Saturday, 30 June 2012

Renewables heading for brick wall despite success

The success of the Renewables Obligation (RO) is underlined by the latest set of figures from DECC, but at the same time news from developers in the field suggest that renewables growth is about to hit a brick wall because of the Government's Electricity Market Reforms. Renewable electricity generated 11 per cent of UK power in the first quarter of 2012, continuing an increase since the RO was introduced in 2003. Yet renewables developers are facing stagnation in the face of uncertainty surrounding the Electricity Market Reform (EMR) proposals. A representative of one independent renewable developer told me that they had been told by a leading electricity supplier that no power purchase agreements were available for independent developers after 2014.

EMR is supposed to take effect in 2017, but before then is a 'transitional' period and the various caps that the Treasury are imposing threaten to cut back renewable development as early as 2014. The EMR effectively restricts development opportunities to the 'Big Six' since in order to qualify for the so-called 'contracts for differences' (CfD) developers have to trade on electricity markets - an option which is effectively open only to the electricity suppliers themselves. EMR restricts competition by freezing out the independents, whether they are large companies or small community windfarms.

The most cost-effective system for the consumer, and one that works very well for all developers, is the German-style 'fixed' feed-in tariff system, promoted elsewhere in this blog. This option, once again, seems to have been overlooked in the scramble to try to launder subsidies for (what look like increasingly unlikely) new nuclear power stations.

However, given the brick wall facing renewable developers the next best thing would clearly be an extension of the Renewables Obligation beyond its closure date date for many independents of 2014. This could be easily achieved. If the Government retains even a shred of seriousness about the green energy agenda, then it should urgently issue an extension to the RO until it has sorted out the mess that is represented by the EMR proposals - and install a 'fixed' feed-in tariff in the long term.

The Treasury is obsessed with impacts on consumer prices, to the exclusion of the advantage of renewable energy in stabilising energy prices. It is not much good having more natural gas instead of renewables if the energy prices for the consumers fluctuate wildly with volatile gas prices. Robert Gross of the United Kingdom Energy Centre (UKERC) has done some good work on the impact of renewable energy on consumer bills. He points out the flaws in right wing attacks on renewable energy funding - which seem to influence Treasury thinking these days (see earlier post on Treasury support for cuts to onshore wind ROCs). See:

Government 'may' give details of strike price for nuclear contracts

In answer to questions from Lib Dem MP Martin Horwood the Government said it 'may' give details of the price paid for electricity generated by Hinkley C. The implication, however, is that it may not give details! Despite this the Government insist that  it will give full details of terms and conditions of the contracts to EDF. This rather vague response on this crucial detail does not satisfy those wanting to see full transparency regarding deals made with EDF. There is still no guarantee that we will get to hear the vital detail of what price is paid to EDF for electricity generated at Hinkley C. We need this detail if we are to calculate the impact on consumer bills and compare the level of support given to nuclear power and other renewable energy sources such as onshore wind, offshore wind and solar power.

Charles Hendry said:

'The Department has not provided EDF Energy or NNB Generation Company Ltd with any indications regarding the strike price that could be received for electricity produced at Hinkley Point C.
Under the Final Investment Decision Enabling Project set out in the Technical Update on Electricity Market Reform published in December 2011, the Government may provide information on strike prices for low carbon generation projects that need to make final investment decisions before legislation implementing EMR takes effect. The terms of any investment instrument or contract for difference issued for electricity produced at Hinkley Point C will be subject to negotiation focusing on delivering a fair deal which is affordable, provides clear value for money, and is consistent with the Government's policy on no public subsidy for new nuclear. There will be full transparency over the terms agreed for any investment instruments or contracts for difference that are issued.'

Ed Davey has told the DECC Select Committee enquiry that nuclear power would not get higher prices than renewable energy sources. But does this include wave power, which as a very new technology, will receive premium support? And would this take account of special deals made with EDF, for example if, as some nuclear supporters have argued, EDF got state backed loan guarantees that would bring down the interest rates it is paid and therefore the strike price it needs?

Of course, as the previous blog post argues, it is impossible to see how Hinkley C is going to be financed in practice. The actions (as opposed to public relations output) of EDF also lend support to this since they have postponed their decision about whether to build Hinkley C.

You can see the responses to Martin Horwood's questions on:

Monday, 25 June 2012

Funding Hinkley C is impossible for the Government

Barring some unlikely  bizarre manoeuvres  and political chicanery it is impossible for EDF to achieve the terms they need to fund even one nuclear project, namely the 3.2 GWe twin reactor project at Hinkley C.
How do I come to this conclusion? Because the sheer cost of the sort of contract that EDF would demand in order to proceed with the project at Hinkley C would be far too prohibitive for the Treasury to accept under the terms of the ‘Electricity Market Reform’ (EMR) as proposed in the recently issued Energy Bill. Using Peter Atherton’s analysis (Citigroup) of the ‘strike price' needed by nuclear, (£166 per MWh), then funding of Hinkley C would raise average electricity prices by 8 per cent over 30 years. This figure would be about 6 and a half per cent for domestic consumers and around 10 per cent for industrial consumers. (Under my own analysis of what financial markets would expect nuclear to be paid the figures look even worse for nuclear!)
This increase in consumer costs is politically impossible just for the production of 6 per cent of UK electricity (which is all that 3.2 GWe of nuclear is likely to generate). You could have twice as much electricity production from offshore wind turbines and solar pv projects and many times the production from onshore windfarms for that increase in prices. Yet the Treasury do not even appear to want to fund offshore windfarms at much lower prices than would need to be offered to EDF for Hinkley C. So EDF’s demands are out of the question.
One proposition to help nuclear power is to give state guarantees to enable cheap loans to be secured by EDF for the project.  It is the ‘blank cheque’ option since in practice the state would have to pay for  nuclear construction cost-overruns, as is usual. However, this also is highly unlikely. Although the price of any contract issued for Hinkley C generation would be reduced somewhat (although it would still be very expensive), this would also mean that the cost of Hinkley C (£14 billion) would have to be added to the Public Sector Borrowing Requirement (PSBR). This would do significant damage to the Government’s debt reduction plans and would likely mean greater cuts in public spending.

As if this was not enough, such an arrangement would be difficult to get through the EU’s rules on ‘state aid’ to electricity generation. Ironically, the European electricity companies have kicked up a fuss about renewables funding meaning that the protocols are quite strict. The Commission is unlikely to agree to member states giving blank cheques to major electricity companies for windfarms, let alone nuclear power.
Moreover, if you gave nuclear such help, there would be a queue of other people wanting the same treatment, with the various different parts of the renewables lobby at the head of the queue. In short , it really would be incredible if EDF got their way.

Of course the nuclear lobby (which includes the Department of Energy and Climate Change) will carry on issuing hopeful sounding press releases about the future of nuclear power. They cannot afford to admit that nuclear is far too expensive for the country to pay for it.

Thursday, 7 June 2012

Tories plot to cut wind through planning bans and subsidy cuts

Conservative-orchestrated policies on planning and funding windfarms is pointed clearly at stopping them. Much coverage in the Conservative press about an irrelevant story about a High Court judgement against a windfarm proposal (which merely supported an Inspector's decision) has obscured the fact that the Government's 'National Policy Planning Framework' (NPPF), which came into force in April, abolished rules favouring windpower. They have been replaced with a set of guidance that Tory led Councils such as Lincolnshire are taking as a green light for policies aimed at effectively banning windfarms.

In 2004 the Labour Government, in an initiative led by John Prescott, introduced Planning Policy Statement 22 (PPS 22) which included a 'presumption' in favour of wind power and also stopped local authorities from prescribing 'no go' zones for windfarms. However, the Coalition's NPPF has cancelled PPS22. There is still guidance in the NPPF saying that planning authorities should encourage renewable energy development (not exactly what Lincolnshire County Council is saying) and encourage them to identify areas suitable for renewable energy development. However, now that the firm guidance in favour of renewable energy has gone, anti-windfarm campaigners are now emboldened to get Councils to prescribe against windfarms.

Let us be clear. This policy weakens support for renewable energy. Even under PPS22 more than half of windfarm planning applications were turned down by local planning authorities. A proportion of these refusals were overturned on Appeal, but the fear in the wind industry now is that local planning authorities will be encouraged, not to approve windfarms, but to turn them down and delay them in even greater numbers.

The other leg of the Tory anti-windfarm offensive is to cut the subsidies for onshore wind. As widely reported in the press, the Treasury wants a 25 per cent cut in the value of support for onshore wind available under the Renewables Obligation (RO). In fact a 10 per cut is favoured by the Department of Energy and Climate Change. Until now onshore windfarms receive 1 ROC, but from 2013 they will get less than this.

The Tories want more blood - ie. even less wind power. The RO  mechanism that will remain in force until 2017 when the Government's lukewarm support system for renewable energy comes into force under its recently published Energy Bill (see previous post).

The Treasury move has little logic in cost-saving given that onshore wind is the most cost-effective widely deployable renewable energy resource. It is a piece of naked anti-windfarm farm politics supported by the anti-wind Tories. RenewableUK estimates that this will cut wind deployment by 25 per cent, making even the Government-supported target of 20 per cent of electricity from renewables by 2020 largely unachievable. It makes a joke out of the Uk's supposed commitment to the EU Renewables Directive. The Government has said that it wants to support community links with renewable energy schemes. Yet this cut in windfarm subsidies will hit community windfarm schemes the hardest, since they are likely to be sited on lower windfarm sites.

This comes hard on the heels of yet another cut in subsidies for solar power.Greenest Government ever? You must be joking!