Is it safe to assume? – Grant Tuff

Comment by Grant Tuff, Consultant Engineer, Energy Systems Modelling at Energy Systems Catapult.

Innovating to Net Zero 2024 was our second ‘state of energy innovation’ report. The report created four future scenarios (Clockwork, Patchwork, Homework, and Dreamwork), using the internationally peer-reviewed Energy System Modelling Environment (ESME), to explore 3,600 different Net Zero-compliant energy system pathways. You can read an overview of the report by clicking here.

But what assumptions go into the modelling? How can we be sure of the findings we are putting out into the world?

Cost assumptions

Our analysis is policy and market neutral, and technology agnostic, placing system value (optimised on costs and emission reduction) as the driver of choices. This means that our model does not make decisions based upon market structures, subsidies or non-legally binding policy targets. Additionally, in Innovating to Net Zero 2024, we assumed that technologies are ‘nth of a kind’. This means, we assumed that they are being built in significant volumes and have benefited from economies of scale to reduce unit costs.

Our cost assumptions were not based on high or fluctuating interest rates. Similarly, we did not base our modelling out to 2050 on the incredibly low interest rates seen since the 2008 financial crisis. In general, we assumed that all technologies – from industrial carbon capture and storage plants to heavy goods vehicles – would borrow at 8% regardless of the year the investment is made or who is making the investment.

By delving into the Bank of England base rate from 1972 onwards, we can observe that our 8% assumption would be too low for pre-1990 levels, but we can be somewhat certain in our assumption that 8% is reasonable – across the whole economy – based on post-1990 base rates and the fact that private investors will pay a premium over the base rate.

We set out to understand what we need to do to reach Net Zero by 2050 at the lowest cost, as such, modelling is policy agnostic. This meant ensuring ESME costs were not retail prices. The cost data used excluded taxes, levies, and subsidies. These may be applied by the government with the specific intention of influencing markets. If we include them in our modelling, then we risk pre-determining modelling outcomes whereas our interest is identifying the best options. In turn, this informs what future markets may need to look like to support the transition, which policy decisions encourage the desired change, and how regulatory frameworks could define a clear and coordinated path and enable supporting innovation.

Modelling for a changing world

The modelling behind Innovating to Net Zero 2024 was responsive to a changing world. An example is the introduction of a carbon border adjustment mechanism (CBAM). Our Clockwork and Dreamwork scenarios assumed that the UK would introduce a CBAM that was comparable to the one introduced by the European Union (EU).

We used UK trade flow data to understand the influence a CBAM might have on specific sectors. The relevant technologies in the ESME datasets were then mapped to the relevant sectors and costs uplifted accordingly. This allows the impact of a UK CBAM on trade outside that with the EU to be represented in the economic optimisation performed by ESME.

Transport demand in a changing world is another factor that ebbs and flows between now and 2050. How do you model for shifting demand and what impact does this have on Net Zero?

To inform our modelling, we used transport demand projections published by the Department for Transport’s (DfT) national road traffic projections 2022 and aligned each ESME scenario with an accompanying DfT scenario. This meant that Clockwork and Dreamwork were aligned with ‘Mode-balanced decarbonisation’, Patchwork with ‘Vehicle-led decarbonisation’, and Homework with ‘Behavioural change’. Road transport costs have also been tailored to each scenario narrative. Over one hundred road vehicle classes are included in the analysis, with multiple drivetrain options for buses, cars, construction and goods vehicles. This offers the freedom for different energy vectors, including fossil fuels, electricity and hydrogen, to be used to meet the overall demand whilst selecting the most appropriate options for each vehicle type.

It’s worth me mentioning the role of nuclear power in our assumptions and modelling. While the world is changing, there are some static assumptions that we have made. We have assumed that the large-scale plants planned at Hinkley Point C and Sizewell C will go ahead as planned, as such, they are included across all our scenarios, this totals 6.6GW of capacity.

For Homework and Clockwork, we added an additional 2.2GW of capacity by including an additional nuclear power station at Bradwell B in Essex.

The impact of COVID-19

In recent years, events such as the COVID-19 pandemic, which caused the world to grind to a halt, have played havoc with data and modelling trends. As such, we took extra care to adjust – on a case-by-case basis – values in 2020. We ensured that the subsequent projections were not impacted by the pandemic and instead provide a more likely estimate of trends across future years.

The assumptions behind our modelling were deliberate choices, designed to represent four different plausible futures, help us understand the opportunities presented by the transition to Net Zero, and to aid the identification of certainties within an uncertain world.

Innovating to Net Zero 2024

This report aims to give people, businesses and UK government confidence to make investment and innovation decisions, and to take action that moves us closer to meeting our Net Zero targets whilst prospering from green growth opportunities.

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