The business leader's guide to the low carbon economy

The world currently uses 85m barrels of oil a day, and we have to get it from somewhere.

The easiest and cheapest way is to drill for it on land. Most of the world’s oil still comes from oilfields below land, principally in the Middle East. If you run out of land based oil, you can start to drill offshore. Offshore production is a lot more expensive than on land, but worth it if prices are high enough. That’s why offshore drilling in shallow waters began in earnest after the oil price shocks of the early seventies. Offshore drilling in the relatively shallow waters of places like the North Sea is tough enough, but nothing like the challenge of extracting oil form deep waters like the Gulf of Mexico. BP’s Deepwater Horizon rig was designed to extract oil from more than two miles below the sea bed using a rig floating a mile above it. By any standards this was a difficult, dangerous and expensive undertaking. Since the rig failed on 20^th April, killing 11 of her crew and sending 3m barrels of oil into the sea, the costs have risen dramatically. BP had agreed to put $20bn into a fund to pay for damages and lost earnings; $100m into a fund to compensate oil rig workers affected by the suspension of normal operations; and may face another $17bn or so in fines.

Whether this accident turns out to be the of 9/11 of energy, as President Obama predicts, is not yet clear, but one thing’s for sure – the price of oil is going to be increasing substantially for the foreseeable future.

Will this mean that it continues to be profitable to extract oil not only from deep water but using other expensive methods like oil shales and tar sands? Or that we start to rein back on oil in favour of cheaper sources of energy? Time will tell.

One of the key environmental commitments of the UK’s new coalition government is to implement a smart electricity grid. But what exactly is a smart grid?

A small power station

Our present electricity grid is pretty stupid in at least two significant ways. Firstly it regulates supply, but not demand. Since demand fluctuates wildly day by day and week by week, we need quite a few power stations idle for much of the time, but ready to come on line at very short notice. Secondly, the electricity flows only one way – from big, inefficient power stations to end users.

A smart grid addresses these problems. A smart grid regulates demand as well as supply: here’s how.  Instead of the price of electricity being fixed for long periods of time, the price varies second by second in line with demand. This information would be sent down the cables with the electricity itself. When electricity happens to be very expensive, some devices, like fridges or battery rechargers would turn themselves off for a bit until the price fell or they really needed to be on. Other devices such washing machines would wait for cheap electricity before turning themselves on at all.

Secondly, electricity would flow both ways. When you plug in your electric car to recharge, it would generally be drawing power from the grid. But if there were a sudden demand for power, you might want to sell the power in your car’s batteries back to the grid. You’d be happy because your car would be buying electricity when it was cheap, and selling it when it was expensive. The power generation companies would be happy because you’d be providing them with the infrastructure to deal with peak demand, instead of their having to build extra power stations to cope with such surges.

When will we have a smart grid in the UK? This is where the government is a bit vague. But if we don’t do something soon to reduce demand or increase supply we’re going to run short of electricity in the UK by the end of this decade.

This graph first appeared in a report to the UK House of Lords Economic Affairs committee, published in 2008. It shows that peak demand for electricity in the UK will exceed supply sometime in 2015.

The main reason for this is that a number of coal fired power stations – including Drax, which supplies 7%of the UK’s total electricity – will have to close as they fail to comply with EU emissions regulation due to come into force in 2016.

However, thanks to some recent wheeling and dealing by the power companies and the British government, the EU has now agreed to give the UK a further three years grace before enforcing the regulations. We now won’t run out of power until 2019 – unless significant new sources of nuclear and renewable energy come on stream by then.

As the UK general election campaign draws to a close in its own inimitable way, all three main parties are committed to reducing CO2 emissions and promoting a low carbon economy. One policy difference between the Liberal Democrats and the other two involve nuclear power. The Lib Dems are against it; the Tories and Labour are all for it. Who’s right?

The three arguments against nuclear power are that it’s expensive, dangerous and unnecessary. Taking each issue in turn:

One nuclear power station costs about £3bn and delivers about 1GW of power. An offshore windfarm delivering the same amount of power would cost about £6bn.

Since the Chernobyl accident in 1986 there have been 443 nuclear power stations producing 16% of the entire world’s electricity with no significant accidents. The World Health Organisation estimates that a total of 4000 people will eventually die prematurely as a result of the Chernobyl disaster.  While this is a terrible toll, it is less than the 4000 miners who die every year in Chinese coal mines, or 24,000 people who die every year as a result of pollution from coal fired power stations.

We could generate all the electricity we need in the UK from wind – if we were prepared to cover an area the size of Wales with windmills. If not, we’re going to need an alternative source, and that’s probably going to be nuclear. For a well informed discussion on how the numbers for electricity generation add up, and why nuclear is probably going to be part of the mix, see David MacKay’s excellent book and website Sustainable Energy without the Hot Air.

According to the International Energy Agency one megawatt-hour of electricity costs around $10 from a coal fired power stations, $60 from an offshore wind farm and $400 from a solar photovoltaic (PV) system, which is why some environmentalists argue that we should focus our energy on wind and wave power, not solar.

But prices have started to drop, partly because silicon has become cheaper, but mainly because of low cost Chinese companies entering the market. Half the world’s production capacity of solar PV panels is now in China, and this proportion is set to increase.

Now that the UK has joined Germany and Spain to provide generous feed in tariffs for domestic PV, expect this market to continue to grow.

This week Environment Secretary Hilary Benn announced more government support for Anaerobic Digestion (AD) a process which essentially mimics the action of a cow’s stomach.  AD turns food waste and manure into methane gas, which can then be used for transport, local generation of heat and power, or even injected back into the national gas grid. The government is spending £10m to support a series of demonstration sites across the country.

A pilot plant in Ludlow, Shropshire, not only generates electricity, but also keeps waste food out of landfill, where it eventually decomposes into methane anyway. When released into the atmosphere methane is eight times as potent a greenhouse gas as CO2, as a contributor to global warming.

The UK currently operates 10 AD plants, with another 10 under construction.

The UK government announced this week that licences had been awarded for ten wave and tidal power projects off the coast of Scotland. Scottish First Minister Alex Salmond described the choppy Scottish waters as the ‘Saudi Arabia of marine energy.’ Hardly: when the six wave and four tidal projects are fully operational they’ll generate around 1.2GW of power, about the same as one average sized conventional power station. The 10 million barrels of oil which pours out of Saudi Arabia each day is enough to supply 1000 power stations. Even so, this investment in wave and tidal is significant, because the power it will provide is secure, low carbon and – if you exclude the huge capital costs – essentially free.

Unlike solar photovoltaic power, which is quite a high tech business, wave and tidal power is quite low tech. You just need to be able to weld together big chunks of metal that will withstand the battering of the violent Scottish seas, and find ways of turning movement into electricity. It should provide some good opportunities for engineering firms that were once involved in shipbuilding and the declining North Sea oil and gas industry.

An interesting spat has broken out between eco warrior George Monbiot, and businessman Jeremy Leggett, founder and CEO of Solar Century, a company which produces solar panels for electricity and hot water.

The government recently announced that anyone who puts a solar photovoltaic (PV) panel on the roof of their house will be paid 41p for every kilowatt hour of electricity they produce – even if they use the electricity themselves. This subsidy, known as a feed in tariff or FIT is guaranteed for 25 years, making the purchase of a solar PV panel a very appealing investment. For an outlay of around £12,000, you can probably expect a guaranteed tax free return of about 5-8% a year. No other risk free investment on offer at the moment comes anywhere close to that.

It’s probably clear why Jeremy is a fan – his company makes solar panels. But why doesn’t George think much of it? According to Mr Monbiot, the scheme (a) won’t make much of a difference to the total amount of power generated by renewables (b) will generate power at the wrong time (in the UK we don’t use much power on sunny days – peak usage is dark winter evenings) and (c) will make the middle classes who can afford the upfront investment better off while doing nothing to address fuel poverty.

Of course he’s right on all three counts, but this won’t stop the government continuing with the scheme, and neither should it.  In a low carbon economy, most electricity will be generated from renewables and nuclear, and much of it will be generated locally rather than in big centralised power stations. The sooner we move to a low carbon economy the better, and that means trying a lot of things to see what works. Domestic photovoltaics may or may not be a significant source of Britain’s energy in 2020, when we have to reduce CO2 emissions by 34%, or by 2050, when we have to reduce them by 80%. But we won’t know unless we try, and that means getting started now.

For more about Monbiot and Leggett, see http://www.monbiot.com/ and http://www.jeremyleggett.net

Wind power is big business in the UK. Back in January of this year the UK government announced that it had granted licences for nine huge offshore windfarms, with the potential to generate 32GW of power – a quarter of the country’s needs. Today Mitsubishi Power Systems Europe revealed that it plans to invest £100m in wind turbine production in the UK.

The economics of an offshore wind farm are almost the opposite of a conventional power station. It’s relatively cheap to build a coal, oil or gas fired power station, but the running costs are high as fuel becomes more and more expensive. A windfarm – especially offshore – has very high upfront costs but the running costs are extremely low, as the fuel is free.

When it blows, that is. Much has been made of Denmark’s ability to generate 20% of its power from wind, but this is really only feasible because of a nifty deal the Danes have made with their Scandinavian neighbours. When the Danish wind blows, they export electricity to Norway and Sweden: when it doesn’t, their neighbours bale them out with hydroelectric power. If we’re serious about wind power in the UK, we’re going to have to find some way of balancing supply and demand like this.

One thing we don’t have to worry about is birds. It’s often said that wind turbines kill huge numbers of birds. Indeed, it’s estimated that Danish windfarms kill around 30,000 birds a year. That sounds quite a lot until you compare it to one million birds a year killed by traffic in Denmark, or the 55 million birds a year killed in Britain by cats.

Unless the British Government takes action, the UK will run short of electricity sometime in 2015. Under EU pollution rules six coal and three oil fired power stations will have to close by then, reducing the UK’s generating capacity by 15%. You could fill this gap – of about 12GW of electricity – by building some nuclear power stations but unfortunately the ten recently approved by the government won’t be ready until 2018 at the earliest. You could also fill the gap by building two huge new windfarms on the Dogger Bank and the Norfolk Bank, but these won’t be ready until 2020 at the earliest.

So it looks like power cuts are on the way, probably just as the new government we’re about to elect this May is coming towards the end of its first term…

… unless power companies RWE npower and E.ON, the two German owned firms who run these coal and oil fired power stations are successful in gaining an exemption from EU rules. Which is why they are ‘in private talks’ with senior Conservative politicians right now.