Security of Supply Levy.

Professor John Gittus

F R Eng. D Sc. D Tech.

November 2002

Summary.

• The DTI’s Standard Scenario predicts that, by 2020, 63% of the UK’s Electricity will come from Power Stations that use Russian Gas.

• Imposing a Security of Supply Levy will, it is forecast, reduce this from 63% to 44%, with a corresponding increase in nuclear generation from 7% to 25%.

• The Security of Supply Levy that accomplishes this increase in nuclear generation exactly pays for lost GDP due to power-cuts which, it is forecast, will be caused by politically-inspired cuts to Russian gas supplies. Such cuts are already being made by countries through which the gas pipelines pass: Russia, Belarus, Ukraine etc.

• The Levy amounts in 2020 to 0.4 pence per kWh of Gas-generated electricity, making the price of electricity from stations that use Russian gas equal to the price of electricity from series-built AP1000 reactors (2.2 pence per kWh) on which the Levy will be zero, since supplies of nuclear fuel are not subject to interruptions.

There is a 2 to 5% Chance that Politically-Motivated Disruption of Gas-Imports will Cause the UK to Lose Half

its Electricity Supplies for Some Months in 2020

Frequency with which UK Electricity Supply will Fall to stated Value.

0

50

100

150

200

250

300

350

400

450

1990 1995 2000 2005 2010 2015 2020

TW

h

Frequency 0.80(0.85)/year

Frequency 0.09(0.13)/year

Frequency 0.05(0.02)/year

It is Forecast that Russia, Belarus and Ukraine will Interrupt the Flow of Siberian Gas, Just as OPEC Oil

Supplies have been interrupted in the past.

Frequencies with which the stated percentage flow of Russian Gas Occurs

through Pipelines through Russia, Belarus and Ukraine.

0

0.2

0.4

0.6

0.8

1

0 50 100 %/year

Percentage Flow

Fre

qu

en

cy

.

Russia, Belarus,Ukraine

Russia, Belarus.

A Security of Supply Levy.

• By analogy with the Climate Change Levy, it is suggested that a Security of Supply Levy be contemplated.

• Its function would be to encourage Generating Utilities to choose fuels, the supply of which is unlikely to be interrupted because of political problems.

The Simplest Levy that depends on the average un-availability of Electricity.

• It is calculated that there would be a shortfall of 8.8 to 9.8% in the amount of Electricity generated from Russian gas.

• The simplest Levy on electricity from Russian gas would therefore be 8.8 to 9.8% of the price charged for electricity: about 0.2p/kWh.

• The corresponding figure, for electricity from nuclear power stations or renewable sources would be less than 1%.

However, These Politically-Motivated Interruptions to Russian Gas are Likely to Last Months, Leading to “Three

Day Weeks”, as Have Interruptions to Oil and Coal Supplies.

Million Barrels of Oil Equivalent (MBOE) Lost per Day due to Political Instability:

(Two Events per Decade)

0

2

4

6

8

10

12

14

1956

Sue

z

1967

6-d

ay w

ar

1972

UK C

oal S

trike

1973

Ara

b Oil E

mba

rgo

1974

UK C

oal S

trike

1974

Iran

ian R

evolu

tion

1980

Iran

Iraq

War

1984

UK C

oal S

trike

1990

Gul

f War

MB

OE

Million Barrels Lost perday

Duration, Months

In the UK, £2.56 is Earned per kWhAnd, below, we show that the Three Day Week caused a

proportionate loss of GDP.

GDP/kWh For UK and its Trading Partners.

1.66

2.04

2.6

1.76

2.56

3.27

2.31

0

0.5

1

1.5

2

2.5

3

3.5

USA

Japa

n

Ger

man

y

Franc

eUK

Italy

Avera

ge

GD

P/k

Wh

% Change in UK GDP, Showing Effect of Politically-Motivated Disruption in Coal Supplies and resultant

3-Day Week in 1974-5

1.07

-0.39

6.29

-3.06-1.72

0.95 0.93 1.400.40

-4.00

-2.00

-

2.00

4.00

6.00

8.00

1971 1972 1973 1974 1975 1976 1977 1978 1979

% C

han

ge

in U

K G

DP

Three Day Week Statistics Show a Loss of 1% in GDP for 1% Loss of Electricity.

• The 3-day working week caused a loss of 8.21% of the UK’s GDP.

• It lasted a fifth of a year, electricity to factories and offices being cut off for three days in five during that period: a loss of (1/5) * (2/5) = 8% of one year’s electric power.

• So in 1974-5: % loss of power = % loss of GDP.

• Nowadays most of our GDP comes from service industries and these use less power. Today the corresponding loss would be one quarter of what it was in 1974-5:

• In 2003-2020: % loss of GDP = 0.25 * % loss of power.

Magnitude of the “Three Day Week” Security of Supply Levy.

• Frequency of Complete Loss of Russian gas, F = 0.02/year.

• Resultant Loss of Generating Capacity, in 2020, C = 62.5%

• Surplus Generating Capacity, potential economies in electricity consumption etc, total S = 30%.

• GDP £ per kWh = £ 2.56: As explained above, we assume that only 25% of this is lost, per kWh lost due to the interruption of Russian Gas supplies. That is to say a loss of £ 2.56/4 = L = £ 0.64 /kWh.

• Then the Security of Supply (SoS) Levy that exactly compensates for these forecast losses in GDP, due to the sporadic politically motivated interruption in Russian Gas Supplies is:

• SoS Levy = F * (1-S/C) * L = 0.66 pence/kWh, payable in 2020 on each kWh generated from Russian Gas.

Security of Supply Levy for Present Scenario.

0 0 0 0 726 37

0

50

100

150

200

250

300

350

400

450

1980 1990 2000 2010 2020 2030

TW

h

TWh Total

TWh from RussianGas

% Levy on ElectricityFrom Russian Gas

Security ofSupply Levy, pence per kWh, Free Competition

0.02

0.21

0.41

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

2010 2015 2020

So

S L

ev

y, P

en

ce

SoS Levy Would Limit Russian Gas to its 2015 Level of Under 50%.

• The fifth and later AP1000 reactors will produce electricity for 2.2 p/kWh.

• Russian Gas will produce electricity for 1.8 p/kWh• In 2015 the SoS Levy on electricity from Russian Gas

would have risen to 0.4 p/kWh, giving a total price of 2.2 p kWh. This is just competitive with the AP1000.

• In later years, the use of more Russian gas would lead to a higher SoS Levy, rendering Russian Gas uncompetitive with the AP1000.

• So the SoS Levy would limit the proportion of electricity generated from Russian Gas to its 2015 value of under 50%.

Effect of SoS Levy on Nuclear Generation.

0102030405060708090

100

1980 1990 2000 2010 2020

TW

h

Nuclear

Nuclear if SoSLevy Applied

Effect of SoS Levy on Electricity produced from Russian Gas.

0

50

100

150

200

250

300

1990 2000 2010 2020

TW

h.

Russian Gas

Russian Gas ifSoS Levy Applied

Conclusions.

• A Security of Supply Levy has been formulated.• This Levy compensates for the loss of GDP predicted to be

produced by power-cuts, themselves due to politically-motivated interruptions to the supplies of fuel to Britain’s Power Stations.

• Such interruptions have occurred and led to a Levy termed “The Suez Shilling” and to “The Three Day Week” .

• Similar, future interruptions are predicted to occur to supplies of gas from Russia to Britain’s Power Stations.

• These predictions of interruptions to Britain’s electricity supplies are based on data on Political Risks collected by Business and the Insurance Industry.

Conclusions, continued.

• The DTI’s Standard Scenario predicts that, by 2020, 63% of the UK’s Electricity will come from Power Stations that use Russian Gas.

• Imposing a Security of Supply Levy will, it is forecast, reduce this from 63% to 44%, with a corresponding increase in nuclear generation from 7% to 25%.

• The Security of Supply Levy that accomplishes this increase in nuclear generation exactly pays for lost GDP due to power-cuts which, it is forecast, will be caused by politically-inspired cuts to Russian gas supplies. Such cuts are already being made by countries through which the gas pipelines pass: Russia, Belarus, Ukraine etc.

• The Levy amounts in 2020 to 0.4 pence per kWh of Gas-generated electricity, making the price of electricity from stations that use Russian gas equal to the price of electricity from series-built AP1000 reactors (2.2 pence per kWh) on which the Levy will be zero, since supplies of nuclear fuel are not subject to interruptions.