How much of the UK's emissions are nearly impossible to decarbonise?

We can envisage decarbonisation of electricity production, of most transport requirements and much of our heating needs. But even after the obvious sectors have been shifted to zero carbon sources, the UK and other societies will still have very substantial emissions. I estimate in this article that CO2 emissions from energy use, which are currently running at about 367 million tonnes a year, are going to be very difficult to cut below 115 million tonnes, about 30% of today’s total.[1]

Why is this number - equivalent to 1.7 tonnes  per person - so high? Critically, I assume that sectors which require fossil fuels because of their energy intensity are going to struggle to replace coal, oil and gas with electricity. You cannot melt iron ore easily, get a commercial airliner up to cruising height or avoid high temperature chemical processes without dense fuels such as oil or coal that burn at very high temperatures

However the world urgently needs complete decarbonisation. To make the obvious point, this means that net emissions in the UK must be zero as soon as possible

My argument in this article is that to achieve this vital target we will need to create synthetic replacements to fuel these very hard-to-switch activities. Principally, our aim must be the development of low cost hydrogen manufacture from water electrolysis. With large quantities of hydrogen made from renewable electricity we can create pathways for the production of fuels that do not add to CO2 or methane in the atmosphere. Somewhat inaccurately, we might think of oils and gases as merely the means by which the high energy of hydrogen atoms is carried in useful form.

The UK, and other societies, need to invest more in the production of fuels that replicate the characteristics of conventional fossil sources but without adding any net carbon dioxide to the atmosphere. As importantly, synthetic fuels will allow us to store energy from surplus wind and sun, allowing dull lulls to be accommodated. Without the storage of energy in synthetic fuels, covering electricity demand by using renewables will be both extremely difficult and expensive.

First, I offer an assessment of the size of the challenge we face in reducing our use of fossil carbon fuels to zero. I look at how energy demand is satisfied by the various energy sources and then calculate the impact of moving that demand from fossil fuels to electricity generated entirely from non-carbon sources. The first step is to ensure all electricity is from renewables, then to decarbonise transport by switching to electric vehicles as much as possible, then to move all coal and oil domestic heating to electricity, followed by gas domestic heating. I assess the climate impact of each shift.

Note: this analysis does not examine greenhouse emissions from activities unrelated to energy provision. These includes methane and nitrous oxide emissions from agriculture and raise total GHGs by about 80 million tonnes. This figure will also have to be reduced to a net zero.

1990 and 2017 emissions.

Emissions from UK energy use in 1990 were estimated at 583 million tonnes, or nearly 10 tonnes a head. Coal caused around of 222 million tonnes of this total. By 2017, coal use was down to little more than one tenth of previous levels and had been driven out of electricity almost entirely. But oil use has also fallen, now running at around three quarters of the 1990 figure. Gas use is up. Total emissions from energy use are now about 63% of the earlier figure. This is a good record by world standards, but emissions cuts are now stalling as the scope for reducing carbon use in electricity generation falters and the UK pulls back from solar and onshore wind.

The makeup of energy need today, expressed as primary energy flows

We probably all occasionally need reminding that electricity is a far less important source of energy than fossil fuels that are combusted for other purposes. The way the statistics are calculated for ‘primary’ energy puts electricity as just over 20% of the total terawatt hours.[2] (A terawatt hour is a billion kilowatt hours). Natural gas is over twice as large a source of energy and oil (petroleum) is also much more important than electric power. Why is this important? Because electricity is relatively easy to decarbonise, oil and gas combustion much less so.

Final energy consumption

Primary energy consumption measures the total inputs of fuel into energy production. But some fuels are employed as sources to be transformed into electricity or used for non-energy purposes, such as making plastics from oil. For example, 286 TWh of gas were used in 2017 to generate about 134 TWh of electric power. The final energy consumption figures in the chart below show that electricity supply - about 301 TWh in 2017 after excluding transmission losses – was less than 20% of total final energy need. Nuclear, conventional renewables and the burning of wood pellets were slightly more than half of the electricity supply.

Moving all electricity to zero carbon sources

Final electricity demand in the UK in 2017 was about 334 TWh. This includes transmission losses of 33 TWh, taking the delivered number down to 301 TWh as mentioned in the last paragraph. 156 TWh, including transmission losses, came from fossil fuels.

This 156 TWh of useful power took 358 TWh of oil, coal and gas to produce. Burning that 358 TWh produced about 76 million tonnes of CO2 out of the UK’s total emissions of 366 million tonnes, or just over 20% of the total.[1]

In other words, complete decarbonisation of the power sector would still leave the UK with almost 80% of its current greenhouse gas output from the use of energy.

Simply replacing fossil energy with renewables would be impossible. When electricity demand peaks, there is no guarantee of wind or solar being available. This is one of the reasons why I argue for an energy policy that includes the replacement of oil and gas by synthetic fuels. The UK can then hugely overinvest in wind and solar and, instead of curtailing production in times of excess power, it can divert the electricity to producing hydrogen from electrolysis so that an energy source is available at all times.

Converting all electricity to low carbon sources reduces emissions by around 76 million tonnes, taking the total down to around 290 million tonnes.

The electrification of transport

After a decade of scepticism, most manufacturers now assume that electric vehicles will replace both diesel and petrol cars. The issue is how fast this happens. In the case of heavier vans and trucks, the industry still plans for liquid fuel vehicles.

In my simple model, I assume that all petrol vehicles switch to electricity and 75% of diesel use also moves to battery power.

I believe that aviation will require liquid into the indefinite future. An aeroplane powered by a battery is just about conceivable for short flights with limited payloads. But unless the energy density (kilowatt hours per kilogramme of weight) of batteries improves by a factor of ten aviation kerosene will remain the fuel of choice for the vast bulk of air travel. A doubling or tripling of battery energy density looks possible but a ten fold improvement looks tough. Therefore I’ve kept oil-based fuels as the energy source for aviation.

In my calculations I have assumed that all transport is currently powered by fuels made from oil. This isn’t quite accurate because a small number of vehicles use electricity or natural gas. An even smaller group is powered by hydrogen. The simplification of saying that all cars and trucks use petrol or diesel doesn’t significantly affect the numbers.

In 2017, transport used about 581 terawatt hours of energy. To give a sense of scale, that’s almost double the amount of electricity used in the UK. Just over half of this is diesel, which is consumed both by passenger cars and by heavy vehicles. However all internal combustion engines for surface vehicles are inefficient, only converting about a quarter of the energy in oils to motion of the car or lorry.

Conversion of all petrol use and 75% of gas oil and diesel to electricity, but leaving aviation to be powered by oil , reduces total liquid fuel needs to 206 TWh, or just over a third of the current level. This reduces emissions by a further 88 million tonnes, taking the total to around 204 million tonnes.

Avoiding the use of coal and oil for domestic heating

About 20% of the UK’s homes do not have access to natural gas. These houses are heated by electricity or by liquid petroleum gas (LPG), coal or oil. In this paragraph I calculate the effect of replacing all coal and oil use in the home with electricity. Oil is more important, supplying about 26 terawatt hours for domestic heating compared to about 4 for coal. Overall, the impact of switching these uses to electricity is quite small, removing about 6 million tonnes of emissions. This takes the remaining total UK energy emissions down to about 197 million tonnes.

Moving all domestic gas heating to electricity or other low carbon sources

Gas for home heating is a far more important source of emissions than oil or coal. In 2017, about 275 terawatt hours of gas heating were used (slightly less than the total demand for electricity). This produces about 52 million tonnes of CO2, so making all home heating zero-carbon would push the UK total down to about 145 million tonnes.

Of course moving all gas central heating to electricity or other low carbon alternatives, such as properly sustainable biomass fuels, is a truly enormous task. Gas demand today peaks in cold winter weather when the UK grid sometimes has to deliver over 300 gigawatts of energy to central heating systems. This is about six times peak electricity demand. So an electricity system that had to provide sufficient power in the winter to meet home heating demand (even if efficiencies were improved by the use of heat pumps) would have to be a large multiple of the size of today’s network. This is another argument for very large scale energy storage, probably in the form of synthetic low carbon replacements for natural gas.

Buildings other than domestic homes also use gas for heating. I have assumed that these uses will remain and will not switch to other sources. My argument is that converting these buildings to another form of heating is at least as difficult as switching domestic use. However a truly aggressive decarbonisation policy might be able to reduce gas use in these buildings.

Reductions in carbon emissions from reduced energy industry and losses in the energy system

Some natural gas is fed into oil refineries, for example to produce hydrogen. As oil demand falls, less is needed. Similarly, refineries themselves will cease to use as much crude or oil products if the demand for fuels falls.

Estimating the reduction in fossil fuel use from these changes is difficult. I have guessed that about 30 million tonnes of emissions are avoided.

What is left?

After decarbonising all these energy uses, we are left with a total need for about 626 terawatt hours. Coal provides about 37 TWh, gas 302 TWh and oil 287 TWh. This is over one third of the primary energy demand provided by these three fossil fuels in 2017. Massive decarbonisation still leaves the UK with substantial CO2 emissions.

The remaining CO2 emissions from energy use that is too difficult to decarbonise are about 115 million tonnes. In the world of maximum decarbonisation, gas and oil each produce about 50 million tonnes of emissions and coal just over 10 million tonnes. Thus there is a long way to go to completely avoid massive fossil fuel use even if we decarbonise all the parts of the economy that we conceivably can using current technologies.

The primary remaining energy needs are as follows

·      Coal: fuel needed for iron and steel making and, to a lesser extent, other industrial processes

·      Gas: industrial processes, heating for non-domestic buildings

·      Oil: aviation, remaining diesel, industrial use.

Aviation alone is responsible for about 26 million tonnes of emissions, or about 0.4 tonnes per head. Next comes industrial gas use at around 20 million tonnes and a similar figure for gas heating for non-domestic buildings. Remaining diesel use is around 16 million tonnes.

What are the implications?

Even the most aggressive move to low carbon energy will not eliminate the need for extensive use of fossil fuels, particularly oil and gas. And the calculations in this note assume that we can move all home heating away from gas even though this will prove extraordinarily difficult.  The remaining need for carbon-based fuels inevitably means that we will either need to change society dramatically, for example by banning air travel or spending many billions on home insulation, or we will be required to make low-carbon substitutes for fossil oil and gas. There really doesn’t seem to be any alternative.

Chemically, making synthetic low carbon fuels is simple. We can make a liquid with all the qualities of crude oil without much difficulty from low carbon sources.[2] In fact, these liquids are better because they do not contain ancillary pollutants such as sulphur. Creating a ‘renewable’ natural gas is even easier. We just need a cheap supply of low carbon energy, probably from wind or solar electricity.

The problem is that today these synthetic fuels are more expensive than their fossil equivalents, if made in the UK. As at August 2018, the wholesale cost of petrol and diesel is about 4p per kilowatt hour of energy (around 5 US cents). An open UK auction for large scale solar PV or onshore wind would probably produce a slightly higher number. Then converting renewable electricity chemically into synthetic oil necessarily involves costs and efficiency losses, implying that the cost of zero carbon substitutes will be higher than oil.

Today, using hydrogen sourced from electrolysis using UK wind or solar would probably mean that oil would cost about 7-8p per kilowatt hour (about 10 US cents), or possibly double what fossil oil costs today. We can usually replace coal with hydrogen, for example in steelmaking, but the cost today will be higher than the fossil alternative.

If we accept that some activities in the modern world will continue to need oil, coal and gas, then we have to find a way of making synthetic and low carbon alternatives no more expensive than today’s prices for fossil fuel. That means pushing down the costs of renewables, buying hydrogen in from countries where renewables are cheaper or letting the countries with the best wind or solar resources make our oil and gas for us. Not necessarily easy but there probably isn’t any alternative if we want the full decarbonisation we urgently need.

[1] I assume that each tonne of coal produces 2.5 tonnes of CO2, a tonne of oil 3.15 tonnes of CO2 and 184 kilogrammes are emitted per megawatt hour of gas burnt.

[2] This, for example, is what Carbon Engineering promises, using hydrogen manufacture from electrolysis combining this with carbon dioxide capture from the atmosphere.

Even the older generation now wants onshore wind.

The UK government conducts regular opinion surveys on energy matters. As has been widely noted, the most recent polling shows a rise in support for renewables, including onshore wind.*

What has not been observed is that this shift in thinking about onshore wind has been caused predominantly by opinion changes in those over 65 years old. This chart shows the increase in the net level of support for onshore turbines. The percentage opposing wind is deducted from the percentage supporting the technology.

Source: BEIS opinion tracker. 'Net support' is calculated by deducting the percentage of those opposed to wind from those who support it.

This is significant because the de facto ban on large-scale onshore wind in the UK has been driven by the perceived opposition to the technology among the old, the the ruling Conservative party’s core supporters. But April’s survey shows that even among those 65+, those supporting wind on land now outnumber opponents by almost 5 to 1. As it becomes increasingly obvious that onshore turbines are now the cheapest way of generating electricity, the government has no political or financial reason not to abandon its restrictive policy.

I compared April 2018’s survey (Wave 25) with the figures from the April 2017 poll (Wave 21). I used the full survey datasets very helpfully provided by the statisticians at BEIS, the government department in charge of energy.

The overall picture is this:

·      in April 2018 76% of those interviewed across all ranges support onshore wind. Of this, 30% ‘strongly support’ this method of generating electricity. Only 8% oppose wind, of which 2% ‘strongly oppose’ it.

·      The age of the respondent strongly predicts attitude. In the 2018 survey, over 65s were 69% in favour and 14% opposed. But among those younger than 65, ‘strong opposition’ to wind barely exists. For example, only one of the 281 people surveyed from the 35-44 age group held this view.

·      In previous analyses I have done of the results of this regular poll I have found that no other attribute (such as income, gender, rural/urban split) assist substantially in predicting attitudes towards onshore wind. Age drives views on turbines.

·      Between April 2017 and April 2018, the survey showed a rise in the percentage of all age groups supporting wind. The number increased from 73% to 76% of those interviewed. This is the highest support level ever recorded.

·      The increase in support from those aged 65+ was sharper; the percentage rose from about 63% to about 69%, substantially narrowing the gap between the attitudes of the old and the young.

·      Those opposed to wind (including those ‘strongly opposed’ and ‘opposed’) fell from 9 % to 8%, equalling the lowest ever recorded. Those against wind among the 65+ group fell from 17% to 14%. Once again, this narrowed the gap with the opinions of younger people.

·      Therefore the change in opinion towards a more favourable view of wind (fewer opponents, more supporters) was far sharper among the older group than the rest of the adult population.

Of course it may be that the sharply reduced rate of turbine installation over the last year has reduced the salience of the debate over wind. The pro-Conservative newspapers have less to rail about. Perhaps if the current policy were changed, as shows some signs of happening, the older generation’s increasing support for wind would be reversed.

But the polling trend is nevertheless clear; the government survey has been carried out for the last six years and shows a sharp increase in support for onshore turbines, even during periods of rapid turbine growth. The current policy of blocking turbines on land is now implicitly supported by less than 1 in 10 of all adults and, more surprisingly, only 1 in 7 of all those over 65. 

* Among other interesting results, those saying that they are thinking about buying an electric car has risen from 5% to 9% of the population over the last year.

Saudi plans suggest all electricity demand will be met by solar in 2030

The Saudi government and an investment fund led by Softbank’s Masayoshi Son announced they planned to invest $200bn in solar PV by 2030. The funds will be spent within Saudi Arabia.

Although the agreement attracted substantial coverage, many of the implications were not properly examined. In the bullet points below I note some of the main consequences of the deal if it is carried forward.

1, Today $200bn will pay for about 200GW of photovoltaic capacity. ($1m per megawatt). Prices of panels continue to fall, as do ‘balance of plant’ costs. I assume therefore the funds pay for 230GW of capacity. In reality, it will be more. I estimate that panels in Saudi Arabia will generate at a capacity factor of about 18% (although Saudi is sunny, it is also hot, which depresses output). 230GW at 18% utilisation generates 363 TWh a year. Current Saudi total demand is about 340 TWh. In other words the Kingdom’s plans see PV generating more electricity in 2030 than the whole country uses today.

2, Saudi demand peaks at around 65 GW in summer afternoons, driven by air conditioning. At these times the 230 GW of solar PV may be generating up to 130 GW of electricity. Although Saudi demand is still growing, total power production at peak from PV is going to substantially exceed national usage. Either Saudi will store power, export it to neighbouring countries, turn it in synthetic fuels or waste it. It will probably be a mixture of all four outcomes.

3, 230 GW of PV is more than 50% of the world’s total installed solar photovoltaics today. Saudi demand for panels and associated electronics are going to buoy the world market for PV, pushing costs down further.

4, World electricity demand is about 25,000 TWh. Saudi solar will cover about 1.5% of this.

5, The Kingdom plans to build 16 nuclear reactors, with probably 20GW of capacity. If the PV plan goes ahead and storage and synthetic fuels absorb excess supply and make it available at night, it is unclear why Saudi Arabia would also want to build new nuclear. Either you build this much PV or nuclear, not both. Somebody has got their numbers wrong.

6, About 60% of current Saudi electricity is generated from oil. At 40% combustion efficiency and the current $70 a barrel, the raw cost of the oil burnt in a Saudi power station is about 11 US cents per kWh. In some Gulf states, the price agreed for PV output is about 3 cents per kWh and Saudi should achieve a similar figure. PV will cut the production cost of electricity in Saudi almost four fold.

7, Switching from oil to PV for electricity generation will save Saudi Arabia about $22bn a year or $700 a head of current population.

8, At an estimated value of 1.5 MWh per barrel of oil and 40% combustion efficiency in an oil-fired power plant, the Kingdom currently uses about 900,000 barrels a day to generate electricity. This is just under 1% of total world oil production. If PV completely replaces oil in Saudi power production, it will reduce world greenhouse gas emissions from combustion by about 0.4%. (But of course the Kingdom will actually just sell the oil elsewhere!)

Errors in BP’s forecasts of the impact of electric vehicles

BP’s respected Energy Outlook was published this week (February 2018). Many commentators have written about the forecasts for electricity generation. I want to concentrate on the impact of electric cars and other efficiency gains on the demand for oil. Specifically, I’m going to focus on what I see as modelling errors and implausible assumptions in the BP analysis.

ENERGY SUPPLIED FOR TRANSPORTATION

Source: BP Energy Outlook, 2018, page 34

Modelling errors

1)    BP sees electricity providing about 4.2% of all transport energy in 2040.[1] The figure is about 1.2% today, almost entirely arising from the electricity used in rail transport. So EVs (and possibly further electrification of rail and even air travel) will only add, BP says, 3.0% to electricity’s share of transport energy between now and 2040. (This small share is clearly demonstrated in the chart above). However, even using BP’s strikingly low figures for EV penetration, the company sees electricity providing the energy for about 31% of all car mileage and just under 15% of all truck travel by 2040.[2] This is a very striking – and arithmetically impossible – disparity.

Electric cars are, and will continue to be, more efficient at using energy to achieve movement than an internal combustion engine and I use a conventional assumption about the energy typically required to move an EV.[3] My calculations show that BP has underestimated the share of energy use contributed by electric cars by about 50%. Instead of rising from 1.2% of transport energy in 2016 to 4.2% in 2040, the true number (using BP’s assumptions) is about 7.2% of energy use.

In support of my assertion that BP has made an arithmetic mistake, I offer another comparison. The company says that natural gas will provide more energy for transport in 2040 than electricity. This is despite gas cars driving only 6% of the miles travelled by electric cars and 25% of the distances of electric trucks. Even though electric cars are probably about three times as energy efficient as LNG or CNG powered vehicles, this is wholly insufficient to explain what I think is BP’s error. (Please note that BP does state that shipping will also use natural gas even though virtually no ships are currently powered in this way).

2)    By contrast, BP has underestimated the efficiency gains from improved internal combustion engines. Once again, I am making this assertion only using the figures BP itself publishes in its extremely useful data file. In its calculations of the total demand for liquid fuels from internal combustion engine cars and trucks, BP assumes an approximate 34% efficiency gain across the entire parc of cars between 2015 and 2040.[4] Nevertheless, its own background figures actually provide an estimate of a more than 50% efficiency gain between 2016 and 2040. [5]The company also states that internal combustion engine efficiency improvements are speeding up. It suggests an average gain of ‘2-3%’per year between now and 2040, implying an approximate gain of around 45%.[6]

These differences are vitally important. BP forecasts a rise of 325 million tonnes of oil equivalent (MTOE) liquid fuel use in transport between 2015 and 2040, taking the figure from about 2,400 to about 2,700 million tonnes. If, instead of the published It correctly used its own estimates for efficiency gains for cars, this number would actually fall, even assuming lower efficiency gains in trucks. This change would, of course, adversely affect the global demand for crude oil. Instead of the picture BP presents of a rise in oil demand for transport to 2030 and then a very slow decline, volumes would fall much earlier to levels below today’s figures.

Highly questionable assumptions

3)    BP sees electric cars rising in number from about 7m in 2020 to about 95m in 2030.[7] This represents average sales of about 9m electric cars a year over the decade, assuming that almost all electric cars sold in the period are still on the road in 2030. This will be between 7 and 8% of all cars sold, assuming average global sales of around 120m a year during the decade. This is in sharp contrast to almost all other commentators.

UBS says, for example, that 16% of all car sales in 2025 will be electric.[8] Major German manufacturers have suggested that between 20% and 25% of all sales in 2025 be plug-ins.[9] Volkswagen talks of selling 3m electric cars a year by mid-decade, a third of BP’s estimate for global sales average across the decade. Several countries, recently joined by Ireland, are planning a ban on internal combustion engines by 2030.[10] Some states, such as Norway and China, may move even earlier.

4)    BP sees the average car travelling a rising number of miles each year. The almost two billion cars on the road in 2040 will each drive an average of about 16,200 kilometres a year, up from about 13,000 in 2016, a rise of over 20%.[11] This flies in the face of the long run downward trend in car mileages in developed countries. There is no justification provided for this assumption and it seems highly unlikely to come about. Doubling the number of cars on the road, and increasing the mileage each travels seems to conflict with the highly congested roads both in developed economies and urban portions of many newly industrialising states.

Conclusion.

BP's mistakes and unconventional assumptions all tend to increase total oil demand for transportation in 2040 compared to 2016. These errors are all multiplicative. More plausible inputs and calculations would result in a forecast from BP that sees oil needs falling earlier than 2030 and then declining at a much faster rate than it projects from this peak. BP does also publish alternative scenarios for electric car sales but I argue that it should use more accurate numbers for its central forecast.

[1] Page 34 of the data pack at https://www.bp.com/en/global/corporate/energy-economics/energy-outlook.html

[2] Page 38 of the data pack.

[3] I assume 6 km of travel per 1 kWh of battery electricity supplied. If we added a supplement to account for energy losses in recharging batteries the BP underestimate would be increased.

[4] BP uses 2015 figures, not from 2016 on page 34 of the data pack.

[5] Page 36 of the data pack.

[6] This is assuming a constant annual gain of 2.5%. The assertion that efficiency will rise by 2-3% a year is found on page 37 of the main presentation at https://www.bp.com/content/dam/bp/en/corporate/pdf/energy-economics/energy-outlook/bp-energy-outlook-2018.pdf

[7] Includes both plug-in hybrids and fully electric cars.

[8] https://www.bloomberg.com/news/articles/2017-11-28/rise-of-electric-cars-quickens-pace-to-tesla-s-benefit

[9] https://www.reuters.com/article/us-volkswagen-investment-electric/volkswagen-accelerates-push-into-electric-cars-with-40-billion-spending-plan-idUSKBN1DH1M8

[10] http://www.thejournal.ie/electric-cars-ireland-2045-3856261-Feb2018/

[11] Data from pages 36 and 38 of the BP data pack. I assume the car parc in 2016 was about 950 million vehicles.

'Burning to the ground': The carbon bubble in gas turbines

As the world switches to low-carbon energy, some oil, gas and coal reserves will become worthless because they cannot be exploited profitably. The phrase ‘carbon bubble’ refers to the possible overvaluation of companies owning these fossil fuels.

But is not just oil, gas and coal companies which are susceptible to the risk. Carbon bubbles also threaten businesses that sell equipment to the users of these fossil fuels. In one of the first examples, the demand for gas turbines has slumped in the last few months, causing dramatic falls in the value of the businesses that make and service this expensive equipment. Many other industries - including the automotive and chemical engineering sectors - will go through the same painful transition.

Installing and servicing gas turbines in power stations to make electricity was a $50bn global industry. Until a few months ago, the three international conglomerates that dominate this business said they were confident of continued demand. Although recognizing that the world is switching to renewable energy, they thought that gas will always be needed as a backup fuel for generating electricity. In the conventional view, the market will also be buoyed by utilities switching from coal to much cleaner natural gas.

So even as late as July 2017, Mitsubishi Heavy Industries (MHI) was predicting that orders in its gas turbine division would be up 15% in the current financial year. Operating profit would rise 31%. GE reported that revenues from its turbine activities were up 5%, surmising that it was gaining share because of its advanced technology. Its published forecasts for 2017 remained unchanged. And although the more cautious Siemens had begun to notice significant falls in orders by mid-year, as late as April it recorded a 4% increase in quarterly sales.

Careful analysis might have identified serious problems with the gas turbine business in the previous year but none of the three major participants expressed any public concerns. Contractions of sales and profits were presented as temporary or cyclical.  But by the end of September 2017, a very much sharper fall had set in and the earlier optimism suddenly disappeared. The huge conglomerates which install and maintain turbines were finally forced to admit to intractable problems requiring immediate and painful action.

Over a period of a few weeks in October and November a slew of announcements from all three companies came out, admitting to serious deteriorations in financial performance. Janina Kugel, a Siemens management board member, said ‘the market is burning to the ground’ and that the world was switching ‘extremely quickly from conventional to renewable energies’. In another comment, her senior colleague Lisa Davis said that ‘the power generation industry is experiencing disruption of unprecedented scope and speed’. The company indicated that it would close factories and reduce its staff by about 6,100 people.

GE went further and fired 12,000 people around the world, almost 20% of the staff in its turbine business. The cash flow from the division for 2017 would be $3bn less than predicted a few months before, it announced, explaining that the last quarterly results were ‘sharply lower than we expected’. The company’s overall performance in the three months to the end of September had been ‘completely unacceptable’ and blame was principally laid at the door of the power generation segment. Forecasts for turbine sales in 2018 were reduced by 35% below the already shrunken number for 2017. Expectations for revenues from maintaining and upgrading power stations were also sharply cut.  Both the CEO of the division and the chief financial officer of the holding company were replaced.

MHI sharply cut its projections for orders, sales and profits. It had shipped only 4 large gas turbines from April to September 2017, half what it had sold a year earlier. The company announced a change of strategy, promising – in the words of the divisional president -  to focus on servicing existing turbines rather than selling new products because ‘all around the world we are witnessing a rapid shift away from fossil fuels and towards renewable energy’.

In early November Siemens published estimates showing that the total number of large gas turbines installed in all power stations will fall from 180 in 2016 to a projected 110 this year, a cut of almost 40% in two years.[i] GE intitally gave some similar figures, suggesting that electricity companies installed just 40 gigawatts of gas turbines around the world in 2017, down from more than 70 gigawatts earlier in the decade and about 130 gigawatts around the year 2000. In its most recent results announcement, it moved its estimate down again and suggested that the figure for 2018 will be less than 30 gigawatts, a multi-decade low.

Source: Siemens AG. Number for 2018-20 is the forecast for each year in this three year period

As importantly, Siemens publicly estimated that the prices it can charge for large turbines had collapsed 40% in the last three years as a result of industry over-capacity. In value terms, gas turbine sales have therefore fallen to a fraction of just a few years ago.

The three dominant suppliers had bought up smaller manufacturers in the last few years and had successfully disguised – to themselves and to most outside analysts – the scale of the drop in the underlying market. Until the last months of 2017, none of the announcements from the three top companies voiced any concern about the resilience of longer-term turbine sales. Similarly, all three had assumed that servicing existing turbines would continue to bring in important revenue.

But by the end of 2017, ancillary revenues were down almost as sharply as those for new large turbines. No-one had predicted this. Existing gas-fired power stations around the world are working for fewer hours each year as renewables ramp up. This is reducing the need for emergency repairs and increasing the interval between regular services. The owners of barely profitable power stations face harsher financial times as wind and solar offer ever-cheaper electricity. So upgrades to the performance of existing gas turbines have been delayed or abandoned.  GE had forecast sales of 36 turbine enhancements in the quarter ending in September 2017. Power stations actually bought 13.

Perhaps most surprisingly, the sale of smaller gas turbines, designed to respond quickly at those times when big power stations cannot cope with demand, also collapsed. Sales forecasts for 2017 were cut to half the number GE projected just a few months earlier. In the most recent quarter (ending December 2017), it shipped just 3 small turbines, down 90% on a year earlier. Peaks in demand are increasingly being met by ‘demand response’, or the managed reduction in electricity use at times of scarce supply. In times to come, large batteries will also help match electricity demand to the amount available. Electricity companies are aware of this and are reducing purchases of smaller turbines.

Performance across all parts of the turbine business fell well below predicted levels in all three companies. Share prices went lower compared to major indices. GE suffered the most, with its stock falling almost 30% in relation to the S+P 500 index between the first announcement of problems in late October and the end of 2017. GE has other troubled businesses, but the unexpectedly poor performance in the turbine segment is partly - perhaps largely - responsible for this decline of nearly $60bn in market value.

MHI saw a smaller fall of about 11% of its value against the main Japanese index between the announcement of declining profit expectations and the end of the year, costing shareholders around $1.4bn. Siemens’s share price fell by about 7% in the week after the initial presentation of the turbine division’s problems on 9th November, reducing its value by over $8bn. The share price has recovered somewhat since and the loss relative to the German index was only about $3bn by the end of the year. And, it should be said, problems in the wind turbine portion of its business may also have affected the share price.

It may be that the global gas turbine business will eventually recover.  But the head of the Siemens power generation division, Jurgen Brandes, spoke eloquently in a conference call with journalists on 16th November 2017 to suggest that his company has now accepted that many of its factories, skilled people and technical expertise will not be needed in the future. After expressing amazement at the recent decision of a country such as Saudi Arabia to switch decisively to renewables, he went on to say ‘There are global trends coming that really indicate that this is a structural shift, a paradigm shift’ away from fossil fuels.

The decline in the gas turbine market happened quite slowly for several years. The largest participants avoided most of the consequences by buying struggling competitors. But the contraction sharply accelerated in the second half of 2017, sliding at a pace that was shocking to some of the most sophisticated companies in the world. Which global industries are going to suffer next from the swing away from fossil fuels?

(Please contact me if you would like a copy of the full text of the detailed report I have written on the events of September-December 2017 in the gas turbine market).

Chris Goodall

Visiting Researcher, Imperial College Business School

chris@carboncommentary.com

+44 (0) 7767 386696

[i] https://www.siemens.com/investor/pool/en/investor_relations/financial_publications/speeches_and_presentations/q42017/171109_q4_presentation_en.pdf Page 9

Fuels from air and water

A future free of fossil fuels requires us to economically produce oil and gas substitutes from synthetic sources. This is because will continue to need oil and gas for activities that are difficult to electrify, such as aviation. As importantly, synthetic oil and gas can provide our electricity when sun and wind are in short supply without adding to the CO2 in the atmosphere. They will provide the main storage medium for high latitude countries, taking surplus electricity and holding the energy in the form of liquids for use on still winter nights.

Synthetic fuels will generally be made using renewable hydrogen combined with carbon-containing molecules not derived from fossil sources. Canadian business Carbon Engineering has just announced that it has made small quantities of fuel entirely from renewable sources using CO2 taken directly from the air.

I think this advance probably qualifies as the most important low-carbon innovation of 2017.

If the cost of this process can be driven down to levels comparable with $60/barrel oil, we have a realistic prospect of all world energy needs being served by renewables, either used directly for power, or employed to create zero-fossil fuels to complement intermittent sources of electricity.

Carbon Engineering (CE) generates its hydrogen from electrolysis. When electricity is abundant, electrolysis is used to split water into H2 and oxygen. Heat is a by-product. The hydrogen is then merged with the CO2 captured from the atmosphere to form useful fuels similar to petrol.

There is no magic in this process. Electrolysis is simple, and increasingly efficient and cheap. Direct removal of CO2 from the air is usually thought of as expensive in energy terms but has been practiced, for example, on submarines for many decades. Reacting hydrogen with carbon dioxide, or its derivatives such as carbon monoxide, is uncomplicated and can be carried out using either chemical or biological routes to create liquid fuels. It is done in chemical plants around the world today. CE’s achievement is to do all these things in one place simultaneously. In effect it has shown a potentially viable route to decarbonisation of energy, not just electricity.

Why? The thesis of my book The Switch is that solar photovoltaics will become increasingly cheap. As a result, developers are prepared to offer electricity from PV at lower and lower prices. Auctions that result in costs of around 2-2.5 US cents per kilowatt hour are now common in the sunniest countries. It is not difficult to find forecasters writing that solar costs will decline to less than one cent per kWh within a decade or so.

The fall in the price of solar-derived power will have a much wider effect than simply on electricity prices. Put at its simplest, it means that solar PV becomes a far cheaper source of energy than fossil fuels. At a price of $60, the underlying energy in a barrel of oil costs around 4.4 US cents per kWh.[1] (For comparison, gas in the UK currently costs around 2.6 US cents per kWh at the wholesale level).

The implication of this disparity is clear. If we can use solar electricity to make petrol equivalents, we may be able to undercut oil, and ultimately replace fossil fuels entirely. Electrolysis to make hydrogen is about 80% efficient today using the newest technologies. This means that solar electricity costing 2 US cents per kWh is used to make hydrogen, the cost of this energy-carrying gas is about 2.5 cents per kWh, well below the cost of oil.

But CE very definitely doesn’t say that its synthetic fuels are competitive today with oil once the cost of carbon capture is included. Grabbing CO2 from the air is thermodynamically inefficient process and uses over 2,000 kilowatt hours per tonne captured, mostly in the form of low-grade heat at around 100 degrees. CE indicates that it has a target cost of around $1.00 a litre for its fuels. That’s probably about double the US wholesale price of petrol and the oil majors won’t be quaking as a result of this week’s announcement.

But two things should make them nervous. First, as renewables grow in the share of electricity markets around the world, they will push down the costs of electricity. As I have said before, the impact of very high winds on north European electricity markets is to force short-term prices down to zero or below. This means that the cost of hydrogen falls as well, as does the price of CO2 capture. (Energy dominates the cost of direct air capture of CO2). This brings down the price of synthetic fuels because they will be principally made at times when energy is cheap even if this means that the ‘refinery’ only works half the time.

In previous work I have seen, CE’s cost assumptions include energy prices that are broadly comparable to average wholesale costs of today. I think this is unduly conservative. Many of the hours over the course of a year will see surpluses of electricity and very low prices, this driving down the final cost of synthetic fuels, probably well below oil.

The second effect is more uncertain but I think is still powerful. As electric cars grow in number oil demand will eventually fall (my best guess is about 2025 for this crucial moment). A switch away from fossil sources towards synthetic oils will increase the speed of the decline from that point. Refinery utilisations will start to fall and upgrades will get increasingly difficult to justify. Staffing costs will tend to rise per unit of output. Existing assets including pipeline networks will get used less. In other words, the underlying economics of today’s oil producers and their refining and distribution operations will tend to deteriorate. Capital will become more difficult to attract into the industry.

This will be a slow process. The oil industry will not collapse overnight. But advances like this week’s CE announcement will eventually reduce the economic viability of the oil industry, speeding up the move from fossil fuels.

What will eventually happen will probably look like the current crisis (I think this is a fair use of the word) in the gas turbine industry. Until six months ago, the titans in the industry (GE, Siemens and Mitsubishi) assumed that the rise in renewables would be good for gas, because CCGT generation would still be needed to supplement intermittent sources of power. It hasn’t turned out that way – after falling in numbers for years, just 100 large turbines were ordered in the last year compared to 400 a few years ago. What is probably as important is that the existing gas plants around the world have been tending to work fewer hours a day. Maintenance needs, say both GE and Siemens, have fallen, reducing servicing revenues. This was completely unexpected. Last week GE said it would fire 13,000 people in the turbine division. A month or so ago, Siemens finally cut 7,000 jobs. The impact of GE’s failure to address the problems in its gas turbine business has been felt in a sharp fall in the company’s share price. This was a carbon bubble deflating very unpleasantly indeed. The same will eventually happen to fossil oil.

But the principal point I wanted to make here is that technologies like CE’s offer the prospect of being able to run the entire energy system, not just electricity, on renewables. It allows the world to invest hugely in wind and solar, with resulting over-supply for much of the days, months and years. Rather than being wasted, this excess will be used to make energy for aviation and other uses that are difficult or impossible to electrify and allow us to cope with periods of no sun or wind.

[1] $60 divided by 159 litres (a barrel) and by 8.8 kWh per litre. 

0.1% of 16-44 year olds 'strongly oppose' onshore wind

Every few months the UK government interviews 2000 people about their views on energy. These surveys show the gradually rising popularity of renewables, including onshore wind. I looked at the underlying data in the latest survey and found that just 1 person between 16 and 44 from the entire interview panel was ‘strongly opposed’ to wind. (Want to know more? She lives in a rural area, earns a high income and supports other renewables. She doesn't like fracking). By contrast, 235 respondents in this group ‘strongly supported’ the technology.

Across all age ranges, wind seems to be rising in popularity. The only group with more than a few opponents are those over 65. And yet the reduction in those opposing onshore wind has been fastest in this age range.

Media coverage shouldn’t start from the assumption that people don’t like turbines. Wind power is popular. Vastly more popular than fracking.

The need for an end to the block on cheap wind

Onshore wind turbines sited in windy coastal locations are the cheapest source of electricity for the UK. Even with the current restrictions on turbine size, developers would probably be able to offer electricity from large new farms at below £50 per megawatt hour. This is less than half the cost of the new nuclear power station at Hinkley Point.[1] It will also beat a new gas power plant. More wind means lower electricity bills for everybody.

Research unit ECIU recently wrote that ‘The effective ban on the cheapest form of new power generation looks increasingly perverse. For a Government committed to making energy cheaper, this risks not only locking people into higher bills, but also runs contrary to its aim of having the lowest energy costs in Europe’.[2]

Government blocked large scale onshore wind two years ago. It now acknowledges that this policy may need to change in light of the continuing reduction in the costs of getting electricity from turbines. Energy minister Richard Harrington said at this year’s Conservative Party conference that 'Provided that it goes through a reasonable local planning system, I see no reason why it should not be on the same level playing field as everything else’.

The easy assumption that onshore wind is unacceptable to voters is increasingly false. The latest edition of the regular government survey on attitudes to wind power and other renewables was issued last week. It showed that onshore wind was supported by 74% of the population and opposed by only 8%. That is a nearly ten to one ratio. (The remainder of the respondents were either indifferent or ‘don’t know’).

Among those against wind, those who are ‘strongly opposed’ to this form of renewable energy represent less than 2% of the UK population. Yet these people seem to be responsible for holding up the development of potential of wind to deliver cheap and low carbon energy.

The net balance of 66% supporting onshore wind is a new record in the five year history of the survey.[3] The average next balance until survey 15 in 2014 was less than 55%. But support has increased in each of the last four waves since then.[4]

Source: Energy and Climate Change Public Attitudes Tracker, BEIS

Two important other conclusions come out of the survey.

1)    Age is by far the most important predictor of attitude towards wind. Young people are almost universally in favour. However, all age groups have increased approval of onshore turbines in the last few years.

2)    The people in rural areas – despite repeated assertions to the contrary – are typically more in favour of wind than urban dwellers. A much larger fraction are strongly supportive. However, more rural interviewees were also ‘strongly opposed’ although the numbers are  tiny.

The impact of age

Only 3% of all those interviewed and aged between 16 and 44 were opposed to onshore wind power. (This includes both people who ‘strongly opposed’ wind and those who simply ‘opposed’). Put another way, 28 people out of the 871 interviewed in that age range didn’t like turbines.

By contrast, 132 people out of 596 respondents who were over 65 disapproved of wind. This was 22% of those interviewed. But even in this age range, only 4% ‘strongly opposed’ onshore turbines.

Source: Energy and Climate Change Public Attitudes Tracker, BEIS

Between survey 15 (in late 2014) and the latest round of interviews, every age group showed an increase in the percentage supporting onshore wind. (In the case of 35-44 year olds, the increase was only half of one percent).

Source: Energy and Climate Change Public Attitudes Tracker, BEIS

Even among the 65+, the percentage approving of turbines rose from 53% to almost 65%. The number disapproving fell from 22% to 16%. This reduction was the largest of any group in absolute percentage terms. The numbers opposing wind amongst all age groups 16-44 is now almost insignificant.

Source: Energy and Climate Change Public Attitudes Tracker, BEIS

Rural versus urban

Perhaps the rise in support for onshore wind is confined to those who live in large towns and cities? These people will generally not even be able to see a new generation of onshore wind turbines from their windows.

The reality is that rural dwellers as a whole are more likely to approve of onshore wind than people in towns. About one quarter of the UK population is defined as living in rural areas. These people include 32% who strongly support wind, compared to 21% for the population as a whole.

 On the other hand, more rural people than urban dwellers ‘strongly oppose’ wind but this is not enough to overturn the general conclusion that living in the country makes a person more likely to support the technology.

Source: Energy and Climate Change Public Attitudes Tracker, BEIS

What does this all mean? The large majority of British people support onshore wind and this support is increasing among all age groups. Tiny numbers strongly oppose turbines and these people are almost exclusively old. It’s time to start developing Britain’s extensive and inexpensive resources of wind again. Despite what you might read in the newspapers, there really isn’t much opposition.

DISCLOSURE: I own a stake in the makers of a new vertical axis wind turbine, shares in two co-operatively-owned farms and debentures in a privately-held turbine.  

[1] The agreed price for Hinkley was lower but price inflation since the date of agreement has taken the cost of new nuclear electricity to well above £100 a megawatt hour.

[2] http://eciu.net/press-releases/2017/britain-in-1bn-block-on-cheapest-energy-technology

[3] The net balance is the percentage of those in the survey supporting onshore wind (‘support’ or ‘strongly support’) less the percentage that oppose (‘oppose’ or ‘strongly oppose’).

[4] Questions about the support for renewables technologies have not been included in all of the most recent waves of the survey.

An industrial revolution for agriculture

Summary

Depending on what is included in the calculation, agriculture accounts for up to a quarter of the world’s greenhouse gases. Emissions include methane arising from the livestock production process, nitrous oxide from the use of fertilisers and, third, the cutting down of forests. Deforestation, driven by the need to expand the land area devoted to the production of food for humans and for animals, adds to carbon dioxide to the atmosphere.

The world has the rough outline of a realistic plan for cutting fossil fuel use across the global economy. It will increase the amount of renewable electricity produced and switch transport to battery cars and lorries. No such scheme exists for agriculture, even in the vaguest outline. The issue is rarely discussed. But unless emissions from global farming are curtailed, all long-term targets for greenhouse gas reductions are unattainable. 

Take one example. The average Briton eats about 18 kilos of beef a year. The emissions from the production of this single food add about 4% to his or her carbon footprint. And nothing in the government’s plans proposes to reduce this, even though we are increasingly aware that net emissions may need to fall to zero within a few decades to meet a 2 degree temperature change target. It is simply politically impossible to push for a reduction in meat consumption. So the problem is ignored.

The livestock production chain is the most important cause of agricultural emissions. A move to a one hundred percent vegan diet would reduce emissions by 50% or more. Although veganism is growing sharply in some places around the world, the switch to conventional plant-based foods will almost certainly be too slow to provide the speed of reductions required.  And even vegan diets have high carbon footprints and land use requirements.

In this article, I suggest that the only way to achieve substantial greenhouse gas cuts is to move as much agriculture as possible out of fields and into factories. This will directly reduce emissions but also cut greenhouse gases by decreasing the pressure to switch forests to agricultural land.

More specifically, we first need to shift to artificial meat. The need to stop farming beef cattle is particularly urgent; Silicon Valley startup Impossible Foods is a highly plausible contender in the race to create acceptable meat substitutes.

A burger from Impossible Foods

My second suggestion is to grow many products in indoor hydroponic systems rather than soil. This saves land, fertiliser, pesticides and reduces greenhouse gas emissions. Hydroponic techniques for growing leafy crops and some berries are also advancing fast. Fellow Silicon Valley company Plenty Farms is showing how the world might get many of its micronutrients from indoor farming.

A wall of lettuce at Plenty Farms

Root crops, such as potatoes and carrots, will stay outdoors for some time. The world’s main sources of human calories – wheat and rice – will also be difficult, but not impossible, to transfer to hydroponic systems. But, despite their importance to human nutrition, these high calorie crops do not occupy much of the world’s usable land area.

We need a new industrial agriculture to reduce emissions and to allow much of the world’s land area to return to forest. Unfortunately, organic agriculture, often seen as a crucial part of reducing emissions, seems unlikely to assist in rapid decarbonisation. It may even increase emissions. As someone who grows and buys organic produce, it saddens me to say this but It is a distraction from the difficult task of feeding up to 10 billion people with the lowest possible carbon footprint.

This is a long article, for which I apologise. I wanted to demonstrate both that we need an industrial revolution in agriculture and that the raw technologies for higher productivity with low carbon impacts are already in place.

The background

Global emissions of greenhouse gases are about 50 billion tonnes a year.[1] Although the figures are considerably more uncertain than for fossil fuel combustion, agriculture and changes in land use contribute about 10-12 billion tonnes of this. The IPCC’s 2014 assessment suggests that agricultural production accounts for slightly over half the total figure, with land use change slightly less.[2] (Land use change in this context is predominantly the conversion of wooded land or wet peatlands to arable or grazing land, a process which results in the emission of CO2 and methane back to the atmosphere).

Agriculture itself directly creates emissions in three main ways. First, some animals, particularly cows and sheep, emit methane from the digestive tract as they break down the complex molecules in the grassy diet. This alone may result in over 2 billion tonnes of equivalent CO2 emissions a year (about 4% of global emissions). Second, animal manure rots down, giving off methane and nitrous oxide. Third, artificial fertiliser applied to fields produces nitrous oxide emissions.

Of the nearly 6 billion tonnes of emissions coming directly from agriculture, perhaps half arises from livestock, or around 3 billion tonnes. Cows are by far the most important source, but the role of pork is increasing fast.

If we add in the impact of deforestation that occurs as a result of increasing meat production, the impact is far greater.

Of the decarbonisation challenges facing the world, this clearly ranks in the top division. In addition, agriculture is the dominant use of fresh water around the world, likely to be an increasingly scarce commodity, and fertilisers and other chemicals applied to fields are important sources of watercourse and coastal zone pollution.

The livestock problem is made worse by the central role livestock production plays in stretching the world’s land resources. About 50% of the world’s habitable land (not glaciated or completely barren) is given over to agriculture. Of this, over three quarters is devoted to livestock and to growing the crops that help feed that livestock. But this land only results in the production of about 17% of the food calorie that humans consume. Land growing crops is - on average – about fifteen times as productive in terms of calories as land given over the animals.

This isn’t an entirely fair comparison because animals are often kept on land that would produce very little grain or other planted crop. But, more realistically, a farmer putting crops instead of pigs into lowland and reasonably fertile field might get five times as many food calories as she did from the animals. Twenty calories of grain fed to a cow will result in about one calorie of usable meat when the cow is slaughtered.

This gross inefficiency is sometimes justified by saying that humans need the proteins provided by meat. This is incorrect; cows and other animals typically eat much more protein, often in foods made from beans, than they actually provide in meat. Mosa Meat, one of the pioneers of artificial meat, says that a cow or pig will transform only 15% of vegetable proteins into edible animal proteins. Animals therefore reduce the net amount of this important food constituent available to humans.

As the now famous Food and Agriculture Organisation (FAO) report said, livestock has a ‘long shadow’. Perhaps surprisingly, relatively few people know this, particularly compared to the increasing numbers aware of the climate impact of travel and energy use. In one survey less than 30% of respondents reported that they believed that meat and dairy production had a major impact on climate change. The figure for transport was twice this.

But not only is the global effect of agriculture as large as all transport emissions, it is far more difficult to reduce. Changes in cultivation practices may marginally reduce the climate-changing effect of cows and sheep. Keeping animals in intensive feed lots probably reduces emissions, but at a cost to welfare that many people regard as too high.

Reducing the land area given over to animals and for the growing of their food would enable arable crops to be grown, at least in some places. The total amount of available food would rise. The world’s extra calorie needs to cope with as many as 3 billion more people in 2050 could be accommodated without further deforestation.

The problem is that as people get more prosperous, they tend to consume more meat. So growing wealth will result in more animals, more land devoted to growing food for those animals and not for humans. Inevitably, the threat to the world’s forests will increase although it is worth pointing out that global deforestation rates have probably been tending to decline for several years. Growing agricultural productivity has keep the land requirements for animal cultivation lower than they otherwise would have been. (One important piece of recent research questions whether forest loss has indeed declined).

Global beef consumption is up about 10% since the turn of the century. We might have expected the number to be higher but increased incomes have generally arisen in countries that do not consume much beef, such as China and India. But rich countries with high beef sales, including the US, might see further growth in consumption. Overall, the US Department of Agriculture sees the average American increasing the amount of meat eaten by 5% between 2015 and 2025, some portion of which will be greater beef purchases.

The second, and very welcome, impact of prosperity is often improved access to high quality foodstuffs that are expensive to produce. Green vegetables, herbs and leafy crops add variety, fibre and important micronutrients to a grain-based diet. Fruits such as berries are attractive to eat and probably good for health. The problem is that these products require far more land for each calorie of food value than the rice or wheat that forms the backbone of most people’s diet. A hectare of spinach, a valuable source of vitamins and metal ions, might produce 5 million calories of food. The same area given over to rice could give six or seven times as much. So as global population expands and people get better off, we can expect more pressure on land use for this reason as well.

What do we do?

1, Replace meat

The most important challenge is to reduce the amount of farmed meat that is consumed. Currently the world uses about 270 million tonnes a year, or just over 30 kilos a person. (These amounts vary enormously, and not necessarily in a way obviously tied to income; the people of Uruguay and Argentine - both middle income countries - eat about 50 kilos of beef alone).

Veganism, or the conscious avoidance of any form of animal product including, is growing strongly in many places around the world. The world leader is probably Israel, with perhaps one in twenty adults saying that they avoid all animal products. About 1% of UK adults now self-identify as vegans - up from not much more than a quarter of this a few years ago - and the percentage is probably double this level in parts of northern Europe. Vegetarianism, its milder alternative, might have gained the affiliation of 10% of Swedes and around 3% of French people, for example.

A rapid worldwide switch to a meat-free diet, preferably with no dairy products either, might be possible but seems very unlikely. Although young adults are restricting their meat intake in richer countries as a deliberate choice, their switch is generally not being matched by the middle-aged and older.

So the world needs to find an acceptable alternative to meat. Plant-based alternatives have historically been poor at copying the texture and full taste of meat. Most vegetarian burgers, for example, may be very acceptable foods to many people but they don’t really mimic minced beef.

We’re left with two main options: trying to improve meat substitutes or making meat in the laboratories. Both routes are being pursued by commercial enterprises, mostly in the US. For what it is worth, I think it is going to be easier and quicker to get good substitutes for meat down to a competitive price than growing similarly inexpensive meat in the lab.

Meat is approximately a trillion dollar industry (c.1% of world GDP) and global capital circles the companies in the artificial segment knowing that the successful businesses will become very valuable entities indeed. And the venture funds putting cash into these companies seem also to be very aware that climate change pressures will be likely to make farmed foods more expensive in decades to come, improving the economics of artificial alternatives.

Meat grown from cultures.

Memphis Meats is one of the leaders in lab-grown meat. Like other companies at the forefront of animal meat replacement, it has attracted investment from well-known investors. Bill Gates holds shares, as does the global agricultural commodity trading firm Cargill. (Gates is an investor in several of the best-known companies in the meat replacement market).

Memphis makes a beef and a chicken meat from animal stem cells cultured from an animal foetus. The company believes it will eventually rely on entirely self-reproducing cells and will not need to extract them from animals. These cells are fed with a cocktail of vitamins, sugars and minerals and over a period of weeks in a bioreactor become meat.

Southern Fried Chicken from Memphis Meats

The cost is still thousands of dollars per kilo and the company won’t start commercial sales until 2021. Memphis Meats provides figures suggesting that the worldwide average price for meat is about $4 a kilo, and it knows it will have to compete with this figure. In fact, one recent survey I saw showed that consumers actually expect to buy artificial meat at a discount to the farm grown product.

Is it possible for Memphis Meats to get costs down to $4 a kilo? It seems a huge challenge to me, given the length of time it will take growing the meat and the expenditure on nutrients but the company points to the huge energy savings possible from lab-grown meat. It says that one calorie of its beef consumes about three calories of ‘food’ compared to the 20+ that a cow would need to make the same quantity of beef. Memphis Meats also stresses the savings in water and land, saying that its technology may cut 90% from the requirements of conventional agriculture. It puts greenhouse gas reductions at a similar level.

Professor Mark Post set up a lab-grown meat startup after creating the world’s first artificial burger in 2013. Mosa Meat is attempting the same task as Memphis Meats, using some cow cells and encouraging them to replicate in a bioreactor filled with nutrients. It has fallen behind and only says that commercial lab-grown meat might be available within ’10 to 20 years’, not the 2021 promised by Memphis Meats.

Other entrants into the race for artificial meat also lag the Californian company. SuperMeat, an Israeli venture trying to tap into the large vegan population in the country, has struggled to crowd-fund its activities. For the moment, Memphis Meats looks like the early winner. But even it has fallen well behind Winston Churchill’s 1931 prediction.[3]

Fifty years hence, we shall escape the absurdity of growing a whole chicken in order to eat the breast or wing by growing these parts separately under a suitable medium.

Better meat substitutes

The race is to make a burger that tastes like real meat. In other words, the customer can get the environmental advantages of plants with the desirable experience of eating beef. Two companies lead the field. Beyond Meat and Impossible Foods.

Beyond Meat has its products in stores across the US, having finally cracked the wary scepticism of the supermarket buyers early last year. The product is made from pea protein and soya and made to taste either like chicken and beef. The company proudly flags the fact that its products are now in the meat section of the conventional large supermarkets, not tucked away in a section of the store catering for vegetarians. And Beyond Meat sells its product as ‘clean’, ‘healthy’, ‘light’ but full of protein. It is attempting to capture the millennial wish for a food that has the supposed virtues of meat (protein) alongside the health-giving advantages of plant foods and their lower calorific content. (However the product does contain titanium dioxide, a chemical that some people think is potentially carcinogenic in the nano-scale form used by Beyond Meat).

Beyond Meat burger patties in a US store

The cost is not yet competitive with conventional meats; stores are selling the burgers at three or four times the price of minced beef. The price premium didn’t stop the US meat giant Tyson Foods investing in the company at the end of last year. And a few weeks ago Beyond Meat announced it had added Leo Di Caprio to its list of shareholders. To capture attention from both is an impressive achievement.

Opinions vary as to whether Beyond Meat does really taste like the products it is emulating. There appear to be few such concerns about the burgers made by Impossible Foods. Impossible also makes its products from the protein of plants including wheat and potato. Its key extra ingredient is ‘heme’, an iron compound richly present in meats (and also to a lesser extent in plants). Impossible Foods uses genetically modified yeasts, specially engineered by the addition of a gene from soya beans to express heme. The compound gives the burger a meat-like taste and texture. It also seems to be the reason that an Impossible Burger seems to bleed a red liquid when cooked.

An Impossible Burger with the centre still red from the heme

At present the Impossible beef patty is sold only to upmarket restaurants. I looked at the menu of one chain and the burger sells for about twice the price of the lowest cost conventional equivalent.  But the difference between the Impossible product and the more expensive parts of the burger menu was not large. In two or three years the cost of the meat alternative will be the same as conventional ground beef, the company claims.

Impossible Foods recently opened a factory in Oakland, California. It’s a big establishment but the world would need over fifty thousand factories of the same size to produce all the meat the globe eats. However it claims that its understanding of the effect of heme on flavour and texture means that it can move from beef to other ersatz meats. And, by 2035 to ‘completely replace animals as a food production technology’, in the brave words of the CEO. You can say things in Silicon Valley, thank goodness, that would be dismissed as ludicrously optimistic in other parts of the world. 

As with Memphis Meats, Bill Gates is a shareholder in the company, which has raised about $200m so far. Its CEO and founder, an idealistic but firmly commercial former biochemistry professor at Stanford, is himself a vegan and says that he started the business explicitly for environmental reasons. Its beef replacement product has a tiny footprint of greenhouse gases, land, water and fertiliser pollution compared to conventional meat.

On the question of the eventual cost of the product, this is what CEO Pat Brown said about the product in an interview in August 2017.

..The economics are very tilted in our favor because the way we produce it is so much more resource efficient. We use a quarter of the water, 1/20th the land, 1/8th the greenhouse gas emissions, way less fertilizer and pesticides and stuff like that. That translates into cheaper production cost. When we look at the technology we have today and project it at scale, there’s a clear trajectory to being able to produce this product and basically all the meats that are in our pipeline at prices that are at or below the cost of the cheapest meats on the market.

How long will this take? ‘Maybe three years or so’. If he is right, then we have a potential way forward to eventually reduce the scale of meat’s impact on the global environment.

I was particularly struck by one of the many other comments the company makes about the effect of switching to meat-free meat. It says that eating just one of its burgers rather than a conventional equivalent will save 75 square feet of land (seven square metres), principally because of the reduced need to grow feed for cattle. This space could, for example, be used for reforestation that will capture carbon. If Impossible Foods is right that one burger saves seven square metres of land for reforestation, then the typical British person switching to their product for all his or her beef consumption would sequester almost a tonne of CO2 a year. This is over ten per cent of that individual’s current footprint. 

2, Grow as much as we can hydroponically and inside buildings or greenhouses

The other move I hope we see is away from field horticulture towards hydroponic techniques. This is particularly useful for leafy vegetables and some berries. Even cucumbers can be grown this way.

Hydroponics avoids the need for soil. Seeds or seedlings are placed with their roots in a channel of water. Plants grow by feeding off the nutrients in the rich broth of water flowing past. Or in some cases the roots of the plant grow directly into air through which a dense mist of nutrient-laden water passes. (This is usually called aeroponics, rather than hydroponics).

Hydroponic techniques can be used indoors or outdoors. If indoors, climate can be more easily controlled. But the ‘farm’ needs to use LED lights to provide the energy the plants need. As LEDs fall in price and gain in efficiency, this is becoming more financially feasible every month. But, it needs to be added, many of the initial hydroponic ventures  havfailed, in part because of high electricity costs for lighting and for cooling but also because they operated at a scale insufficient to cover high fixed costs.

Hydroponics can deliver huge increases in yield per square metre of space. If the plants are stacked vertically in trays, proponents claim a hundred-fold greater output of food. Water use is also dramatically reduced, by up to 99% according to Plenty Farms. Since about 70% of the world’s frash water is used for agricultural purposes, this matters.

Pesticides are either not needed or can be employed in tiny quantities. Weedkillers are unnecessary. Fertiliser consumption can be at least halved. As importantly, very little, if any, fertiliser pollution gets into watercourses. The third most important source of greenhouse gases from agriculture is from the breaking down of ammonia based fertilisers partly to nitrous oxide, a particularly virulent cause of global warming. Hydroponics reduces this source almost to nothing.

Not all plants can be successfully grown in hydroponic systems. But those crops that can be cultivated often have a relatively low yield of calories per hectare out in the field. So they occupy more space than would be needed for high yielding crops such as rice or potatoes of the same food value. More prosperous people not only eat more meat but also prefer to consume larger quantities of green vegetables. As the world’s population grows and average incomes increase, the need for indoor hydroponic cultivation becomes ever more obvious.

The best-funded hydroponic growers also tend to share an ambition to make the production of lettuces and other greens more local. That is, instead of shipping the product from a remote location, perhaps California or Spain, to the main urban markets of the US or Europe, they want to locate the hydroponic farms next to centres of population. The food is much fresher and thus its nutritional content is likely to be better. Incidentally, it also reduces the carbon footprint of the greens or berries because of reduced diesel emissions.

Does a lettuce grown hydroponically taste as good as a fresh lettuce from a local farmer’s market? The prevalent opinion is a confident ‘yes’. The companies trying to take hydroponics to a much larger scale in industrial countries employ scientists who focus exclusively on improving the mix of nutrients in the broth and the spectrum of light directed at the plants. (Most indoor hydroponic growers use a light that appears very pink to human eyes).

Two companies look as though they have solved most of the early problems with large-scale hydroponic growing and say they are ready to roll out their industrial farms to large cities around the world. Plenty Farms uses vertical hydroponic towers which face the light sources; AeroFarms uses an aquaponic technique combined with stacked trays of growing plants.

Plenty Farms

Recently funded with an additional $200m by investors including Jeff Bezos’s foundation and Eric Schmidt of Alphabet, Plenty Farms aims to develop farms on the edges of every major city in the world. The underlying technology it uses is the ZipGrow Tower, a 6 metre high moulded white plastic square tube into which a black plastic spongy material full of air slides. Lettuces and other plants are germinated and grow to small seedlings in a separate area and are then inserted into the black sponge.

A wall of basil with LED lights on the left

After being filled with seedlings, the tower is moved to a vertical position alongside other units and water containing the right nutrients is dripped down through the sponge. The roots of the young plants capture the nutrients and the water itself. In the right conditions, plants will grow perhaps twice as fast as they do out in the fields.

At harvest time the plants such as lettuces are simply cut away from the matrix and transported to where they are to be sold.

Plenty’s first farm is in South San Francisco. It is about 0.4 hectares in size and claims to produce about 900 tonnes a year of lettuces, herbs (particularly basil) and other crops. The intention is to double the size for future urban farms. The average US resident apparently eats about 10 kilos of lettuce a year, meaning that one of Plenty’s new sites will cover the demand from nearly 200,000 people if focuses entirely on this crop. That means the London area might need 50 farms, totalling about 40 hectares, though they would logically be placed right next to the main supermarket distribution centres rather than in the city itself.

Can this new form of farming offer produce at prices that compete with conventionally produced greens? Most existing urban hydroponic farms offer lettuces and other greens that are priced at a multiple of grocery store prices. (Think $5 for a 30 gram box). But Plenty is convinced that parity is possible. Electricity costs may be high but labour and other operating expenses should be lower.

How much land will be saved by each Plenty indoor farm? My rough calculations suggest about 50 hectares. (By the way, this isn’t consistent with the claim that Plenty and Aerofarms increase land productivity by at least a hundred-fold. The company’s own figures suggest an actual figure of around sixty times). Each one is therefore not hugely significant, but many thousands of farms around the world will make a difference.

Aerofarms

At the other side of the country in New Jersey, Aerofarms does things a bit differently. But the aims are the same: very dense production of leafy vegetables in unused buildings. Aerofarms sprays a mist of nutrients rounds the roots of plants, stacked in trays between which sit LED lights.

The trays in an Aerofarm indoor growing farm

It makes similar claims to Plenty about the reduction in water use, fertilisers and pesticides. It says that it avoids 98% of transport emissions from shipping greens across the country. Aerofarms has also dipped heavily into the pools of venture capital looking at agriculture and has raised more than $100m. It has now put farms into other countries, including in the Middle East, and wants 25 within five years. Like Plenty, it recognises the importance of producing its crops at a price no higher than ordinary greens. (Though this still looks very high compared to European prices).

Both technologies use the power of the Internet of things to gather data from cameras and sensors to achieve the best yields and product quality. These are true factory farms.

A final thought

Many people in Europe romanticise farming, particularly if it is of the small-scale family kind. We think that the more agriculture resembles the farming of half a century ago, the more environmentally benign it is. This is wholly wrong. The damage that livestock production and intensive field agriculture is doing to the soil, to watercourses and to the climate is huge, but almost entirely unseen.

As much as possible of our food production needs must be fully industrialised as soon as possible. That means food creation needs to go indoors and agricultural land returned to the wild and to forest. Without this change, the battle against climate change is unwinnable. We already have the outlines of the technologies to make the shift.

[1] This includes carbon dioxide and the other greenhouse gases weighted according to their global warming potential.

[2] IPPC Fifth Assessment report, 2014, p811 et seq.

[3] I saw this quotation on the website of an organisation that funds research into artificial food – www.new-harvest.org. 

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UK renewables are now fully cost-competitive with fossil sources

The offshore wind auction produced a price of £57.50 per megawatt hour for two projects. The first phases of Hornsea2 and Moray offshore wind farms will be completed before April 2023 and will receive this guaranteed return.

In November 2016, the UK government produced an assessment of future electricity generating costs. Its central estimate of the likely price needed to attract developers to build offshore wind for projects completing in 2025 was £100. In other words, today’s announcement (11th September 2017) shows that offshore wind costs in five years’ time are not far off half what the government projected for 2025.

The 2016 official projections updated figures from 2013. In the earlier 2013 assessment, the cost of offshore wind installations in 2030 was put at £120, over twice the realised price for 2023.

Where does offshore wind now stand in comparison to other generating technologies? In the 2016 projections, the government suggested the following estimates for 2025. Figures are per megawatt hour.

Gas £82, including assumed carbon cost

Gas £53, without any carbon cost

PV £63

Onshore wind £61

Auction result for offshore wind, 2023, £57.50.

These numbers show that gas is projected still to be slightly cheaper - if carbon pollution costs are ignored - in 2025. But the differences between gas and renewables are, at most, £10 per megawatt hour. And most people in the industry now say that onshore wind and PV costs in 2025 will actually be substantially lower than the figures offered by BEIS in November 2016.

In addition, the assumed costs of power production from gas are flattered by a highly optimistic forecast of the percentage of time that a new power station will be actively producing electricity. The government estimates a CCGT plant will work 85% of the hours of a year. As more and more wind comes onto the British grid, this assumption will look increasingly wrong. A more realistic figure would push up the effective price of power produced by gas because the capital costs will be spread over a smaller total output.

Today’s wind auction shows that the main sources of renewable electricity (wind and solar) are now fully cost competitive will all types of fossil fuel power and require no subsidy. Commentators still saying that renewables are ‘expensive’ need to be corrected.

Bankruptcy in two ways - 'gradually and then suddenly'

Humankind has many psychological flaws. One of the least recognised is an almost complete inability to understand the impact of compound interest. Our minds can deal with linear change well; if a new wall is half finished after ten days, all of us can predict that completion is likely within a further couple of weeks. But give us a problem involving percentage growth rates and almost all of us fail miserably.

This deep psychological flaw makes us underestimate the speed of changes in technology. The consequences of this for business, as it deals with the inevitable transition from fossil fuels to carbon-free energy, are profound. Most low carbon technologies, from electric vehicles to offshore wind power, are at early stages of development with market shares that scarcely register. But their growth rates are high, often reaching 40% or more. Largely unnoticed by the giants in their industries, they will take over markets far faster than most of us psychologically inadequate humans think possible.

In my presentations I often use an illustration to show how we all struggle to understand the speed of change. Imagine a market in which a new technology has fought for decades to obtain a 1% market share. (Think of solar photovoltaics or electric vehicles, which have approximately this share of global electricity production and new car sales today). If the innovation is now growing at 40% a year and this rate continues, how long will it be before it has captured 10% of sales? Most people answer with figures of many decades. The right answer is about seven years.

Moreover, even at 10% market share it is all too easy for us to think that the innovation can be ignored. It is still a small fraction of the available market and another human weakness - complacency - allows entrenched competitors ignore the pace at which their market is being undercut. The old technology may still be growing in absolute terms even as the upstart gains 10% share, encouraging a comforting sense that all is normal.

But if growth continues at the same rate it will take only a further seven years for the market to be wholly taken over by the new technology. So the upstart will have taken only 14 years to get from one per cent market share to complete dominance.

To make the point a different way, if an existing business waits until an insurgent technology has hit a 10% market share before it wakes up to the threat, it is probably doomed. The typical large company cannot change fast enough. Its sales will start falling soon, it will then typically haemorrhage cash and its credit rating will slump as lenders recognise the inevitability of decline. By then it is too late to counter the threat from the insurgent new product. Capital will have dried up, distribution channels defect to the new technology and the best employees will have left.

The novelist Ernest Hemingway has one of his characters ask another ‘How did you go bankrupt? ‘Two ways’, was the response “gradually and then suddenly.’ The competitors in the old energy economy, dominated by fossil fuels and internal combustion engines, are still mostly in the ‘gradual’ phase of their bankruptcy. The ‘sudden’ phase may arrive much sooner than they imagine.

The best known example of the how explosive growth transforms an entire industry is, of course, the arrival of the digital camera and its impact on conventional photography. Kodak, the dominant global producer of photographic film, can lay claim to having invented the digital camera in 1975. The company doesn’t appear to have actively commercialised the product and it was Sony that bought out the first consumer device in 1981, although this was an electronic, but not fully digital, camera.

The first true digital cameras were put on sale in the late 1980s. It took until about 1998 for the product to reach 10% or so of total camera sales. Film-based camera sales continued to grow at least until this date and industry participants could be forgiven for not realising that the ‘sudden’ phase of their destruction was well under way. Even by 2000, the threat from digital cameras to conventional film was far from understood. Here’s what the marketing material for one independent market research study said at the time:

‘While digital camera sales have not begun to erode film camera sales or film usage on a worldwide basis, steady market growth will inevitably begin to replace film camera adoption’.

(https://www.dpreview.com/articles/2326873238/digicamsales)

Just five short years later, the conventional camera was all but finished. Agfa, the leading European photographic film manufacturer, went under in 2005. The delusions of those backing this company persisted well after others knew that the death knell for film had sounded. Just nine months before the final closure, its owners said that ‘Agfa Photo will continue to play a leading role in the photographic industry’. It had descended ‘gradually and then suddenly’ into bankruptcy after ignoring the threat from digital. Konica stopped producing film in about 2006. Kodak struggled on until 2012, kept alive by a wider range of products.

Fuji was the only one of the four biggest global manufacturers of photographic film to prosper in the digital world. In the words of The Economist it survived because ‘It developed a three-pronged strategy: to squeeze as much money out of the film business as possible, to prepare for the switch to digital and to develop new business lines’. It had recognised the inevitable victory of digital cameras in the 1980s, long before digital had a significant market share and ran its business to engineer a successful transition. The lesson is that companies threatened by the global transition to low-carbon energy need to prepare well before the need becomes obvious.

Think of some of the key building blocks in the process of transition to a low-carbon economy: offshore wind, solar PV, electric vehicles and storage batteries. All of these technologies are still only insignificant fractions of much larger markets. Many people therefore believe they will still be immaterial for decades to come. Unlike Fuji, all the major oil companies - possibly with the exception of Total - are in denial about the possible speed of transition away from fossil fuels.

Even those who have closely followed the rapid growth of renewables, energy storage and EVs tend to assume that future progress will be quiet and undisruptive. One recent report from a very well-regarded fossil fuels investment analyst that suggested that the move away from oil, for example, would be a ‘slow, balanced transition’ which left the large international companies still in control of the energy business.  The older technologies, he indicated, will fade very gently from view as the fossil fuel companies gradually ramp up their investment in low-carbon alternatives. The low-carbon revolution can be easily managed by the incumbents, he told us. If this isn’t unduly complacent, I don’t know what is.

Nevertheless, almost everybody seems now to recognise that the era of fossil fuels is drawing to a close. For example, the CEO of Shell says that solar power will eventually be the dominant source of electricity. And even the most cautious of car component manufacturers are now predicting an eventual end to the internal combustion engine. This is new; even three months ago many still saw an indefinite future for the petrol car. But none of us can know exactly how fast the switch to alternatives will take.

The crucial thing for us to understand is that at fast growth of a new technology undermines the old companies in an industry more quickly than human psychology allows us to believe. The story of how the major competitors failed to predict the advance of digital cameras will be repeated across many industries in the next two decades.

Free electricity - sort of

At some stage in the future, electricity will be free. Of course nothing is truly costless and what I actually mean is that instead of paying for each unit of power we will buy a package of a certain number of kilowatt hours a month. Included in the bundle will be a payment for having a grid connection, and perhaps a restriction or a higher charge on the flow of electricity at points of peak demand.

Here’s what the advertisement for this service might look like. (Although they’ll probably phrase it a little more snappily).

£50 a month buys you our mega-bundle.

Up to 500 kilowatt hours outside our peak charge period

Charges inside the peak hours of 4pm to 7pm – only 20 pence per kilowatt hour

Maximum draw of 5 kilowatts at any time – enough for the tumble dryer and kettle (just)

What do we need from you? You let us switch your appliances off for half an hour or stop your EV charging when electricity is in short supply

Why will the future look like this? Because electricity is going to get cheaper and cheaper to generate while other costs will rise. More specifically, each extra unit of power coming from PV or wind costs absolutely nothing to make. The corollary is that suppliers will be prepared to supply the power at a very low price, pushing power costs down. But, on the other hand, paying for the distribution of electricity won't get any less expensive.

Although the ‘marginal’ cost of an extra unit of electricity is close to zero, the owners of solar and wind farms still need to be paid. What they want is a guaranteed payment for each month of operation. That will enable the owners to recoup the capital they invested in the initial construction of the farm. 

If I commit to buy the mega-bundle advertised above for twelve months, my retailer can make a secure payment to an electricity generator to cover my maximum use over each period. (As with mobile phone bundles, if I use more than I have paid for, I’ll get a large extra bill). The retailer will also get enough to pay its own business costs.

Peak times are excluded from the bundle. That is when the wind farm operators (or battery farms working with PV) will be able to get the highest prices for any power they haven’t sold because demand is high. So bundles will be constructed to severely discourage electricity use in peak periods. (If this policy is successful, of course, then peak time demand will probably fall sharply and it may no longer be the maximum).

The retailer that supplies me will also need to transport the electricity to me. Much of this cost is fixed. The pylons and the distribution cables don’t cost more when they are humming at times of peak use. Nor do they cost less when barely used in the dead of night. Logically, we should be paying for the connection to our homes, not necessarily the amount of electricity we use. This is essentially analogous to mobile phones; the base station’s costs are not related to the amount of data flowing through it.

You may think this all very bizarre and a very long way from what is happening now. That would be a mistake, I suggest. In fact, the obvious creakings of the UK retail electricity business today are a symptom of the market trying to move in this direction, obstructed by outdated regulation and entrenched pricing patterns.

Part of the problem is that the UK pricing system is tending to subsidise smaller electricity consumers to the detriment of those using large amounts. We cannot change this overnight, and nor should we, because consumers of small amounts of electricity tend to be households that are less well off. Rebalancing pricing to introduce lower charges for each unit of electricity and introducing a monthly fixed price will hurt poorer households.

Nevertheless, the long-run pressure is clear. The variable element of our electricity bill – essentially a payment for kilowatt hours – will fall sharply and the fixed portion – an amount we pay however much power we use within limits – will rise. This force is already at work.

Let me go into a little more detail.[1]

1)    In the six years to 2016 the percentage of household electricity charges going to pay for the power purchased by the retailer has fallen from about 55% of the bill to around 38%. 2017 will probably see a continuation of the decline. This means that only just over a third of your bill is being spent on buying the electricity to supply you.

Source: Consolidated Segment Statements for Big Six electricity retailers

2)    The portion of your bill going on charges for transporting your electricity and covering the subsidies for energy efficiency and paying for renewables has risen from about 30% in 2010 to over 46% in 2016. In the final year, these charges totalled more than the direct cost of electricity purchases for the first time.

Source: Consolidated Segment Statements for Big Six electricity retailers

3)    A split between transport costs (‘distribution’) and subsidy costs has only been available for the last year four years. Analysis shows that the costs of power distribution, paid to the National Grid and, more importantly, to the local network operators or ‘DNOs’ rose by over 4% to 29% of the electricity bill while subsidy costs increased by over 2% to almost 16% of the average domestic payment, or about £80 per household. Distribution costs are therefore now almost one third of the bill and the percentage is likely to rise further. Much of the distribution costs of the electricity system is not directly related to the amount of power carried over the wires. Some subsidies that are paid for by electricity customers, such as the ECO obligation to fund energy efficiency, are also not tied in any way to the amount of power consumed by a household. However, most subsidies - such as the cost of paying Feed In Tariffs - are directly tied to the amount of electricity produced.

Source: Consolidated Segment Statements for Big Six electricity retailers

4)    The last category of covers the cost of running the business. This fell from about 15% in 2010 to around 13% three years later but has since risen sharply to almost 17%. This is probably a function of two things: rising expenditure on the smart meter programme and a fall in the total amount of electricity supplied. The second reason may need some additional explanation; if the amount of electricity bought by customers falls, but head office expenditure stays constant, then the percentage of the bill represented by overheads will rise. This appears to have happened recently. Very little of the costs of running the electricity retailing business will directly depend on how much individual consumers buy. If I double my purchases because I have installed air conditioning, the number of staff in the head office will not change.

Source: Consolidated Segment Statements for Big Six electricity retailers

Across these four principal categories (power purchases, distribution, subsidies and business costs) the clear trend is for the cost of electricity itself to form a much smaller element. But fixed costs that are unrelated, either partly or completely, to the volume of electricity that a customer buys, are tending to rise.

Increasingly what the customer is buying is therefore not electricity itself but rather a package of services that is more and more dominated by distribution costs and other indirect items. In an entirely free and unregulated market, this package would probably be charged for by a fixed monthly fee.

At the moment, most domestic customers pay a daily standing charge of around 25 pence, or around £90 a year. In 2016, the average domestic customer (including those who use electricity for heating, which pushes up the figure) spent around £1.43 a day in total, almost six times as much. The daily standing charge does not even cover the cost of running the office activities of the Big Six retailers and their smart meter programmes. Whether or not the UK does eventually move to selling monthly electricity in packages like mobile phones, the daily fixed charge will have to rise.

The increase will pay for the business operations of the retailers and, more importantly, for the cost of distributing electricity to the point of use. At the moment, the local distribution companies charge a fee for each kilowatt hour they supply to domestic consumers. But as households decrease their consumption, now an established trend in the UK and elsewhere, the largely fixed costs of moving electricity round are spread across smaller and smaller volumes of power. The per kilowatt hour charges may rise.

Or, and I think this is more likely in the long run, the distribution operators will move to charging per connection, rather than per kilowatt hour supplied to a house. Consider, for example, a house with a 4 kilowatts of PV on the roof. Its draw from the distribution system is quite small, and its use is focused on evenings. Not only is the household not paying a fair share of distribution costs, but is also benefiting from being able to import power at precisely the times when the local network is most overloaded and so it should be paying a higher price per kilowatt. (Much of the cost of running a distribution company arises from having to upgrade or reinforce power lines to meet maximum demands). The UK and other countries could discourage domestic PV to avoid this problem or it could simply oblige all customers to pay a fixed monthly fee for distribution costs.

The increase in the proportion of power costs that are fixed, combined with decreasing costs to generate electricity, will have inevitable effects. It will take a long time, but electricity will eventually be sold as monthly contract that combines a bundle of kilowatt hours, higher costs for peak demand periods and, probably, fees for exceeding a maximum draw on the distribution system. And, as a corollary, the householder will get paid for handing control of the charging of the domestic EV to the electricity company so that it can manage supply and demand better.

Does this still sound like fiction? It shouldn’t do. All the individual elements are already in place around the globe. Sonnen, the battery company, runs a scheme in Australia and Germany that gives households a fixed allowance of kilowatt hours per month if they install a battery and allow Sonnen to charge and discharge remotely. Many places, including Hawai’i and other US states, use time of tariffs to hold down peak demand. Other countries, such as Italy, impose maximum usage limits in kilowatts. Some areas, including parts of California, incentivise EV owners to allow the electricity network to manage the charging of the battery. Other places have raised fixed charges sharply in relation to per kilowatt hour costs.

The move to pricing electricity similarly to mobile phones has social consequences. It may have severe impacts on less prosperous households and, in time, also on those that are unable to install batteries for electricity storage. (Such households will be less able to adjust their draw from the grid to minimise their use of electricity at peak times). The issues will need to be discussed and regulation needs to be thoughtful.

But the need to move to lower charges per unit of electricity sold combined with higher charges for the privilege of being connected to the grid and freely drawing power is clear and should not be ignored. The current review of the UK domestic electricity market by Professor Dieter Helm is a good place to start discussing how we manage to create a transition to fair pricing that also encourages low-carbon sources. It’s in no-one’s long term interests that pricing patterns that diverge strongly from the underlying economic reality remain unquestioned.

[1] The numbers in this article are largely derived from data submitted to the UK regulator, Ofgem, by the largest six electricity and gas retailers in the annual Consolidated Segmental Statements. These can be found here. https://www.ofgem.gov.uk/system/files/docs/2017/06/links_to_consolidated_segmental_statements_0.pdf . The figures for 2016 exclude Scottish and Southern because it has not yet filed its segment accounts with Ofgem because its financial year ends later than other companies.

100% EVs can be easily accommodated on the UK grid.

The UK government says it wants all new cars and taxis to be electric by 2040 and the doom-mongers have come out in force. They say that 100% EVs this will strain the UK capacity to produce electricity.

This is not correct. 

Let’s put a few numbers around the question of how and when electric cars will take over from petrol and diesel and what the impact will be.

How much annual demand will 100% EVs add to UK electricity demand?

1, A 2017 electric car will typically get 4 miles from a kilowatt hour of energy. The average car in the UK travels about 8,000 miles a year. That means that a typical electric car will use about 2,000 kWh a year.

2, In 2016 there were 36.7 million cars on the road in the UK. The total amount of energy required to power these cars if they were all electric would be about 75 TWh a year. (A terawatt hour is a billion kilowatt hours).

3, The total consumption of electricity in the UK last year was  about 300 TWh. So if all car and taxi transport was by electric vehicles, the total amount of electricity needed would rise by approximately 20%.

Can the UK accommodate this?

4, If all the vehicle charging in the UK was done in the hour of electricity demand from 6 to 7pm each night, then the total electricity demand in that hour would rise by just over 200 GW, or four times today’s highest power demand. This would not be possible.

5, Instead, the charging will be largely done at night. This will be encouraged by the measures the government will put in place to encourage off-peak charging. If 60% of charging occurred at night, when electricity demand falls and wholesale energy prices tend to be lower, then the increment to electricity demand will be about 15 GW (120 GWh over 8 hours). On average, winter nighttime electricity demand runs at at about 16 GW below the daily 16.00-19.00 peak. In other words, if users are incentivised to charge their vehicles overnight, demand will be essentially flat between 22.00 and 06.00. This is good outcome.

6, Between now and 2030, the UK will add about 25 GW of offshore wind. Typically, these turbines will produce at about 50% capacity factor. (This is higher than 40%+ experienced at the moment as turbines get taller, more efficient and sited in higher wind locations). These turbines will thus produce about 110 TWh a year of electricity. (25 GW *50% * 8760 hours). Offshore wind load factors tend to be highest in winter, when power demand is also high. The annual electricity demand from 100% electric cars (75 TWh) will be just under about 2/3 of the amount of power produced by the offshore wind installed from now until 2030.

7, Digital technology is proceeding fast. Within a few years, the rate of EV charging at any moment across the country will be automatically adjusted to help match overall supply and demand. Not only can EV electricity needs be easily met, properly engineered control systems will mean that charging will help stabilise the electricity system, not the reverse.

Exytron: the world’s first ‘power-to-gas’ system with integrated CO2 collection and reuse

Most of the new power to gas systems turn excess electricity into hydrogen and then methane (natural gas). The methane is burnt. This generates CO2, which is vented to the atmosphere.

Exytron, of Rostock, Germany, has gone one vital stage further. It recirculates the CO2 from methane combustion in a closed loop. If this technology proves to be robust and becomes inexpensive, it solves many of the world’s remaining energy storage problems while offering zero emissions heat and power.

·      Exytron uses surplus electricity from renewable sources to generate hydrogen and oxygen in an electrolyser.

·      The H2 is fed into a reactor alongside a stream of CO2 to make methane. The methane is kept in a tank.

·      The oxygen is also stored.

·      When electricity or heat is required, Exytron’s machines then burns the methane in an oxygen-only atmosphere. A turbine makes electricity from this combustion.

·      Heat is an important by-product. This can be used both for hot water and for space heating.

·      The only products of this combustion are water and CO2.

·      The water is condensed and used for future electrolysis.

·      The CO2 is recirculated and used for the methane manufacture. The surplus heat generated in the process of methane generation, and then combustion, is used for water and space heating.

The unit can provide power and heat on demand. It is complemented by sophisticated computer intelligence that forecasts future electricity production from PV and the needs for power and heat.

This is the first fully closed ‘power to gas’ system in the world. It emits no CO2 to the atmosphere.

The key advances Exytron has made are

a)    the use of oxygen, rather than air, in the methane combustion, meaning that the system produces a stream of very pure CO2 for reuse in the methanisation circuit. Previous attempts to do this have failed because methane will burn at an excessively high temperature in a stream of pure oxygen. Using a simple innovation, Exytron has solved this problem.

b)    the methane creation process (using the conventional and well understood Sabatier reaction) employs a new catalyst.

c)     All the individual processes are carried out at temperatures and pressures that can be easily, safely and cheaply achieved.

More on the technology

I visited Exyton to talk to the engineers as they prepare to install their first commercial system in a large apartment building in Augsburg, southern Germany.[1] The owners of the building are seeking to meet the German government’s targets for emissions reductions from domestic heating. The apartment block was built in the 1970s and would be very expensive to insulate to meet Germany’s 2030 standards. So the Augsburg housing company that owns the apartment block has decided instead to develop a low-carbon heating system. From what I can see, this is eminently sensible; better insulation is often more costly than simply decarbonising energy supply. The frequent assertion that energy efficiency is always a better route than reducing the carbon content of that energy is simply not backed by the facts in the case of domestic housing.

My first objective when I visited Rostock was to understand how the unit will be used. The first commercial installation – to be completed in the next few months - provides an illustration.

The Augsburg building has a 90 kW PV system on the roof. It contains 70 flats, with an average demand of around 30 kW for the full building. The electricity use will higher in the morning and early evening, and lower at night. There will be periods when PV electricity would spill to the grid. In the Exytron  surplus power comes from the roof, it is used to split water into hydrogen and oxygen in an alkaline electrolyser.

2H20 => 2H2 + 02 (+heat)

The oxygen is put into a store while the hydrogen is immediately employed to make methane. CO2 is also in store ready to be streamed with the hydrogen through a Sabatier reactor. The methane that is generated is then stored. The Sabatier reaction gives off heat. This is used for hot water and heating.

4H2 + CO2 => CH4 + 2H20 (+heat)

When the PV system is not generating excess power, the stored methane can be burnt to produce electricity, and heat. In other installations it might be sometimes transferred into the gas grid.

CH4 + 2O2 => CO2 + 2H20 (+ large amounts of heat + electricity)

The two outputs of this part of the process are water and CO2. The water is condensed from steam and used for heating. The CO2 is stored and eventually is piped back to the methanation process where it can be combined with hydrogen. Therefore no CO2 will be produced at any point in the cycle.

In the next installation which will be completed after Augsburg, the whole unit will be contained in three shipping containers in the parking area of the building. The methane, oxygen and CO2 tanks are beneath the ground at another part of the car park. In Augsburg, the units will be contained in the basement.

The round trip efficiency (electricity to electricity) of the Exytron system is about 50%, I was told. However the bulk of the loss is available as useful heat, meaning that the total efficiency is more than 85%, if I understood correctly.

Running the process.

The 90 kW PV installation at the Augsburg building will produce an average of around 10 kW of power over the course of a year. (The panels have to be laid flat, reducing the yield). The average electricity need will be perhaps three times this level. And, of course, the building will require heat as well. So the unit will not just need the electricity from the PV but will also import power to make methane. Dr Busse, the CEO, stresses that there is little benefit to overall CO2 emissions from the process unless renewable electricity is used to make the zero-carbon methane.

Both the local PV electricity and imported renewable power may be stored in a battery. If, for example, spot electricity prices are expected to be low at some later point, it may make sense to store power in advance of need. As I understand the position in Augsburg, the installation is able to buy in electricity at prices that are much lower than the very high German retail tariffs because it will produce low carbon heat.

Surplus energy will be stored as methane. This methane can be burnt at the installation for power and heat/cooling but also can be added to the local gas grid at times of excess.

Dr Busse stressed the difficulty facing operators of local ‘power-to-gas’ systems such as the one in Augsburg. It will need to continuously forecast power and heat needs several days ahead, while also predicting how spot market prices will change as the hours goes by. The system needs to use power when it is cheap and produce it when it is expensive. There will also be occasions when it will be financially better to use standard natural gas to make heat rather than generating it from methanisation from CO2 and hydrogen.

Exytron showed me the numbers that demonstrate that its Augsburg installation will make money for its owners, partly by allowing them not to expensively re-insulate the building and partly because the average price of power is lower when their power to gas system is complete. Exytron told me that the cost of their Augsburg system is about €550,000, or around €8,000 per apartment.

Putting this in a UK context

Imagine a building with a high heat need and also a large renewable energy source, such as PV on the roof. The building buys any extra electricity it needs. These demands will be paid for at different prices at various times of day.

The Exytron system will enable the user to have near zero carbon heat (or cooling) and power. The local PV electricity is used first. When it is in surplus, it is used to generate methane. When it is insufficient the methane is combusted for power and for heat.

At times, such as mid-winter, the PV generated locally will be insufficient to meet daily average demand. Then the Exytron system will buy in electricity when it is cheap – perhaps at night – and make enough methane to cover the power needs of the following day’s peak. When wholesale electricity is very cheap indeed, but the methane store is full, it may even make sense to make gas and export it to the gas grid. (But, as I understand it, this gas would not be zero carbon because the Exytron system would then have to import some natural gas to rebalance its own supplies of CO2).

A user paying 9p (about 11 € cents, 12 $ cents) per kWh for electricity on a standard business tariff may be able to strike a much better deal if it agrees to only buy power between midnight and 6 a.m. The company will certainly not pay the high additional prices for power consumption during winter late afternoons. A closed CO2 cycle plant such as Exytron’s allows a company both to benefit from low night-time prices and use the waste heat from the methanation process. If the company uses only renewable electricity and buys no grid gas, net CO2 emissions are close to zero. However it will probably need to continue to buy some external gas so full decarbonisation may not be achievable.

Expanding the Exytron process

The Exytron system is both an electricity storage system and a zero-carbon CHP process. It allows the intelligent shifting of power generation from one time to another and also provides extensive capacity to generate heating and cooling with no CO2. This gives it a potential role in much larger installations than single buildings. Exytron told me, for example, of how its technology might be used to provide both power and heat in the area around one of Germany’s soon-to-close nuclear power stations at Grundremmingen. Waste heat from the power station is currently used for local district heating networks. It would be possible to replace this with heat from the a large Exytron plant(s) powered by new local wind farms, anaerobic digesters and PV sites.  It is working with Siemens on this.

It also has an outline of how it might also make methanol (the simplest liquid fuel). Storage of methanol is even simpler than that of methane. The process flow diagram is below.

Costs and the future

At the moment, this is an expensive system. If its first installations are successful, it will get cheaper. It is already possibly the least expensive way to decarbonise heat (heat pumps might be better in some circumstances, using renewable electricity). As electricity continues to get cheaper as a result of falling renewables costs, the relative competitive position of the Exytron system will improve.

Existing power to gas systems, such as Electrochaea’s, require a source of CO2. And they don’t capture the CO2 from the eventual combustion of the methane. Powered by CO2 from anaerobic digesters, they will have equivalent CO2 credentials, but only then. Exytron’s big advantage is that it doesn’t need an independent source of CO2. This means that it can, in theory, expand to cover all the heat, cooling and energy storage needs of the world, whether this in an off-grid Indian village or a major metropolis, provided it can obtain enough zero-CO2 electricity and have big enough gas storage tanks.

Exytron is a plausible contender for a role as the central enabler of the energy transition. But, please note, the company itself doesn’t make this claim. CEO Karl-Hermann Busse, possibly the most pessimistic entrepreneur I have ever met, is far too aware of the obstacles the company faces. He mentions the inertia of many of the existing fossil fuel businesses as important barriers. He says that they will endlessly talk to him but then never commit to partnership. Perhaps a UK company would like an introduction to Dr Busse? No-one should be worried he is going to over-sell his invention.

Having struggled to understand the process logic of the Exytron system myself, I realise that it is  complex and in some respects counter-intuitive. However I believe that it is the first genuinely carbon-neutral linked heating and electricity generation system in the world.

[1] Disclosure. I paid for my travel to Rostock. Exytron kindly handled my hotel accommodation and two meals. I am very grateful for the help of Exytron managers Klaus Schirmer and Dr Albrecht Meier and for the extensive gloomy comments of Dr Karl-Hermann Busse, the CEO and inventor. 

Hydrogen made by the electrolysis of water is now cost-competitive and gives us another building block for the low-carbon economy

Generating an extra unit of electricity via PV or wind has no cost. One implication of the growth of renewables is that open-market power prices will therefore tend to fall. As the economists say, prices tend to converge on the marginal cost of production. We are seeing this today in electricity markets. This has profound effects.

In this note I look at the impact of the likely continuing fall in open market electricity prices on one important source of GHG emissions. I try to show that hydrogen production, which is currently almost exclusively carried out by a process using methane and steam, will move to being largely based on the electrolysis of water. Much of the commentary on the energy transition is optimistic about the move to electrification of transport and building heating but deeply pessimistic about reducing the fossil fuels used in industrial processes. In the case of hydrogen manufacture this pessimism is mistaken.

More generally, I suggest that hydrogen will become the dominant route to long-term energy storage, not principally as the gas itself but in the form of methane and liquid fuels.

To be clear, I think hydrogen fuel cell cars stand very little chance of competing against battery vehicles. However I do believe that using water electrolysis to make hydrogen, which is then merged with carbon-based molecules (such as CO2) to create synthetic natural gas and substitutes for petrol and aviation fuel is likely to be the central feature of the next phase of world decarbonisation. For the fossil fuel companies trying to find their way out of reliance on oil and gas, synthetic replacements for existing fuels have to be a key focus of their long-term planning. The manufacture of hydrogen, and the creation of renewable fuels that use this hydrogen, is an activity more similar to the core business of oil and gas companies than PV or wind.

I don’t suggest that regulations or international agreements will cause the shift to renewable hydrogen, but rather that simple economics will drive the oil majors, chemical producers and others towards making fuels from electrolysed hydrogen, rather than natural gas or crude oil.

The fall in wholesale electricity prices will continue

The 6th and 7th June 2017 were windy across northern Europe. During the long days, the sun also shone much of the time. In Germany, two thirds of total electricity output at midday on the 7th came from wind and PV. In the UK, gas-fired power stations were throttled back to not much more than 20% of power generation. Coal generators stood completely idle for much of the period.

The impact on power markets was striking. The average spot price for power for near-immediate delivery fell to very low levels. Germany saw negative figures overnight and near-zero figures for much of the day. The average UK price between 3pm Tuesday 6th and 3pm Wednesday 7th was just over £13 a megawatt hour, or 1.3 pence per kilowatt hour. UK short-term prices were below zero for much of the night. Until recently these were very rare events indeed and they still only happen a few times a week.

But as the installed capacity of renewables continues to increase, this pattern will occur increasingly frequently. Both the UK and Germany continue to expand offshore wind, and PV to a lesser extent. The UK has ambitions to have 30 gigawatts of offshore wind by 2030. Full output from offshore will almost cover summer midday demand by itself. The contribution of PV will mean that renewables will cover total electricity need. It is very difficult to see wholesale prices not reflecting this oversupply in a long-run downward shift.

Nevertheless, the UK government continues to forecast sharply rising wholesale retail electricity prices. From an average of £37 per megawatt hour in 2016, the price is expected to increase more than 50% to £56 in 2030. Households are predicted to be facing retail bills equivalent to £180 per megawatt hour by the same date. Let’s put that number against today’s average wholesale price: £13 is just over 7% of £180, an impossibly large gap. The government’s forecasts are frankly delusional: wholesale electricity prices are coming down, and down they will stay. Absent large tax increases, they will never reach £180 for domestic customers.

Importantly, this permanent deflation of electricity prices will inevitably affect the price of fossil fuels. For a generation we have been used to seeing electricity costs as a largely a derivative of fossil fuel prices. Higher gas costs, for example, used to feed automatically into higher wholesale and retail electricity rates. That link is now beginning to work the other way; falling electricity prices are tending to drive natural gas costs down. If less natural gas is used in power production as a result of the growth of renewables, overall demand for the commodity is lower and the price falls.  As EVs become more common, the same linkage is being established with oil. Lower power prices make electric vehicles more attractive, reducing the need for petrol and diesel. As time moves on, the price of electricity will therefore become an important determinant of the price of oil.

Electricity’s role as a price-setter for fossil fuels can be seen most clearly by comparing June 6th-7th UK wholesale price with the cost of gas. At £13, the short-term market price was only just above the equivalent price for wholesale gas of around £12.50 a megawatt hour. In other words, for one 24 hour period, electricity, which is usually regarded as the premium source of energy, was just a few percent more expensive than the fuel which is usually used to make it. (By the way, $50 oil is in energy terms equivalent to about £25 a megawatt hour, or twice the price of gas. In the long run, renewables will also restrain the price of oil from upward movements).

Most electricity is bought and sold on contracts several days or months in advance, and these prices will be substantially higher than those experienced in the spot market of the 7th June. But, nevertheless, the short-term indicators are providing a powerful signal to investors thinking of investing in fossil fuel electricity generation. As wind and solar become predominant sources of electricity, the finances of using gas or coal to make power become more and more parlous. For example, new gas-fired generation will require large subsidies across Europe if power stations are to be constructed.

The tight link between fossil fuel prices and renewable costs will become stronger as electricity becomes an ever larger proportion of all energy use. First, I want to illustrate one example of this which I don’t think gets enough attention: the likely switch from the use of methane to water electrolysis as the main route to making hydrogen.

Hydrogen from electrolysis

The world produces about 50 million tonnes a year of hydrogen. (Some sources suggest it is more than this). The gas is used as an additive in oil refineries, as a raw material for making ammonia and for many different industrial processes including, for example, the making of margarine.

Almost all hydrogen is made today from what is known as ‘steam reforming’, usually of methane (the main constituent of natural gas). A stream of gas is mixed with high temperature steam in the presence of a catalyst. The eventual output of the process is a mixture of CO2 and hydrogen. The valuable hydrogen is collected and the CO2 vented to the atmosphere. If my calculations are correct, the hydrogen produced today through the steam reforming process is resulting in approximately 500 million tonnes of emissions a year, or well over 1% of global GHGs. [1]

Hydrogen can also be made using electrolysis of water. Electricity is used to split the molecule into hydrogen and oxygen. If made using water electrolysis, global hydrogen production would today use about 15% of world electricity generation. When manufacture of H2 is switched from using methane to employing surplus electricity, hydrogen will be an important method of balancing the world’s grids. When power is abundant, the electrolysers will be turned on. Their work will stop when electricity gets scarce.

In the past, electrolysis was very rarely employed because the energy source, electricity, was more expensive than the gas used for steam reforming.

Is this still true?  We need to investigate the energy efficiency of steam reforming and its operating and capital costs as well as the relative prices of gas and electricity.

·      Very roughly, a new electrolysis plant today delivers energy efficiency of around 80%. That is, the energy value of the hydrogen produced is about 80% of the electricity used to split the water molecule. Steam reforming is around 65% efficient.

·      However, the capital costs of a steam reforming system are currently below the price of a new electrolyser of a similar capacity. The project report for the conversion of the Leeds area in Northern England away from natural gas and towards hydrogen for business and residential use suggested a steam reformer cost of about £600,000 per megawatt of capacity. Like much else in the low carbon economy, electrolyser costs are falling fast. Some manufacturers see electrolyser costs of around £700,000 per megawatt within the next year or so. ITM Power, the Sheffield electrolysis manufacturer, says its costs are already below €1m (about £870,000) for each megawatt of capacity. As the size of electrolysers sharply increases - we may see 10 megawatt devices soon – the cost per unit of capacity will fall. Eventually, electrolysers will be significantly cheaper than steam reforming equipment.

·      Electrolysers require little maintenance or much administrative labour. Steam reforming has higher operating costs but I have not been able to obtain clear estimates. (If you happen to have a good source, I’d be very grateful to hear about this). So I have ignored this number.

·      Whether the hydrogen is made by steam reforming or by electrolysis, both low and high pressure storage will be required. The costs will be equivalent unless, for example, the electrolyser is only run when electricity prices are low. In this case, the electrolysis route will inevitably require more storage.

We can roughly estimate the relative costs of making hydrogen using electrolysis at different electricity prices and comparing this with the average price of hydrogen in Europe today. As far as I can tell, hydrogen from steam reforming currently costs around 5 pence per kilowatt hour’s worth of energy value supplied to an on-site user.[2] This number is without any cost or taxation applied to the CO2 vented to the atmosphere. Even at today’s low carbon prices, this would add to the fully calculated cost of H2.

When will falling electricity prices make it more economic to create hydrogen from electrolysis? Let’s look at the elements that make up the cost of hydrogen from electrolysis

·      The capital cost of the electrolyser. I assume a purchase price (including installation) of €700,000 per MW of capacity to take electricity to generate hydrogen. This is lower than the price that would be achieved today but should be possible by 2019/2020. I suggest that the electrolyser will work perhaps 4,000 hours a year, principally when power is cheap because of abundant wind or solar. At a discount rate of 7%, the owner will need to earn €65,000 a year to cover the cost over 20 years. Per MWh of electricity use over 4,000 hours, the cost is €16.25. For simplicity, I will convert this to £14.15 per MWh at today’s £/€ exchange rate

·      The running cost. Estimates for this are scarce but the number is not large. I estimate €5 per MWh, or £4.35. I think this is conservative.

·      The electricity cost. This is the critical element. Until the recent sharp falls in wholesale electricity prices, the price of electricity made electrolysis seem expensive. I took a reasonably typical day – yesterday, July 4th 2017 – for the analysis. Unlike the days in early June mentioned at the beginning of this article, it wasn’t particularly sunny or windy. I think it is fair to use this day as being representative of the pattern of summer electricity prices. The average price in the short-term balancing market was £35.87 over the 24 hours. However in the lowest-priced 11 hours (22 half hour periods) it was £23.92. Because I assume that the electrolyser runs 11 hours a day (about 4,000 hours a year), I use this average price.

UK 'balancing market' electricity prices for 4th July 2017

·      Add these three elements together and we get a total cost for a 1 MW electrolyser running 11 hours a day of £42.42 per MWh of electricity used to make hydrogen.

·      This amount of electricity in an 80% efficient electrolyser will generate about 800 kWh of energy value of hydrogen. (This efficiency is slightly better than can be achieved today by ITM’s PEM electrolysers, but not much).

·      800 kWh of hydrogen produced at a cost of £42.42 means a cost of 5.3 pence per kWh of energy. That’s about 5% more than the costs estimated by the H21 project for the conversion of methane to hydrogen to power homes and businesses in the Leeds area of northern England.

·      In other words, at today’s power and electrolyser prices, hydrogen from electricity is almost at the same price as hydrogen made via steam reforming (using the assumptions in the H21 project, which employ a slightly higher methane cost than the current UK price).

·      As power prices continue to fall, particularly in periods of high wind and sun, and electrolysers get cheaper and more efficient, the relative advantage of using electrolysis will improve. And there is almost no doubt that this will happen. Hydrogen for chemical plants, fertilisers and other uses will be made using cheap electricity, not methane. Air Liquide, one of the three largest hydrogen manufacturers in the world, has already committed to making 50% of its hydrogen for ‘energy uses’ (such as fuel cell cars) from low-carbon sources, including electrolysis, by 2020.

To sum up: hydrogen may or may not be used extensively in cars. Personally, I doubt it. However hydrogen will become a critical vector in the wider low carbon transition. It will be made using water electrolysis when electricity is sufficiently cheap. That will happen more and more frequently particularly in areas of high sun but where natural gas tends to be expensive. (Australia and Chile are examples). That is the first stage. Then the world will move to using hydrogen as a route that allows cheap electricity to be indirectly turned into renewable gases and liquid fuels.

Once we have inexpensive renewable hydrogen, it becomes possible to transform that hydrogen using standard chemical engineering into renewable fuels. It is all a question of price; there is nothing difficult about making aviation fuel, for example, from hydrogen and waste CO2. We just need electricity to be cheap enough. And a quick look at the pricing charts on electricity grids with a high renewables penetration will show just how fast that day is coming.

Electrolysis is like PV fifteen years ago: a promising technology that is still thought to be more expensive than the fossil fuel alternatives. But, as with PV, it is on a steeply declining cost curve. The manufacture of hydrogen from water is a central part of the next phase of the energy transition.

[1] One molecule of CH4 combined with H2O in the steam reforming reaction creates 4H2 and one molecule of CO2. The molecular weight of one molecule of CO2 is more than five times four molecules of CO2. And the full GHG emissions resulting from steam reforming need to include the heating of steam and other processes.

[2] http://www.northerngasnetworks.co.uk/wp-content/uploads/2016/07/H21-Report-Interactive-PDF-July-2016.pdf See the figure of £0.0505 at the bottom of page 260.

When will electric cars cause oil demand to start falling?

The volume of fuel needed to power cars and other light vehicles will start falling in early 2026. This is the prediction of a simple model I have built to forecast how the electrification of transport will curtail oil use. I think the model is the first systematic attempt to calculate the year-by-year impact of EVs.

By 2030, petrol and diesel use for light vehicles will be declining over 1% a year and the fall will accelerate rapidly thereafter. In that year, electrification will have pushed oil use 4 million barrels a day below what it otherwise would be. This equates to about 4% of today’s global production. But oil demand for fuelling cars and light vehicles will nevertheless be higher in 2030 than today because of the increasing overall volumes of cars sold.

I have built this model because the oil companies are now producing their own estimates of the impact of battery cars on oil use. These figures seem too informal and contain many unrealistic assumptions. I thought it might be helpful if I carried out a fuller piece of work. I want to stress that my spreadsheet is also uncomplicated but I think it represents a real advance on other ways of estimating this utterly crucial figure for the world economy, and our climate change ambitions.

The key input to the spreadsheet is, of course, the rate of growth of electric cars. In order to provide maximum credibility, I have used figures provided last month by Continental AG, (‘Conti’) one of the top five global car component manufacturers.[1] The company carried out a major review of the likely evolution of the car market, including conversations with other suppliers and customers.[2] Continental sees pure electric vehicles representing just under 20% of the global market by 2030. Hybrid electric cars will also have grown by that date, meaning that ‘close to 60% of the market will be electrified’ in the company’s words.[3] (This figure includes substantial volumes of what are called ‘mild’ hybrids, a type of vehicle that almost entirely relies on internal combustion engines). I think Conti's numbers are too conservative but I have used them because of the investment the company has made understanding its marketplace.

The start of the date at which oil demand for transport begins to fall is critical to the future of the oil industry. Large amounts of crude, particularly in high cost locations, will be stranded if EVs start cutting oil use soon. In common with other oil majors, BP has said that it expects oil demand for cars and light vehicles to continue to rising at least until 2035. Continental envisages both lower overall vehicle sales of all types in 2030 but also a much larger percentage of fully electrified battery-only vehicles than BP. Investors in both types of company – oil and automotive – should be interested in which of the future is correct. My model shows that if Continental is right, BP’s optimism is very mistaken.

Model outputs

My model gives the following result for daily oil demand. The two lines below show a world of no further electric vehicle sales and one which follows Continental’s suggested trajectory. The gap between the two lines is just over 4 million barrels of oil a day in 2030. This compares with BP’s estimate of a gross saving of around 1.2 million barrels a day from electric cars in 2035 before taking increased vehicle numbers into account. (I do not know whether BP includes ‘mild’ hybrids in its calculations).

Source: Spreadsheet projections and Continental AG

In addition, I thought it might be useful if I included another estimate that see pure electric cars grow at a faster rate. Continental sees 22 million new battery-only cars sold in 2030. What happens if this number is actually 40 million? (I also assume a faster rise across all years from today). This is a challenging figure, implying that about 35% of new cars and light vehicles are fully electric in 2030. However it is clearly possible, given that many of the manufacturers are now openly talking about 25% EV sales in 2025. My projection is below. As you might expect, the reduction in oil use starts earlier, falling from late 2024,and by 2030 demand is 6 million barrels a day below the ‘no electrification’ scenario. However, it is only by this date that oil demand finally falls below the 2016 level. The future challenge remains immense.

Source: Spreadsheet projections

Appendix

Method

The purpose of the model is to show how much petrol and diesel is used by cars and other light vehicles in each year to 2030. The fuel use is a function of the number of vehicles, the distance each travels and the average fuel economy (litres per 100 km travelled or miles per gallon, either US or UK).

The key inputs to the spreadsheet are

a)    Historic and forecast car and light vehicle sales, both electric and conventional.

b)    Estimates of the length of life of cars and other vehicles. How many vehicles made in each previous year are still being driven? (Evidence from the UK is that very few vehicles more than 25 years old are used on the roads. Those that are still in service will generally drive very small numbers of miles).

c)     Estimates of how many miles/kilometres vehicles drive per year. If the UK is any guide, the distance travelled falls sharply as the car ages. The model assumes no change in future in average vehicle miles for each age of car.

d)    Fuel economy estimates. The spreadsheet estimates how much fuel is consumed per kilometre travelled based on average fuel economy for each year. The fuel economy of a car made in a particular year is assumed not to change as the car ages.

e)    Estimates of how much fuel is saved for each class of electrified car or other light vehicle. Continental splits its forecasts into different classes of electrification and the model suggests a fuel saving for each type.

A simple example. To build up an estimate of the number of barrels of oil needed to fuel cars and light vehicles in 2016 I needed to calculate the number of vehicles produced in 2003, for example, that were still on the road, the average mileage travelled and their fuel economy. I want to stress that all of these numbers are uncertain and therefore there will be errors in my inputs. However my estimate of the total amount of fuel used globally is consistent with estimates produced by the US Energy Information Administration.[4]

More detail follows on these inputs.

a)    Vehicle sales. The yearly sales of all type of vehicle were about 94 million in 2016. This includes heavy freight vehicles totalling about 3 million. I have assumed that these will not be electrified in the near future. (Although Elon Musk as has recently talked about a planned articulated or ‘semi’ truck in recent weeks). So I use a 91 million estimate. I increase this number in line with Continental’s forecasts, reaching 111 million in 2030.

b)    Age of cars on the road. The UK publishes statistics on the age distribution of its cars. This enabled me to work out the mortality rates of vehicles. If, for example, we see 1.5 million of the 2006 registrations were still around in 2015 but only 1.4 million in 2016, we can estimate the age distribution of vehicles leaving active use. We can show that, on average, 15% of vehicles are removed from the road in their fourteenth year, the peak year for mortality. Care is needed here; the average life of vehicles has increased substantially in the last twenty five years but this effect appears to have slowed down or stopped, at least in the UK. I use the pattern of UK car mortality as the basis of my estimate for the world.

c)     In the UK, the use of car declines as it gets older. This seems to be largely an effect derived from heavy car users buying new vehicles and then selling them to lighter drivers as the car ages. There is also a minor impact from people driving less as they grow older. If I buy a car when I am aged 50 and keep it for 15 years I am likely to use it much less when I am 65. I use the UK’s figures for the miles/kilometres driven for each year of a car’s age.

d)    Fuel economy estimates. We have good data on the average claimed fuel economy figures for the major economies for passenger cars. ‘Real world’ fuel consumption is known to be substantially higher. And, of course, the fuel use of heavier vehicles such as buses and delivery vans is greater than domestic cars. I have created an estimate of the average fuel use (litres per 100 kilometres) for the world. This is not as brave as it sounds. The fuel economy of a Ford Focus will be very much the same whether it is sold in Ecuador or Germany.

e)    Fuel savings by type of car. Continental sees four classes of electrically assisted vehicle. At the top of the tree is the pure battery car. (We will also see pure electric vans, of course, and increasingly battery-only buses). This saves 100% of its liquid fuel consumption. Then comes the plug-in hybrid. I assume this reduces oil demand by 50% below the standard car of the same age. So-called ‘full’ hybrids, which cannot be plugged in but save some fuel because of regenerative braking, a need for a smaller engine and other features save 25%, I estimate. ‘Mild’ hybrids, which use a battery to store energy from braking and use it to improve acceleration, save 12%. The latter three figures are my own estimates based on reading motor industry statements. If others can suggest better figures, please do get in touch.

The work I have described so far involves a number of careful guesses. I don’t want to pretend my model is particularly accurate. However the key point is that when I work out the fuel consumed by each yearly cohort of cars and add it up to get an estimate of the number of barrels of oil needed each year to make gasoline/petrol and diesel, my figures are very similar to the US government estimates. In other words, I may have wrongly individually estimated the global car stock, the fuel economy and the miles travelled but the final result is reasonably accurate.

The major problems with my model

a)    I have extrapolated the rate of mortality of cars and light vehicles from UK statistics on cars alone.

b)    Similarly, I have estimated how the mileage of cars changes with the vehicle’s age from UK data. This information is also self-reported by respondents to questionnaires and may suffer as a result.

c)     I have had to generate assumptions of how much fuel the various types of hybrid save. (I have not included ‘range extender’ cars, assuming that this category will fade as battery size increases).

d)    I do not know how fast underlying fuel economy will improve from now on. My assumption is that this will be quite slow, apart from the improvements induced by electrification. I have used a rate that gradually decreases. The underlying reason is not technological. Rather, it is that as the electric car market grows the R&D effort in large OEMs and component manufacturers will swing away from internal combustion engines.

e)    I have assumed that electric car buyers are broadly typical of all buyers. In other words, the cars they buy or would have bought (e.g. large versus small, petrol versus diesel) mirror the market as a whole. To be clear, if electric car purchasers are would actually have otherwise bought very small cars, the savings in total global fuel consumption would be less than if they were otherwise to buy a large car. My spreadsheet sees the electric car sales pattern as similar to internal combustion engine deliveries. The same assumption is made with respect to the distance travelled, and how this changes as the car gets older, and the age at which the car is scrapped.

f) I have not included any impact from the arrival of autonomous cars, nor car-sharing. By 2030 these factors may be reducing the number of new cars sold, although the total mileage driven may not change much. 

[1] Page 14 of this presentation gives the key numbers: http://www.continental-corporation.com/www/download/portal_com_en/themes/ir/events/20170425_strategy_powertrain_uv.pdf

[2] Continental provided estimates for 2016, 2020, 2025 and 2030. I have interpolated between these figures for the intervening years.

[3] In Continental’s terminology, a car is ‘electrified’ if it can be plugged into the electricity supply but also if employs any form of hybridisation, including what is termed ‘mild’ electrification using a small battery to assist acceleration and recover energy from braking.

[4] Figures available at www.eia.gov/outlooks/ieo/transportation.cfm

Keeping David MacKay's 'Sustainable Energy - without the hot air' up-to-date

As the anniversary of Sir David MacKay’s untimely death approaches, I think we should honour his memory by trying to update Sustainable Energy as a crowd-sourced project. I have made an initial attempt to suggest how we might develop the section on photovoltaics but others will want to suggest other rewritings to reflect today’s extraordinary pace of change in solar and other energy sources. We need Sustainable Energy as much as we ever did and we want it to be as up-to-date as possible.

This hugely influential book was published eight years ago and it still sells well today. It had been in preparation for several years. Sustainable Energy – without the hot air represents the best possible summary of what David could find out at the time. But things change and I believe we best celebrate his memory by trying to keep his work as up-to-date as possible. In the PDF attached to this page I have written some suggestions for how the 800 words that David wrote on photovoltaics might be amended to reflect changes after the book was written.

 Since 2008, the fastest developments have been in solar power and in batteries although improvements in offshore and onshore wind have also been remarkably fast. Perhaps the best way of illustrating just how rapidly solar photovoltaics have moved on is to quote the figure that David used (using data from a then-recently opened solar farm in Germany) for the cost of providing each person in the UK with 50 kWh per day. The number was about €91,000 for each inhabitant. Today, that has fallen to about €18,000, or just under 20% of the cost less than a decade ago. 

That number is still enormous, but it would provide each of us with about half of all the energy, not just electricity we needed. (Energy use has decreased since David completed his book). Solar photovoltaics increasingly look as though they will become the cheapest way of delivering the energy a modern society needs. This is true for the UK and doubly so for the nearly 50% of the world’s population that lives in the tropics.

But to rely on solar means we will also need to find ways of storing energy economically. Understandably, David’s book does not contain much on this most vital of modern energy concerns. Although, for example, he mentions lithium batteries, he could have no knowledge of how Elon Musk and others have pushed the cost down by a least as much as the decline in PV prices since 2008. So David’s sections on energy storage and, in addition, his writings on wind and possibly nuclear need also to be updated. And we need to work again on his useful ‘stack’ of potential different contributions to the UK energy need. We will want to include sections on the scope in a modern economy to move energy demand from one period of the day to another, a topic that had barely begun to be considered a decade ago.

Some proposals for updating David MacKay's section on solar photovoltaics

The comments above are only tentative suggestions. But I do think those of us interested in ensuring that energy policy in the UK remains science-based and relies on good, robust numbers should be working together to keep David's unmatched work as an invaluable source.

A progressive carbon tax could be the low-cost way to decarbonise

The idea of a universal carbon tax is gaining popularity around the world. Instead of complex subsidies and regulations, we might be able to get decarbonisation more cheaply and simply if the use of fossil fuels was taxed at a rate proportional to the amount of CO2 emitted. As has been shown in the UK over the past couple of years, quite modest taxes on coal use have almost removed this fuel from the power generation mix. Carbon taxes raise the price of fossil fuels, disportionately penalising coal, the most polluting source of energy.

The voices in favour of a carbon tax now include Exxon, former US Secretaries of State and the Chinese government.  The idea is appealing to the political right because it minimises the distortion to energy markets and, at least in theory, captures the full cost of carbon pollution, encouraging the quicker growth of renewables. Instead of expensively subsidising low carbon energy, with all the difficulties that this involves, perhaps it is better to simply make fossil fuels relatively more expensive? But those on the left have been less impressed because it will tend to increase the price of goods, such as natural gas for heating, that tend to absorb a much large fraction of the budget in lower income households.

Is there scope for compromise? Can we keep the right happy with a carbon tax and also appease the left’s concerns? Several countries are exploring – or have already introduced – a carbon tax whose proceeds are completely recycled to individuals and households. In the Canadian Province of Alberta, for example, fossil fuel use is penalised by a tax of C$20 per tonne of CO2 emitted. This has tended to increase the price of energy and items made locally using fossil fuels. But 100% of the tax raised is then paid out as an allowance to Albertans in the bottom half of the income distribution. This year a single adult will receive C$200 and a couple C$300. The net effect of the carbon tax and the rebate combined is to redistribute income from richer groups to the less well-off. This is because poorer people typically use less electricity and other fuels and buy fewer items with indirect or direct fossil fuel content.

How could this work in the UK? The country has CO2 emissions of about 390 million tonnes a year. (I’m excluding methane and other global warming gases in this illustration). About 65 million people live in the UK, so the average person is responsible for about 6 tonnes of CO2. If all fossil fuel use was taxed at, say, £50 a tonne the typical individual would see price rises of around £300 a year. (Calculating the CO2 embodied in imported goods would increase this figure).

Some of this would directly be via electricity and gas bills and increased petrol and diesel costs. Another portion would be less invisible because it would be wrapped into bills for other things. Restaurant meals, for example, might go up slightly because the costs of power had risen and ingredients had gone up slightly in price because of higher transport charges.                             

Let’s assume everybody in the UK was credited with £300 each year. As in Alberta, poorer folk would tend to benefit because they consume less energy, or things that embody energy, than the average. So their extra bills would not outweigh the £300 that they got annually from the government. In a sense, this £300 would be the beginnings of a ‘basic income’, the increasingly popular idea of a benefit that is paid to everybody, regardless of need or entitlement.

As an illustration of how a carbon tax merged with a rebate, or ‘basic income’, might operate, I looked at how much money UK households (not individuals) spend on electricity, gas and other domestic fuels, including petrol for the car. This analysis does not cover all the energy that is embedded in the goods and services we buy or are provided with using our taxation payments. But it does cover the direct expenditure on motor fuels and home energy. This is therefore a very simple and incomplete analysis but demonstrates how a carbon tax might help reduce income equality.

I used standard sources for this work.[1] The government produces an annual survey that splits homes into tenths (‘deciles’), ranging from those who have the least amount of money to spend to those who have the most. A household sitting at the top of lowest decile spends a total of about £194 a week, according to the latest data. A household in the top spends more than £1211 a week or over six times a much.

These totals are split into various categories. The survey records the average expenditure on fuel to heat the home and on petrol or diesel for a car. These weekly figures are in the table below. As you can see, households in the bottom decile spend more than £22 a week on home energy and fuel for a car. This is considerably more than 10% of total expenditure on all items. Domestic energy alone is about £17 a week, and this is likely to have risen as a result of recent price increases. People in the top decile spend eight times as much on motor fuels but less than twice as much on home energy. This means that overall they spend little more than half as much as the poorest tenth as a proportion of their income. 

This is the core of the problem. If a country such as the UK puts a carbon tax on energy it will disproportionately affect the least well-off. It will be what is termed ‘regressive’. This makes a tax politically impossible. So I went on to look at the impact of recycling the whole tax back to UK households. (Of course, as in Alberta, it could be just given back to a less-well-off portion of the population).

To do this exercise I had to make assumptions about the quantities of electricity, gas and motor fuels bought by each decile. And then I needed to calculate the amount of CO2 resulting from the use of these energy source. The analysis shows that a household in the bottom expenditure decile is responsible for less than 4 tonnes of CO2 (domestic energy and motor fuels only) while a home in the highest spending tenth accounts for over ten tonnes. The average is about 6.6 tonnes. (Note that these figures are for homes, which contain on average 2.4 individuals).

The next step is to calculate the extra cost that households in each decile would bear as a result of a £50 carbon tax. The lowest decile will see bills rise by just under £180 while the highest will pay an increase of about £530. (For the lowest spending households this would be a cost increase that took away about 2% of their total spending power and is thus very unlikely to be implemented without some form of monetary compensation.

The final analysis is to assess what would happen if the entire tax were recycled as lump sum payment to each household. Each home would receive about £330, representing 6.6 tonnes times £50 per tonne. The net impact – tax cost versus lump sum rebate – is shown in the following chart. The numbers indicate that the least well-off homes would gain £150 a year and the wealthiest would lose £200. On average, payments would equal the tax.

When implemented in this naively simple way, a carbon tax can be made ‘progressive’ (helping the poorest and taxing the richest). The political right can approve, because the tax is an efficient and market-based way of taxing pollution while left can support it because the impact increases the net household income of poorer homes.

Of course a carbon tax should be made universal if it is implemented at all. It should cover all uses of fossil fuels including those employed to manufacture imported goods and services. Otherwise it will disadvantage home producers against foreign suppliers. The encouraging thing is that it looks more possible to get an international agreement on a standard carbon tax now than it ever has been in the past. (That's not to suggest it will be easy).

In the UK renewable subsidies are often blamed – usually inaccurately – for putting up energy prices by large amounts. It is becoming politically more challenging to get society to agree to continue to support low carbon energy (including electric transport). I sense it would be easier to get continued decarbonisation using a carbon tax, combined with a rebate, than continuing with subsidy schemes. And, perhaps foolishly, my training in economics gives me an almost religious faith in the price mechanism as a way of directing an economy.

[1] The Living Costs and Food Survey, ONS. https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/expenditure/bulletins/familyspendingintheuk/financialyearendingmarch2016

Power-to-gas: the remaining critical ingredient in the energy transition

A windy week in Germany produced the expected result. Wholesale electricity prices from 19th to 26th February 2017 dipped below zero four times and much of the weekend saw figures below €25 a megawatt hour. This pattern is increasingly frequent across many electricity markets. As the Economist pointed out last week, the arrival of large scale renewables with zero operating cost is eating away at the businesses of those companies reliant on selling on the open market. €25 does not pay for the cost of the gas to generate a megawatt hour in a power station.

German electricity production

(Prices are the wavy lines at the bottom of the chart. Electricity production from wind is the light green area)

Source: Energy-charts.de. (Best site in the world for full public information about a power market!)

In the US, NRG, which is the largest independent producer of power, summed up the problem by saying its business model was now ‘obsolete’. Lower and lower prices are making it impossible to produce electricity from gas or coal in markets increasingly captured by solar and wind. Equally, no-one can raise the finance to build new power stations, even in those countries with ageing fleets, such as the UK, because of low prices and fewer and fewer hours of operation. This problem will get worse.

Whether you are an enthusiast for a fast transition to a renewables-based energy system or are sceptical about the pace of change, the destruction of the traditional utility by the eating away of wholesale prices is not good news. It increases the possibility that the increasingly rapid switch to renewables around the world will be brought to a shuddering halt by governments worried about the security of energy supply because of the intermittency of wind and solar. Although we can make huge progress in adjusting electricity use to varying supply, ‘demand response’ will never be enough to deal with weeks of low wind speed and little sun in northern countries.

I want to put forward the view that there is only one way to deal with this problem. When power is in surplus, it needs to be turned into natural gas. This will reduce the amount of excess electricity and provide renewable gas for burning in power stations when renewables are in short supply. ‘Power-to-gas’ is the critical remaining ingredient of the energy transition. Can I put this as strongly as I can? Without a rapid and whole-hearted commitment to this technology, the renewables revolution may ultimately fail.

Power to gas

Electricity can be used to split water into hydrogen and oxygen in the reaction known as electrolysis. The hydrogen is then combined with carbon dioxide, either using biological techniques or through the conventional Sabatier process. This generates methane, the main part of natural gas. If the CO2 used in the reaction is derived from organic sources, such from anaerobic digestion, it is ‘renewable’.

What is the net impact of this transformation of electricity to natural gas? First, the surplus of electricity is reduced. Second, the energy in the electricity is largely transferred to the energy in methane. This methane can be indefinitely kept in natural gas networks, which generally have a capacity for storage vastly greater than the batteries are ever likely to possess. Although Britain has relatively little gas storage, other countries often have months of capacity. They can make gas when electricity is abundant and then use that gas to generate power when the wind and sun are not available.

The energy economics of power to hydrogen

Large amounts of hydrogen are generated today around the world. The gas is almost entirely created through a process known as ‘steam reforming’ which takes methane and water creating hydrogen and carbon dioxide. The CO2 is vented to the atmosphere, thus adding to global emissions. Very approximately, hydrogen made from methane costs about twice the cost of natural gas per unit of energy carried. So if natural gas (mostly methane) costs 1.6 pence (2.0 US cents) per kilowatt hour, which is approximately the current wholesale rate in the UK, then producing a kilowatt hour of hydrogen will cost about 3.2 pence (4.0 cents).

The alternative way to produce hydrogen is through water electrolysis. This uses electricity and until recently the conversion process has been less than 70% efficient. And, generally speaking, electricity has been several times expensive than natural gas per kilowatt hour. A commercial customer might have bought electricity at 8 pence a kilowatt hour or more, meaning that at 70% efficiency hydrogen costs about 12 pence per kilowatt hour (14.6 cents) or almost four times as much as gas produced from methane. Clearly, no-one produces hydrogen using electrolysis unless they are remote from steam reforming plants.

Electrolysers are getting much cheaper and more efficient. We will see electrolysis costs fall to around $400/kilowatt and efficiencies rise above 80%. However making hydrogen from power will still be usually more expensive than from steam reforming of natural gas.

But look again at the chart of German prices above. Anybody owning an electrolyser that could work when electricity prices are low would have been able to make hydrogen for much less than from methane for much of last week. Very roughly, at any time the German power price was below €25, an electrolyser could make hydrogen more cheaply from electricity than from gas. That is, if the electrolyser owner could get access to inexpensive wholesale power, it could absorb cheap electricity. I reckon – but do not have the numbers to prove this – that German prices were below €25 per megawatt hour for at least 30% of last week.

This is a complicated area so please let me labour this point. The evolution of power markets is pushing the typical short-term wholesale price of electricity down to historically unprecedented levels. At the same time, the commercial and household price of power is rising as subsidy and electricity network costs rise as the renewables revolution takes hold. The low wholesale price of power at times of wind or of strong sun means that making hydrogen from electrolysis is often cheaper than using natural gas. And as wind and solar capacity rises, this reversal of usual pricing differences is going to happen far more frequently.

Of course most business do not buy power through a wholesale market, and almost everybody has to pay grid distribution charges. So the logical place to put these electrolysers is next to wind farms or solar parks which can use power at no direct cost. When these entities are expecting to get very low power prices they will swing over to making hydrogen instead.

Hydrogen to methane

Hydrogen is useful and will grow in importance. But moving it around is complicated and expensive. So I think it will be used predominantly at the point of production, either for chemical products, fuelling fuel cell cars or making methane. In my view, it is making methane that offers by far the most important opportunity because it can be stored and transported so much more efficiently than hydrogen.

Methane (CH4) can be made from hydrogen and CO2 in one of two main ways. The traditional Sabatier process offers a simple route, albeit with substantial energy loss. That is, one kilowatt hour of hydrogen (you’d get this by burning about 25 grams of the gas) turns into about 0.75 kilowatt hours of methane. The rest is lost as heat. The second is biological. Some microbes in the class called Archaea can absorb hydrogen and CO2 and exude methane as a waste product. Their efficiency is about the same, or slightly better, turning up to 80% of the energy in hydrogen into methane. They can make the transformation quickly and in relatively low cost production systems. As I say in The Switch, the leading contender is a German company called Electrochaea which operates its first 1 megawatt plant near Copenhagen getting its CO2 from a stream of biogas out of a wastewater treatment plant. The CO2 is free. In fact it should have a negative cost since it allows the whole stream of biogas to be feed into the natural gas grid rather than inefficiently burnt in gas turbines on site.

Think of methane as identical to natural gas, although the gas in pipelines also contains varying amounts of longer molecules. If we use surplus electricity to make hydrogen and then combine it with CO2 to make methane, then we are losing energy at two different stages: electrolysis and methanation. Very roughly, the best we can hope for is to obtain 65% of the energy in electricity out of the process in the form of methane.

Natural gas trades at about 1.6 pence (2.0 US cents) per kilowatt hour at the central trading point in the UK. How cheap does electricity have to be to make it financially attractive to use it to make ‘renewable’ methane? Very roughly, and before the operating costs of the machines, it has to be 1.6 pence times 65% or just over 1 pence per kilowatt hour (1.25 US cents).

The German market operated at less than this price for about 35 hours last week, or one fifth of the time. In all those periods, an electrolyser could have been profitably making hydrogen to be converted back into methane. The methane – which has very low greenhouse gas emissions because it has been made from renewable electricity and the CO2 from organic waste – can be pumped into the gas grid. It can then be used to make power in a gas turbine when electricity is in short supply.

Conclusion

To most people in the utility industry, the idea that it can possibly make sense to use valuable electricity to make cheap natural gas still seems absurd. They aren’t looking at the charts, I say. As wind and solar electricity grows in importance, the cost of power will inevitably drift towards zero. (First year economics tells us that prices always edge towards the marginal cost of production). Electricity will become cheaper than gas. On a windy weekend night in the North Sea offshore turbines will produce more electricity than northern Europe needs at some date in the not-to-distant future. Negative wholesale electricity prices will become increasingly prevalent.

We really need this to happen. First, it means we can happily heat buildings with low carbon electricity, even without the advantages of heat pumps. More important, it means that instead of using fossil natural gas for power and heat generation, we can use renewable natural gas instead, particularly when power is costly because of lack of wind and sun.

The central argument of this article is thus that the right way to ‘fix the broken utility model’ that the Economist talks about is to link the gas and electricity markets through large-scale application of power-to-gas technologies. Big utilities talk about understanding the need for decentralisation but the reality is that they will be terrible at moving away from centralised production plants. What they would be good at is running large scale electrolysis and methanation operations that allow them to continue to run CCGT power plants when electricity is scarce. We will not need capacity payments or other complex subsidies and incentive schemes. By creating a continuing role for CCGT we will have found a way to keep our energy supply secure without threatening decarbonisation objectives. 

1.     With many thanks indeed to Vyas Adhikari for his help understanding some of the questions of chemistry and energy transformations involved. Errors are all mine.

2.     The material in the piece above is highly compressed. I’m happy to provide more analysis and back-up if anyone is interested.

Is there an alternative to the Westinghouse AP1000 nuclear plant?

Toshiba is struggling to avoid bankruptcy because of the cost overruns at the two US sites constructing its subsidiary Westinghouse’s AP 1000 nuclear reactors. Latest estimates suggest that these new plants will absorb almost as much cash as Hinkley Point C per kilowatt of generating capacity.

The cost of electricity delivered by a nuclear power station is very largely determined by the amount of capital expended during its construction. This suggests that the AP1000 design will need a contract price for its power generation similar to the £92.50 plus inflation agreed for EdF’s Hinkley Point proposal. This number is now probably higher than the cost of offshore wind and substantially larger than the costs of solar or onshore turbines.

The Financial Times reports that the government wants to cut the rate paid to future nuclear stations by 20% or more. If neither the EPR design for Hinkley Point nor the AP1000 proposed for Moorside in Cumbria can achieve this, are other contenders available that might offer better cost control? The best example to look at is probably the four reactor project in the United Arab Emirates. Constructed by Kepco, South Korea’s dominant electricity supplier, this 5.6 gigawatt scheme is on track to start up the first reactor at some stage in 2017 and complete the final plant in 2020. So far, the evidence is that the design will probably cost about half the EPR and AP1000 per unit of generating capacity. My approximate calculations suggest that the Korean competitor can probably provide power to the UK at around £56 per megawatt hour, slightly lower than onshore wind today.

Nuclear construction prices have two key constituents. One is called the ‘overnight’ element. This is the notional cost of building the plant using the assumption that it is entirely constructed ‘overnight’. In reality, of course, nuclear power stations can take decades to complete. The money spent in the first year by the owner has an interest cost attached to it which will not be recouped until plant starts getting paid for generation. This is the full cost of construction.

In the table below, I’ve written down what I think is the approximate overnight cost of each of the three reactor designs, at least as far as we can see today. In the second row, I have put the full cost, including the assumed interest cost. In both cases, I have had to use publicly available information. (This information is often confusing and I may have made errors). 

Main points.

1)    The Hinkley Point EPR is usually stated to have a projected ‘overnight’ cost of £18bn. I assume an exchange rate of £1 to $1.25. The full cost, including the interest burden during construction, is often written as £25bn, or about $31.25.

2)    The two AP1000s being constructed at the Plant Vogtle site in Georgia, USA, are being constructed by Westinghouse and a subsidiary under a contract with four future owners, of which the most important is Georgia Power. Georgia Power is already charging its customers for the AP1000 construction costs and therefore the underlying ‘overnight’ and full costs are far from clear. Second, the contract sees most of the overrun being borne by Westinghouse and most sources seem to suggest that this number is currently about $3bn. However a quick look below at a photograph from January 2017 suggests that construction is still very incomplete and overruns may increase sharply both because underlying costs increase and because completion is delayed, thus increasing interest charges.

A January 2017 photograph of Plant Vogtle construction (copyright Georgia Power)

3)    The detail available on the UAE Kepco contract is not great. It seems that the initial contract between Kepco and the state entity was for $20bn. I have taken this as the overnight cost. In late 2016, a re-financing was arranged for $24.4bn and I have assumed that this is the full cost including interest until the completion of the first reactor.

4)    The table below shows that a) the Kepco APR1400 project is much bigger than the UK and US sites and b) it will be completed, as things stand today, much more rapidly than the AP1000 and the hoped-for 10 year cycle for the EPR at Hinkley. It also has a construction cost per kilowatt of about half the alternates.

An estimated assessment of the economics of construction and likely construction time

5)    I’m going to employ a rule of thumb that the fuel cost of a nuclear power station is about $5 a megawatt hour and the operating expenses are around $14, including decommissioning. (Please note: although decommissioning costs are high, they are 60 years into the future. Therefore their ‘present value’, in the language of economists, is small. Anybody studying the costs of cleaning up the UK's early nuclear sites today is entitled to laugh at this idea).

My calculations suggest that if the interest cost required is about 9%, the Kepco APR1400 could be financed at a guaranteed UK electricity price of about $70, or approximately £56 per megawatt hour. This is just over half the inflation adjusted price being paid to the EPR’s owners at Hinkley Point.

Whether Hinkley Point is constructed or not depends on the ability of EdF to raise money in the capital markets. (It has just started a new fundraising that will help). But we know for certain it will be last EPR ever constructed since EdF has stated it will use a new design in future locations. By contrast, the international evidence is that the Korean approach to nuclear construction, focusing on ensuring that the design is standardised and experience gained at one location is transferred to the next site, appears to be working. Although the full details of the UAE project are not public, the project appears to be on time. The first of the four Berakah reactors will be probably completed within five years, an achievement that contrasts with the disastrous experiences with the EPRs in Finland and Normandy, France.

Should the UK invite Kepco to come in and develop a crash programme of nuclear construction? The design approval process will take 4 years, we are told. So the earliest the new capacity would be ready would be about 2028. By that time, offshore wind will probably be cheaper than the APR1000 costs and onshore wind and solar will certainly be. Whether energy storage has progressed fast enough for wind and solar to be sufficient is unclear.

The crucial point seems to me that if the UK wants nuclear – and people will have very different opinions on this - it needs to transfer its attention away from the increasingly complex business of getting Toshiba and its partners to construct Moorside and look instead to the world’s most successful nuclear power station constructors. Kepco stands out. I guess it could achieve the UK government's current objectives for electricity generation costs. So might the Russians and the Chinese, but their offerings are politically highly problematic, to put it mildly.

2017 BP Energy Outlook

BP’s Annual Energy Outlook forecasts how much energy the world will use until 2035. It breaks this down by fuel source and region. It also estimates the likely change in carbon emissions. The 2017 edition has just been published and I compared some key numbers to those published last year. My core conclusion is that BP is still reluctant to recognise how sharply falling costs will inevitably increase the growth rates of renewable electricity and electric cars.

Total energy demand.

The chart below shows what BP expects to happen. World energy demand is now forecast to rise at 1.3% a year until 2035, down from 1.4% this time last year. Oil and gas growth rates are cut but, despite the impression in the text, coal demand is still expected to rise slightly.

The pattern of changes in renewables.
Every year since 2011, BP has increased its estimates for the total output of renewables in the next couple of decades. This year, the increase is as big as ever. In fact, the yearly revisions are tending to grow in size. We are still only looking at 10% of world primary energy demand by 2035, but at least this is trending in the right direction.

Source: BP Energy Outlook, 2016 and 2017

Why is BP getting more optimistic about renewables?

Last year, BP produced estimates of the cost of wind and solar that were massively out of line with analyst calculations of the cost of electricity produced. For example, BP said that solar PV costs in the US would average about $110 a megawatt hour in 2020.

All the estimates have come down in 2017. But they are still detached from reality. Reading off the chart, BP seems to be saying that PV in the US will cost, on average, about $58 a megawatt hour in 2035 - a cut of 30% on its 2016 estimates - although it might be as low at $35 in some locations. The finance house Lazard said the US is now at around $50-$55 for solar PV today in good locations. Rather surprisingly, BP sees no cut whatsoever in solar costs in the US between 2025 and 2035, a view that will be shared by almost nobody, either in the renewables industry or outside.

BP is also more bullish about onshore wind in the US and in China. In BP’s eyes, wind will be unambiguously the cheapest source of power in both places by the latter part of the next decade. By 2035, wind is shown as less than half the cost of either gas or coal in China.

This is where credulity is stretched very thin indeed. Even though BP shows renewables as by far the cheapest source of power in China, it assumes that they will represent only about 19% of power generation in 2035, up from about 7% today. There’s no explanation for this. Indeed, the only thing BP does say is that renewables integration into electricity grids will be relatively painless. So the reason for the slow growth is unclear, particularly in view of the Chinese government’s published expectations for renewables investments and its wish to retire much of its coal-fired capacity.

Electric cars

BP now acknowledges that electric cars exist, and will have some effect on oil demand. (In the past it said that natural gas would be a more important transport fuel than electricity). It projects 100m electric cars out of a total fleet of about 1.8 billion by 2035. EVs cut oil consumption by about 1% below the level it would otherwise have been. Electric cars only capture about 10% of the total growth in the number of cars on the world’s roads.

The company sees that battery costs are falling, and that eventually this will make EV’s directly cost-competitive – perhaps within ten years. But BP doesn’t say whether this on the basis of a purchase cost comparison or the easier target of being cheaper over the entire life of the car. Nor does it say why, if EVs are cost competitive, that only a tenth of incremental sales are electric over the next couple of decades.

It says that battery packs currently cost around $220 a kilowatt hour and sees this number falling to around $140 by 2035, while acknowledging the high degree of uncertainty about even the current numbers. Some will suggest that BP’s 2035 figures are already close to being achieved today. (GM was paying $145 a kilowatt hour for battery cells nearly eighteen months ago).

As with renewable electricity, I suspect we will see BP increasing its forecasts for EV sales as each new annual outlook appears. Nothing too dramatic each year but enough of an increase not to seem completely out of touch. But nothing in this year's Energy Outlook suggests that BP understands how the rapidly rising competitiveness of new energy sources will have self-reinforcing effects and increase the speed of the transition away from gas and, particularly, oil.