All posts by karljeffery

Starting a decarbonised electricity market

How do we start a market in decarbonised electricity?

Here’s my thoughts so far.

If the government (thinking of the UK, but equally applicable to any other government) is serious about hitting its “80 per cent CO2 reduction by 2050” target, and on the way, a 40 per cent by 2030 target, at some point there will be a market for decarbonised electricity, since someone has to supply the electricity which doesn’t involve carbon emissions.

How will this market work?

Right now, the market for decarbonised electricity – for renewals – works by the National Grid being forced to buy all the electricity which solar and wind generate at whatever rate they are currently paying for the cheapest form of electricity (coal with CO2 emissions). The market for the other sort of decarbonised electricity – coal + CCS – doesn’t work at all. This way we get whatever low targets the government is currently happy with.

But as the requirement to decarbonise electricity grows, the logic will change.

The government could achieve its target by explicitly requiring the National Grid to purchase decarbonised electricity. At this point, there will be a market for whoever can supply it the cheapest.

The government might also achieve its targets by forcing the phase out of free burn coal power. This would mean the National Grid buying its electricity from the next cheapest option – gas. But then the government will need to start phasing this out as well, if it wants to reach its targets.

This discussion is very interesting because at some point in the future, so long as targets are met, there wil be a market for decarbonised electricity. And the people who correctly predict it, and make their investments at the right time, will make a lot of money.

Interesting.

Why is CCS not investable?

Why is carbon capture and storage not investable in the UK right now?

The UK / EU have announced they want 20% reductions in CO2 by 2020, 30% by 2030 and 80% by 2050.

If these targets are to be achieved, this means that the amount of conventional coal power (without carbon capture) will soon be limited. This will create a market for decarbonised electricity to fill the gap.

In 2030 for example, electricity will need to be around 50% decarbonised to hit this 30% overall target (if we work on the basis that transport will take longer to decarbonise, since it needs both a supply of decarbonised electricity or hydrogen, and a conversion of vehicles to electric or fuel cell power).

If the National Grid (UK electricity body) must limit the amount of electricity supplied to the UK which can be carbonised as 50% of the total, then it will be shopping for decarbonised electricity. This comes at a price, but the price will be passed onto consumers who will presumably pay rather than go without their hot drinks and other things electricity provides.

This means there will be a real market for wind and coal + CCS – the sources of decarbonised electricity. They can both compete with each other. The market price will adjust until the 50% can be supplied – or until the electricity price rises to the point that consumer demand drops.

Basically there’s going to be a lot of demand for decarbonised electricity and a willingness to pay in 2030 – and a gradual increase up to that point.

If it takes at least 10 years to plan and commission a carbon capture plant, you might think that there’s a reasonably strong investment case in carbon capture right now – and this investment case will strengthen over the years.

There’s a collossal amount of capital in the world looking for reliable returns which don’t need to be particularly high. So if you take a slightly higher risk and invest in carbon capture now, perhaps you can sell your investment on to investment funds with a lower risk profile in a few years, at quite a high profit.

I’m not an investor – no-one is investing in this idea right now although it is fairly clear – but I can’t see the holes either. Unless people think there’s like a likelihood this carbon discussion will go away. Do we need some kind of government guarantees?

 

 

Start with ‘how’

“Start with why” is one of the most famous TED talks. The presenter explains that businesses typically market themselves by talking about ‘what’ they do (for example, a law firm will put lawyers to work on your case), and explain how their ‘what’ is better (we have better lawyers). But commercially successful companies often start marketing by saying ‘why’ they are doing something (for example, Apple says we want to revolutionise the way people work with devices, or something like this). In between ‘why’ and ‘what’ we have ‘how’ – how the business achieves what it sets out to achieve.

Here’s an idea. In the arena of climate, most people are still focussing on the ‘why’. Why should we reduce carbon emissions? Should we reduce carbon emissions? Why is Shell not getting the message about reducing carbon emissions and drilling in the Arctic” and so on.

How about we skip the ‘why’ discussion on the basis that everyone who will ever get the message has already got the message, and get on with the ‘how’ – how are we actually going to reduce emissions?

Let me start. The ‘how’ question is easy to answer at a basic level (more renewables + CCS, provide decarbonised electricity and phase out direct burning of fossil fuels. Less long distance car driving, convert cars and home heating to electric or hydrogen power, run industrial heating on electric).

At a deeper level we need investors to put more money into renewables and CCS, we need government to create a market for the decarbonised electricity they provide, we probably want the public to be more aware of the specific choices they will need to make.

To create a market for decarbonised electricity, we need carbonised electricity to be restricted, or investors to believe that it will be in 10+ years.

The UK government and European Union have variously announced 20% reductions in CO2 by 2020, 40% by 2030 and 80% by 2050, but that’s not enough to give investors confidence right now in carbon capture and storage.

It isn’t clear exactly why that is – but that looks like precisely the sort of question which ought to be answered, as part of our understanding of the ‘how’.

 

What if the government set a deadline on non CCS power?

What if the government were to set a decree today that all power generation must be 100% zero CO2 by 2045 (30 years from now).

Running carbon capture on a coal plant (capturing 100% of the CO2) adds (let’s say) 30% to the cost of generating electricity.

That means that electricity costs will rise 1% a year over the next 30 years.

Surely that’s politically achievable?

And by doing this, the entire carbon problem can be solved.

With decarbonised electricity we can go on to have decarbonised transport, heating and cooling; and decarbonise much of industry. We’ll have a problem with aviation (until hydrogen planes) but can probably remove 90% of CO2 emissions. Even long distance driving (beyond the range of electric cars) will be possible with fuel cell vehicles powered by hydrogen.

If all our vehicles were electric powered (or powered using hydrogen, also generated from coal + CCS power stations by gasifying coal), then we’d need more coal or gas power stations in 2045 than we have now. But that’s OK though isn’t it, if they all have carbon capture?

 

Using expertise to reduce emissions cont/d

US CO2 emissions (according to EPA) are 37% electricity, 31% transportation, 15% industry, 10% residential and commercial (I think that means buildings). 6 per cent from other sources.

How can expertise be used to reduce all of these?

ELECTRICITY: decarbonised electricity options widely exist (wind, solar, coal + CCS). They are all more expensive, but the high price is more of a political problem (how can politicians ask people to pay more for electricity) rather than a society problem (can people afford it). The problem is increased by lack of a market mechanism to make it investable – (there are many attempts but none really working). Also solar + wind have an intermittency problem, and electricity storage hasn’t been solved (although there are many ideas). So coal + CCS looks like a ‘low hanging fruit’.

TRANSPORTATION: is perhaps the toughest carbon problem to fix. The easiest way is if people stop travelling but that’s very hard for a politician to acheive and of course not something the public wants. Adding carbon fees to travel costs as a disincentive is a possibility but perhaps not a good one. Electric transportation is a possibility, but is only low carbon if there is decarbonised electricity (see above). Hydrogen power is another possibility, but the hydrogen needs to be created from gas or coal with carbon capture, so unlikely to happen until carbon capture happens. (Or it can be created from renewables).

INDUSTRY: The problem with industrial emissions is that most industry can easily move, and carbon regulations are unlikely to happen globally for a while, if at all.  So adding cost to industry in a rich country drives the industry to move and emissions stay the same. There is some wiggle room perhaps. Another possibility is if the buyers of goods are required to ‘pay’ for the carbon somehow (or at least, be more aware of it) – then it doesn’t matter which country the goods are actually made in.  If decarbonised electricity was available then that makes it much easier for industry to be decarbonised.

RESIDENTIAL AND COMMERCIAL BUILDINGS – technology largely exists to make buildings zero carbon, although there could be some penalty on comfort and cost – smaller windows, thicker walls, less airconditioning in summer or heating in winter. There are big advances in this technology happening all the time. Again, decarbonised electricity can be used for heating and cooling.

One conclusion here is that decarbonising electricity really is a massive step forward in reducing all CO2 emissions. We’re moving as fast as we can (arguably) in renewables. We’re not moving as fast as we can for coal + carbon capture.

 

How can experts reduce CO2 emissions?

Following our theory that perhaps the best route to reducing CO2 emissions is allowing people to develop and use expertise in different fields,

What kind of experts + fields would get there?

One of the most exciting areas, I think, is when a consumer facing company (such as Glaxo Smith Kline) sets itself goals to reduce its carbon footprint and understand it in depth. You have the drive, the capability, the funding, the power.

The continued drive to machinery efficiency is exciting, but limited in what it can achieve. We might make a car which is 10% more efficient in 10 years but not many people believe cars could be massively more efficient.

The realm of wind power has many experts – particularly in financial planning side of it – and in persuading the public to spend more money for wind power.

In the realm of policymaking, we have what sounds like regulation by stealth. My theory is that it is very hard for politicians to increase people’s fuel costs and stay elected, but they can (and do) make rules that new buildings must be more environmentally efficient.

Aviation is virtually impossible to solve. Airlines are in the business of persuading people to take more flights – which all means more CO2 emissions. Unless you curtain their business, which is very politically hard, airlines need to wait for hydrogen or (arguably) biofuel power to be low emission.

Transport emissions is a messy one. The biggest target for reducing CO2 emissions is long drives 15-40 miles – and it would be hard to persuade these drivers to get the train or bus, bearing in mind this usually means increased costs and lower flexibility. But many cities have successfully managed to reduce driving over shorter distances.

For the realm of industry, my best idea is to increase the labelling of where the carbon is. Perhaps one day everyone will calculate their own carbon footprint on an ongoing basis, and if you sell something to someone else, the embedded carbon emissions goes off your ledger onto theirs.

That’s the only way I can think of, of developing a sensible scheme for making it investable for manufacturers of (for example) chemicals, cement and steel to invest in carbon mitigation / carbon capture.

 

Investors are still saying “carbon capture – will that ever make money?”

I just did an interview about private equity opportunities in oil and gas with a director of an investment bank.

We got to carbon capture and he screwed his nose up and sort of said, there could be some business opportunity here but we have no idea what it is!

I’ve seen similar sentiment expressed by other investors this year.

How can we make carbon capture look more investable for people like this?

Perhaps 60% of the decision making for private equity is past performance – they won’t admit it because they can’t justify their fees that way but it is probably true! But that means that CCS will struggle to get PE investment,

But what about the other 40 percent – how do we make it worth investing in or convince them to invest in it?

My best answer is that CCS is investable when you consider it is the only way for EU countries to meet their future targets. But that is still a bit too vague for investors.

Can we come up with a better answer?

How about this way of looking at the carbon problem.

  • We need to have a way of allowing people to develop and use their expertise more in reducing carbon – there are so many ideas and schemes, some inclination, some of it will work better than others, and the pathway forward is to pick the right schemes and drop the weak ones. In this I include technology, business and policy schemes.

 

  • There needs to be a way of keeping score (a bit like money in the commercial world) and ETS is probably good for this, so long as the price of an emission credit is equivalent to the cost of avoiding carbon emissions (which it would be, if there was no surplus of allowances in the market and the ETS cost was a factor in people’s decision making). Many people believe that the money system is bad for society, they have a point, but we still stick with it, even if just as a means for keeping track of who is where! The same with ETS allowances.

 

  • Currently there is an emphasis on ETS as the driver – ETS isn’t really the driver though (like money isn’t the ‘driver’ of business). Eg people should be talking about schemes to cut carbon emissions at lower cost than the ETS price and how they can make a profit that way.

 

  • It all points to getting the ETS system working as the main way forward though, even if other commercial schemes (such as Red Hydrocarbon type scheme) can work in parallel with it (with convertible credits)!

Can we ignore the ‘trade’ part of ‘cap and trade’?

Mention ‘EU Emissions Trading Scheme’ to any carbon capture professional and you hear a big groan. The scheme made big promises of driving investment in carbon capture and other low carbon technology and failed to deliver. Meanwhile wind and solar managed to get their funding via other government routes and carbon capture didn’t.

Many people have explained why they think Emissions Trading can never work. The “trading” is a government allocated permission to permit – so you need a lot of trust in government’s ability to restrict the emissions to people who hold the certificates. The more successful the scheme is in driving low carbon emission, the less valuable the ‘trading certificates’ are, so the market is moving in the wrong direction (for a successful market, the price should surely rise the more popular the product being traded is).

These are fair points. But the Emissions Trading Scheme is about “cap” as well as “trade”. If we ignore the trading part of it, we have a cap on emissions – which, according to EU ETS Wikipedia page, will reduce by 1.74% a year from 2013 to 2020, and by 2.1% a year from 2020 to 2030, driving emissions from the ‘ETS sector’ (power generation and heavy industry, basically) by 43% by 2030.

Now we have something very different – a market for low carbon electricity.

How far can we quantify this market, in order to give security to a carbon capture investor?

If we assume that EU electricity consumption is constant until 2030, we can get a good idea of how much “low carbon electricity” will be required in Kwh.

If investors have a focus just on meeting this market demand at minimum cost, they can calculate that CCS can provide electricity at a lower cost per Kwh than other forms of low carbon – so CCS can earn revenue for electricity at the price of the next highest option (probably wind).

In other words, invest in a carbon capture power station now, for operation in (say) 2020, you can get as much revenue from your carbon capture plant as you could if you had to generate the power using wind turbines, but make much more profit since CCS is cheaper than wind.

There must be a flaw in this logic, since investors have looked at this in much greater detail but come to a different conclusion. Can anyone say what it is?

Or are investors too focused on the ‘trading’ part of ‘cap and trade (and disappointed at its results so far) to take anything associated with ETS seriously?

Our basic idea with Red Hydrocarbon is that the climate problem is best solved by the market – but based on a new market for ‘zero carbon energy’ (driven by regulatory caps) not with Emission Trading Scheme. This could be done by regulatory limiting of fossil fuel production – which would be a completely new scheme. But could it also be done with the EU ETS cap?