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Scottish Energy Study Volume 5: Energy and Carbon Dioxide Projections for Scotland

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2. Methodology and Assumptions

The starting point for energy projections must be a reference set of data for a recent year. The previously published Scottish Energy Study - Volume 1 21 provides such statistics for Scotland in 2002 and these, together with the less detailed regional energy statistics published by BERR22, have formed the starting point for these projections. The projections give separate consideration to Scottish energy demand and to the activity of the energy supply sector in Scotland.

Starting from the reference year, the estimation of future energy demand is a complex issue because consumer demand is not for energy directly but for the services it provides such as warmth, lighting, travel, entertainment, motive power, process heat, etc. Some of the main factors influencing energy demand are:

  • Prices of primary energy supply ( i.e. oil, natural gas, coal), which ultimately feed through to the prices paid by final consumers.
  • Economic growth ( i.e.GDP) that determines the level of business activity and the average wealth of individual consumers, both of which influence the level of demand for energy related services.
  • Population, which determines the number of individual consumers as well as affecting the size of the national economy.
  • Investment in new more efficient devices and processes that can deliver energy services while using less energy ( e.g. better domestic heating boilers, enhanced building standards, more fuel efficient cars).
  • Changes in the mix of fuels used, either in response to their relative prices or because one fuel is more convenient to use than another ( e.g. use of gas for domestic heating, the growing preference for diesel fueled cars, uptake of biomass etc.).
  • Government policies on energy and greenhouse gas emissions.

BERR's energy and CO 2 projections for the UK give separate projections for each of the main energy consuming sectors, namely domestic, industry, services (including agriculture), and transport. These take account of the above factors and include explicit assumptions for future fossil fuel prices, GDP and population growth, and the impact of established and proposed policy measures. The projections are produced using a mathematical model that uses econometric relationships to project future demands and includes feedback between demand and delivered energy prices. The impact of policy measures that directly affect energy prices ( e.g. the EU Emission Trading Scheme) are assessed by the model, while the model can be constrained to include other policy targets ( e.g. liquid biofuels). The model delivers solutions that balance energy supply and demand at the UK level.

BERR's projections included the impact of UK level policy measures, including those introduced by the Climate Change Bill, those proposed in the Energy White Paper 2007 and the impact of the EU Emission Trading Scheme ( ETS) on the electricity generation sector. For the latter the ETS was assumed to trade at €20/tCO 2 from 2010-2015 and €25/tCO 2 from 2015 to 2020 in both the CC and HC scenarios.

However, BERR's projections were produced before the EU 2020 target for renewable energy was agreed, and therefore the measures needed to meet this target across the UK through, for example, accelerated deployment of renewable electricity and heat were not considered. As a consequence these projections for Scotland also do not explicitly incorporate the EU 2020 target, although ambitious targets for renewable electricity and heat are investigated in this study.

In July 2008 BERR23 issued a consultation on the strategy to meet the EU 2020 target, therefore the policy mechanisms to be used and the division of effort between sectors is currently uncertain 24. In October 2008 the Scottish Government issued a parallel consultation on the Scottish Renewable Action Framework - which sets out proposals for the development of all forms of renewable energy in Scotland.

Scottish demand in each sector, and for each fuel type, was escalated from the 2002 reference year by scaling in line with the BERR projections for the UK according to the general relationship:

formula graphic

(Where 20XY represents the time-steps 2010, 2015 and 2020.)

While this approach has the advantage of maintaining consistency and comparability with the projections for the UK, it does implicitly assume that Scotland follows the UK average with regard to the key drivers of energy demand ( i.e. economic and population growth, impact of UK level policy measures, etc.). Therefore these initial estimates were adjusted to take account of differences between Scotland and the UK average. In particular the projections were adjusted to take account of the Scottish Government's targets for economic or population growth, whichever was considered to be the more influential on the demand sector 25, while sensitivity analyses investigated other variations specific to Scotland. The GDP and population assumptions for Scotland were determined as follows:

  • Population - The Scottish Government has set a target for Scotland to match the average European ( EU15) population growth between 2007 and 2017. For the purpose of these projections it has been assumed that this will be the same as the historic EU15 population growth 26. This growth rate was also assumed to continue up to 2020 27.
  • GDP28 - The Scottish Government has set a target to raise Scotland's rate of economic growth to match the UK by 2011, and to match the growth rate of the smaller independent EU Member States, defined as Austria, Denmark, Finland, Ireland, Luxembourg, Portugal and Sweden, by 2017. For the purpose of these projections this was achieved by setting Scottish GDP growth to change gradually so that it converged with the growth assumptions for the UK used in BERR's energy projections by 2011. Beyond this time Scottish growth was set to continue to increase gradually to converge with the historic (1975-2005) average growth rate of the smaller EU member states (2.7% per year) by 2017, and to retain this growth rate up to 2020 29. Historically Scotland's economic growth has lagged behind that of the UK. Therefore the GDP projections for Scotland were started 0.25% below the growth rate assumed in the BERR projections. This differential was gradually reduced to meet the UK growth assumed by BERR in 2011 (2.5%). Beyond 2011 BERR assumed a lower growth rate for the UK of 2.0% per annum, therefore convergence to Scotland's 2017 target was attained by increasing Scottish growth gradually from 2.1% in 2012 to 2.7% in 2017.

The resultant Scottish population and GDP assumptions are presented in Table 1, where they are compared to the assumptions for the UK used by BERR in their energy projections. It is notable that with these assumptions Scottish GDP per capita exceeds the UK average by 2020, but Scotland has a declining share of the UK population.

Table 1 Comparison of UK and Scottish population and GDP assumptions to 2020

2002

2010

2015

2020

Change 2002-2020

UK

GDP (£bn at 2003 basic prices)

966.0

1197.9

1329.0

1467.3

+52%

Population (Millions)

59.23

62.33

64.53

66.75

+13%

GDP per capita (£)

16,309

19,219

20,595

21,982

+35%

Scotland

GDP (£bn at 2003 basic prices)

75.9

93.8

105.3

120.2

+58%

Population (Millions)

5.05

5.19

5.30

5.41

+7%

GDP per capita (£)

15,029

18,073

19,868

22,218

+48%

% of UKGDP

7.9%

7.8%

7.9%

8.2%

-

% of UK population

8.5%

8.3%

8.2%

8.1%

-

One exception to the above approach was the year 2005 for which demand was estimated by a combination of extrapolation from the 2002 baseline data and the use of BERR's regional statistics for 2005 when these were available with sufficient disaggregation. Consequently population and GDP assumptions were not needed for 2005.

In order to maintain consistency with the analysis undertaken by BERR and in order to be able to carry out analysis using cash value estimates of GDP for Scotland, the Regional Accounts (produced by ONS) have been used to estimate GDP in Scotland. It is important to note that GDP growth rates for Scotland derived from the Regional Accounts presented in this report will vary considerably from the GDP growth rates produced using the Scottish Government volume (constant prices) index. There are a number of reasons for this. Firstly the ONS current price estimates (from the Regional Accounts) are produced using a different methodology from the Scottish Government volume index, and are based on different data sources. Secondly, in order to create a constant prices series for Scotland using the Regional Accounts a UK level deflator was used to convert Scottish current price estimates into constant prices - as the ONS do not produce constant price estimates for Scotland in the regional accounts. Applying a UK deflator to Scottish figures is not ideal as it obviously does not account for differences in the structure of the Scottish economy relative to the UK - however, despite these limitations, such an approach is required to estimate constant prices for Scotland from this data series. The GDP volume index estimates produced by Scottish Government statisticians applies industry/sector specific deflators at much lower levels to reflect the industry structure of the Scottish economy. The equivalent UK series, produced by the ONS, is the CGCE volume index 30.

With regard to energy supply the key sectors in Scotland are electricity generation and oil refining. BERR's energy model considers existing large fossil fuelled and nuclear power plants on an individual basis, and these results were used directly for the Scottish energy projections. Scottish electricity generation from renewable sources was assumed to meet the targets set by the Scottish Government, which are 31% of Scottish gross consumption in 2011, increasing to 50% in 2020 31. Energy consumption in oil refining was assumed to vary in line with the UK projections (see Section 4 detailing the analysis of supply side energy sectors). Data for 2005 were taken from BERR statistics for that year.

BERR used three scenarios for future variations in primary energy prices to 2020, namely Low, Central and High. These projections for Scotland have used only the Central and High scenarios because the prices considered by the Low scenario appear less realistic given the peak in energy market prices that has occurred since BERR first published its projections. The Central and High fuel price assumptions are listed in Table 2, and it will be noted that these too are low compared to peak market prices seen in early 2008. Until updated projections for the UK are available then it is not possible, with the scaling approach adopted herein, to revise these Scottish projections to take account of higher energy prices without losing consistency and comparability with the UK level results. However, a qualitative discussion is given on the potential implications of higher energy prices for energy demand and CO 2 emissions in Section 6. Because the same ETS allowance prices were assumed by BERR for both the CC and HC scenarios this did not affect the relative price differentials of the fossil fuels between the scenarios.

Table 2 Fossil fuel price assumptions used in BERR's projections for the UK

Crude Oil ($/bbl)

Natural Gas (p/therm)

Coal (£/tonne)

Central

High

Central

High

Central

High

2010

57

70

42

50

30

38

2015

50

75

38

53

31

41

2020

53

80

40

55

32

45

In addition to the uncertainties associated with projections it should be noted that there are many short term factors that influence the actual energy used in a particular sector in a particular year. The most obvious example is the weather, a mild or cold winter will have a significant affect on the use of heating in the domestic and services sectors, and will have some affect on industrial consumption. These short term factors are included in actual historical data but are not included in longer term projections. Hence trends in historical data will show short term variations whereas long term projections will show more smooth trends.