Friday, 23 November 2012

More Government hot air on green energy spending


Today's announcement by the UK Government that it may allow several billion of pounds spending on green energy by 2020 is little more than hot air. There will be practically no new renewable energy projects unless the Government sets a good enough 'strike price', that is a high enough level of guranteed income per each unit of electricity generated. Independent renewable energy generators are likely to be frozen out of the market completely by the 'contract for difference' (CfD) arrangements they propose. The prospect of new nuclear power (which is not green anyway) seems increasingly unlikely.

First let us deal with the nuclear hot air that abounds. I must say it is puzzling that press releases issued by EDF agencies and John Hayes, the Minister of State for Energy, give the impression that a deal with EDF over Hinkley C is imminent. But this is only puzzling if you ignore the tendency of Government, for six years now, to announce the imminent arrival of nuclear power. It is becoming a bit like 'Waiting for Godot'. But on a rational level the propect looks exceedingly unlikely.

As discussed in earlier blogs, nuclear power would need a strike price of over £150 per MWh before Hinkley C even begins to look financeable (even ignoring the fact that the EPR is a design with no generating experience). At a 10 per cent internal rate of return (IRR) Hinkley C might just be financeable at a strike price of around £100 per MWh (the sort of level the Government is rumoured to set). But EDF are going to have to make the investment 'on' balance sheet - that is by holding the debts on their balance sheet- which means deferred dividends for shareholders. This is 'equity' financing from which shareholders will expect a much higher return - 15 per cent IRR being a minimum benchmark. Yet EDF could earn this level putting the money into lots of other projects. This also assumes that EDF has much money to invest, and even this is very doubtful. In fact EDF's share price has fallen considerably in recent months and continues to fall and its debt to earning ratio is rising to worrying levels. See  http://www.bloomberg.com/news/2012-07-31/edf-seeks-partners-to-build-u-k-reactors-as-debt-balloons-1-.html

http://www.businessweek.com/news/2012-11-14/edf-slides-on-profit-outlook-cut-in-output-target-paris-mover

Indeed, just as EDF is reported to be seeking new business partners for its share in new nuclear investments, its partner in Hinkley C, Centrica, is now on the edge of formally ending its 20 per cent option in Hinkley C. Centrica says, in effect, it has much better things to do with its money. See http://www.thisismoney.co.uk/money/markets/article-2234448/Centrica-abandon-nuclear-plants-Britain-energy-giant-switches-investment-US-market.html

The only possibility for salvaging this position would seem to be some sort of Government underwriting or something to that effect. This appears to have been ruled out by the UK Government, and although, in theory, the French Government could do this, this raises the issue of why they would want to do it. AREVA the nuclear constructor (whose holding company is mostly owned by the French Government) underwrote an EPR being built in Finland. Yet AREVA's  financial position is, shall we say, challenged. See http://en.wikipedia.org/wiki/Areva. Given the difficult state of French public finances, effective handouts by the French state to foreign nuclear adventures by state companies look unlikely, and certainly very irrational. Francois Hollande has appeared to rule this out as well.

As if all of this was not bad enough news for nuclear prospects, the Government are also in trouble with in Brussels with its nuclear subsidy plans, with its request under state aid rules for the CfD nuclear arrangements being seriously questioned. See my earlier blog on this. See also Alan Whitehead's blog at
http://alansenergyblog.wordpress.com/2012/11/19/things-arent-quite-what-they-seem-2/

The prospects for renewable energy are a little better than this, although the prospects are hamstrung by the Government proposals, which as discussed in earlier blogs, will as they stand, effectively prevent independent generators from establishing projects. Given that one half of the Government does not want many more onshore windfarms anyway, one must question the Government's will to do much about this. Of course onshore windfarms can be funded with relatively modest subsidies from the consumer. They will need a 'strike price' of about £80 per MWh for a reasonably sized programme if this was funded by a proper feed-in tariff - a so-called 'Fixed' Feed-in tariff that allowed independents to take up power purchase contracts.

But the Government will have to offer more than £100 per MWh if much of the 'Round 3' offshore windfarm programme is to be built. Something in the range £120- £130 per MWh is likely to be required, depending on the success of the cost reduction programme. Solar pv also needs at least this sort of level for the large schemes, and at least £160 per MWh for smaller ones. The costs have come down a lot, but the orders need to keep coming in to maintain this progress. The only surviving Conservative minister with significant green credentials, Greg Barker, appeared to have won a concession for an energy efficiency feed-in tariff, but how much of a real option this will be also remains to be seen. Judging by Ed Davey's answers to Alan Whitehead at the DECC Select Committee on November 20th, that might not amount to very much. Thanks to David Lowry for pointing this out. See
http://www.publications.parliament.uk/pa/cm201213/cmselect/cmenergy/uc749-ii/uc74901.htm
The point about today's announcement about the Energy Bill is that it says absolutely nothing about these details of strike prices and contractual terms. These are not set to be announced until at least February next year, and there are even doubts about the level of transparency about such issues. Quoting large sums for the 'Levy Control framework' (LCF), is pretty meaningless. The LCF is, in any case, merely an artificial Treasury invention designed to give it formal power to control DECC spending commitments.

Unless the right strike prices are set, and unless the right contract terms are given, very little of this sum will actually get spent. Indeed, the advantage (to the Treasury) of announcing a reasonably large figure LCF figure for 2020 (although nothing for beyond that) is that discussion is focussed on the cost to the consumer, whereas in fact under the real Government plans, spending on renewables is likely to be quite thin by comparison - with consumer costs, in reality, being very small indeed. So we should brand this announcement for what it is - a lot of hot air. We still await news of some substance. Indeed we should demand some substance in the way of real feed-in tariffs for real green energy sources: renewable energy, energy efficiency and most certainly not nuclear power.

4 comments:

  1. What this cap on the levy seems to do is make explicit the incompatibility between nuclear and renewables. It restricts the budget, and, given your anticipated strike price and government aspirations, this will mean most has to be allocated to nuclear.

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  2. As a resident close to the new Horizon nuclear development at Oldbury I was wondering why you think that Hitachi appear to have paid e.on and RWE £700 million for Horizon?

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    Replies
    1. I hear the deal has been closed for £696 million. Among the explanations that Hitachi may have (I certainly cannot speak them, of course!) is that they can demonstrate their seriousness of their efforts to potential clients such as those interested in developing a plant in Lithuania (which is being given a state guarantee) and, in terms of the UK, they will hope that in future the incentives and guarantees will be big enough for them to attract investors. This might happen, of course, with a majority Conservative Government (after the next election) if the Conservatives alter their previous stance of not underwriting nuclear power towards offering state guarantees as is necessary, in effect, for nuclear power plant to be built anywhere in the world.

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