Thursday, 10 May 2018

Hitachi's Wylfa project is even more expensive than Hinkley C

A fake price for the faltering proposed Wylfa nuclear plant will obscure the fact that the project, backed by Hitachi, will be even more expensive than Hinkley C. Negotiators for the Wylfa project are clamouring for the Government to use taxpayers money and a commitment to pay at least some of the risks of construction cost overruns to massage the price of the deal down compared to Hinkley Point C. If this is done, then the combined support for Hinkley C and Wylfa projects through loan guarantees, equity support and risk underwriting could rival the size of bill the UK has to pay the EU for Brexit. But a carefully contrived fake price produced by giving a massive taxpayer funded handout to the project will obscure this terrible consequence.

Hinkley Point C (HPC), scheduled to be built by EDF, is now said to cost around £20 billion, almost exactly the same as the cost of the Hitachi-led Wylfa project. In fact both of these figures do not appear to include interest charges, and so will be underestimates of the total mount of money needed to be paid out before the plant is even built. But the interesting thing is that whilst the Hinkley C project is 3.2GW, the Wylfa project is smaller, at around 2.9 GW, which actually makes the Hitachi project even more expensive!

The costs have jumped upwards for the Wylfa project because the developers have to meet UK safety standards. Indeed this fact undermines a lot of wishful thinking and confusion among nuclear supporters who look at the costs of constructing projects in places like South Korea and the UAE and suppose that they can be transposed to the UK. They cannot, because the British public expect higher safety standards, and these are required by the Office for Nuclear Regulation.

Hinkley C is routinely quoted as having been given a 'contract for difference' (CfD) worth £92.50 per MWh payable over 35 years, underpinned by what seems likely to be a loan guarantee of maybe £15bn or more. Note that the £92.50 per MWh price is in 2012 prices, and that today this is worth just over £100 per MWh given that the contract is uprated using the Consumer Price Index (CPI). This price will be paid by electricity consumers (over 35 years) once the project starts operating. But the thing to watch over even more is the massive sums that may flow from the Treasury in taxpayers money before the project generates a single KWh. The scale of potential losses is likely to be made much worse (by comparison) under the terms of the deal that its supporters are advocating for the Hitachi project at Wylfa.

Of course the Government do not want to be seen to give a similar price for the Hitachi project as the HPC project; hence the attempt to massage down such a figure by the ruse of the Government handing over taxpayers money to the consortium long before the project is generating any electricity.

Figures of around £70 per MWh have been suggested for Wylfa, based on what is euphemistically described as the 'Government taking an equity share'. This is still a lot more than renewable energy projects such as onshore wind and solar farms (effectively banned by the Government) or even offshore wind, whose costs have been tumbling to well below £70 per MWh in recent contracts awarded in the UK, The Netherlands, Germany and Denmark. Of course all of these projects run onmuch shorter contracts than HPC and they certainly don't get any loan guarantees or 'equity' support from the governments. But expect a lot of bloated estimates of dealing with 'intermittency' to excuse such differences. But a major problem in any cost comparison is that the nuclear price of any Wylfa deal will have been faked

Of course you can reduce the contract paid for ANY power project if the Government pays for part of it! We could (supposedly) have wind and solar power for free on this basis! So this process will be just a giant exercise in fakery, but one that has large and potentially catastrophic impact on the nation's finances.

Contrary to what the Government claims, if the they do offer loan guarantees to EDF for building Hinkley C, then the Government will have to start paying out in the (extremely likely) instance that the project suffers cost overruns and is not completed on time. So the UK could be liable for up to around £15 billion on this deal alone - even before electricity consumer start paying out on the very high price that has been agreed to pay for HPC's electricity.

But it gets much worse with the proposed Hitachi deal. There the Government's liability could, in theory, be open-ended. Not only will the Government be giving an initial handout to Hitachi of several billion pounds for what is called an 'equity' share in the project, but the Government will also at least share part of the risk of paying for (again almost inevitable) cost overruns on the project. This will be on top of the loans guarantees, similar in nature to those to be offered to HPC.

To top is all of course, the reactor earmarked for Wylfa, the 'Advanced' Boiling Water Reactor, has a rather chequered operating record in Japan.

So if up to, say, £15 bn of taxpayers money is at risk through HPC's loan guarantee scheme, the same will be the case for Wylfa and top of this will be billions handed out in the public 'equity' share PLUS a share of any of the cost overruns. The cost of leaving the EU through payments to the EU Commission has been variously estimated as being £30-£40 billion, so the cost of our nuclear programme will rival, perhaps even exceed that. And that is before we include the high costs that electricity consumers will have to pay over 35 years!


Report: see:
https://uk.reuters.com/article/uk-britain-nuclear-hitachi/hitachis-u-k-nuclear-project-to-get-guarantees-from-government-media-idUKKBN1IA0IV?rpc=401&

Saturday, 5 May 2018

Why the 2018 local elections were a good result for Labour

The local election results were a good result for Labour in that if the results were simply transpositioned to a General Election then Jeremy Corbyn would be Prime Minister. Arguments saying that Labour will necessarily do worse at a real General Election don't wash.

Ok it wasn't exactly a landslide Labour surge, but Labour did improve significantly on its 2014 result. The projections made would put Corbyn into office. See https://twitter.com/JohnRentoul/status/992487750661279745

 Moreover the Liberal Democrat and Green Party vote went up as well, which, indirectly is also good news for Labour for the simple reason that a lot of these voters would vote tactically for the Labour candidate in a General Election in marginal Tory-Labour seats. Hence Labour could actually end up with a significant lead in seats over the Tories at a General Election - and remember, the Tories only need to lose 10 of their current seats and Corbyn will be Prime Minister. In theory under some scenarios the Lib Dems might go with the Tories again to keep them in power, but in reality the revulsion of Lib Dems (led by Vince Cable especially) against re-visiting this option would be likely to allow Labour to form a Government.

On the other hand comparisons with Miliband's experience of doing moderately well in 2014 and then losing in 2015 don't carry much weight. Why? Well because in 2015 substantial numbers of UKIP supporters voted tactically for the Tories in order to get the EU Referendum, which turned out (for them) to be a winning strategy. But now with UKIP collapsing UKIP voters have returned to their former folds and so by definition there won't be much UKIP tactical voting at the next election, and much less motivation to do so anyway. So, in contrast to 2014, the Labour vote is more solidly placed for the next General Election. Indeed, as I have argued, the tactical voting possibilities are actually positive for Labour at the next GE, as opposed to being rather negative for them in 2015.

Hence this is a good result for Labour. The Tories face an uncertain economic future. The UK has practically the lowest growth rate among OECD countries. The 'Leavers' in the Conservative Party may say this is not caused by us leaving the EU. - But that only puts blame on the Tory Government. So, unless there's a a major upswing in the economy thing may actually be pretty good for Labour overall.


Friday, 20 April 2018

Problems with French nuclear plant could spell final end of Hinkley C project


This week's story about problems with pipe welding at the French nuclear plant being built at Flamanville could spell the end for the Hinkley C nuclear project. Treasury backed loan guarantees to build Hinkley C have been linked to a target date for commissioning of the Flamanville plant of the end of 2020. Yet the current target date of completion by the end of 2019 has been thrown in doubt by the freshly announced problems.

The main focus of attention of this problem for Hinkley has simply been that the design of the Flamanville plant - the European Pressurised Reactor (EPR) - is the same as that to be built at Hinkley C and that the engineering problems bode ill for the British scheme (1). That is right, but it is rather worse than this. The commercial issue is that if the French plant is not commercially operating by the end of 2020 then it seems the Treasury will not be able to give loan guarantees for the scheme. According to the analyst Professor Steve Thomas, the rules agreed between the European Commission and the British Government stipulate that ''until Flamanville 3 was in commercial service, there would be a cap on the guaranteed loans effectively meaning funding would be primarily through equity' (2)

It is very difficult to see how EDF could build the plant without the Treasury loan guarantee - something like £17 billion (probably more) would be needed as a loan. EDF just won't have the ability to raise anything like £17 billion on the bond markets. Indeed the decision to go ahead with preliminary works on the site (building a jetty and a cement works) alone, without the loan guarantee being in place, was regarded as so risky that the firm's Finance Officer resigned in protest at the decision. But EDF will not start building the main parts of the power station until it has the necessary finance. Even if all went well (what are the chances of this?) the Hinkley C project would not be up and running until 2027. But if the Treasury does not give loan sanction, and the contract seems to say that Flamanville has to be running by the end of 2020 for this to happen, then the project will not be built. - Unless the whole thing is re-negotiated of course, which would seem very difficult to achieve.

Construction of the Flamanville EPR began in 2007.

It may be that a failure to complete Flamanville by the end of 2020 will give anti-Hinkley officials some relief as they will be very worried that the offer of loan guarantees will turn into a black hole. Otherwise, given the experience of building nuclear power stations, including (especially) EPR projects, it seems highly likely that the Government would have to pay the bill through the loan guarantee agreements. The notion that the 'risk' of the project lies with EDF as opposed to the British  Government is very likely to be proved wrong. Some of us have known this since the start. Others have just been kidding themselves.

References


(1) Vaughn, A., (2018) 'EDF warns of faults at nuclear power station it is building in France', Gaurdian, April 10th,  https://www.theguardian.com/business/2018/apr/10/edf-warns-of-faults-at-nuclear-power-station-it-is-building-in-france
(2) Thomas, S (2016) 'The Hinkley Point decision: An analysis of the policy process' Energy Policy Vol 96 pp 421–431, page 427

Friday, 13 April 2018

How the memory of the first world war is driving us to the third world war

A truly toxic combination of militant nationalism and liberal opposition to chemical weapons is driving the world seemingly inexorably towards world war. We know who the militant nationalists are - people including Trump and Putin but, amazingly, the memory of World War One and the anti-chemical weapons institutions that it spawned are leading liberal opinion into a coalition of the mad hurtling towards our own collective destruction.

The horrors of gas attacks in the First War War and the desperate need to avoid them are etched in the political psychologies of western liberal opinion. The efforts to combat chemical weapons were launched through the 'idealism' of the League of Nations and the Geneva Convention which banned use of chemical weapons n 1925. More recently, we are governed by the Chemical Weapons Convention signed in 1993.
It is one of paradoxes of liberalism that it appears pacific and noble in its ideals but will plunge into self-destruction in supposed defence of the ideals that it defends. The present Syrian crisis, and those probably even worse to come, expose the paradox of liberalism. It is aggressive in support of its ideals which are supposed to oppose barbarity yet often the consequences of the actions it supports result in much worse barbarities than those which its actions are meant to defend. Such is the myopia driving much opinion towards war with Russia.

Now by hammering away at liberal idiocies I don't mean to minimise the contribution of militant nationalism - which seems to have taken hold in large parts of the world. Few people these days seem to stop to think how the notion of putting your own country 'first' means a relative gain over another nation either by soft, or hard, power. At best this means that others suffer and maybe die, but at worst this means that if an opposing power simultaneously adopts this logic then the end product is war.

With some luck we shall avoid war in the current crisis that followed the chemical attack in Douma. Probably. But in some senses war has already started between Russia and the USA. It arguably began in February when American forces at Deir al Zor in Syria killed an unknown number of Russian irregulars who were part of a force attacking a Kurdish force that was fighting with the USA against IS.

A chilling thing about this incident was that these irregulars may not have been totally under the control of the Russian Government. But what is the Russian Government anyway? Was the Skripal poisoning organised directly on Putin's orders or was it orchestrated by a faction within the GRU/FSB? I don't know, but the possibility of a militant nationalist force which dominates Russia today being partly out of control in a dangerous confrontation with the West should really worry us to our core. Especially when matched by a militant nationalist US President who does not want to seem 'weak'. Both sets of powers (US and Russia)  are driven by an ideology of militant nationalism and try to give the impression that they are unpredictable and out of control. Well, to a great extent, they are.

We may avoid a direct war in the Eastern Med with Russia this time, by some covert agreement with the Russians to tolerate some token strikes. This may pass without a war, with luck. But what happens if, probably when, there is another chemical attack by Assad's forces?

The Syrian civil war is far from over. An incident like Douma may well occur again. That may be the point when the world plunges into the abyss. With Trump we are heading towards a trade war with China and a World War with Russia. The great liberal irony is that liberalism is helping this process along, ostensibly to avoid horrors of the First War War, but in reality triggering an armageddon that could prove even worse.



Wednesday, 11 April 2018

National Grid finally comes clean on missing renewable energy generation numbers

National Grid (NG) has finally released figures of 'distributed' renewable energy - that is solar and wind power connected at the distributed as opposed to transmission level of the electricity system. These figures reveal that such distributed renewables will contribute around 7 per cent of UK electricity supply on an annual basis. This includes around 5.7 GW of wind power and 13 GW of solar power, each of which types contribute roughly the same amount of energy on an annual basis.

For years people like me have been complaining that the National Grid's transmission figures - routinely repeated by people who think they know what is going on - have greatly underestimated renewable energy generation capacities. But now the NG has come clean - apparently, though, only in the process of using the information to argue that they have the answer - batteries. See:
https://www.ft.com/content/5381b45a-3caf-11e8-b7e0-52972418fec4
Of course the Government publishes annual renewable energy generation figures which includes all sources, but the NG data has always looked like (in fact was) a great underestimate of the total renewable energy capacity, which is now enough to generate around 30 per cent of UK electricity supply on an annual basis. But the new NG figures allow us to plug the rather large gap between the (misleading) NG figures for the capacity connected to the transmission network and the real total amount of electricity generation.

Of course what is really needed to deal with the 'variability' of distributed generation is a much bigger role for the electricity distribution companies in balancing their own levels of demand and supply rather than the problem simply being passed through to the National Grid. Whether the distributed electricity companies are up to the task is another question.

Perhaps it is here that greater public involvement in their management comes in. But it should be 'bottom-up' management, not a state replication of the current local distribution monopolies owned by different multinational corporations. Ideally boards of the distribution companies should be elected, and that will inject some desire to develop a sustainable energy system that responds to popular modes of generation and popular needs.

Monday, 9 April 2018

New report implies that the proposed Scottish Government Energy Company will NOT boost renewable energy


A report from Ernst and Young on the proposals to launch an Energy Company owned by the Scottish Government gives little hope that the Company will give a substantial boost to renewable energy. The report was issued by the Scottish Government in advance of consultations on the Energy Company being started.

At the time of the SNP's Conference last October (2017) Nicola Sturgeon announced the intention to start a Scottish Government owned energy company and that:

“Energy would be bought wholesale or generated here in Scotland – renewable, of course – and sold to customers as close to cost price as possible,” she told the Scottish National party conference in Glasgow on Tuesday. “No shareholders to worry about. No corporate bonuses to consider.” 

Hopes that such a company would be able to open the doors to the many possibilities for cheap onshore wind and solar farms in Scotland are likely to be dashed if the company is formed following the priorities set down in the report. The idea of 'increasing the proportion of energy from renewable sources' is relegated to 'phase two' of the agenda for the Company (see page 16). In political terms this means that whilst there may be a lot of advertising focus on how the company gets its energy from renewable energy sources, in reality little or no new energy will be sourced from new renewable energy projects - that is unless they would have been started anyway as a result of programmes funded by Westminster.

The Scottish Energy Company is likely to follow the practice of various self-styled green energy companies of saying they supply energy from renewable energy sources, even though these schemes would exist anyway (and otherwise be given supply contracts by other companies). The renewable projects come into being because of incentives from the Westminster Government (through the Renewables Obligation, feed-in tariffs or contracts for difference). It is true that Ecotricity (and to a much more limited extent Good Energy) has established a substantial amount of renewable energy projects through its generation arm, but again, this would not have been possible without the support schemes organised by Westminster.

It follows that unless and until Westminster revives some method of offering long term power purchase agreements (PPAs) to onshore wind and solar farms, it is difficult to see, under the priorities outlined by Ernst and Young's report, that the Scottish Government will procure much (if any) new renewable energy generation.

What renewable energy projects need are the offer of long term power purchasing agreements (PPAs) lasting say, 15 years. This is needed be cause unlike fossil fuels renewable energy projects are capital intensive.Even though such projects may be able to deliver energy for the consumer at the same, or lower, price than fossil fuels, they will not be built unless investors and bankers are insulated against the risk of power price market fluctuations. This can be done through the projects having long term PPAs.

Yet the priorities as outlined in the report offer little hope that the Scottish Government Energy Company will offer long term PPAs. The Energy Company seems likely to procure its electricity from short term contracts (or PPAs) from energy generators. This will preclude the possibility of helping new renewable energy projects start generating, because they will need much longer PPAs

The Energy Company therefore faces the prospect of trying to compete solely on price in an electricity market increasingly populated by many small companies all trying to do the same thing, whilst at the same time failing to deliver its promises of promoting renewable energy.

Some references:

https://www.theguardian.com/politics/2017/oct/10/sturgeon-proposes-cheap-state-owned-energy-for-scotland

http://www.bbc.co.uk/news/uk-scotland-scotland-business-43692809

The Ernst and Young report:

http://www.gov.scot/Resource/0053/00533962.pdf


Sunday, 1 April 2018

Why Britain's distorted electricity market means that 'subsidy free' renewable energy is a myth

The media is awash with stories of the imminent emergence of 'subsidy free' wind and solar power in the UK, but the reality is that the uncompetitive nature of the British electricity market mostly undermines that prospect. In theory onshore wind power and maybe some solar power projects would be able to generate power to sell at competitive prices on the British wholesale electricity market. In practice most of the potential buyers of energy from new renewable energy projects will not be interested in buying the energy even at cheap prices simply because it conflicts with their own generation portfolios.

True, there is a limited possibility for some very large corporate consumers who are interested in buying green electricity to fund new projects by issuing corporate power purchase agreements (PPAs). But in reality this market is small, and I have heard this estimated to be no larger than 100 MW a year. That means it would take around 20 years for not quite 1 per cent of electricity to be supplied this way.

PPAs are needed for new renewable energy projects that offer the generators the certainty that they can be paid a minimum amount for each MWh that they produce for the long term. The UK Government's PPAs, called contracts for differences (CfDs), last 15 years. However they are no longer available for onshore wind and solar.

The problem is that most of the market for offering PPAs that can fund new renewable energy projects comes from the big electricity suppliers, who have been known in the past as the 'Big Six'. Only PPAs offered by really large companies will be usually taken seriously enough by banks and and other institutions to enable renewable energy projects to obtain long term loans or equity. The trouble is that the Big Energy suppliers will usually have little interest in offering long term PPAs to new renewable energy projects. For a start they can buy in power at much the same price as the renewable energy generator can offer without needing to commit themselves to long term agreements. Crucially, the big electricity companies are struggling to keep their own power stations in business, and are not going to sign up competition from other people for their own business!

It is something of a trade secret that the only reason the Big Energy companies ever did offer long term PPAs to renewable energy companies under the Renewables Obligation was simply because they could make a lot of money out of doing so. In effect, they were compensated for the losses their power plant accrued through not being able to sell so much electricity. This goes a long way to explain how it is that renewable energy has, in the past, seemed so much more expensive in the UK compared to other European countries. But now those Government incentives are no longer on offer to new renewable energy projects.

Without financing renewable energy projects cannot be set up, and financial institutions will usually only invest/loan money to companies that they think have a pretty certain likelihood of being in business for the length of any PPA that they will issue. Various smaller electricity suppliers may have a very robust future. However, unfortunately, many financial institutions may not have a sufficiently positive attitude to smaller electricity suppliers to allow them to offer cheap financing to those potential renewable generators that have been offered PPAs.

There are, of course, various green electricity suppliers who offer renewable electricity, but of course these will invariably be existing projects that have been funded already through the Government's Renewables Obligation or maybe the feed-in tariff scheme. But these options are no longer available for new renewable energy projects.

At the end of the day there are a few independent big consumers - the Googles, Microsofts etc of this world - who will be interested in offering corporate PPAs to cheap new renewable energy projects. However such companies represent a very small segment of the electricity market.

At the end of the day, there may be lots of potential for generating electricity from renewable energy at prices that are no higher than that from new gas fired power stations. But the British electricity market is skewed against this happening. Renewable energy projects are capital intensive which means that investors have to take a long term risk to support them - so we need long term PPAs to be underpinned by the Government. But despite encouraging noises coming from Energy Minister Claire Perry on this subject, there seems little early prospect of such contracts (CfDs in government-speak) being made available for onshore wind and solar.