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Modelling of Energy Technologies Prospective in a General and Partial Equilibrium Framework

Final Report Summary - MENGTECH (Modelling of Energy Technologies Prospective in a General and Partial Equilibrium Framework)

The general objective of the 'Modelling of energy technologies prospective in a general and partial equilibrium framework' (MENGHTECH) project was to develop the modelling framework for a better assessment of energy policies given the EU ambitious targets regarding sustainable development.

The models considered in this project are POLES (World energy system model), Primes (European energy system model), Prometheus (Stochastic investment model of the electricity sector), LOPEX (a world oil market model), Nemesis (macro-econometric EU model) and GEM-E3 (world and EU general equilibrium models).

The development of the POLES model aimed at applying the new modelling framework developed in Matted and in Prometheus in order to take into account the network effects in the adoption of new technologies and the adaptive expectations approaches to the formulation of decision-making under uncertainty. The MENGHTECH project has also been an opportunity to take better into account the competition between different biomass technologies with an improved description of forest and energy crops potentials. It is expected that the incorporation of these additional mechanisms in the POLES will improve policy analysis especially when important changes in the technologies paradigm are necessary.

The development of the macroeconomic models has covered two aspects: the design of a theoretical specification for a better modelling of the dynamic in the adaptation of new technologies and the improvement of the basic R&D module in Nemesis and in GEM-E3.

To test the model extension, a climate policy scenario was evaluated considering first competitive markets for oil and gas. With the depletable resource module the crude oil / gas prices are now explicitly modelled and are greatly influenced by the resource availability in the reference. With the climate policy, the demand for crude oil is decreasing and has a negative impact on the price of the resource, the availability constraint becoming less stringent. This limits the shift away from oil and gas and therefore the impact on the GDP of oil and gas producing countries. It has a positive welfare effect for countries with relatively low reduction targets. If the overall impact of the climate policy does not differ significantly between the two models, the distribution of the cost between regions does. This clearly shows the importance of explicit modelling of resource extraction. When trying to run the model with an oligopolistic market, it appeared that there is an issue in the GEM-E3 database as derived from GTAP for the modelling of the extraction sectors and more specifically the gas extraction sector. The problem appeared when testing the model with a climate policy scenario which raised convergence problems. It will need an update and recalibration of the GEM-E3 world model which was not possible within this project because of lack of resources but it will certainly be the first task in the further development of the GEM-E3 world model.

The MENGHTECH study with POLES has developed a reference and a carbon constraint projection of the world energy system till 2100. The reference projection adopts exogenous forecasts for population and economic growth in the different world regions and it makes consistent assumptions for the availability of fossil energy resources and for the costs and performances of future technologies. The carbon constraint case reflects a state of the world with climate targets, aiming at an emission profile that is compatible in the long-term with concentration levels below 550 ppmv CO2 equivalent, i.e. a profile that is consistent with those analysed in the Stern report. Taken together, the reference projection and the carbon constraint case indicate the major changes to be expected in the structure and development of the world energy system in different policy contexts. The images of the world provided in the MENGHTECH runs of POLES clearly illustrate the need for radical changes in the world energy system.

The policy cases examined here with Primes for promoting the hydrogen economy were:
1. a ten-fold increase in R&D expenditures on fuel cells from 2008 to 2016;
2. case 1 combined with an additional tax on fuels for road transport of the order of 0.6 euro 08/lt from 2025 onwards;
3. case 2 plus recycling 5 % of the tax revenues as additional R&D in fuel cells and hydrogen infrastructure;
4. case 3 together with 100 % subsidy to all hydrogen distribution and storage infrastructure.

The R & D inductions to fuel cells improve the performance of the fuel cell cars and double its penetration rate. However, it is not enough for an early penetration mainly due to the lack of the early development of the necessary infrastructure to support high penetration rates of hydrogen cars. The reduction of fuel cell stacks and systems costs is the key for the successful penetration of hydrogen in electricity and steam production. Despite the attractiveness of stationary fuel cells at the end of the projection period, their share in the CHP market remains limited due to the low turnover of the steam raising equipment stock mainly because of stagnant industrial demand for process heat. In the buildings sector, the turnover is also particularly slow and fuel cells make only significant penetration despite their cost attractiveness only with the expansion of urban distribution networks in the last years, reinforced with the subsidy on hydrogen distribution and supply infrastructure.

The following conclusions can be drawn:
- The future success and eventual timing of a hydrogen economy in Europe is highly dependent on technological developments. A key element is the reduction in costs of fuel cells stacks and systems.
- Automotive applications constitute the key segment for the future of fuel cells. They are likely to experience the highest penetration rates, and lead improvements that can spill over to other applications and carry forward infrastructure development.
- The major obstacle that mobile fuel cells face is the continuous improvement in internal combustion engine cars. The latter maintain a high share in cases where only hydrogen supply is promoted but they decline sharply in the cases where fuel cells experience a technological breakthrough and are fiscally favoured.
- Fuel cell applications in the heat and power sectors lag behind developments in the road transport sector, even in cases where they experience equivalent technological improvements. This is because they face wider competition from other options.
- CO2 emissions are sharply reduced in line with much higher efficiency on the demand side and a carbon-free configuration for hydrogen production.

The following broad conclusions can be drawn regarding the penetration of electricity in road transport and residential / commercial / services sectors:
- The transformation of the road transport structure towards electricity intensity passes from the adoption of intermediate technologies such as plug-in hybrid vehicles that act as a stimulus for the development of infrastructure and for consumer acceptability.
- Despite this transitional issue the likelihood of an early transformation of European road transport is higher by means of electrification than it is by a shift towards a hydrogen-based system.
- There is considerable scope (more than tripling current penetration rates) for electrification of heat related uses in the residential / commercial / services sector. However, there are limits associated with heat pumps characteristics that inhibit complete dominance.
- In the presence of a vigorous climate policy electrification of road transport and increased penetration in heating related markets produces significant reductions (around 13 % to the horizon of 2050) in total CO2 emissions with considerable additional potential as fuller electrification of road transport proceeds.

With the scenarios with Prometheus the objective were to examine to what extent lack of knowledge of future climate policies affects the investment decisions of power market agents and notably, to what extent climate policy variability inhibits (or enhances) early action on emission abatement. Comparing the results from the different scenarios, some broad remarks emerge:
- Conventional thermal options see their share reduced in the divergence scenario in response to the increased risks for very high effective carbon values. The loss in share affects all options but is more noticeable for conventional hard coal burning facilities.
- Clean coal technologies without carbon capture and sequestration see their share drop by more than five percentage points between the low intensity and divergence scenarios in 2050. In the case of integrated coal gasification this loss is almost entirely compensated by gains of the version of the technology equipped with pre-combustion facilities.
- Investment in nuclear power emerges as a major hedging tool. Unlike CCS it does not entirely depend on a high carbon value outcome for its profitability. The latter is on average modest because of the high capital costs but its risk exposure is essentially confined to electricity price uncertainty and the volatility of interest rates. In fact the divergence scenario registers a higher nuclear share than in the reference despite the additional 20 euro per tonne of CO2 on average that characterise the latter.
- The divergence scenario also implies a loss of share for natural gas based gas turbine options although the impact of this development on emissions from the power generating sector is relatively slight. The loss in share is not compensated by increased penetration of CCS variants.
- Renewables share increases by just over two percentage points in 2050 as a result of moving from the low intensity to the divergence scenario. Most of the gains are registered by the more mature renewable options like onshore wind power, large hydro and thermal biomass use.

The long-term oil and petroleum extraction (LOPEX)-model served to study the necessary conditions for a market relaxation and a lower crude oil price. Before evaluating the impact of oil price on the climate and energy packages, a sensitivity analysis of economic, energy and environment indicators to oil price were realised with two different versions of Nemesis model: one with exogenous technical change and one with endogenous technical change, with the model developments realized in work package 2 for the energy module and in work package 3 for endogenous technical change.

The policy analysis with GEM-E3 had as objective to examine the impact the new modelling features can have on policy assessment. The first policy cases focused on a R&D policy and its contribution to growth within the EU. Then environmental policies and the role of R&D decisions and policies on the cost of the environmental policies within the EU are examined. Finally, with GEM-E3 World, a game-approach was examined for possible participation schemes for post-2012 climate policy focussing on the strategic behaviours of countries / regions.

Within the MENGTECH project, it was interesting to complement the climate policy evaluation with GEM-E3 with a game approach for a better integration of the strategic behaviour of the players. This exercise was done jointly with the EU JRC IPTS as part of the dissemination objective within the project. The choice of policy scenarios was based on the joint work CES-IPTS for the DG ENV European Commission on the post Kyoto scenarios for the EU communication on climate change in January 2007. The game approach developed here is still very preliminary. There is clearly a need for a further discretisation of the game (more players, stages, policy options etc). Then it can complement the policy insight from the GEM-E3 simulations by looking more specifically at strategies the main players in the climate negotiations can adopt.

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