Stern Review out
The Stern Review on the economics of climate change is out today and all the papers are carrying the story. The full report runs to 700 pages so forgive for not yet reading the entire thing (some key points). However a few things jump out:
- Since the Stern Review is a UK exercise, much of the talk has been about unilateral measures, for example, a shift to green taxation. However taking the case of cheap flights, one of the fastest growing sources of emissions, it may not be feasible to introduce an extra tax because of EU and international agreements on aviation. Even if an extra tax on aviation were possible, many people (e.g. Dieter Helm, an energy economist at Oxford) argue quite convincingly that such taxes would have very little effect. Oil prices have already gone from $10 to $70 per barrel in recent years with no noticeable impact on demand. How would an extra £10 tax on a ticket make a difference? Just how much would you have to tax cheap flights to get people to stop? Some would also argue that taxing aviation is discriminatory against the poor – there is likely some truth to that but recent research finds that in fact wealthy people make up the majority of cheap flight passengers.
- While there is a strong moral argument for action at home, the Stern Review makes it clear that international action is required. The figure that keeps getting quoted is that if the UK shut down all of its power plants, China’s growth would swamp those savings in just over a year. The report therefore calls for an international cap and trade system. It makes sense from a scientific point of view (the goal is to reduce carbon emissions; taxes are only a proxy for emissions and if people can afford to pay the tax, emissions don’t fall) but it could be very difficult to implement. How on earth do you get all the nations on earth to agree to a common carbon market? Kyoto was hard enough. However without such an agreement, it could be extremely difficult to win any domestic arguments about emissions reductions – just read what these selfish people
* have to say about going it alone.An interesting angle on this whole unilateral/multilateral thing comes from the New Economics Foundation though. As noted in yesterday’s Observer, the UK may only be responsible for 2% of global emissions but UK firms are responsible for 15%. In the same way that state regulation in California acts as a driver to automotive innovation across the US, perhaps UK corporate legislation could encourage UK firms to reduce emissions and innovate, arguably developing competitive advantage for a low-carbon world.
- Finally, Tony Blair said that this is the most important report he’s received in his time in office. Others also imply that we can now get on with solving climate change because an economist has put a price tag on things. I know money makes the world go round and everything but honestly, if hundreds of scientists have been saying for at least 5 years (10+ depending on how certain you want to be) that we’re in big big trouble, why not listen? It’s not even new in the finance world – reinsurance companies have been concerned about climate change since the late 1990s, seeking to limit their exposure to the increased risk of hurricanes, floods and so on.
Clearly the scientific approach has only brought policy makers so far. While the response to the Stern Review is unlikely to be accepted everywhere with open arms, it does mark a change in the debate. But given warnings in Stern and elsewhere that the world has less than 10 years to act, the impact of this report should be judged in month, not years. For example, negotiations on the next round of Kyoto are due to began in Nairobi next month in hopes of getting an agreement by 2010-11. Stern however is calling for action by next year and that means getting the US administration on board now. Perhaps that is the acid test for the report; otherwise it will join an increasing large pile of careful research that has been ignored to our peril.
PS – The iCount climate protest is this coming Saturday in Trafalgar Square. If you can, go along; if not, sign up to one of their pledges.
LCBP funding: going, going, gone?
The ENDS report has a (registration-only) article about the rate at which the LCBP funding is being used up. Initially, £6.5 million was provided to fund household microgeneration from 2006/7 to 2008/9. However it’s only part way through the first year and already £3.5 million has been allocated. Without any additional funding on the horizon, the REA and others are worried that the currently booming microgeneration market will dry-up until more grants are available. Much in the same way that things slowed down between the end of the Major Demonstration Programme and the LCBP last April.
The response from government has been a bit mixed. On the one hand, there’s the conservation DTI line: “We are monitoring the rate at which this money is being paid out and are currently reviewing the amount that is available for individual applicants.” In other words, the budget for the programme is not likely to increase (whether that’s the decision of DTI or the Treasury is a bit of a mystery) and instead people will simply be offered less money, helping the pot go longer.
On the other hand though, Defra is saying that industry should offer more innovative forms of finance for microgen: says the minister, “it should be as easy to get finance for a wind turbine as it is for a sofa.” This makes sense: B&Q’s started to sell microgeneration technologies in its stores and surely it’s only a matter of time until you start seeing “0% financing for the first year” offers popping up.
There are two questions here. First, can DTI and Defra prod industry to develop these offers before the grant funding gets throttled back? If the transition can be managed well, it could be excellent opportunity to establish microgeneration technologies on their own, gradually removing the crutch of grant support. The second issue is whether the shift in funding will alter the types of technologies installed. According to the EST figures, 59% of the applications to date have been for solar hot water and 28% for solar photovoltaics or microwind. If the grants shrink, it seems likely that the number of PV installations will fall in favour of cheaper technologies like solar thermal. The PV industry therefore has the most to lose and they should be taking the lead on working with government to ensure that new private finance options are available to consumers when the grants dry up.
What should I be paid for my microgeneration?
As I mentioned last time, the energy regulator Ofgem recently released a document outlining the next steps that should be taken to promote microgeneration. One of the major issues it mentions is how much households should be paid for the output of their microgeneration systems.
There are two problems here. The first, as I discovered during my research on PV households, is that households often have difficulty finding out about what offers are available:
“I do know that [his supplier] has a facility for taking solar power but every time that I take it up with the normal accounting, the normal staff there, they deny it, and the supervisors deny it. But if you take it further up the chain, they say that they do have the facility so they don’t really know themselves. You would be put off if you tried to approach them to sign up for taking solar electricity, you would be put off completely by the sales staff to start with, you wouldn’t get passed them unless you were very lucky.”
This respondent installed his PV system more than two years ago and the situation has improved since then. However you still cannot use a price comparison website like uSwitch.com to find these tariffs: it’s up to the system installer to provide advice or the consumer to make individual inquiries with each supply company.
Once a tariff has been identified, the next question is whether or not the price being offered is fair. There are currently three types of tariff on the market: payments for generated electricity (whether it is used in the home or exported to the grid), payments for exported electricity (i.e. only those generated units returned to the grid), or a profile payment based on the characteristics of a typical microgenerating household (specific to the technology and household type). The figure below (taken from my recent paper on the UK microgeneration industry (PDF)) shows that payments for generation are the most common.
Over the course of the year, an average PV system (about 2 kWp) could expect to receive £60 under the generation tariff, £40 under the export tariff, and £80 under the profile tariff; in countries such as Germany, where a premium is paid for exported electricity, a household might receive as much as £210 per year.
Interviews with industry representatives (PDF) found that most of these tariffs were “aspirational” – in other words, electricity suppliers developed the tariffs in the interest of consumer relations and to prepare for potential growth in microgeneration; they typically represented a net cost to suppliers. Because of this, and since the prices do not reflect the true value of microgenerated electricity, Ofgem and others have suggested that these offers may not be sustainable in the long-run.
So what might be a fair price for microgeneration? It’s good to start by examining how the retail price of electricity is determined. As shown in this Ofgem notice (excerpt below), the price of electricity is a mix of fuel prices, taxes, and network operation services. The value of microgeneration output can then be determined from this.
Consider the following case. You are a PV household and you have generated 1 kWh of electricity. If your electricity supplier claims the ROC value of this electricity, you should receive compensation (about 4p per generated kWh). If that unit of electricity is then exported, other factors come into effect. For example, your neighbour’s electricity meter cannot distinguish between your PV-generated kWh and a kWh from a large generating station located far away and therefore your neighbour will be charged the full retail price of electricity for receiving your PV electricity. However the electricity supplier has not had to pay to transmit that electricity over high-voltage lines. The full calculation is a bit complicated (see the full thesis) but a microgenerating household should be paid at least 4.2 p per generated kWh and 3.4 p per exported kWh. The prices should arguably be higher than this though to account for the cost of installing a microgeneration system and the value of the electricity in terms of aiding grid performance (e.g. reducing peak demand in the case of microCHP). Profile payments, although administratively easier, are less preferable as they do not reflect the real cost of microgenerated electricity (particularly important if trying to inform changes in consumer behaviour).
Following the enactment of the Climate Change and Sustainable Energy Act, suppliers are under pressure to develop tariffs for microgeneration and inform their customers of these offers. If they fail to act by June 2007, the Secretary of State can then force suppliers to introduce such tariffs (he/she must act before June 2009 though). As noted above, most suppliers already offer something for microgenerators: it remains to be seen however whether or not, these offers will change in order to remain viable in a growing microgeneration market. If you’re interested in more information on how this issue is developing, please check out the website of the Electricity Networks Strategy Group (specifically this page).
The next steps for microgeneration
Earlier this week, Ofgem released a decision document on the regulatory implications of microgeneration. Although the report does address some of the specific questions raised by last April’s original consultation, it has a much wider scope. By considering parallel issues such as supply licence proposals and metering innovation, the report is really a big picture assessment of the regulatory situation facing UK microgeneration.
The report concludes that, while many regulatory barriers to microgeneration have been removed, some obstacles still remain. For example, many grid-connection and metering issues have been clarified, thus facilitating the basic installation and operation of a microgeneration system. However initiatives to encourage the more complete integration of microgeneration into the elecitricty system, such as the use of agents to make the collection of ROCs easier, still need work and further consultations are planned. A few radical changes are proposed as well, including the removal of the 28-day rule
In light of this report, it’s useful to step back from the regulatory minutiae and think about how microgeneration has advanced overall in recent years. On the policy front, things are looking quite good. When I began my doctorate in 2003, microgeneration barely featured on the policy agenda. However as evidenced by Ofgem’s work, government grants, increased research and media attention, microgeneration is now a major part of UK energy policy debates (especially in the domestic sector). With approximately 82,000 microgeneration installations in the UK, microgeneration is becoming more common on the ground too. However if the UK is to achieve its climate change goals, research suggests that on average two microgenerating devices will need be present in every home by 2050. Clearly then, much still has to be done to move microgeneration from rhetoric to reality.
In the next entry, I’m going to talk about an issue that intersects both the regulatory changes discussed here and the larger picture for growth in microgeneration: how to ensure that households receive a fair payment for the output of their microgeneration system.
“The ‘28 Day Rule’ requires all energy supply contracts to be terminable on 28 days’ notice. Some suppliers have argued that relaxing this rule and proving consumers with the option of having longer term contracts could enable energy suppliers to provide more energy efficiency services to domestic consumers, and the trial will test this, and whether customers can be adequately protected without the right to switch supplier.”