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An Options Approach to UK Energy Futures


The UK’s target of reducing greenhouse gas (GHG) emissions by 80% by 2050 poses an even greater challenge to its energy sector and particularly to electricity, which is now expected to decarbonise completely. This is a huge and risky structural transformation for a sector of crucial importance to the well-being of society and the economy.

For policymakers, the decision making is particularly delicate as the risks accrue not only from the performance of the investment programme itself in terms of technology, innovation, prices, and security but also from the global context of geopolitical consensus, scientific evidence, industrial competitiveness,  the flow of capital, and society’s willingness to pay. Government policymaking, therefore, has the awkward challenge to be both flexible and yet give reliable long-term signals. As a consequence, industry perceives policy risk to be high, and in a liberalised market, the major companies may choose to act more cautiously than governments expect. With the scale of investment being contemplated at unprecedented levels, the risks of stranded assets are significant, and companies will also be liable to be flexible in their investment propensities. Understanding how flexibility in policymaking can be formulated at a high level in a way that considers the optionality and market conduct that it might incentivise among investors is, therefore, a complex open question.

The objective of this project is to develop a high-level, decision-analytic framework within which to assess UK energy decarbonisation options. The first aim is to outline the taxonomy of possible uncertainties stemming from not only market and technology R&D factors but also global climate developments. Next, the project will identify likely UK energy policies and market structures in order to outline the future evolution of the UK energy system. It will structure these as a high-level decision tree, using software such as Precision Tree to link to a specification of the stochastic MARKAL model. The novelty of the work relative to the stochastic MARKAL model is that it will provide a high-level framework for evaluating the interaction of scenarios, decisions, options to delay, investment types, and the potential for stranded assets within various industry structures. The following five work packages   will be carried out:

  • WP1: High-level taxonomy of uncertainties
  • WP2: Menu of decarbonisation options
  • WP3: Characterisation of market structures
  • WP4: Characterisation of policy measures
  • WP5: Framework for decision analysis

Key contact: Professor Derek Bunn, London Business School
 

Key Outputs

Munoz J. I., Bunn D. W. (2013) Investment risk and return under renewable decarbonization of a power market, Climate Policy 13(Supplement 1):87-105