Government signals (not-so-good) rates for wind and (apparent) blank cheque for Hinkley C

The Treasury has announced good rates for onshore and offshore wind and also tidal stream. Although it has not announced a price for new nuclear it has said that Hinkley  C is eligible to receive   a Treasury guarantee to underwrite Hinkley C. This raises the prospect that new nuclear will, despite the consistent denials by Ed Davey, be given not only a price guarantee but also a costs guarantee that amounts to a blank cheque. And a much longer contract to boot compared to renewables.

The price of £95 per MWh for onshore wind will allow the schemes in the pipeline to be built and also make the community benefit commitments suggested by Government affordable. The price of £155 per MWh falling to £135 for offshore wind should also allow the offshore wind programme to move forward.

Note added later: These headline figures appeared to be less more generous later on when the 'small print' became visible in that the contract length has been reduced compared to the RO (from 20 to 15 years) and the inflation will be only partly uprated. In effect, in reality, these figures represent a CUT compared to the Renewables Obligation of close to 15 per cent.

But with guarantees for construction costs and a longer contract nuclear is still being offered a better deal compared to wind power. We await further details on the form of the blank cheque that the Government is considering to give to EDF.

See the quote about nuclear on page 67
'the proposed new nuclear power station at Hinkley Point C is eligible for a UK Guarantee, in addition to over 25 projects worth £13.5 billion which have also been prequalified for the UK Guarantee Scheme;'

See the details of renewable funding on page 30

See:

https://www.gov.uk/government/publications/investing-in-britains-future

Government to offer better terms to nuclear than renewables - but all in vain!

See my submission to the House of Commons Environmental Audit Committee (EAC) Inquiry on Energy Subsidies.
Go to: http://www.parliament.uk/business/committees/committees-a-z/commons-select/environmental-audit-committee/inquiries/parliament-2010/energy-subsidies-in-the-uk/
You will have to press 'view all' to see my submission (David Toke)

The summary of the submission reads:

The Government’s claims that similar support is being made available to all electricity generators under Electricity Market Reform is false since better terms are likely to be offered to nuclear developers compared to developers of renewable energy. In particular the Government is likely to award contracts giving nuclear power developers premium price support (subsidies) for much longer periods compared to contracts to be offered to renewable energy developers. Indeed if the demands posed by EDF are met not only will nuclear power developers be given premium price (subsidy) support for more than twice as long as renewable energy developers, but they will also be paid considerably more in ‘headline’ strike prices than onshore wind and they will also be offered loan guarantees which will not be available to renewable energy developers. A Government offer of loan guarantees, whether initially agreed as ‘partial’ or complete, as suggested by the DECC Select Committee, will lead to a blank cheque for nuclear which will crowd out funds for renewables which are much more cost-competitive in practice.
The Government appears to be gearing up to justify giving preferential treatment to nuclear power compared to renewable by pointing to a distinction between ‘baseload’ and ‘intermittent’ low carbon generators. This distinction is irrelevant and arbitrary for the purposes of giving subsidies, and moreover represents an about turn in the policy compared to that given when EMR was introduced at the end of 2010. Then it was argued that novel technologies like offshore wind could receive higher support, not nuclear power which is not a novel technology. This policy change seems to have no other plausible explanation other than nuclear power turning out to be more expensive in reality than was expected according to hopeful projections by nuclear advocates.
Any policy of giving preferential support to nuclear power compared to renewable sources such as wind power is contrary not only to the principles underlying competitive energy markets but is in flagrant breach of EU state aid rules. The EAC should warn against this and urge that the best disposition of low carbon support to achieve good value for the consumer is towards renewable energy rather than nuclear power.

An 'updated' comment:

Following the Government's Budget Review, the Government is announcing its infrastructure plans.The £300 billion plus infrastructure programme seems to be heavily reliant on energy. The trouble is that not much of it will actually be built given the incentives that I guess will be offered.  I am not worried about the lack of nuclear power stations of course - money should be instead spent on renewables and energy efficiency. The problem is that it won't be! So what will be built on the supply side? Well there will be some incentives for shale gas, gas powered fired stations (in the capacity mechanism to be set up after the Energy Bill is adopted), just-about-adequate funding of onshore wind power, but probably there will be few offshore wind power projects going ahead with the incentives to be offered under the 'strike prices' for contracts-for-differnces (CfDs).  Some solar power will be implemented because of grass roots enthusiasts. But there will be no nuclear power. There are not enough enthusiasts for that and the nuclear industry is essentially waiting for a state-backed blank cheque to pay whatever construction costs are built up. That is incompatible with liberalised electricity markets. The Conservatives like nuclear power, but when it conflicts with the aims of liberalising markets, liberalisation takes precedence.

Renewable generators to be short-changed though use of inflation price index

The Government has effectively decided to slash the value of prices paid to renewable energy generators purely through the adjustments made for inflation. As a result by the end of the contracts for a particular project the prices paid to generators will be around 10 per cent less than current arrangements purely because of a deficient level of inflation adjustment.

Under the Renewables Obligation (RO), the value of the 'renewable obligation certificates' (ROCs) are uprated using the Retail Price Index (RPI). But now the  'strike prices' for the contracts for differences (CfDs) will be uprated using the 'Consumer Price Index' (CPI). This change has been increasingly used by the Government as a wheeze to effectively reduce the real value of welfare payments in the future. However, now it is being applied to renewable energy. It is all very well saying that incentives should decline for a developing technology in the future '(degression)', but the problem here is that the prices paid to particular projects will decline over the lifetime of particular projects using the same piece of equipment. This will mean that an investor in a given renewable project will get a lower rate of return compared to an investor in a fossil fuel power plant. That is because the fossil fuel power plants income stream is much more likely to be typical of the RPI rather than the CPI.

To understand this you have to know about the crucial difference in calculating RPI versus CPI. Often this is passed off through the fact that CPI uses a narrower basket of goods (which is relevant to some extent of course), but the key difference is that CPI just accumulates average increases in inflation rather than calculate how prices really change though being influenced by the increases in inflation in previous years. The CPI is calculated through using an arithmetic mean whereas the RPI is calculated using a geometric mean. Inflation increases geometrically, not arithmetically.The impact of this is that as time goes on there is an increasing deviation between CPI and RPI.

In short, the prices paid to a renewable energy generator after 15 years will be roughly ten per cent less under the CPI rather than the RPI. For more detail on these differences, see explanation on impact on investments and charts on

http://www.investopedia.com/ask/answers/06/geometricmean.asp


http://en.wikipedia.org/wiki/File:UKinflation.png

As discussed in the previous blog, inflation indexing has been trumpeted by spokespersons for the nuclear industry as some sort of breakthough for them. It is not at all. Indeed, for the renewable energy industry it represents a significant setback and a reduction in incentives compared to the Renewables Obligation. It is accepted that under a feed-in tariff system (even the Government's contorted version of a feed-in tariff) prices paid to generators will be lower than under a certificate system since the feed-in tariff offers greater certainty over income streams to investors. However, on top of this, investors will now be short changed because inflation in the real world will increase faster than the output of the method used to calculate it. It is another boost to gas power stations, natural gas imports and shale gas!

Will EDF get an inflation-proofed deal? Renewable generators are watching!

Will EDF get an inflation proofed deal for subsidies for Hinkley C? Renewable energy generators will be watching this closely.

The EDF public relations team continues to pump out a lot of hopeful press briefings about prospects for Hinkley C. Stories appear in newspapers from unattributed sources about how a deal acceptable to EDF is about to be brokered with the Government. In fact such a deal seems to be highly unlikely, or at least one that meets EDF's demands for close to a 40 year contract, close to £100 per MWh guaranteed payments and, crucially, underwriting of construction costs (the blank cheque option). Nevertheless the publicity machine roles on in an effort to preserve the jobs of people most associated with the notion of new nuclear construction for as long as possible. It is a bit like the story of neanderthals clinging on to life in obscure corners of Europe, although that may do an injustice to neanderthals who were probably quite intelligent and unlikely to recognise nuclear power as an intelligent energy choice for the future. The EDF machine seems to be aided by unidentified insiders to government who are probably well beyond the control of the Secretary of State for Energy and Climate Change, Ed Davey, himself.

Certainly the news even coming directly from the Minister of State for Energy, Michael Fallon, does not give much credence to the best efforts of the EDF publicity machine. He says that the Government and EDF are still at odds on five or six points.

See
http://www.telegraph.co.uk/finance/newsbysector/energy/10104713/EDF-doesnt-have-us-over-a-barrel-in-Hinkley-nuclear-talks-says-Michael-Fallon.html

So what are these five or six points? I can see that the Government will be at odds over the strike price, which is the amount per MWh that a generator will be guaranteed to be paid over a defined contract period. EDF want a lot more than the Government is prepared to give. The Government would suffer political embarrassment, severe questioning, and difficulties in getting EU state aid approval if it gives EDF a higher strike price compared to onshore wind power.

EDF also want a lot longer contract than the Government is prepared to give. Indeed the Government is, it seems, already committed to giving EDF a 25 year contract whereas onshore wind will only get 15 year contracts. How do you square that one with EU state aid rules? Well, blow me on that one!  But that is not enough for EDF who want 35-40 year contracts. On top of all of this this, EDF want not just their income per MWh guaranteed, but also construction costs guaranteed by Government(this is a really big deal - it means government offering EDF a blank cheque in all but name). Well that is three, so there's more?

 Well one item that I believe that EDF wants is to be indemnified against future legislation improving safety or security at nuclear sites, from which EDF have suffered recently from the French Government operating in a post-Fukushima mode. But that is a pretty impossible demand since one Parliament cannot bind another and trying to write this into a legal agreement which can be translated into costs would, to say the least, keep some highly paid lawyers, well, highly paid for quite a long time. A fifth issue is that of inflation indexing the strike prices in the 'contracts for difference' (CfDs). Now that is a more serious issue for renewable as well as nuclear power generators since feed-in tariffs on the continent usually have some form of inflation adjustment. Without it the 'opportunity cost' of making investments into low carbon generation increases, and makes them less viable.
EDF spokespersons appear to hold out hope for concessions on this issue of inflation indexation. See:

http://uk.reuters.com/article/2013/06/18/britain-nuclear-inflation-idUKL5N0EU37Y20130618?rpc=401&feedType=RSS&feedName=economicIndicatorsNews&rpc=401

Representatives of the renewable energy industry will be (at least privately) hoping for a concession here as well, since it helps improve their position. Of course this goes for the vital issue of the level of 'strike price' that the Government will set, and that they have said will be announced in July (next month). A key reason why the Government does not want to give in the EDF's demands is that they will be under very heavy pressure to give the same terms to renewable energy sources. EDF do not want to mention, and the Government themselves will be keen to draw attention away from the fact that inevitably nuclear power will be given better terms than onshore wind, even though EDF's demands are still a long way from being met. EDF, of course, try to draw comparisons away from onshore wind and towards offshore wind. Yet even here the reality is that EDF want much higher subsidies to be committed to their nuclear plant than are ever likely to be committed to the same amount of electricity generated from offshore wind.

In order to give an idea of the negotiating positions, see Tables 1, 2 and 3.

Table 1: Treasury negotiating position

technology	Strike price	Contract length	Underwriting costs	Total cumulative  £ subsidy per MWh over contract length(assuming wholesale power price of £50 per MWh)
Nuclear power	80	25	No	750
Onshore wind	80	15	No	450
Offshore wind	100	15	No	750

 

 

Table 2 If EDF’s demands are met......

technology	Strike price	Contract length	Underwriting costs	Total cumulative  £ subsidy per MWh over contract length(assuming wholesale power price of £50 per MWh)
Nuclear power	95	35	Yes	1575 PLUS costs ‘underwriting’ bonus
Onshore wind	80	15	No	450
Offshore wind	100	15	No	750

 

Table 3: Parity between nuclear and offshore wind: if EDF’s demands are met......

technology	Strike price (£/MWh)	Contract length	Underwriting costs	Total cumulative  £ subsidy per MWh over contract length(assuming wholesale power price of £50 per MWh)
Nuclear power	95	35	Yes	1575 PLUS costs ‘underwriting’ bonus
Onshore wind	80	15	No	450
Offshore wind	155	15	Yes	1575 PLUS ‘underwriting bonus

In Table 1 above I have assumed that the Treasury is holding to the Government aspiration of reducing offshore wind costs to £100 per MWh by 2020. If the figures in Table 1 hold then there will certainly be no nuclear power stations built, but also no offshore wind either. However, the onshore wind programme will continue more or less as it is at the moment, providing there is 'inflation indexing' of the CfD strike prices.

Table 3 illustrates what would happen if offshore wind was given parity with the subsidies that EDF wants. In fact, offshore wind, especially if its costs were underwritten, would not need as higher strike price as this, illustrating what some of us have known already - that offshore wind is in fact a cheaper option compared to nuclear power. Nuclear power supporters may attempt to argue against this notion by saying that nuclear power stations last for a much longer time than offshore windfarms. This argument is itself suspect on two grounds. First it undercuts the claim made by nuclear supporters that the current fleet of nuclear power stations is retiring and that therefore we 'need' to replace them. Secondly, offshore wind infrastructure, which will amount to around half their total costs, will last a lot longer than 15 years. Indeed the windfarms could be re-bladed for much reduced costs (compared to the original installation). By contrast, energy consumers would be 'locked' in to paying high subsidies for a very long period for nuclear power when much cheaper resources would most likely be available from renewable energy sources with falling prices.

I have heard it said that DECC and the Treasury are engaged in a battle to pin the blame for the failure of the nuclear new build programme. Certainly a lot of people have an interest in prolonging the notion that new nuclear power is coming. However, just as in the Samuel Beckett play characters wait (in vain) for 'Godot' to arrive, the nuclear hopefuls will be waiting in vain. But they seem to feel that they cannot admit to the failure of their enterprise since this questions their very existence as members of a nuclear industry that is going nowhere.

The real Yeo scandal - his Committee's promotion of nuclear above renewables

With newspaper stories circulating about Tim Yeo MP's alleged dalliances with various lobbyists (biomass and a fake solar company have been mentioned) you'd think Tim Yeo spent most of his time promoting renewable energy. The reality is that the influential Committee he chairs, the Select Committee on Energy and Climate Change (DECC), has been busy pumping out faithful pro-nuclear propaganda which favours, in effect, nuclear power being given a blank cheque for construction costs from the Government. Previous blog posts have detailed how the Committee favours the Treasury offering 'loan guarantees' to nuclear power (presumably on the basis of 35-40 year contracts) whilst renewable energy has to make do with 15 year contracts and no loan guarantees. Nuclear loan guarantees and underwriting of nuclear construction risk. That is the language spoken by the Committee which Tim Yeo leads.


All of this contrasts sharply with the rather considered way in which the Committee has deliberated renewable energy issues. They want measured, reasonable support of course, which ends up being pretty  cautious in some crucial respects. But, revealingly, there is no mention of giving blank cheques or underwriting construction risk of offshore wind power or solar power, or energy efficiency. Even in the case of marine renewables (technologies which most deserve some underwriting of construction risk) energy sources like tidal stream and wave power are not the subject of a demand from the Committee for underwriting. Why not? Well, this year the Committee clearly has a priority of bailing out nuclear power's sagging fortunes in the face of the Government’s proposals for Electricity Market Reform. Is giving nuclear virtually unlimited state subsidies more important than any new energy technology? The DECC Select Committee seems to think so.



Maybe the newspapers ought to do some investigating of how it is that the nuclear industry has such a stranglehold over the output of the DECC Select Committee.



You can see the blatant piece of pro-nuclear pleading on



http://www.parliament.uk/business/committees/committees-a-z/commons-select/energy-and-climate-change-committee/news/building-new-nuclear-the-challenges-ahead/



You can see the Committee's report on marine renewables published last year.



http://www.publications.parliament.uk/pa/cm201012/cmselect/cmenergy/1624/1624.pdf

Why the EU is being hypocritical about wine dumping and solar protectionism

China's case against EU subsidies on wine seems much more firmly based than the EU's case against Chinese imports of solar panels. That does not justify the protectionism imposed by the EU or threatened by China of course, but it does shine a light on the EU's hypocrisy in its claims to support both environmental protection and free trade.

The EU pours massive quantities of subsidies into agriculture, which of course supports agricultural exports to the rest of the world. Such subsidies impoverish poor third world farmers who are not only frozen out of EU markets but also see the prices they can be paid for crops sold on their home markets depressed as heavily subsidised and often wastefully produced EU food products are dumped on world markets.

The EU spends around 40 per cent of its budget on EU food subsidies (around 20 billion euros), including over 1 billion euros a year on wine production, mainly to France Italy and Spain. This will help export wine to China.

The EU's food subsidies result in massive environmental distortions. Doubtless wine could be produced with less energy and chemical input in many places around the world apart from the EU, just as is the case with other food products. For example, massive amounts of sugar and rice are produced in the EU despite the fact that the longer growing seasons and more sunlight (yes, solar power!) mean that sugar and rice is produced in the EU with much larger amounts of non-renewable, fossil fuel, and damaging chemical inputs compared to most parts of the tropics. The EU has, of late, tried to mask these distortions by moving to a system of paying farmers 'direct payments' rather than linking it to production, but this is little more than a facade for continuing to pay inefficient farming in the EU that destroys third world farmer living standards and increases fossil fuel use.

All in all the EU subsidy policy is a significant boost to global warming. Its agricultural subsidies boost inefficient, energy wasteful, production of food, and its tariffs on solar panels reduce the numbers of solar panels installed!

Those arguing for EU (and US) solar protectionism have surprisingly little evidence for their argument that the Chinese are subsidising solar panels. It seems their strongest argument is that the Chinese are 'rationalising' production by creating larger companies to produce solar panels. See

http://www.americansolarmanufacturing.org/

Well, the creation of longer production lines for solar power is precisely what is needed to bring down costs. This hardly compares to the very direct subsidies that the EU commits to support its environmentally damaging agricultural sector.

For details of EU wine subsidies see:

http://www.just-drinks.com/analysis/just-the-facts-wine-subsidies-in-the-eu_id105207.aspx

and.......

http://www-958.ibm.com/software/data/cognos/manyeyes/datasets/wine-subsidies-under-eu-cap-in-mil/versions/1

SUPPORT THE CAMPAIGN AGAINST EU TARIFFS ON CHINESE SOLAR PANELS. Go to http://afase.org/en