluff Natural Resources has said the UK must maximise the production of gas in its waters to minimise reliance on supplies from overseas amid efforts to tackle climate change.

The company’s chairman Mark Lappin noted the Committee on Climate Change had recognised oil and gas would account for the bulk of the country’s energy needs while efforts are made to reduce net carbon emissions to zero by 2050.

Mr Lapping said the Committee had produced a report that was generally thorough and thoughtful and that recognised ‘net zero’ did not mean the end of hydrocarbon production.

However, Mr Lappin observed: “ The key difference between the Climate Change Committee and our own view is that instead of becoming increasingly reliant on imports from overseas we should be focussing on national production and consumption of natural gas from the United Kingdom Continental Shelf.”

He added: “A domestic supply of natural gas is good for jobs, good for tax receipts and the balance of payments, as well as being better for the environment compared with importing gas from as far afield as the Middle East and South America.”

Mr Lappin made his comments on a day the Brent crude price surged 20 per cent in early trading after drone strikes on Saudi Arabian facilities at the weekend led to the interruption of 5.7 million barrels of crude oil production per day. That is equivalent to more than five per cent of the world’s daily supply.

Analysts said the long term impact of the events in Saudi Arabia on oil prices may be limited given the uncertain outlook for the global economy. The events could lead to renewed debate about the importance of UK production nonetheless.

An Australian firm yesterday showed belief in the potential of the United Kingdom Continental Shelf (UKCS) by agreeing to buy in to acreage west of the gas-rich Morecambe Bay.