No-regrets, efficiency improvements and

penetration rates for end-use technologies

Poul Erik Morthorst

Energy Systems Group, Systems Analysis Department

Risų National Laboratory, Denmark

Abstract

Denmark participated in the UNEP Greenhouse Gas Abatement Costing Study which was aimed at developing a common methodology for undertaking cost assessments of greenhouse gas abatement, and using this methodology to carry out a number of country studies. One of the main components of the Danish country study was the methodological analysis of cost curve construction and the testing of the developed methodology on national CO2 reduction scenarios.

Following the development of a baseline scenario, two main reduction scenarios were constructed: a) a 20% reduction scenario for 2005, and b) a 50% reduction scenario for 2030, taking as its starting point the 20% scenario for 2005. The medium-term cost curve for 2005 and long-term cost curve for 2030 for CO2 reduction were established on the basis of these two reduction scenarios.

The existence of so-called "no-regret" options are discussed. No-regret options exist when it is economically attractive for society to undertake these options and at the same time reduce CO2 -emissions. Two illustrative cases are developed describing the introduction of standards for households appliances. It is shown that introduction of such standards for household appliances might be an attractive way to accelerate the adjustment process towards more efficient appliances. Improving standards for household appliances could reduce CO2 -emissions in 2005 by approximately 2% compared to the baseline, and at the same time lower the energy-system cost to society.

Three-quarters of the CO2 emission reductions are realized through supply-side options. Restricting the use of no-regret demand-side options would require additional supply-side CO2 reductions in order to achieve the same reduction target, and this might prove very difficult to achieve.

1 Background

Denmark is a fairly small country with a total area of 43,000 km2 and a population of approximately 5.1 million inhabitants in 1992. The population density was approximately 119 inhabitants per km2 in 1992. The economy is well-developed and is dominated by the manufacturing industry, and market and non-market services. In the 19th century the Danish economy was dominated by agriculture but now agriculture contributes only about 6% of the gross domestic product while supplying important raw materials to the manufacturing industry.

Figure 1 shows gross domestic product divided into seven sectors. The shares of market and non-market services are particularly noticeable. 97% of non-market services comprise public services such as education, health care etc.

Figure 1.Gross domestic product divided into sectors.

The Danish energy supply system includes three supply grids: electricity, district heating and natural gas. More than 50% of total space heating needs are supplied by the district heating grid, and 55% of the district heating is produced by combined heat and power (CHP) plants.

In 1990 gross energy consumption amounted to 745 PJ. Of this oil accounted for 45%, coal for 36%, natural gas slightly less than 9% and the remaining 7% was covered by mainly renewables and imported electricity. Figure 2 shows how gross energy consumption developed from 1950 to 1990. A very rapid growth of about 10% p.a. in the 60s gave way to relatively stable energy consumption through the 70s and 80s. A considerable substitution of oil took place and now more than 90% of Danish power plants are coal-fired.

As can be seen in Figure 3 Denmark has a relatively high per capita emission of CO2 compared with most other countries. The main reason for this is the high share of coal in the Danish electricity production.

2 Cost curves for CO2-reduction in Denmark

Denmark participated in the UNEP Greenhouse Gas Abatement Costing Study1, which was aimed at developing a common methodology for undertaking cost assessments of greenhouse gas abatement, and using this methodology to carry out a number of country studies.

Figure 2.Gross energy consumption in Denmark.

Figure 3.CO2 emissions of selected countries, tonne/capita.

One of the main components of the Danish country study2,3 was the methodological analysis of cost curve construction and the testing of the developed methodology on national CO2 reduction.

A large number of demand-side and supply-side CO2 abatement options was evaluated with respect to a baseline scenario. These included: energy conservation in households, industry and services, the use of CHP, natural gas, biomass and renewables (utilizing some of these possibilities). Two main reduction scenarios were developed:

a. a 20% reduction scenario for 2005

b. a 50% reduction scenario for 2030, taking as starting point the 20% scenario for 2005.

The main results are presented in Table 1. The calculations show that it should be possible to reduce approximately 20% of CO2 emission by 2005 at an average cost4 of approximately -100 DKK/tonne5 CO2 (negative cost), while in 2030 approximately 50% can be achieved at an average cost of approximately +40 DKK/tonne CO2 .

Table 1.Results of the two reduction scenarios for 2005 and 2030.


                                               1992       2005        2030 

Final energy consumption, PJ                    564        550         551 
- reduction from baseline                         -         7%         15% 

Gross energy consumption, PJ                                               
- oil                                           289        255         240 
- natural gas                                    80        126         200 
- coal                                          286        181          24 
- biomass                                        46         98         162 
- renewables                                      8         35          42 
- electricity import                             35          0           0 

Total                                           744        687         668 
- reduction from baseline                         -         9%         21% 

CO2  emissions, million tonnes               56.2       42.9       31.3     
- reduction from baseline                    -         21%         48%     

Annual costs, 109 DKK (1992) *                   30         33          42 
- increase from baseline                                   -3%          3% 

Average cost of CO2  reduction DKK/tonne           -       -100         +40 



* Danish currency. 1US$ = 6.75 DKK

Using these two reduction scenarios as starting points the cost curves for CO2 reduction were constructed. A cost curve for reducing CO2 emissions is a simplified way to illustrate the possibilities for reducing CO2 emissions by using different technologies and the associated costs. Given a specific target forCO2 reduction, it is possible from the cost curve to rank those CO2 -reducing options in order of economic attractiveness.

Based on the two scenarios the medium-term cost curve for 2005 and the long-term cost curve for 2030 were constructed using the retrospective approach6. The marginal7 and average cost curves are given in Figures 4 and 5 for the two scenarios.

Figure 4.Medium-term cost curve for CO2 -reduction. (Danish currency:

US$ 1 = DKK 6.75).

Figure 5.Long-term cost curve for CO2 -reduction. (Danish currency:

US$ 1 = DKK 6.75).

For both scenarios the economically most attractive as well as the most efficient options, both with regard to CO2 reduction, can be grouped into three:

Utilization of the existing excess capacity in the Danish natural gas and district heating networks. For both networks the major part of the investments (transmission and distribution networks) has already been undertaken, implying that only the marginal costs of connection and building the domestic installations are to be incurred. By utilizing waste heat from the power plants, almost 4% CO2 reduction can be achieved in 2005 through these options at an economically very attractive cost (negative costs). In 2030 the CO2 reduction potential is reduced because of increasing capacity utilization in the baseline. In spite of this, utilizing the network capacity has a very favourable impact on the average cost of CO2 reduction in Denmark. Ignoring these options for 2005 would decrease the CO2 reduction to approximately 17% compared to the baseline and increase the average cost to approximately 25 DKK/tonne CO2 reduced8.

No-regret options on the demand side, i.e. options that are economically attractive and CO2 reducing at the same time. The most important of these options are electricity conservation in households and services, and energy conservation in industry. Altogether these options are responsible for reducing CO2 emissions by approximately 6% in 2005 compared to the baseline. In 2030 the total demand side contributes approximately 10% of CO2 reduction, or approximately 20% of the total CO2 reduction. A high degree of uncertainty is related to the implementation of these demand-side options, although a conservative view is taken in both scenarios with regard to the realized potential.

For the supply side utilization of biomass resources dominates the results in both scenarios. In 2005 biogasification reduces CO2 emission by approximately 5% and the use of decentralized CHP-biomass combustion reduces CO2 emission by approxi-mately 3%. In 2030 the use of biomass reduces CO2 emissions by approximately 20%. It is clear that the availability of biomass resources (at least 98 PJ in 2005, and 162 PJ in 2030, including straw, woodchips and waste) is crucial to the results. Biogasification plants are assumed to be developed to a technologically commercial level and to be economically close to break-even in 2005. If this proves not to be the case, the cost of CO2 reduction will be higher, depending on the alternative cost of biomass combustion.

For both scenarios it is observed that the supply side plays a dominant role. Approximately three-quarters of the total CO2 reductions are achieved on the supply side.

The low average cost of CO2 reduction in Denmark is partly due to the utilization of excess capacity in distribution grids and the existence of no-regrets options on the demand side. It might be argued that these economically attractive options should have been included in the baseline, however, there are two main reasons for not doing this:

Both connection to networks and the use of no-regrets demand options are imposed on the consumer. Making connections compulsory and introducing standards for appliances limit the free choice of the consumer, implicitly indicating a loss.

Even the implementation of voluntary options necessitates the use of subsidies and information campaigns that would not have been introduced if the long-term effect on the climate was not an issue.

If the climate change due to the enhanced greenhouse effect were not taken seriously, there would have been no background for introducing such regulatory measures and therefore no reason to include the options in the baseline.

However, if these economically attractive options were excluded from the reduction scenarios, the amount of CO2 reduced would have been limited to approximately 12% in 2005 and 35% in 2030 compared to the baseline. Correspondingly, the average cost would have increased to approximately 225 DKK/tonne in 2005 and 250 DKK/tonne in 2030.

3 The existence of no-regret options

So-called "no-regret" options exist when it is economically attractive for society to undertake these options and at the same time reduce CO2 -emissions.

A no-regret option may be defined as an investment which is

economically profitable, and

not automatically taken up in the baseline.

The latter condition is closely related to the adjustment time of the energy system: sooner or later all economic profitable options will be taken up in the baseline, it is just a matter of time. The main objective of a no-regret option might then be to accelerate the adjustment process towards equilibrium.

This case is illustrated in Figure 6 for a specific type of household appliance sold in the market today. These are characterised by a significant variation ranging from the least energy efficient appliances to the most efficient ones, easily amounting to a factor of 2.

Figure 6.Development in efficiency for new household appliances, sold on the market.

Over time the average appliance will become more efficient - but it is impossible to predict whether the relative spread will narrow or widen. However, seen within a finite time-horizon,

the average consumption of some future generation of appliances may be expected to be below the consumption of the best appliance on the market today. Thus over time the no-regret options will be taken up in the baseline.

There are naturally many barriers that can prevent rapid adjustment of the system:

low awareness on the part of the agents

lack of information, making it impossible for the agents to choose the right options

financial constraints

political issues.

One way of accelerating the uptake of profitable options is to introduce standards for appliances. Following Figure 6, in ten years time the least efficient half of appliances on the market will be cut off, increasing average efficiency, and putting pressure on the manufacturers, perhaps even accelerating the development of better appliances.

The introduction of a standard for household appliances can typically follow this procedure:

1st step: A standard equal to the average consumption of the appliances on the market today is introduced. 1-2 years is allowed for manufacturers to adapt to the standard.

2nd step: Following life-cycle analysis, an optimal trade-off between additional investment costs and the saved fuel costs over the lifetime of the appliance is estimated, leaving consumers economically indifferent to when the standard is introduced. Typically the second step improves average efficiency by approximately 15-40%. Manufacturers are allowed 5-6 years to adapt.

3rd step: New appliances presently on the drawing board. These technologies set the milestones for development 10-12 years ahead.

The electricity consumption of freezers sold on the Danish market today is shown in the histogram in Figure 7 (adjusted to a standard volume of 200 litres). A total of 59 freezer models are included in the statistics, giving an average consumption of 417 kWh/year. The distribution is characterized by having two peaks: A significant number of low-energy consuming freezers, and a correspondingly significant number of high-energy consuming ones. The low-energy appliances are typically newly introduced to the market, while the high-consuming ones are more old fashioned production series which have been on the market for a number of years.

Figure 7.Electricity consumption of freezers on the Danish market today (adjusted to a standard volume of 200 l).

Introducing a standard equal to the average today will limit the number of models of freezer on the Danish market to 22 and reduce average consumption to 300 kWh/year, (efficiency improvement of more than 25%) based on existing models of freezers. Of course, during the adaptation time of 1-2 years manufacturers will develop an increased number of freezer models with high efficiency, thus probably leaving the total number of freezers available on the market close to what is seen today.

The same analysis is shown in Figure 8 for refrigerators on the Danish market today. It can seen that the total variation is greater than was the case with freezers (a factor of 3.5 from the most to the least efficient refrigerator), but the standard variation for energy consumption for refrigerators is lower.

Figure 8.Electricity consumption of refrigerators on the Danish market today (adjusted to a standard volume of 200 l).

Introducing a standard equal to the average today will limit the number of refrigerator models on the market from 69 to 27, and reduce average consumption from 253 kWh/year to 215 kWh/year (efficiency improvement of 15%). As in the freezer case the adaptation time will give the manufacturers a possibility to develop new low-energy consuming refigerators, and then in reality not limiting the number of available refrigerators on the market significantly.

Figure 9 sums up the results of the two analyses, showing the average consumption of the freezers and refrigerators on the market today, consumption if a standard equal to the average was introduced and finally the consumption of the best appliances on the market today. A substantial increase in efficiency is obtainable, especially for refrigerators, if a development towards the best appliance on the market today is brought into action.

Figure 9.Electricity consumption for freezers and refrigerators, sold on the market today.

4 The use of no-regret options in the reduction scenarios

As shown in Figures 4 and 5 a significant part of the CO2 reduction achieved is related to the use of no-regret options. With regard to the results for electricity consumption in households (mainly related to the use of appliances), the following three assumptions are of vital importance:

the utilization rate for the appliances is kept constant at the same level as 1992,

the penetration rate of appliances is expected to increase substantially from 1992 to 2005, as shown in Figure 10. Penetration rates are assumed to be the same in the baseline and the abatement case,

the efficiencies of appliances in the baseline follow a trend development (business - as - usual) of approximately 1.5% p.a. In the abatement case it is assumed that standards are introduced before 1995 resulting in developments which are in line with the analysis in section 3. Average consumption figures are shown in Figure 11 for 1992, the baseline and abatement case in 2005.

Following this, it should be possible in the year 2005 to reduce CO2 -emissions by approximately 2% by imposing standards on household appliances, and at the same time lower the energy system costs to society.

Figure 10.Assumed penetration of appliances in the baseline and abatement scenarios.

Figure 11.Assumed development in appliance consumption in the baseline and abatement scenario.

5 Conclusion

The results of the analysis indicate that it should be possible for Denmark to reduce its emissions of CO2 substantially relative to the baseline scenario.

A 20% reduction scenario, compared to baseline, was set up for 2005, and a 50% reduction scenario was developed for the long term to 2030.

The results show that it should be possible to reduce CO2 emissions significantly at reasonable costs, both in the medium term (2005) and long term (2030). CO2 reduction costs for 2005 are estimated to be -100 DKK/tonne CO2 (negative costs), and +40 DKK/tonne CO2 for 2030.

Approximately one quarter of the reduced quantities of CO2 are realized through demand-side options. A significant part of this reduction is obtained through the use of so-called "no-regret" options, where it is economically attractive for society to undertake these options and at the same time reduce CO2 -emissions.

Analysis of the introduction of standards for household appliances shows that this might be an attractive way to accelerate the adjustment process towards more efficient appliances. Improving standards for household appliances could reduce CO2 -emissions in 2005 by approximately 2% compared to the baseline, and at the same time lower the energy system cost to society.

Approximately three-quarters of the CO2 emission reduction are realized through supply side options. Excluding the use of no-regret options in demand from the analysis would require additional of CO2 reduction on the supply sector, which might prove very difficult to achieve.

References

1. UNEP (1992). UNEP Greenhouse Gas Abatement Costing Studies, Phase One Report, (1994) Phase Two report.

2. Morthorst, P.E. and Grohnheit, P.E. (1992). UNEP Greenhouse Gas Abatement Costing Studies - Denmark. Phase 1. Risų National Laboratory.

3. Morthorst, P.E. (1993). The cost of CO2 reduction in Denmark - methodology and results. UNEP Greenhouse Gas Abatement Costing Studies - Denmark. Phase 2. Risų National Laboratory.

4. Average cost is defined as total incremental cost divided by total CO2 reduction.

5. Danish currency: 1US$ = 6.75 DKK.

6. For an explanation of the different approaches for constructing cost curves, see: P.E. Morthorst, CO2 -reduction cost curves for Denmark, Energy Policy (forthcoming).

7. Marginal cost is defined as the incremental cost of the chosen option divided by the CO2 reduction achieved by applying that option.

8. Due to interdependences in the energy system it is difficult to omit part of the chosen scenarios options, and the given figures are to be taken as rough estimates only.


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