Wednesday, 25 November 2015

Payments to fossil fuel plant now being counted as 'environmental' by Treasury

In a move that will astonish many the Treasury have decided to count payments to existing fossil and nuclear power stations for providing capacity as 'environmental' levies'. Real environmental spending is, as a result of the Government's policies, falling, and is being replaced by payments for polluting power stations. This 'levy' money is collected as a levy on consumer energy bills. See the Table below complete with newly added budget line 'capacity market'.
The fear must be that as so-called environmental levies increasingly consist of payments to power stations to provide capacity, funding for renewables and energy efficiency will increasingly be crowded out by subsidies to fossil fuel power stations and nuclear power. Meanwhile spending on energy conservation has been slashed in this statement, and support for solar power and onshore wind cut to next to nothing in policy statements made earlier in the year. See some commentary on the latest cuts to energy efficiency spending at

The capacity mechanism has been introduced as a measure to encourage power station developers to bring new plant on line. You can see a description of the first auction at
You can see comment by me on this at and also in the context of Government plans energy plans at

So now we have a new policy - to extend a phrase used by the PM's office before the 2015 General election - 'cut the green crap'  - and spend it on brown crap instead! This is not a joke. The inclusion of the capacity mechanism under environmental levies is very serious indeed. This is because many believe that spending on the capacity mechanism will mushroom - and do so well beyond the figures mentioned in the Treasury below. The Government's policy is a very serious, perhaps mortal, blow for any UK programme to carry on reducing carbon emissions beyond 2020 or even 2018.
NOTE: I am corrected by Jon Ferris who points out that my original assertion (now deleted) that payments made through the capacity mechanism count towards the cap on low carbon spending is incorrect. Although the capacity mechanism is counted as being part of the 'levy Control Framework', The Government's energy statement, in 2014 at least, says that this is not included in caps on 'low carbon spending'. The extent to which this is a fine distinction may, in the light of the shifting emphasis of spending, be a matter of opinion! But I bow to John' in this case as a matter of form!
The Treasury figures........ 
2.7 Environmental levies

£ billion


Carbon reduction commitment
Warm homes discount1
Feed-in tariffs1,2
Renewables obligation2
Contracts for difference
Capacity market
Environmental levies
Note: This is consistent with the 'Environmental levies' line in Table 4.6 of the November 2015 Economic and fiscal outlook.
1 The ONS have yet to include Warm Homes Discount and Feed-in Tariffs in their outturn numbers.
2 Forecasts do not include the outcomes of the consulatations on feed-in-tariffs or renewables obligation that have yet to be decided.


Chart 2.7, Economic and fiscal outlook supplementary fiscal tables – November 2015,

Wednesday, 18 November 2015

Amber Rudd re-set: a do-nothing fantasy policy

Amber Rudd today compounded the fantasy that surrounds UK energy policy by declaring that the future would depend on new gas fired and nuclear power stations without any realistic policies of delivering such objectives. Meanwhile her Government is stopping support for renewable energy and energy efficiency even though (or perhaps precisely because) they are being delivered in substantial volumes.

New nuclear power, as discussed in previous blog posts are very unlikely to be deployed for the forseeable future, perhaps never. On the other hand the Government's capacity mechanism will serve, at best, to be a very expensive way of delivering gas fired power stations.

Nuclear Power - Hinkley C, as discussed earlier, seems only likely to be built in the context of the break up and bankruptcy of the French nuclear sector and EDF in particular  (see earlier posts) which hardly makes this likely. The other supposed nuclear projects have no realistic chances of investors given the high risk that surrounds the costs of such projects. See my earlier post

Gas fired power stations - As discussed in an earlier blog post, no new gas fired power plant are currently set to be delivered. The capacity mechanism will 'spike' in its prices for new capacity in 2019 as the market is prepared for coal fired power stations to be finally phased out in 2023, that is if the Government do phase them out. See
The capacity mechanism will prove to be a very expensive way of funding new combined cycle generating (CCGT) plant, none of which are likely to be deployed as a result of the first auction earlier this year.

The most cost-effective way of making CCGTs happen would be to organise auctions for contracts to be issued to them them broadly similar to that organised for renewable energy last year - what are called contract for difference (CfD) contracts to ensure that the power station operators got some certainty about electricity sales. But, they are unlikely to do this because then people would ask why contracts for the same price were not issued to onshore wind - which is a no-no for Tory Party political reasons.

An even better way to get more power plant capacity, as suggested also is the blog post about spiking capacity mechanism prices would be to incentivise lots of CHP plant and district heating which is the most flexible system available, as well as incentivising more energy efficiency to reduce demand.

A cheap way to provide new capacity is to incentivise the National Grid to install batteries and feed into them wind power which is otherwise constrained or worth zero on the wholesale market. That way wind can provide even more firm capacity than it does already (see last post on this). But that's far too imaginative for a Government who do not even realise that fracking and new nuclear power is just not going to happen.....

Thursday, 5 November 2015

The untold story of how windfarms help keep the lights on

The UK press has been full of stories implying that wind power is to blame for the National Grid having to call in expensive demand shedding measures recently to keep the lights on. What they will not tell you is how often wind power saves the UK consumer large amounts of money because the National Grid does not have to buy in expensive reserves of power. Also they do not tell you that wind power in fact has quite a substantial contribution to effective firm power station capacity.

It is all very well repeating over and over again that the wind sometimes doesn't blow very strongly, but that doesn't tell you how to keep the lights on. Put simply, the chances of there being challenges to keeping enough electricity generation to meet demand at any point in time depends on a combination of factors being present; not just there being not much wind, but also that there are unexpected failures in power stations, unexpected high demand and unavailability of other power or demand side reduction options at any given time. Usually wind power will be slaving away saving the the need to buy in more reserves of power or demand side management during those winter days and nights when our electricity system is challenged. But we don't hear about this.

It would be as ludicrous to dismiss wind power's contribution to providing firm capacity as it would to insist that a particular power station can be guaranteed to be online all of the time. Indeed, a difference is that low wind power production may be usually more predictable than power stations going offline through breakdowns.

In fact, buried deep inside regulatory reports there is official recognition that wind power does have substantial equivalent firm capacity. As can be seen in OFGEM's electricity capacity assessments. See the 2014 version at

OFGEM defines:'Equivalent Firm Capacity of wind (EFC): the average contribution of wind power to the de-rated margin. It is the quantity of firm capacity (ie always available) required to replace the wind generation in the system to give the same level of security of supply' (pages 26-27)

In fact OFGEM's models indicate that the 'wind equivalent firm capacity factor'  varies in its models from 14.8 per cent to some 25.9 per cent depending on the scenarios modeled for a range of years.

Now that is quite substantial (ie a mean of around 20 per cent). According to the UKWED database there are currently around 13.5 GWe of wind power installed in the UK.

Hence, in effect, averaging out the mean of the models assessments of equivalent firm capacity provided by wind, wind power adds the equivalent of  2.7 GWe of firm capacity to UK generating capacity. That, by the way, is rather more than the equivalent of around two and a half Sizewell B nuclear power stations.

We hear a lot about how the Government is throwing huge sums of money into something called a capacity mechanism to produce very inefficient outcomes. What I'd like to see, (among a lot of other things!) is a calculation of how much the electricity consumer is saving through the equivalent firm capacity that wind power is providing, which is likely to be quite large! That, of course, is apart from providing a lot of cheap clean energy.

Tuesday, 27 October 2015

Could Hinkley C spell the end of EDF?

EDF's apparent obsession with continuing with the increasingly financially toxic European Pressurised Reactor (EPR) programme by building another two units at Hinkley C could spell doom for EDF. Further drastic losses on Hinkley C similar to the mounting losses accrued by AREVA and EDF on the EPRs being built in Finland (Olikuoto) and France (Flamanville) might lead to what hitherto has seemed unthinkable - the break up of EDF. At least a major sell-off of assets seems almost certain if EDF is to finance Hinkley C, but if the project then went badly in the same way as the Olikuoto and Flamanville projects then both privatisation and a break up seem plausible outcomes.

Financial institutions are issuing increasingly strong warnings about the financial wellbeing of EDF, the electricity multinational which dominates the French electricity market. Both Moody's and Standard and Poor have issued warnings that EDF will face credit downgrades if it goes ahead with Hinkley C.  See

Investec , an investment broker has urged people to consider selling shares in EDF (87 per cent of EDF is owned by the state, but 13 per cent is privately owned). The financial bulletin 'This Is Money' which has previously been very positive about the UK nuclear power programme reported this outcome and also commented: 'Future nuclear decommissioning costs in France are already set to affect EDF adversely and the bank questions whether the company has set aside enough cash to cope with this and the expense of refurbishing existing N-plants' See also

The Financial Times recently reported that EDF 'looks to sell 10 billion euros worth of assets to boost balance sheet' EDF needs infusions of capital to meet the costs of the forced merger with the failing nuclear constructors AREVA, as well as its other liabilities, even before the Hinkley C 'investment' is considered. I put the word investment in quotes since there is increasing feeling in the financial community that a decision to go ahead with Hinkley C would be a huge financial risk. I would call it sheer madness. The EPR has already sunk AREVA. EDF, its nuclear client, has been drafted in to pick up the pieces. But if EDF has to absorb more EPR losses, next time there will not be a cousin company to pick up the damage. Could privatisation of EDF be a plausible outcome?

Indeed, the notion of privatisation as a general measure to reduce the debts of the French state have been discussed by Nick Butler of the FT, himself a regular sceptic about the plans for Hinkley C.
See 'Is privatisation the answer?'

Of course the notion of privatisation is barely on the agenda in France, and in the case of EDF it would be fiercely opposed by the left wing union, the CGT, which is very influential within and around EDF. But if EDF does go ahead with Hinkley C and the project ends up anything like as badly as the other EPR projects then EDF will be facing some very big losses indeed. Selling off more shares in the company may not be a good solution if the share price has fallen.

The French state could then be left with two options. First would be giving the bill to ordinary French people through a direct subvention of taxpayers money for EDF or an increase in electricity prices (maybe a mixture of the two) or, secondly, and here is the rub, breaking up EDF and selling off the still profitable parts to pay off the debts. So which would French people prefer, paying for mounting losses out of their own pockets, or breaking up EDF?

Of course people assume when we hear that a 'final investment decision' is soon to be taken by EDF over Hinkley C (note: a final investment decision has been about to emerge for three years now!) people assume that EDF have learnt lessons from the previous two reactors and that next time will be different. Why do people thiunk they have learnt anything? If anything, things seems to be getting worse with the other two schemes, with construction times becoming ever longer. A better question would be to turn it around and ask. Isn't it likely that Hinkley C will be a another disaster? EDF say they are going to build two reactors at once at Hinkley C! To cap it all, people have no idea whether the reactors will actually work (very well)!

Clearly too much notice is taken of EDF's pronouncements on what happens with Hinkley C. Certainly I have never thought that this project was rational. But are EDF pursuing financial rationalities? They are certainly pursuing what looks like an increasingly outdated industrial ideology with a deeply held religous zeal that defies notions of financial rationalities.  And that (via Hinkley C) may well lead EDF into the abyss.

Of course, as noted in my previous blog post, the Hinkley project has not made any serious progress in two years. It is not expected to happen any time soon, as they say. But even the possibilities that this mad project might happen is making the financial community very wary about EDF.

Wednesday, 21 October 2015

Hinkley C - no progress in two years

The only successful thing about the Hinkley C project is the management of the news to imply that there has been progress in the project. In fact there has been absolutely no progress, certainly not in the financial terms, and in many ways things have got worse. That is compared to two years ago when the UK Government's much criticised terms, for paying EDF £94 per MWh (2015 prices) for 35 years underpinned by a 60 per cent loan guarantee by the Treasury, were given state aid clearance by the EU Commission.

Two years ago it was being reported that Chinese companies were to take between a 30 an 40 per cent equity stake in Hinkley C. It was reported that a 'final investment decision' would be taken by April 2014 and the project would be completed by 2023.

Now we hear blazoned across the media the 'new' breakthrough of a deal between EDF and the Chinese nuclear companies whereby the Chinese will take a one third equity stake in the project. The story goes that a final investment decision will soon be made and the expected completion date is now 2025. So what has changed over the last two years? Well, not the signing of a contract between the British Government and EDF, that is for sure, since no such thing exists. All that has changed, in substance it seems, in 2 years, is that the suggested completion date has been put back by....wait for it....2 years!
If you don't believe me, read for example the latter sections of the article in New Civil Engineer of October 22nd 2013 at
Of course we have so many announcements of an imminent final investment decision over the past three years that their value has now depreciated to vanishing point.

But while nothing of substance has changed on the status of the commercial terms, there has been a major deterioration in technical and financial context of the European Pressurised Reactor (EPR) programme. The reactors being built in Finland and France, which were already overshooting their delivery dates in 2013 are still not finished, and not expected to be finished for some time yet. Major safety flaws have been found in the reactor, which is currently being investigated by the French nuclear regulators.

AREVA, the French state owned nuclear constructor collapsed and is being absorbed into EDF. Incredibly EDF is now reported to be selling off several billion pounds of assets to absorb the consequential liabilities and to fund Hinkley C. Now why would the French state want to take the very high risk of another disastrous project at Hinkley C with the same EPR design and end up shelling out billions of pounds of euros in losses to build a nuclear power station for another country (UK)? I don't know. It sounds mad to me. It is certainly a terrible advert for state ownership of electricity companies. Moody's are warning of a credit ratings downgrade for EDF if they go ahead with Hinkley C.

My own guess is that the British Government is only keeping the PR for the project positive because it hopes to provide a smooth passage for other financial deals it is doing with China, and to preserve at least the appearance of keeping alive the British nuclear power programme.

Supporters of nuclear power like to be charitable and say that if only the Treasury lent the project low interest loans (without insurance,presumably,to make the taxpayer doubly liable!) then the project would get built relatively cheaply. Well, no it wouldn't. For one very simple reason. The Treasury would not know how much to lend. This is  because, despite all the figures bandied around in analyses by the EU Commission and many others, nobody has a good idea of how much the project will cost. The Treasury, to their favour, is not prepared to write EDF a blank cheque. Long may this remain so.

Sunday, 11 October 2015

Government heading for electricity capacity price crisis in 2019

As Conservatives gear up for the next election they could be hit by a electricity crisis as the costs of subsidies for new gas power stations escalate in 2019. This is because of a triple failure of policy; its failure to realise that its nuclear power objectives are undeliverable, the failings of its 'capacity mechanism' which beckon an escalation in costs in 2019, and a failure to promote decentralised energy solutions that would avoid these problems. To cap it all, as the Conservatives implement their ending of incentives for most renewables, they end the development of low carbon solutions that will decrease electricity prices in the medium and long term.

Let's go through this carefully. First, we have discussed in this blog at length how the notion that nuclear power could be delivered at a price cheaper than even offshore wind is now is a myth. The nuclear programme will certainly not be delivered at anything like the time or scale envisioned. To boot we now rely on a huge loss making French nationalised industry (EDF soon to be merged with AREVA) to decide to make another very likely huge loss on another EPR at Hinkley C even then involving British consumers paying the incentives until at least around 2060.

Second, to make up for the shortfall in capacity the UK may experience through this failure of nuclear policy we have a market based 'capacity mechanism' through which plant are ordered, and are paid standby fees, for their ability to provide capacity when demanded by the National Grid. This system is supposed to make up for the fact that increasingly wholesale power prices are being depressed by the increasing quantities of renewable energy, thus making it unviable for power station investors to recoup their investments from sales on the wholesale power markets.
 The prices of the standby fees payable under the capacity mechanism are determined at annual auctions for contracts to supply the capacity in 4 years time (the first of which was held earlier in this year for 2018/9). The Government sets a total firm capacity figure that should be supplied through the capacity mechanism and the Government will pay the price (through electricity consumer bills), at the highest margin bid to meet the total capacity required by the Government in the future. The problem is that as old coal fired power stations retire by 2023 there is very probably going to be a tremendous 'spike' in the size of capacity payments awarded in the auctions in and around 2019.

In fact the capacity mechanism is just as much a 'subsidy' or 'incentive' as anything earmarked for renewables or nuclear, and in 2019 the size of this is set to soar. The problem for the Government, and the electricity consumer is that it is not just the new plant that receives the subsidy, it is all generation capacity except, in practice, renewable energy. Even old nuclear power plant, which are going to be kept online anyway as much as possible for technical and economic reasons, receive this subsidy. The problem will erupt around 2019 when a lot of new capacity will be needed. Various companies with plans for combined cycle gas turbines (CCGTs) are now lining up in eager anticipation to put in bids through which they will receive large payments to induce them build the new capacity. Not only will there be large capacity payments, but ALL existing generators (except renewable ones) will receive the payments. This will make the power actually supplied by the  new CCGTs, in practice, very expensive.

Against this background it is no exaggeration to  say that onshore wind is now the cheapest widely available option for new generation. From 2019 onwards it seems unlikely that once you count in the costs of paying all generators enough through the capacity mechanism to get new CCGTs built that the cost of the CCGTs will be much, if anything, less than £70 per MWh. CCGTs have been costed by Policy Exchange at around £60 per MWh, but for them to be delivered in practice a lot of money will have to be paid to the other suppliers of (old capacity). This jerks up the effective price to much higher than £60 per MWh.

But none of this will help new wind power or solar power projects. They need something known in the trade as long term power purchase agreements (PPAs) that will pay them, say, £70 per MWh over 15-20 years. But none of the electricity companies will pay them this. Moreover the Government has decided to ban even the many windfarms that now having planning consent from gaining PPAs by competing for 'contracts for difference' (CfD). These CfDs, of course are available for Hinkley C and other nuclear power proposals.

Of course there are alternatives to the Government's policy. The potential shortage of flexible capacity could be solved through a combination of, first, increasing (rather than as the government is doing, decreasing) regulations favouring energy efficiency in buildings, and secondly by encouraging through planning law and incentives the deployment of combined heat and power plant (CHP). This is an organic process that will not involve the spikes in capacity mechanism that will result from what Kevin Anderson of Scottish Power has called (last week) a 'new dash for gas'. This system works well in Denmark. Indeed the CHP plant which would be best associated with district heating systems could be converted to using, or used in conjunction with, industrial sized heat pumps, the latter which could make good use of excess quantities of renewable energy. Government estimates put the potential for CHP at massive quantities

Interestingly, the party policy that currently seems to be closest to this notion is that of the 'new left' Labour Party, whose policy, is I understand, now influenced by former MP Alan Simpson who campaigned to get the feed-in tariff system legislated in 2008. However, even if a Corbyn Government were to get elected in 2020, it will be too late to avert the coming electricity gas capacity price spikes.

For some relevant references and commentary, see:

Saturday, 5 September 2015

The notion that nuclear is cheaper somewhere else is a myth

The British attitude to the notion that nuclear power is not cheap after all is a bit like a child who first hears that Father Christmas does not, after all, exist. Disbelief, and in this case a belief that if only Father Christmas is nationalised, then it will still be true. The psychologists call this cognitive dissonance, in other words if a fact is uncomfortable to you, you believe that the fact is wrong.

The belief that somehow nuclear power will be cheaper if somehow it is done differently here has been stoked by a recent IEA Report which says that British nuclear power, in the shape of the proposed contract for Hinkley C, is the most expensive in the world. In fact the IEA report is heavily reliant on a limited number of projections of costs, which in the world of nuclear power is a fantasy world in itself. However what is more apparent is that it is not so much that nuclear power is more expensive in the UK so much that it is only in the UK that something vaguely approaching a estimate of nuclear costs on the same basis as other energy technologies has been attempted. This is because of the need to make nuclear at least look like it was fitting into the contours of what passes for a competitive electricity generation market in the UK.

Of course nuclear power looks expensive if you do it that way. because it is! (assuming you want to treat nuclear power on the same costing basis as other energy sources). Even this (Hinkley C) comparison is somewhat biased towards nuclear because other technologies don't get 35 year contracts, and they don't get a Government offer to underwrite 60 per cent of the projected construction costs. So, the Government's declared price for Hinkley C is, in reality an underestimate of nuclear power costs compared to other energy sources. This is even more the case since the plant hasn't even started construction yet.

I'm scratching my head as to how the IEA could have come to the conclusion it did. The French EPR is now several years behind schedule in its construction and is said to now cost three times more than its original estimate (already!). As for the Finnish EPR, well, that cost just goes off the scale.

Even if you look at other reactors being built in the West, the high costs are also much in evidence. The AP1000 reactors being buult in the USA are as expensive as the EPR. See my earlier analysis at:

And the claims circulating about how the proposed Hitachi project will go better than Hinkley C are more exercises in fantasy. I commented about this earlier as well. See:

There's a lot of stories about how much cheaper nuclear power is in China. Well, I don't know whether anybody has noticed this, but easily analysable information on costs of nuclear construction in China is about as scarce as it was from the old British CEGB on a bad day (and it was, apart from the occasional leak, usually a very bad day).

But recent commentary of the Chinese nuclear programme is not especially encouraging: Take for example from the Global Times, whose news items seem to run in parallel with the priorities of the Chinese Government:

'Since 2004, China has been approving projects using advanced nuclear power reactors, including US-based Westinghouse's AP1000 and France-based Areva's EPR (Evolutionary Power Reactor), many of which are now under construction. Dubbed generation III reactors, they are designed to withstand the crisis that damaged the Japanese nuclear plant.

Construction of these projects has not been smooth. Sanmen Nuclear Power Station in Zhejiang Province was expected to be the first nuclear power plant in the world that uses AP1000 technology. The first of the two reactors was scheduled to finish construction and start operation in November 2013, but construction is now over 18 months behind schedule. The plant won't start operation until 2016 at the earliest, an official from China's State Nuclear Power Technology, the company building the power plant, said in January.'

Of course the Chinese Government has some grandiose plans for nuclear power construction. So did the UK Government back in 2010!

So where is the British flight into 'nuclear power is cheap somewhere' fantasy leading us? Well, to nationalisation, of course, a charge led by the IPPR, a centre-left think tank, which I suppose, is a more plausible vehicle for this than, say, a right leaning think tank such as Policy Exchange (who, incidentally, have recently discovered that onshore wind power is reasonable cheap after all and should be offered some contracts).

Nationalisation won't make nuclear power any cheaper. The claims that somehow the 'cheaper' money from the state will make the technology less expensive ignore some relevant facts. First, the Hinkley C deal already has access to state backed finance through the agency of the state owned (French and Chinese) companies that are building the plant and the state guaranteed loan offered by the UK Treasury. Setting up a state body to compete with others in the electricity market will also generate a further (interesting) EU state aid application. But really the talk of cheap state money, is not the key point that the nuclear people are aiming at.

What the pro-nuclear lobby now wants is for limitless sums of money to be siphoned off from public spending on education, health and whatever else and spent on building nuclear power stations. The money will be notionally borrowed, a contract that will be concocted that will claim that the electricity consumer will pay the money back at a later date, and the balance will be paid for by, well, less schools, hospitals etc. Meanwhile a story will be manufactured about how all of this is cheap. Cognitive dissonance will prevent people asking why if it is ok to fund nuclear power this way, then why isn't it ok to fund offshore winfarms and other things.

Of course, even this isn't 'the crack' as a Liverpudlian friend of mine used to put it. The 'crack' is that the state will end up giving the whole project a blank cheque so that the disastrous construction process can be bankrolled entirely from a bottomless pit of state finances. Talk about allegedly 'cheap' money from the Government is just a cover for what the nuclear people are really aiming for. A cost-plus contract, spend however much you want contact, a blank cheque. The road towards this will no doubt be littered with pretend signposts, like they'll be a tender process etc, but at the end of the day nothing will happen until the blank cheque has been sent. I have been pleasantly surprised to see that the UK Government has not signed such a thing. The Treasury has not been pushed into accepting this (one thing that me and George Osborne agree about). Yet.