Tuesday, 1 November 2011

Anger over high energy bills is test of EU's commitment to renewables

The EU has set ambitious goals for its electricity and gas supply sectors. These goals involve decarbonisation, an increased share of renewables, improved security of energy supplies and a reduction of demand. Do these goals all point to higher prices per unit of energy? The answer is, quite simply, yes.

Reducing the carbon emissions from the energy sector necessarily means raising the price of carbon dioxide released from gas and from power production. This can happen through a combination of reducing the cap on the quantity of emissions traded in the EU emissions trading scheme, via higher carbon taxes or by higher emissions performance standards. Higher carbon prices (actual or implicit) are essential to underpin low-carbon investments.

Current projections for the UK suggest the price will rise from its current level of about £10 per tonne of carbon dioxide to £70 per tonne by 2030. For electricity, this would raise wholesale electricity prices by about 40% based on the impact on the cost of gas-fired power generation. If gas for domestic heating were also to be subjected to a charge of £70 per tonne of carbon dioxide, this would raise wholesale gas prices by 70%.

Increasing the share of renewables in electricity and heat is likely to be expensive for some time to come. Onshore wind is currently about 50% more expensive per unit of energy than conventional power sources, while offshore wind is about 250% more expensive. If half of UK electricity were to come from an equal combination of onshore and offshore wind, this would raise the wholesale price of electricity by 50%. Heat from other renewable sources, such as solar thermal or biomass, is likely to have significant cost implications for the price of heat.

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