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UK decentralized
02-MAY-2006

applying the WADE economic model

What would happen to UK power prices and emissions of carbon dioxide if all the new electricity generating capacity installed over the next 20 years was decentralized energy? And what if it were all centralized, whether fuelled by gas, coal or nuclear? The WADE economic model answers just these questions, as Sytze Dijkstra reports.

Decentralized energy (DE) has seen mixed fortunes in the UK over the past few years. While development of largescale DE – mostly industrial cogeneration – has been stagnant, microgeneration is the rising star of the UK’s energy debate. Interest in this more ‘sexy’ concept is increasing from government, industry and the media. Initiatives by local governments (such as the borough of Woking in Surrey), consultations and studies on microgeneration commissioned by the Department of Trade and Industry (DTI), and media coverage on the Conservative Party leader installing a rooftop wind turbine, have introduced DE to a wider public. However, any full consideration of DE must also include large-scale projects, as these would have a much larger impact on meeting Britain’s energy needs.

This two-sided situation coincides with the DTI’s Energy Review, considered key to a sustainable energy future for UK. Like many other countries, the UK is grappling with the question of whether new nuclear power stations are required to meet future CO₂ emission targets. In this debate, DE is playing an increasingly important role. On 6 March, the Sustainable Development Commission (SDC), the government’s environmental advisor, concluded against nuclear. One of their arguments was that large-scale investment in new nuclear power would lock the country into a centralized generation model, closing all options for further spread of decentralized technologies.

Other supporters of DE include local governments, such as the Greater London Authority – which has been expressing plans to decentralize the capital’s electricity supply – and environmental groups. DE equipment manufacturers have also been participating in the consultation, but they have less clout than utilities and the nuclear industry.

The DTI has so far been cool to the idea of DE, though it is studying the possibilities and implications of DE. Different studies have been conducted, but concrete evidence-based projections have been scarce. For this reason, Greenpeace UK commissioned WADE to apply the WADE Economic Model to the UK as supporting research for Greenpeace’s response to the Energy Review consultation process. The Greenpeace report, Decentralizing UK Energy: Cleaner, Cheaper, More Secure Energy for the 21st Century, can be accessed on the Greenpeace UK website.

Table 1. Electrical generation and capacity of total electricity supply and DE in the UK (2004). Source: WADE World Survey 2006, based on DTI DUKES 2005
	Generation	Capacity
Total	393.0 TWh	80.37 GWe
DE	28.1 TWh	5.9 GWe
% DE of total	7.2%	7.3%

THE UK ELECTRICITY SYSTEM

Currently the UK’s electricity supply is still highly centralized. Data from the Digest of UK Energy Statistics (DUKES) show that DE only represents 7.3% of total capacity and contributes to 7.2% of generation (Table 1). Large-scale cogeneration (> 1 MWe) represents the largest share of DE capacity (3.1 GWe), but other DE sources such as on-site renewables are growing rapidly.

In terms of fuel use, most generation in the UK is coal-fired, with natural gas a close second (see Table 2). However, gas is increasingly important, and declining North Sea gas reserves have raised concerns about energy security, as the gas dispute between Russia and Ukraine illustrated. Gas use will therefore be a major issue in decisions about future energy policies.

Table 2. Fuel use by the UK power sector (2004); Mtoe = million tonnes of oil equivalents. Source: DTI DUKES 2005
Fuel type	Generation (Mtoe)
Coal	31.3
Oil	1.14
Gas	29.1
Nuclear	18.2
Hydro	0.42
Other renewables	2.99
Other fuels	1.55
Net import	0.64
Total	85.4

Nuclear energy is another key issue in the current energy debate. Existing nuclear plants are ageing and most will retire over the next 30 years. This fuels concerns about an ‘energy gap’, and many argue that a nuclear replacement programme is the only way to fill this and meet the country’s carbon emission targets.

A final issue for the UK’s electricity system is its ageing transmission and distribution (T&D) network. After large investments in the 1960s and 1970s, the last few decades have seen under-spending in the T&D infrastructure, so that most of the existing network will need to be replaced over the coming 20 years (Figure 1). This entails huge costs, which have so far been largely ignored in the energy debate.

Application of the WADE Economic Model to the UK is aimed to analyse these issues. It aims to represent a comprehensive picture of the power industry, clarify many of the arguments used in the debate, and provide concrete evidence for choosing the most cost-effective and sustainable energy future.

THE WADE ECONOMIC MODEL

The purpose of the WADE Economic Model is to calculate the economic and environmental impacts of supplying incremental electrical load growth with varying mixes of DE and central generation (CG). Starting with known generating capacity for year 0 and projections for capacity retirement and load growth, the model builds user-specified capacity to meet future growth and retirement over a 20-year period.

Figure 2 shows the data flow of the WADE model, and specifies the model’s inputs and outputs. In total, the model requires over 1000 different inputs on four different worksheets. The model’s data input requirements are detailed and extensive, requiring comprehensive information about various aspects of existing electricity generation, as well as projections of future trends and technology development. Most of these data are generally collected as national statistics, so they have high reliability, and the results are acceptable and relevant for government departments.

Using existing retirement inputs, retirement rates, and future demand growth, the model calculates the required new capacity to meet demand. The user can distribute this capacity over different technologies.

In each run, the model builds five cases for new capacity to meet incremental demand over 20 years, ranging between the two extreme scenarios of 0% DE/100% CG to 100% DE/0% CG. In addition, different runs of the WADE Economic Model, representing different scenarios, allow sensitivity analysis of important variables such as fuel prices and demand growth, and allow direct comparison between different electricity supply systems. In this way the model can help make policy decisions by comparing concrete alternatives.

The model’s outputs show a range of results for the five scenarios with different shares of CG and DE. It gives the total capital costs (of both generation plant and T&D) over the 20- year period, as well as the retail costs (future costs adjusted or levelized to their present value), the annual CO2 and other pollutant emissions from new and total generation, and the fuel use (both absolute and by share of generation) in year 20. The model can also give results for intermediate years within the 20-year analysis period. These results, and particularly costs and carbon emissions, relate directly to policy aims and consequences, and are therefore essential criteria in the decision-making process.

UK MODEL APPLICATION – SCENARIOS

Baseline

Any application of the WADE model starts with the construction of a reliable baseline scenario. For the UK, this meant collecting data from DUKES, the DTI statistics database, as well as from the IEA and other international sources, and entering these into the model. The scenario as a whole was then checked through comparing its results with reported data and projections. Furthermore, the results were discussed with experts from Imperial College London, whose comments were incorporated. The key parameters and investment shares of the UK baseline scenario are given in Figure 3a.

This scenario aimed to represent a likely future electricity system, based on the expected responses of the market and government to the existing issues. It assumes that new nuclear capacity will be built in the second decade of the analysis to replace existing plants, and assumes that nuclear will have 20% of the generation capacity at 2002, based on DTI data. Until new nuclear plants become operational, it mainly uses gas combined-cycle gas turbines (CCGT) to meet demand, but also some coal-fired generation to limit the UK’s reliance on gas imports. Renewable generation, mostly wind energy, is increased gradually, reflecting projections of potential development.

For the Greenpeace report, the 100% CG case of the baseline scenario, called ‘Central Nuclear’, was compared with a range of other future electricity supply scenarios.

Alternative scenarios

The main alternative considered was called the DE/Renewables case. This had all the same inputs and assumptions as the Central Nuclear case, but a different generation mix (Figure 3b). In addition, 75% of all new capacity was decentralized, while 25% consisted of centralized renewables.

This scenario aimed to represent a decentralized alternative to Central Nuclear. No new nuclear capacity is built, while existing plants are retired at projected rates. There are no new centralized fossil-fired plants either, so that all new central generation (25% of the total market) is renewable (mostly wind and bioenergy). The 75% market share of DE is mostly gas-fired CHP, but shares of micro-CHP and on-site renewables will increase over the 20-year period. This reflects their increasing competitiveness and the rising interest in these technologies from the DTI and the public.

A second, more radical, alternative was the Greenpeace scenario, which assumed a demand reduction of 0.5% through energy-efficiency. New generation was high in renewables, making their final generation share 27% (Figure 3c). This scenario represents a more radical approach to reducing carbon emissions from the power sector. It combines rapid development of renewables and energy-efficiency measures, surpassing government targets. It aimed to show that such measures could contribute to significant CO₂ emission reductions, additional to the baseline case. This is representative of the kind of developments that many environmental proponents of DE would like to see.

Sensitivity analysis

The analysis also included several additional scenarios, which were meant to test the sensitivity of the results of the three scenarios to certain key parameters. Table 3 outlines the characteristics of these.

APPLICATION OF THE UK MODEL – MAIN RESULTS

The baseline results for the UK showed that a more decentralized electricity supply system results in lower capital costs, lower delivered electricity cost, lower carbon emissions and less fuel use. Table 4 compares the extreme cases, in which all new capacity investment is either centralized (100% CG) or decentralized (100% DE). Figures 4 and 5 illustrate the effects of decentralizing the UK’s electricity system in terms of delivered costs and CO₂ emissions.

The results for the baseline scenario show that a more decentralized electricity supply in the UK reduces costs, CO₂ emissions and fuel use. The main reason for the savings is that the model assumes that DE requires less T&D capacity than CG, because it generates electricity much closer to the point of use. This assumption is valid in the UK context for three reasons.

• The UK’s T&D system is ageing, so most T&D capacity requires replacing within the next 10–20 years.
• The UK’s electricity demand is expected to grow most significantly in the commercial and residential sectors in urban areas. In these areas, the national grid is becoming increasingly constrained, so that any new demand will require additional T&D as well as generation capacity. The requirements would be larger for CG than for DE.
• New gas-fired CCGT power stations would most probably be built where new gas pipelines from the European continent come in. They would therefore require new transmission lines to connect them to the grid.

The model results illustrate the importance of future choices in terms of T&D investment, and support the SDC argument that large-scale investment in nuclear technology would lock the country in a centralized generation system for the foreseeable future.

Table 3. Scenarios used for sensitivity analysis for application of the UK model
Sensitivity scenario	Characteristics/variation from the baseline
Low fossil-fuel price	Half the annual fossil fuel price increase
High fossil-fuel price	Double the annual fossil-fuel price increase
No new nuclear	New nuclear capacity replaced by a mix of gas, coal and renewables
No new central gas (rationale was to limit the dependence on gas imports from continental Europe)	New central gas CCGT capacity replaced by a mix of nuclear, coal and renewables. The share of decentralized gas-CHP was also reduced in favour of coal-CHP and on-site renewables
Zero demand growth and no new nuclear	New nuclear capacity replaced by a mix of gas, coal and renewables Annual demand growth of 0%
Central wind and nuclear (not included in the original Greenpeace analysis)	Same as the alternative scenario, but with centralized generation consisting of a mix of wind and nuclear power

Part of the savings made by the DE cases is also due to the higher operating efficiency of these technologies, particularly through cogeneration and reduced transmission losses. Fuel use and CO₂ emissions are most strongly affected by this.

It is important to realize that the central generation mix of the baseline scenario only introduces new nuclear generation from 2014, reflecting its long lead-time. Consequently, the 100% CG scenario also includes a substantial amount of new gas-fired CCGT. This explains the savings in CO₂ emission and fuel-use of the DE/Renewables case, and shows that building any new gas-fired power stations that do not recover heat in the UK is clearly problematic in terms of Kyoto commitments and energy security, two core issues of the DTI Energy Review.

Table 4. Main results of for the UK baseline scenario

	100% CG scenario	100% DE scenario	Saving	Relative saving
Capital costs – capacity and T&D (£1 = E1.44)	£70 billion	£51 billion	£19 billion	27%
Delivered costs (£/kWh)	£0.0683	£0.0582	£0.0101	15%
CO2 emissions (Mtonne/year)	36.75	33.92	2.83	7.7%
Fuel use (PJ/year)	2303	2163	140.0	6.1%

 

UK MODEL APPLICATION – SCENARIO COMPARISON

Baseline scenario vs alternative scenario

In the Greenpeace report, the baseline scenario (Central Nuclear) was compared directly against the alternative proposed by Greenpeace (DE/Renewables). The findings of this comparison were similar to the overall conclusion of the baseline outputs: the decentralized alternative had lower costs, CO₂ emissions and fuel use than the central nuclear scenario (Figure 6, left half). This comparison highlighted the importance of political choices between future energy systems. The report is available on the Greenpeace UK website.

Baseline scenario vs Greenpeace scenario

Comparison between the baseline scenario and the more radical Greenpeace scenario showed the most remarkable results for fuel-use and CO₂ emissions (Figure 6). The costs of the two cases were comparable, but the Greenpeace scenario showed that with demand reduction through energy-efficiency measures and large-scale development of renewable sources, both carbon emissions and fuel use could be cut drastically. Total CO₂ emissions from the decentralized Greenpeace scenario were 30% lower than in the Central Nuclear case, and natural gas use was reduced by 25%. It is important to keep in mind that this is partly due to the considerable share of gas CCGT in the Centralized Nuclear baseline.

Fuel price sensitivities

Sensitivity analysis dealt with several key parameters. First it considered fuel prices, for which future trends are clearly uncertain. The effect of changes in fuel-price trends on the retail price is significant (Figure 7), and it affects DE more than CG, because retail prices are higher than wholesale prices. However, the results show that the benefits of DE are maintained at fuel-price rises of up to 10% per year.

Generation portfolios

The model application to the UK also included analysis of various generation portfolio-alternatives, in addition to the DE/Renewables and Greenpeace scenarios. Particularly, the impacts of building no new nuclear power stations or no new gas CCGT power stations were considered. As expected, carbon emission and fossil fuel use increased in these cases (Figure 8), while costs remained largely unchanged. Their high reliance on gas imports from continental Europe confirmed that these were not attractive alternatives to either the baseline or alternative scenarios.

Demand growth

The final step of the sensitivity analysis considered the impact of demand growth on the results. This proved to be the single most important factor influencing all results. Reducing demand growth from 0.5% per year to 0% results in carbon emission savings comparable to a nuclear replacement programme, as in the Centralized Nuclear scenario
.

At the same time, this would reduce capital costs by almost 20% and fuel use by 10%. With zero demand growth, retail prices were slightly higher in the centralized case, because many costs are fixed and do not depend on the amount of electricity generated, so that with lower total generation the unit price is higher. However, DE retail prices decreased with lower demand growth.

UK MODEL APPLICATION – IMPLICATIONS

The application of the WADE Economic Model was directly relevant in the context of the government’s Energy Review process, as it gives evidence-based feedback on the implications of various future electricity-supply scenarios. It therefore added to the growing interest and support for decentralized energy, and confirms the findings of other studies.

The results of the WADE Economic model for the UK contain three key messages for the Energy Review, relating to three key objectives: lower costs, lower CO₂ emissions and greater energy security.

• A more decentralized supply model lowers the delivered costs of electricity.
• Decentralized energy is more effective in reducing carbon emissions from the power sector than centralized generation. This is most obvious from the fact that the DE/Renewables scenario adds another 6.15 million tonnes to the savings already made by the Central Nuclear scenario. This also indicates that nuclear power is not the only way to meet the UK’s Kyoto commitments.
• Decentralized generation reduces fuel use, and thereby reliance on imports from Europe. Fuel-use results showed that all scenarios contained significant natural gas use, thereby leading to fears of import dependence. Particularly, gas CCGT is problematic in terms of energy security. Gas use in DE scenarios was still considerable, but significantly smaller than in centralized cases, because of fewer losses and higher efficiencies. With diminishing UK gas reserves, it is therefore only prudent to use it as efficiently as possible, enabling the country to bridge the gap to more widespread development of renewable sources.

Altogether, the WADE Economic Model shows that on the three key criteria of costs, emissions and energy security, decentralized energy is a more effective option for meeting future UK energy demands than centralized generation.

Sytze Dijkstra is Research Executive at WADE, Edinburgh, Scotland, UK.
Fax: 44 131 625 3334
e-mail: sytze.dijkstra@localpower.org

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