Wednesday, 23 May 2012

Electricity Market Reform Bill - More gas and not much else

The Government's Electricity Market Reform (EMR) (published on May 22nd) may be called a 'decarbonising' Bill, but it seems to be working out in practice as more of a natural 'gasifying' bill. Essentially (as discussed earlier on this blog) there will be no new nuclear power, there will (after 2017) be a slimmed down renewable energy programme and there will be a large increase in the proportion of our electricity coming from gas. This increase will have to come from imported gas, with consequential increased exposure to gas price (and, as a knock-on) electricity price volatility for the consumer.

This is not how it was intended. The original plan, at least in the eyes of the nuclear lobby who were in the driving seat of the original EMR vision, was that a plan for around 30 per cent electricity from nuclear power would be executed and largely in place by 2025, with, hopefully, much more to follow (onwards towards fast breeder reactors etc). Renewables were to be allowed only in so far as they came in at was assessed to be below the cost of nuclear power, and the way that some of the consultancy work seemed to be pointing suggested that after 2020 there wouldn't be much of a renewables programme at all. There would also be a few gas fired peaking power plant.

That this vision has not appeared in practice is down to two factors. The first is the perennial storyline with nuclear power is that the nuclear lobby push out a lot of public relations that the next reactor/project will be far cheaper than the rest and that without nuclear disaster will befall the nation (or world). To do them justice, they do actuallly seem to believe this (or at least that the ones after the 'first of a kind' will be very cheap), but their enthusiasm is undermined by the extremely consistent historical record that suggests that the cost trajectory of nuclear power is upwards rather than downwards. In practice, as with the evidence of cost overrun and delay of the European Pressurised Reactors (EPRs) at Okiluoto and Flammeville, the nuclear pr storyline has no basis in reality. It is just that the nuclear lobby manage to spice up their storyline every so often until such time as it is shown to be wanting.

The second factor is the expectations of the British Treasury. The nuclear lobby may have been pragmatically expecting that whatever the problems with the EPRs, the British Government would be so determined to ensure that the programme went ahead that it would be 'underwritten' by the state, that is given a blank cheque. The Treasury seems to have other ideas, and it actually seems to take its notions of 'competition' between energy sources seriously. Which means no nuclear power stations. The Treasury is insisting that the costs of offshore wind come down so that it is economic at a price of no more than £100 per MWh (10p/KWh). Given that nuclear requires a strike price of at least £150 per MWh, the Government can hardly start out handing these contracts to nuclear power at that price (£150 per MWh). The Government's EMR proposals seem to clearly point in the direction of this conclusion. Actually the price of £150 per MWh is probably on the low side. It is what I estimated in a previous blog, but it has been pointed out to me that I was using earlier, lower, cost estimates for nuclear the EPR than have emerged more recently. I made the point about Treasury expectations in a session on Scotland BBC Newsnight in which I helpfully suggested that the resources not being used to support nuclear should be transferred to renewables. I should have said 'renewables and energy efficiency' of course. Apologies to Andrew Warren from the Association for the Conservation of Energy for that slip. See On Radio 4’s Today programme (yesterday, about 7.10 am) I commented that selling investments in nuclear power is rather like selling Greek Government debt bonds. People need to expect a rather high promised return to buy them, like the very high electricity price that needs to be promised to nuclear power to get it going. Ed Davey has said that nuclear will not get a blank cheque. We can thank the Treasury for that one. Hear my interview on Radio 4 on

But the trouble with the Treasury's standard is that rather than transferring resources to green energy they are simply allowing natural gas generation to take over. In fact the renewables programme from 2017/18 onwards is planned to be a severely cost attentuated, truncated and confused reform of the current version. There is an auction system set to be introduced to truncate onshore wind first, the idea for which is adopted through a misunderstood version of the current Danish offshore wind procurement mechanism (which is not, by the way, working out very well at all). It is hopeless for onshore wind and will cut down delivery of projects by at least half, probably more (many Tory backbenchers will rejoice here). It also fails to fit in with the way The Crown Estate has been organising Round 3 offshore windfarms. The Scottish Government may be able to negotiate some small funds for tidal stream and wave schemes, but that remains to be seen.

An especially sad part of the reform package is the way that the 'contracts for differences' (CfD) scheme is being presented as saving money for the consumer. If you compare it to a German style 'fixed' feed in tariff (FIT), the model adopted for the small renewables (see earlier blog), it comes as as quite costly. The CfD mechanism is good, it is claimed, because it makes sure the renewable operators have to pay back money which is earned when wholesale electricity prices are higher than the 'strike' price premium payment (normally called the FIT rate). That is somewhat less than relevant since this phenomenon will be offset by the way that wholesale prices fall below the 'strike price'.

The Cfd system certainly gives a worse, not better, deal for the consumer than just giving an average price through a 'fixed' FIT. The consumer gets a worse deal because the system loses money in the bureaucracy, most of it which will go to the Big Six electricity companies who effectively run, and profit from, the electricity trading system. Renewable operators will be forced to trade on the electricity market and made to guess in advance when they are going to generate energy. Predictive mechanisms for wind power are good, and getting better, but it is senseless to make individual wind projects do this since they will lose money and the system will work much better if the System Operator, the National Grid, balance out fluctuating renewable energy supplies. This point has been made using economist's squiggles by David Newbery of Cambridge University.

In order to overcome the philosophical difficulty of deciding what exactly the wholesale price actually is (difficult since there there is no overall trading price), an invented reference price is used to calculate when operators should get subsidies, and when they should not. This injects uncertainty into the system about what projects will earn in advance, which puts up the cost of risk capital, which puts up the price of projects. The final kick of the CfD system is that it squeezes out anybody who is not a full trader on the electricity market, that is all but the very largest schemes and electricity suppliers. The independent generators will have to go to the electricity suppliers themselves to get contracts (power purchase agreements), and the electricity suppliers will take a big cut of the income. My own research done in the past suggests this may be around 20 per cent of the income stream.

The Cfd idea may have been driven by a notion that this obscures the existence of subsidies for nuclear power, ironic given that there is no nuclear power coming. However it is also justified by an ideology that renewables must be integrated into the electricity trading market arrangements. The fact that electricity trading is dominated by, and in free form peripheral to, the activity of the Big Six oligopoly, is not considered to be important. Neither is the fact that renewable energy would be much better off being outside this framework and that using a German-style FIT would provide genuine independent competition with the Big Six in ways which will reduce the costs of fossil fuel electricity.

To sum up, the new renewables regime which will operate after 2017 will reduce the flow of renewable schemes coming on line (compared to the current Renewables Obligation), and make the market even more dominated by the Big Six than it is now.

Energy efficiency, by the way, receives scant attention in this document. There are schemes for energy efficiency in the commercial sector that have been implemented in France, for example, but nothing effective is being offered to commerce or industry by Government policy in terms of sticks or carrots apart from 'voluntary' climate change agreements. The domestic energy efficiency programme has been cut back by around 50 per cent since 2009 according to the Association for Energy Conservation.

And as for solar power...well everybody who is interested in the story knows what has happened there (with the programme being slashed). You can be positive, I suppose, and say at least it is not as bad as the lunatic policy in the USA where solar power is taxed and oil given subsidies. But then we will just have to leave it to the Germans, Chinese etc...

Greenest government ever? Who said that?

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