Affordability

4.4.2.1 Sub-dimension 3: Cost to the System

This sub-dimension carries out quantitative analysis of the costs of realising the three

pathways. These costs are assessed separately for each of the major three parts of the energy system: generation, transmission, and distribution.

Indicator 3a. Cost of Electricity Generation  Quantitative indicator

 Levelised Cost of Electricity (LCOE), measured in £/Megawatt-Hour (MWh)  Total annual generation costs, measured in £bn

 Potentially applicable to other countries

LCOE uses a widely recognised calculation for the cost of electricity generation. The calculation includes Capital Expenditure (CAPEX) costs (i.e. pre-development and construction), fixed Operating Expenditure (OPEX) costs (i.e. fixed operation and maintenance, insurance and connection charges) and variable OPEX costs (i.e. variable operation and maintenance and fuel). Component data is taken from DECC (2013d) and Mott Macdonald (2010). The

calculation takes into account the capacity and load hours of each type of generation. CAPEX is discounted at a rate of 10%. This is then used to show total annual generation costs for the pathways in £bn. The ‘cost of electricity generation’ indicator would be relevant for assessing the energy security of a wide range of pathways, including countries other than the UK; however, application to other contexts would require additional data because the cost figures used here are specific to the UK context.

Sensitivity analyses are carried out to show the impact of: - Different discount rates (DR Sensitivity)

- Decreasing CAPEX costs due to learning and economies of scale (LC Sensitivity) - Changes in CAPEX costs based on DECC estimates (CAP Sensitivity)

- Fuel costs - Carbon price

Indicator 3b. Transmission upgrade costs  Quantitative indicator

 Calculates costs of necessary additional and upgraded transmission infrastructure, in £bn

This indicator estimates the cost of upgrading or adding to the transmission network in order to absorb the electricity generation of the pathways. Transmission upgrade costs for offshore wind are calculated using unit costs and existing data about the likely unit requirements of all the Round 2 and Round 3 wind farms (data from National Grid 2013c). Interconnector offshore costs are calculated using unit and cable costs for planned interconnectors (National Grid 2013c; 2013d) and data on individual interconnectors from the websites of the individual projects. Onshore costs are calculated using the estimates of network upgrades that will likely be required for different amounts of new generation, from the Electricity Networks Strategy Group (ENSG 2012). For onshore wind and nuclear, these onshore transmission estimates are weighted according to likely locations of onshore infrastructure, using locations of existing nuclear generation sites and siting estimates of current and future wind installations, from National Grid system maps and projections (National Grid 2012). For all other onshore

generation, locations are weighted according to current generation sites (National Grid 2012). This indicator would be relevant for assessing the energy security of a wide range of pathways, including countries other than the UK; however, application to other contexts would require additional data because the cost figures used here are specific to the UK context.

Indicator 3c. Distribution upgrade costs  Quantitative indicator

 Calculates costs of necessary additional and upgraded distribution network infrastructure, in £bn

 Potentially applicable to other countries

Distribution network costs are estimated on the basis of a paper by Pudjianto et al (2013), which carries out detailed spatial modelling of the distribution networks for the Transition Pathways through to 2050. This indicator would be relevant for assessing the energy security of a wide range of pathways, including countries other than the UK; however, application to other contexts would require additional data because the cost figures used here are specific to the UK context.

4.4.2.2 Sub-dimension 4: Cost to the Consumer

This sub-dimension utilises the information from the previous affordability indicators to estimate the eventual cost to the consumer. This is done both quantitatively and qualitatively. Firstly, a quantitative analysis is conducted of the annual household retail electricity bills of the three pathways. Secondly, this information is used as the basis for a qualitative assessment of the important question ‘affordable to whom’ (Cherp and Jewell 2014), focusing on fuel poverty and the affordability of the pathways to the most vulnerable groups in society.

Indicator 4a. Annual retail electricity bills  Quantitative indicator

 Calculates future annual electricity bills to domestic consumers, in £/y  Potentially applicable to other countries

Annual retail electricity bills are calculated using the wholesale price and a ‘consumer uplift’ based on an estimated breakdown of an average household bill. This breakdown consists of 19% of the bill for supplier costs and margins, 9% for social and environmental policies, 20% for network charges, and 5% for Value-Added Tax (VAT). The annual bills are calculated without VAT; this is a standard method which makes it easier to compare between countries.

Wholesale prices are calculated by defining the price-setting technology using hourly demand data for the whole year. The load duration curve is first split into horizontal stacks according to the capacity of each fuel, and the estimated merit order as given in the pathways data. The year is split into four time periods: summer and winter peak, and summer and winter off-peak. This is used to calculate the number of hours during the year for which each fuel is setting the electricity price. The LCOE data for total variable costs is then used to show the cost of electricity generation for the price-setting fuel. These prices are multiplied by the number of hours in the year for which each fuel is setting the price, giving an overall wholesale price of electricity.

The wholesale price estimates are then used to estimate the annual electricity bills to consumers. The baseline estimate is calculated using the same consumer uplift as today. Sensitivity tests are then carried out to show the impact of:

- Increasing price of generation for each major fuel by 20% (coal, gas, nuclear, biomass)

- Changes in the merit order of dispatch

- Impact of assumptions r.e. price of imported electricity - Impact of assumptions r.e. carbon price in 2030 and 2050 - Changes to social and environmental programmes - Different estimates of wholesale price

- Different network charges (based on transmission and distribution costs, see 3b and 3c)

- Population growth - Economies of scale - Changes to the EMR

- Utility profit margins and rent-seeking.

For more detail on all the sensitivity analyses carried out, including the rationale behind each, see Appendix C.

The ‘annual bills’ indicator would be relevant for assessing the energy security of a wide range of pathways, including countries other than the UK; however, application to other contexts would require additional data because the cost figures used here are specific to the UK context.

Indicator 4b. Impact on levels of fuel poverty  Qualitative indicator

 Uses annual bills data and pathways storylines to assess risk of heightened levels of fuel poverty, on high/medium/low scale

 Variable / limited relevance to other countries.

In the absence of detailed information on future incomes which would be required for a quantitative assessment of fuel poverty, a qualitative analysis is carried out using the ‘annual bills’ results, existing information on fuel poverty (Hills 2012) and the pathway storylines. The combination of annual bill data and qualitative analysis allows the identification of ‘high risk’ and ‘low risk’ pathways; more detail is given in Appendix C and in the results in section 5.4.3. Fuel poverty is a particularly prevalent issue in the UK, mainly because of ageing, poor-quality housing stock (compared to some other industrialised countries), combined with cold winters

and relatively high income inequality. Therefore this indicator would be of variable or limited relevance to energy security assessments of other industrialised countries.