Over the next decade, large energy investments are required in the UK to meet growing energy service demands and legally binding emission targets under a pioneering policy agenda. These are necessary despite deep mid-term (20252030) uncertainties over which national policy makers have little control. We investigate the effect of two critical mid-term uncertainties on optimal near-term investment decisions using a two-stage stochastic energy system model.
The results show that where future fossil fuel prices are uncertain: (i) the near term hedging strategy to 2030 differs from any one deterministic fuel price scenario and is structurally dissimilar to a simple average of the deterministic scenarios, and (ii) multiple recourse strategies from 2030 are perturbed by path dependencies caused by hedging investments. Evaluating the uncertainty under a decarbonisation agenda shows that fossil fuel price uncertainty is very expensive at around 20 billion. The addition of novel mitigation options reduces the value of fossil fuel price uncertainty to 11 billion. Uncertain biomass import availability shows a much lower value of uncertainty at 300 million.
This paper reveals the complex relationship between the flexibility of the energy system and mitigating the costs of uncertainty due to the path-dependencies caused by the long-life times of both infrastructures and generation technologies.