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’.