How gas manipulation scandal could spread to electricity with Electricity Market Reform

Media reports about price opacity in gas trading markets sets a context in which price manipulation can occur. The Government is about to introduce an Energy Bill implementing Electricity Market Reform which will make the precise amount of subsidies paid to nuclear and renewable energy sources very difficult to calculate and handover more control of the the renewables market to the major electricity players. In the process this reform will effectively prevent independent developers from setting up renewable energy projects.

Independent analysts have already warned that the complex and highly opaque system of 'contracts for differences feed-in tariffs' (CfD- FiTs), that is proposed by the Government, will create favourable conditions for major electricity companies to make money out of the complexity. Currently we have a relatively transparent method of calculating how much extra is paid for renewable energy, but this will disappear as the funding for 'low carbon' energy sources is pooled together. What a coincidence it is that we will find it difficult to calculate exactly how much extra (on top of market rates) is paid for nuclear power! Proposals for a much simpler and cheaper 'Fixed FiT' system (used in Germany) have been sidelined. This system would be much more transparent and would also give independent developers good chances of establishing projects.

Under the Government's EMR proposals, there will be no publicly accountable monitoring of subsidies paid to low carbon generators (the government insists they are not subsidies anyway) because the system of paying 'top-ups' will be administered through ELEXON, a private subsidiary of the national Grid. There is no arrangement, at least so far as I can see in the currently constituted Bill, for there to be any publicly available information on subsidy levels or 'top ups'. Payments to individual companies for particular projects will be labelled as 'commercially confidential'. The Government may establish a body to provide backing to the contracts (to provide guarantees of payments) but this does not mean that there would be any monitoring of payments actually made.

Currently, under the Renewables Obligation, OFGEM administers issues of renewable obligation certificates (ROCs), and it is possible to get hold of details of ROCs issued to particular generators from OFGEM. This information is relatively easy to understand and turn into estimates of subsidies paid. However OFGEM is being kept out of direct monitoring of payments made under the CfD arrangements, so this avenue will not be open.

It may be possible to make generalised informed guesses about what levels of support particular technologies are receiving through CfDs by subtracting estimates of power prices from 'strike prices' for the technologies (inasmuch as even these are made public - not certain in the case of EDF and Hinkley C yet), but these will be only informed guesses. Future pressure may require the National Grid to publish details of their own estimates of the power price fluctuations (necessary to make decisions about top-up payments), but even if this happens a) this information will require the help of experts to generate estimates of 'top-ups' paid, and b) even then there will be a level of uncertainty because the power prices estimated by the national Grid will not necessarily be the same as the money that is actually received by the generators. Fears have been expressed that the major electricity companies can manage the complexity to generate extra profits for themselves out of the system.

Because CfDs are only available to companies that trade on electricity markets (which is a very expensive, capital intensive operation usually only open to electricity suppliers and very large companies) this effectively excludes even quite large independent companies from developing renewable projects. It is ironic that at a time of criticism of the 'Big Six' the EMR firmly entrenches control of the renewables market in their favour. A report I have written about this is being published by Friends of the Earth.

Learn more about this controversy. Hear and discuss how propects for renewable energy and independent developers could be improved with the right amendments made under the forthcoming Government Energy Bill. Do all of this at a Conference on January 18th at the University of Birmingham. Details can of the Conference can be found at: http://www.claverton-energy.com/wp-content/uploads/2012/11/Feeding-Renewable-Policy_yc_5_10_2012.pdf