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Carbon in UK Power – Part 2: Is It Time to Prioritise Carbon Over Price?

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Carbon in UK Power – Part 2: Is It Time to Prioritise Carbon Over Price?

Date
December 22, 2020
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Up until now, the UK has prioritised keeping the lights on and consumer bills down ahead of environmental concerns. In other words, the security of supply and price are put above carbon intensity in the energy trilemma of the UK.

This priority could be set to change as Britain gets serious about its 2050 net-zero target. As we highlighted in our previous article there is still a lot of work to be done to achieve this aim or even the mid-term goal of a 68% cut in greenhouse gas emissions by 20301.

Companies are waking up to the importance of sourcing low carbon generation, yet the current design of power markets makes this both hard to achieve and difficult to quantify (something we discuss in a future thought leadership piece). For example, Volkswagen just announced2 that its top executives’ bonuses will be linked to its ESG targets and last month Sony hinted3 at leaving Japan due to limited access to clean energy with the carbon intensity of the country’s electricity network more than twice that of the UK.

In Part 2 of this series, we:

  • Highlight the challenges the UK faces to reduce carbon from power generation over the coming decade;
  • Demonstrate how our choices greatly impact the UK’s efforts to continue to reduce overall carbon emissions;
  • Introduce the concept of the marginal power unit in the UK system and its importance on carbon emission reductions;
  • Show that measuring carbon on an annual basis is nowhere near detailed enough for the UK to achieve its goal, with a much more granular, half-hourly view on carbon intensity required, just like we have on prices and,
  • Underline the importance of working with a market-leading energy partner to ensure businesses achieve maximum emission reduction.

 

The Marginal Unit

Newton’s third law states that ‘for every action, there is an equal and opposite reaction’

In the power stack, the lowest cost generation is used first while the last generating unit required to meet demand typically sets the price4. This is known as the marginal unit or price-setting unit. Our analysis in this second article highlights the key role this marginal unit will play in reducing the UK’s carbon intensity.

The relevance of Newton’s third law to electricity is that by turning on a generating asset we are displacing an alternative source of production. Yet these decisions are made based on price and not emissions. But to meet the emission goals we need to be considering the carbon impact of these actions as well as the cost of supply.

Through Hartree Solutions’ in-house modelling, we can extract a marginal balancing unit for each hour5, rather than an annual basis more typical within the industry. We can do this from both a forward-looking perspective and a retrospective view.

 

Granular Carbon Analysis

Our highly granular approach gives us a great insight into historic, real-time and forecast carbon emissions. This allows us to design long-term solutions to reduce the carbon content of a company’s electricity use and ultimately completely offset it.

Using this model, when we analyse the relationship between the grid’s average carbon intensity and the power price, we see a good correlation. As power prices increase, the average carbon intensity of the grid also increases.

Hartree Analysis of the correlation of the power price and the average carbon intensity of the network

However, when we look at the carbon intensity of the price-setting unit and the power price, this correlation breaks down. This highlights the impact of a regulatory framework that favours keeping prices down over carbon intensity and can act as a handbrake on the UK’s success in continuing to reduce power emissions.

Hartree Analysis of the correlation of the power price and the marginal carbon intensity of the network

Further, we are also able to demonstrate the poor correlation between the actual carbon impact of your actions (the marginal units carbon intensity) and the average carbon intensity. This highlights the issues in using the average carbon intensity as the driver for our decisions as it can actually lead to increased carbon emissions in the UK.

Hartree modelled correlation between the average and marginal carbon intensity

When the grid has a high percentage of low carbon generation but still needs some high carbon generation to meet demand, we could be fooled into thinking that we should look only at the low average carbon intensity and that further carbon reductions are not possible. Yet, where we can substitute this high carbon intensity grid generation with lower carbon local generation, we can further reduce the UK’s total emissions. This is why measuring specific consumers and on-site sources of generation against the marginal carbon intensity of the network is key if the UK is to continue reducing emissions at the rate required.

Hartree analysis of the carbon content showing the marginal vs average over the course of a day

 

Choosing the Right Energy Partner

If you are serious about truly reducing the carbon impact of your business it is essential to work with the right energy partner that is not only able to measure and forecast the carbon-intensity of the network but also able to optimise your energy usage in real-time to benefit you as a consumer. We believe this is a unique skillset of Hartree Solutions.

Most companies and businesses similarly look at their annual carbon intensity rather than a more granular measure. Usually, this is for ease and a lack of data available. It leads to public announcements which boast of ‘purchasing 100% renewable generation’. We believe these can be misleading as it is unclear how their electricity is generated when the wind doesn’t blow or the sun doesn’t shine.

We only need to look back at 26th Nov ’20 where renewable generating made up only 7% of total generation over the day. On days like these, claims of a grid-connected user’s electricity being 100% renewable are questionable.

Generation by fuel type from National Grid data

 

The Challenges that Lie Ahead

The reality is that the UK network is some years away from being able to provide economic solutions for 24/7 low carbon generation. And this is a reality that we as an industry need to better understand and be more open and transparent about.

Delving deeper still, we have charted the UK power generation units that most frequently set the marginal price and then animated them to be sorted by carbon intensity to further highlight the breakdown in correlation between those aspects.

Hartree Analysis highlighting the breakdown in the correlation between price and the marginal setting unit

Any action we take, say via on-site generation, which displaces a marginal unit and reduces emissions from the grid should be the measure against which we consider the impact of that action.

There is also a wide variation in the volume of carbon emissions that are offset depending on the exact timing of the action. All hours are not equal. This becomes clear when we look at a specific day using our in-house modelling between the impact of our action on carbon emitted into the UK atmosphere on an hourly basis.

Much like the total emissions chart in Part 1, we can see the average tCO2/MWhe has significantly and consistently decreased over time as has the marginal equivalent.

 

Hartree analysis of the UK’s annual carbon intensities – average vs marginal

Additionally, displayed over a 24-hour day we can see the importance of analysing any effort to reduce carbon emissions on an hourly basis both on an average and marginal basis. Again, we see a large drop from 2015 as gas has largely replaced coal as the marginal unit. The impact of Covid-19 has led to a big fall from 2019 to 2020 but our analysis indicates that declining trend is set to halt by 2023.

Hartree analysis showing the hourly profile of the average carbon intensity

 

Hartree analysis showing the hourly profile of the marginal carbon intensity

As mentioned in the first article in this series, the easy switches have been exhausted and the real challenges lie ahead. Further evidence of this since we released Part 1 is the prequalification result for the upcoming Capacity Market auction for the delivery year 2024/25. Even four years from now the makeup of reliable generation to insure against blackouts is little changed in its carbon makeup with gas generation continuing to be both relied upon and constructed in the medium term.

The 2024/25 Capacity Auction continues to attract the same fuel type of mix as per the current system

Material carbon reductions from a change of fuel type or technology are not on the immediate horizon in the same way we have experienced over the last five years. We must therefore work harder to reduce our impact on emissions. However, the granular approach adopted by Hartree Solutions can make this achievable, certainly from an individual company’s perspective. We measure the carbon savings from your actions utilising new or existing generation assets. These assets can be optimised to reduce costs, carbon emissions or a combination of both. In the latter, of course, there is a trade-off between reducing costs and reducing emissions and how we balance those two desires. This is where we believe our partners should not only have open transparent data to make this decision but also set these goals themselves.

Ultimately, not all emissions can currently be reduced to zero at source in an economical manner. Therefore, we offer a best-in-class set of carbon offset solutions so each customer can strike their own balance.

No two customers will have the same basket of offsetting products. It is an open and bespoke solution to meet your needs, but Hartree Solutions can offer you a complete solution via directly connected additional renewable generation, optimization of flexible assets to further reduce emissions and completed by offsetting your entire business operation.

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Footnotes  
68% reduction in greenhouse gas emissions
Volkswagen announcement
3 Sony hints at move away from Japan
4 The unit setting the imbalance price is derived via a complicated calculation as seen in this document by Elexon
5 The marginal price setting unit extracted from our model is our in-house estimate
6 The Christmas Day Carbon challenge is limited to one entry per person. Entries must be received before 00:01 on Christmas Day. Hartree’s modelling will be used to determine the maximum marginal carbon intensity for any hour on Christmas day. The winning entry is the one closest to the maximum value. Where there is a tie the first entry received will be the winning entry. No Hartree or Hartree affiliate employees will be eligible to win. For each unique entry received we will donate £10 to the winners verified charity of choice up to a cap of £5,000.

 

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written by
Adam Lewis

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Additional grid capacity arrives at Peterlee

As the energy revolution advances, the UK grid continues to transition towards a more sustainable…

As the energy revolution advances, the UK grid continues to transition towards a more sustainable future. Until the UK is at the point where it can run 100% of the time on 100% renewable energy, it needs some additional support as it moves further and further away from large scale coal-fired plants. During this time of transition, additional resources are needed to support the National Grid to ensure businesses can continue to operate and domestic consumers are not impacted. The need for grid flexibility has increased in importance with so many people working from home during the Covid-19 pandemic.

This week our Peterlee site took delivery of two 2MW units that will be available to support the National Grid. The onsite generation units will provide balancing services and flexibility as the UK grid continues to try and balance the growing renewable assets available. By setting up another site, we ensure we are playing our part in keeping a consistent power supply to the UK. Once fully commissioned this site will be able to provide an additional 4MW of power to the grid when it needs it most.

Unit arrives and is offloaded at Peterlee.
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Hartree Partners and SYSTEMIQ launch Vertree

Hartree Partners and SYSTEMIQ launch Vertree to accelerate investment in global carbon markets New business…

Hartree Partners and SYSTEMIQ launch Vertree to accelerate investment in global carbon markets

  • New business founded to drive positive impact as $30bn Voluntary Carbon Market matures

  • Joint venture combines world-leading sustainability expertise of SYSTEMIQ with trading and risk management experience of Hartree Partners

  • Vertree will focus on high-integrity nature-based solutions; investing in its own projects; and market-leading insights and due diligence

 

Wednesday 26 May 2021, London.

Sustainability experts SYSTEMIQ and global energy and commodities firm Hartree Partners today announce the launch of Vertree Partners Limited, trading as Vertree, a joint venture that enables organisations to accelerate and deliver ambitious climate commitments through nature-based solutions.

The launch follows news that corporate carbon-neutral pledges led to a record Voluntary Carbon Market (VCM) transaction volume in 2020, growing 6% year-on-year. According to the Taskforce for Scaling Voluntary Carbon Markets, the global VCM could reach between US $30bn and US $50bn in size by 20301.

Nature-based solutions are a crucial part of Voluntary Carbon Markets, harnessing the power of the planet’s natural resources to address the dual climate and biodiversity crises. Done well, nature-based solutions protect and restore vital habitats to increase biodiversity at the same time as reducing atmospheric greenhouse gas emissions by avoiding or removing them.

Land-use change ranks second only to the burning of fossil fuels as the biggest source of emissions that contribute to climate change. But investing in tropical rainforests to sequester and store carbon can have a significant beneficial climate impact; according to the Intergovernmental Panel on Climate Change, ‘‘reducing deforestation and forest degradation rates represents one of the most effective and robust options for climate change mitigation”2.

 

Ariel Perez, Vertree’s Managing Director, said: “It is no longer sufficient to slow the rate of emissions the world produces; we also need to begin removing CO2 that already exists. Although the priority should be to abate emissions wherever possible, the range of technological solutions available today varies greatly, and achieving net zero will require some degree of carbon reductions and removals. Nature-based solutions are among the most scalable and effective ways to reduce emissions, protect and restore biodiversity, and to support the United Nations’ Sustainable Development Goals”.

However, the current supply of high-integrity nature-based solutions is insufficient to meet the commitments already made by a number of large organisations. McKinsey estimates3 that annual global demand for carbon offsets could reach between 1.5 to 2.0 gigatons of carbon dioxide (GtCO2) by 2030 and between 7 to 13 GtCO2 by 2050. According to their research, “the development of projects would have to ramp up at an unprecedented rate” to meet that demand, with issues such as a lack of financing leading to constrained supply.

“We are committed to catalysing significantly more long-term investment in nature-based solutions”, Perez continues, “but this must be done in a way that genuinely addresses global emissions while improving the livelihoods of local communities. Vertree’s expertise in carbon markets, along with over a decade of on-the-ground forest and landscape project experience that is embedded in the joint venture, enables us to adopt this long-term perspective.”

Vertree will further address concerns around the integrity of carbon offsets with market-leading insights and due diligence of both the projects it supports and the organisations it works with. All Vertree projects are verified and audited by third parties, including the Verified Carbon Standard; Architecture for REDD+ Transactions; Gold Standard; and Climate, Community, and Biodiversity Standard. Vertree will also use the Core Carbon Principles set out by the Taskforce on Scaling Voluntary Carbon Markets, which assess impacts on the climate, biodiversity, and local communities.

Taraneh Azad, SYSTEMIQ’s Partner and COO, said: “We created Vertree to provide nature-based solutions that the world can trust, with the highest possible standards of environmental and social integrity. Our ambition is to enable Vertree clients to trace funding all the way back to the forests and local communities that they’re investing in, ensuring Vertree projects are both transparent and impactful.”

Ahead of the UK’s Presidency of COP26 in November, the scaling and operation of Voluntary Carbon Markets has become a focus for policy makers and investors. The Taskforce on Scaling Voluntary Carbon Markets, led by Mark Carney, released its final report in January 2021, and the Voluntary Carbon Markets Integrity Initiative began consulting on guidance in March.

 

Notes to Editors:

About Vertree

  • Vertree Partners Limited, trading as Vertree, is a joint venture that combines the world-leading sustainability expertise of SYSTEMIQ and the carbon markets and environmental products experience of Hartree Partners.
  • Vertree will drive positive impact in the maturing voluntary carbon market by focusing on high integrity nature-based solutions.
  • By investing in its own projects and using market-leading insights and due diligence, Vertree will enable organisations to accelerate and deliver ambitious and credible climate commitments through nature-based solutions that also have positive impacts on communities and biodiversity.

Website: https://vertree.earth/
Twitter: @VertreeP
LinkedIn: https://www.linkedin.com/company/69693048
Instagram: VertreePartners

About Hartree Partners LP

  • Hartree Partners is a global merchant commodities firm specialising in energy and its associated industries. It focuses on identifying value in the production, refinement, transportation and consumption of tradable commodities and anticipating opportunities in the supply chain where they may be under or over-valued.
  • Founded originally in 1997, Hartree has a global reach spanning 12 offices and over 100 traders. The company’s rigorous research, analytical approach, and entrepreneurial culture have contributed to its strong track record and growth over that time.
  • Hartree Partners is owned by the company’s managing partners, senior staff, and Oaktree Capital, an alternative investment company with over $113bln of assets under management and a major investor in low carbon and renewable technologies.

https://www.hartreepartners.com/

About SYSTEMIQ

SYSTEMIQ is a B Corp created in 2016 to drive achievement of the UN Sustainable Development Goals and the Paris Agreement by transforming markets and business models across three areas: land use, materials and energy. Working with partners across sectors, SYSTEMIQ aims to unlock economic opportunities that benefit business, society and the environment. To learn more, visit www.systemiq.earth

Twitter: @SYSTEMIQ_Ltd

 

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