Ed Davey's excuse for limiting wind power contracts to 15 years whilst Hinkley C gets a whopping 35 year contract is blown away by some elementary history checking. Lots of wind turbines in Altamont Pass - installed during the so-called Californian 'windrush' - are still turning after 31 years. Davey claims that the contracts he has awarded are in proportion to the technologies' design life expectancy. Yet the Altamont turbines will be turning until 2015, a 33 year lifetime, and only then taken down because of a repowering exercise, and also modern planning conditions which they did not have back in 1982. See http://www.sustainablebusiness.com/index.cfm/go/news.display/id/23757. I am given to understand by a leading authority on the subject that it is likely that quite a few machines built in the early 1980s are expected to carry on running past 2015....
Certainly one can expect modern wind turbines to last a lot longer than these efforts right at the start of the modern windmill era.
So using the Davey formula (about 60 per cent of lifetime as a contract length), using even 33 years as an example, wind power should get a 20 year contracts, not 15. But if this happened, the 'strike price' for wind (£95 per MWh at year 2018) would be reduced below that set for Hinkley C.This would breed trouble as the UK Government tries to claim that they are giving the same incentives to renewables as nuclear to pass through the EU's state-aid regulations (see previous blog post). (Note added in September 2014: Since this was written, payments for onshore wind have been reduced to £90 per MWh (or less) from 2018, making the Hinkley C settlement look even more lop-sided towards nuclear power).
The fact is that wind turbines are much easier to replace than nuclear power stations means that their lifetime, tower for tower, will normally not last as long. In fact nuclear power stations are retrofitted over the years and in reality the oldest nuclear power stations still running (40-44 years) will have had much of their mechanics replaced over the years. So the comparisons being made do not mean very much - except as an excuse for a political conjuring trick to fool the European Commission.
Then there is the loan guarantee for Hinkley C, all £10 billion of it, that constitutes 65 per cent of the capital cost of the 3.2GW development. If wind power got such guarantees, their costs could be reduced much further as well, since the borrowing costs would be a lot less. Indeed borrowing costs could be reduced by at least 2 per cent - which makes a big difference to the economics of wind power.
I have calculated what the effects of these two changes - increasing the contract length from 15 years to 20 years, and giving loan guarantees for 65 per cent of the capital costs. The result is that if this was applied to windpower then a strike price of £75 would be the equivalent of the £95 per MWh the Government is offering wind power from 2018. This figure is considerably less than what the Government is giving to Hinkley C.
When the comparisons are done with Germany, the story is even starker. In Germany investment costs are very cheap compared to the UK because of arrangements with local banks, underwriting from wind generator manufacturers, high debt-to equity rations, and the schemes do not have to subsidise the utilities like they do in the UK. So, incredibly, although average windspeeds are much lower in Germany (and average capacity factors are much lower than the UK), wind still comes out as being much cheaper in Germany. Feed-in tariff rates for solar pv have also now fallen well below the rate the Government has set for Hinkley C. Indeed, the German feed-in tariff system as a whole gives out far less money since feed-in tariff rates decline during the project length and they are not uprated with inflation as compared to the UK.
See the comparison graph at http://www.renewablesinternational.net/cost-of-new-nuclear-and-new-renewables/150/537/74119/. This was prepared by Thomas Gerke of Agora Energy. As Renewables International who discuss the study comment: 'Clearly, the rates that will be offered for new nuclear by 2023 in the UK are far above what solar + wind currently cost – and the rates for solar + wind will go down by then, not up!'
By comparison with this, Hinkley C will deliver bigger and bigger profits to its investors as time goes on with a contract of such length as 35 years. This is because, as time goes on, interest charges and bank loan repayments are reduced by inflation, whilst the Hinkley C revenues are partly uprated in line with inflation (using CPI).The deal has been slammed by investment analysts for this reason. See:
http://www.theguardian.com/environment/2013/oct/30/hinkley-point-nuclear-power-plant-uk-government-edf-underwrite
All in all, the Government's reduction in the contract length for renewables and its offer of a £10 billion loan guarantee for Hinkley C with a 35 year year contract represent a piece of political gerrymandering to try and squeeze a camel through the needle of the EU state aid regulations.
Wednesday, 30 October 2013
Sunday, 27 October 2013
Hinkley C to be paid more than twice as much as German solar pv arrays
Looming large over the UK Government's EU state aid application for Hinkley C is the charge that this deal will distort the EU's internal market, in particular to undercut solar pv arrays in Germany over 10 MW in size. Such arrays are no longer eligible to receive premium prices under the German feed-in tariff system. Such plant will only receive the wholesale electricity price, which is less than half the rates to be paid to Hinkley C.
Even the German feed-in rates for smaller solar pv arrays have been reduced to well below the contract price being offered to EDF etc in the UK (see link at the bottom of this post). In addition, even in the UK the value of the incentives for British community wind power are in practice much lower than what is being offered to Hinkley C. See previous post on http://realfeed-intariffs.blogspot.co.uk/2013/10/give-community-wind-power-same-emr.html
The fact that the Hinkley C deal distorts the EU's internal market to give a state aid to nuclear power that is not available to renewable energy directly flies in the face of the EU's state aid regulations. Under these rules it is permissable to give premium price incentives to renewable energy, subject to clearance by the EU Commission that they have been applied according to the correct procedure. However, state aid for non-renewable energy, while not necessarily illegal under EU rules, has to be the subject of a special application. The issue that arises here is that the UK Government, in effect, is wanting to give priority state aid in the EU electricity market to a fuel which has no exemption over and above a fuel which does have an exemption.
There has been disquiet among the EU about the distorting effect of feed-in tariffs for renewables themselves. See http://realfeed-intariffs.blogspot.co.uk/2013/01/european-commission-threatens-feed-in.html
But at least these renewable energy feed-in tariffs are in keeping with EU state aid law, which is more than can be said for the Hinkley C proposal.
The issue of maintaining competition rules for the internal market is a serious one since a major priority of EU energy policy is to increase the possibilities for cross border trading in electricity. Pursuant to the EU's 'third' internal energy market package, since 2009 a body called the European Network of Transmission System Operators - Electricity (ENTSO-E) has been established under EU law. It is working with the Commission and industry stakeholders to develop a pan-EU electricity trading model and ensconce this in regulations. A key reason for this is to improve the prospects for trading the increased cross border electricity flows that are associated with a build up in variable renewable electricity.
The UK is going to be increasing trade in electricity along with the others, with increased electricity interconnector capacity helping this. But what is going to be happening now? British policy will be giving a state-aided competitive advantage to nuclear power in this cross border trade over and above renewable energy. This threatens to directly contradict EU competition and internal market policy and law.
This issue will be a prominent factor in the European Commission's investigations in the UK Government's application for state aid for Hinkley C (for which it has recently notified the Commission). Renewable generators across the EU will be pointing out how the UK policy may be contravening EU law. Analysts will remember that it took a case at the European Court of Justice (ECJ) to establish the right of the German state to give premium prices to renewable energy. What would the ECJ say about a case where nuclear power was being given priority premiums in the EU electricity market against renewable energy? I can see no basis in law for this, as discussed above.
The British Government has its plans that the Hinkley C state aid consent will be given by the Commission in a year's time. Well, nuclear interests may control the British Government so that they can plan how they like, but they do not have quite the same leverage at the EU level. The EU Commission has already rejected an attempt by the UK Government to get EU state aid rules changed to allow state aid for nuclear to be included on the same basis as renewables. Added to this of course are the politics. David Cameron's Government loves regailing the Commission with talk of incompetence, waste etc, so he can expect to have no particular favour on this issue. The British Government may be lucky to obtain state-aid approval for the Hinkley C deal in just a year!
See some details on feed-in tariff rates in Germany and the UK:
http://www.renewablesinternational.net/new-solar-fits-in-germany-and-uk/150/510/71782/
In the UK solar arrays of this size will continue to be eligible for the Renewables Obligation and the so-called feed-in tariff under Electricity Market Reform. Except of course that under EMR the 'feed-in tariff' is only accessible to the major electricity companies, and, as things look at the time being at least, independent generators will only be offered power purchase contracts by the 'Big Six' electricity companies on the basis of them taking a significant 'cut' of the 'feed-in tariff' income stream . This is the opposite of the German system where wind, solar, biomass and hydro generators have direct access to the feed-in tariff, which was originally introduced precisely to give the independent generators freedom from reliance on the utilities.
See some discussion of German wholesale electricity prices at:
http://www.carbonbrief.org/blog/2013/07/the-energiewende-and-energy-prices-public-support-and-germany%E2%80%99s-long-term-vision/
Even the German feed-in rates for smaller solar pv arrays have been reduced to well below the contract price being offered to EDF etc in the UK (see link at the bottom of this post). In addition, even in the UK the value of the incentives for British community wind power are in practice much lower than what is being offered to Hinkley C. See previous post on http://realfeed-intariffs.blogspot.co.uk/2013/10/give-community-wind-power-same-emr.html
The fact that the Hinkley C deal distorts the EU's internal market to give a state aid to nuclear power that is not available to renewable energy directly flies in the face of the EU's state aid regulations. Under these rules it is permissable to give premium price incentives to renewable energy, subject to clearance by the EU Commission that they have been applied according to the correct procedure. However, state aid for non-renewable energy, while not necessarily illegal under EU rules, has to be the subject of a special application. The issue that arises here is that the UK Government, in effect, is wanting to give priority state aid in the EU electricity market to a fuel which has no exemption over and above a fuel which does have an exemption.
There has been disquiet among the EU about the distorting effect of feed-in tariffs for renewables themselves. See http://realfeed-intariffs.blogspot.co.uk/2013/01/european-commission-threatens-feed-in.html
But at least these renewable energy feed-in tariffs are in keeping with EU state aid law, which is more than can be said for the Hinkley C proposal.
The issue of maintaining competition rules for the internal market is a serious one since a major priority of EU energy policy is to increase the possibilities for cross border trading in electricity. Pursuant to the EU's 'third' internal energy market package, since 2009 a body called the European Network of Transmission System Operators - Electricity (ENTSO-E) has been established under EU law. It is working with the Commission and industry stakeholders to develop a pan-EU electricity trading model and ensconce this in regulations. A key reason for this is to improve the prospects for trading the increased cross border electricity flows that are associated with a build up in variable renewable electricity.
The UK is going to be increasing trade in electricity along with the others, with increased electricity interconnector capacity helping this. But what is going to be happening now? British policy will be giving a state-aided competitive advantage to nuclear power in this cross border trade over and above renewable energy. This threatens to directly contradict EU competition and internal market policy and law.
This issue will be a prominent factor in the European Commission's investigations in the UK Government's application for state aid for Hinkley C (for which it has recently notified the Commission). Renewable generators across the EU will be pointing out how the UK policy may be contravening EU law. Analysts will remember that it took a case at the European Court of Justice (ECJ) to establish the right of the German state to give premium prices to renewable energy. What would the ECJ say about a case where nuclear power was being given priority premiums in the EU electricity market against renewable energy? I can see no basis in law for this, as discussed above.
The British Government has its plans that the Hinkley C state aid consent will be given by the Commission in a year's time. Well, nuclear interests may control the British Government so that they can plan how they like, but they do not have quite the same leverage at the EU level. The EU Commission has already rejected an attempt by the UK Government to get EU state aid rules changed to allow state aid for nuclear to be included on the same basis as renewables. Added to this of course are the politics. David Cameron's Government loves regailing the Commission with talk of incompetence, waste etc, so he can expect to have no particular favour on this issue. The British Government may be lucky to obtain state-aid approval for the Hinkley C deal in just a year!
See some details on feed-in tariff rates in Germany and the UK:
http://www.renewablesinternational.net/new-solar-fits-in-germany-and-uk/150/510/71782/
In the UK solar arrays of this size will continue to be eligible for the Renewables Obligation and the so-called feed-in tariff under Electricity Market Reform. Except of course that under EMR the 'feed-in tariff' is only accessible to the major electricity companies, and, as things look at the time being at least, independent generators will only be offered power purchase contracts by the 'Big Six' electricity companies on the basis of them taking a significant 'cut' of the 'feed-in tariff' income stream . This is the opposite of the German system where wind, solar, biomass and hydro generators have direct access to the feed-in tariff, which was originally introduced precisely to give the independent generators freedom from reliance on the utilities.
See some discussion of German wholesale electricity prices at:
http://www.carbonbrief.org/blog/2013/07/the-energiewende-and-energy-prices-public-support-and-germany%E2%80%99s-long-term-vision/
Tuesday, 22 October 2013
Give community wind power the same EMR terms as Hinkley C!
EDF etc have been offered terms for constructing Hinkley C which are much superior to the terms being currently offered, under the terms of Electricity Market Reform (EMR), to community wind power schemes (and also, in crucial ways, all renewables). Hinkley C is getting £92.5 per MWh for 35 years with 65 per cent of its capital costs 'underwritten' by loans which will be guaranteed by the Treasury.
From 2018 onshore wind is being offered, under EMR, a 'headline' strike price of £95 per MWh, but only for 15 years and without any loan guarantees. Remember that independent generators will, in reality be paid a lot less than than £95 per MWh, perhaps little more than around £80 per MWh, since the contracts for differences (CfD) feed-in tariffs are available only to major electricity companies. The Big utilites (in effect the Big Six) will cream off this sort of difference between these two figures. So £92.5 per MWh over at least a 20 year contract with 65 per cent of their costs raised through Treasury guaranteed (and therefore low interest) loans would be a very good boost for community wind power schemes - that is if such power purchase agreements (PPAs) were directly available to such schemes.
The Government has talked about extending the size of the schemes which qualify under the small feed-in tariff from 5MW to 10 MW. However this makes little difference as the rates payable under the small feed-in tariff are very low for anything larger than a few hundred KW. A 2 MW project, for example, would receive less than £60 per MWh.
In addition to offering Hinkley C type terms to community wind schemes, other types of renewable energy schemes could do with having much longer power purchase agreements and access to Treasury loan guarantees. Indeed the length of the PPAs for renewables in general has been cut from 20 years under the Renewables Obligation to 15 years under EMR. Tidal and wave and offshore wind schemes would benefit greatly from having access to Treasury loan guarantees. Offshore wind schemes could benefit greatly from having 35 year contracts as much of their infrastructure would last for that long. Why not give all renewables PPAs of at least 20 years and give them access to at least £10 billion worth of Treasury-backed loan guarantees? Why not give struggling solar pv companies some Treasury backed loans?
If you factor in all of the issues discussed, then community wind is much cheaper than power from Hinkley C. If it had direct access to feed-in tariff contracts, a 20 year contract and 65 per cent loan guarantees then it could put on just as economically viable schemes for around £70 per MWh - which is about a quarter cheaper than Hinkley C.
The Government say that they will not give 20 or 25 year contracts to wind because the contract lengths are being given out in 'proportion' to the life expectancy of the power plant. They say nuclear will last 60 years, and hence will get a contract to last 35 years. In which case, then, what is all this nonsense about having to replace nuclear power stations that are about to retire? If they last 60 years, then the first of the major existing nuclear power stations (AGRs) will not retire until 2036. So why do we need a programme to replace them at all?
To recap how you can work out what community wind loses from the 'headline' wind strike price of £95 per MWh set for 2018 com pared to the terms offered to Hinkley C:
around £15 per MWh lost to major electricity companies in 'top sliced' contracts
Around £7 per MWh lost is having a 15 rather than a 20 year contract
Another £3-5 per MWh lost through having to pay higher interest rates.
Of course offshore wind schemes, which are seen as being a bit more riskier than onshore schemes would benefit much more greatly from having Treasury loan guarantees - their cost could be reduced by £10 per MWh, in addition to having costs reduced by access to 35 year contracts. Tidal and wave projects need Treasury backed loans as a virtual necessity because the technologies are still seen to be too innovative to receive conventional bank loans.
If you factor in all of the issues discussed, then community wind is much cheaper than power from Hinkley C. If it had direct access to feed-in tariff contracts, a 20 year contract and 65 per cent loan guarantees then it could put on just as economically viable schemes for around £70 per MWh - which is about a quarter cheaper than Hinkley C.
The Government say that they will not give 20 or 25 year contracts to wind because the contract lengths are being given out in 'proportion' to the life expectancy of the power plant. They say nuclear will last 60 years, and hence will get a contract to last 35 years. In which case, then, what is all this nonsense about having to replace nuclear power stations that are about to retire? If they last 60 years, then the first of the major existing nuclear power stations (AGRs) will not retire until 2036. So why do we need a programme to replace them at all?
To recap how you can work out what community wind loses from the 'headline' wind strike price of £95 per MWh set for 2018 com pared to the terms offered to Hinkley C:
around £15 per MWh lost to major electricity companies in 'top sliced' contracts
Around £7 per MWh lost is having a 15 rather than a 20 year contract
Another £3-5 per MWh lost through having to pay higher interest rates.
Of course offshore wind schemes, which are seen as being a bit more riskier than onshore schemes would benefit much more greatly from having Treasury loan guarantees - their cost could be reduced by £10 per MWh, in addition to having costs reduced by access to 35 year contracts. Tidal and wave projects need Treasury backed loans as a virtual necessity because the technologies are still seen to be too innovative to receive conventional bank loans.
Thursday, 17 October 2013
Hinkley C: A Secret blank cheque is in the post (update)
Update - well, I wrote this under the expectation that the Government would soon formally agree a contract with EDF, they would go ahead, and later on EDF would come back for more money as the project exceeded its budget with the usual construction delays.
But as Mark Johnson has kept reminding us, the contract has never been signed. It is just a proposal, and a proposal which even if issued would only partially underwrite the deal. Perhaps this is not enough for EDF and their Chinese allies. Certainly it appears that the Chinese interests want some government to underwrite the deal, whether it be the French or British Government - to issue a water-tight bank cheque. But the Treasury is saying at least that they don't want this. But what is the case is that there is a widespread belief that this is a project that should not go ahead even among many nuclear supporters. So, as yet no blank cheque has actually been received by EDF for Hinkley C!
But, here's the bad news - Labour think tank IPPR and, it seems, the Labour Energy Team now want to offer them a blank cheque for real! See my June 2015 posting 'Pressure Grows for blank cheque for Hinkley C'
This is the version I wrote in 2013:
The Government's hoo-hah over the Hinkley C nuclear deal hides what should be regarded as a decision by the British state - after denying it for years - to give a blank cheque for the power plant. In that sense, the headline price, whether £90 or £93 per MWh over 35-40 years does not really mean very much. All it means is that the owners of the power plant will get the returns they want (provided the plant actually works) no matter how much the plant actually costs or how long it takes to build and how much interest charge is racked up in the process. The state will take the losses, and given the history of nuclear power, this is all but assured. Never mind the fact that all of the competitor renewable energy plant have to take and pay for their own risks, nuclear is to be given a special, state-bankrolled place in the firmament, with a price tag attached as a bit of window-dressing. The cost of Hinkley C, when calculated on the same basis as other generation technologies, is more like £150 per MWh or higher, depending on the assumed contract length.
The consumer is now to be locked in to a deal which will shut out what are now, and what will assuredly be even more so in the decades to come, much cheaper alternatives, and be committed to pay extra for the near certainty of extra costs in future years on top of the declared 'strike price' of £90 or so per MWh. That is a key thing to remember. The fact that this deal breaks the key Government commitments to financial competitiveness and previous refusal to 'underwrite' nuclear costs is interesting, but secondary to this point. We are to be kept in the dark about the extent of the Government's commitments to EDF in this deal. The details will leak out in the years to come, of course, and people will ask, how can this happen? How indeed! Not only will we witness in the unfolding years the very high probability of the usual nuclear saga of cost overruns, lengthening construction schedules, and blaming of this Government by future Governments, but once again the state will have paid heavily for this technology not just as it is being built, but ultimately to dismember it and take care of its nuclear waste products for decades and centuries to come.
I have observed in the past that Hinkley C would not be built without a blank cheque - indeed I assumed that since the Government kept denying that it would agree to this, the natural assumption was that Hinkley C would not be built. But now it seems the pass has been well and truly sold. All that remains now is for us to wait for the European Commission to take its time to approve the deal, and then the tragic comedy show of what could well be one of the last (if not the last) nuclear power station(s) built in the West will begin.
There is a lot of coverage of this, but of course, see
http://www.telegraph.co.uk/finance/newsbysector/energy/10384745/Chinese-companies-to-buy-big-stake-in-next-generation-of-British-nuclear-power.html
and of course the key passage:
'Treasury negotiators are said to have made concessions on power prices, profit sharing and construction guarantees to achieve a breakthrough in talks that have teetered on the brink of collapse'
Thursday, 10 October 2013
Does the deal with EDF mean the Government is handing EDF a blank cheque now?
There are reports in today’s Times of a deal between
Government and EDF involving a strike price of £93 per MWh over 40 years for the Hinkley C project. This
obviously involves an enormous public commitment, but how enormous is this? The
terms matter very much, including,
1. What
agreement is there about ‘underwriting’ the construction risk of the Hinkley C
project
2. What
are the terms of the £10 billion guaranteed loan
3. Is
this strike price to be 'inflation' uprated in line with CPI or RPI? (the renewable
incentives are being uprated in line with the inferior CPI)
4. Are
there any provisions for altering the ‘strike’ price in future in an upwards
direction?
5. Is it
not the case that the ‘deal’ will allow EDF to part-complete Hinkley C having
overrun costs and exhaust the £10 billion Treasury loan and then demand more
money from the taxpayer/electricity consumer to complete the project?
The prospect of a public underwriting of £10 billion loan
guarantee could potentially mean that the nuclear power station could be
part-built, that the project costs could overrun, and that the taxpayer would then
have to come up with even more funds to complete the project under a further funding regime, much as what happened with Sizewell B.
That is what could happen if EDF gets what could well be (depending on the detail) a blank cheque for the project. The question is will we get to know about the extent of our commitments, or will we, as usual with nuclear power, only find out some of the extent much later on? Remember, just before the 2010 election the Conservatives said that they would not agree to the costs of nuclear power being underwritten by the Government.
What is certain is that when all added together, the costs of getting energy by paying for electricity from Hinkley C are more than what it would cost people to get the same amount of electricity from renewable energy sources such as wind power and solar power, not to mention various energy efficiency possibilities.
Wednesday, 9 October 2013
Why the Government's planned renewables programme is mostly fantasy
Publicists at DECC and the Treasury deserve credit for convincing people that renewable energy will continue to build up at much the same rate as at present, because close inspection of the plans reveals that behind the smoke and mirrors the incentives for renewable energy planned under Electricity Market Reform (EMR) are being severely cut back. Indeed the Government plans really do deserve the description of fantasy since the public debate about the alleged impact of so-called renewable 'subsidies' on energy prices has very little real connection to what Government policies will actually produce.
The bulk of the incentives that are alleged to help new 'green energy' will be bound up with the 'carbon floor price' mechanism, which, since it is really a carbon tax, will serve as a revenue raising device for the Treasury and a cash cow for EDF's old nuclear power stations, but will have no discernable impact on developing new renewable energy schemes. The rest of the incentives will only be spent at a low level since they are set at such a puny level that little development will take place. The Government's 'green deal' for energy efficiency is practically a joke (with a miniscule uptake) whilst the incentives for renewable energy will be sharply reduced compared to the incentives currently available under the 'RenewablesObligation' (RO). On top of this the Government continues with a pantomime presentation about how 'community renewable' schemes will be given extra support whilst the reality is that the incentives on offer amount to much less than schemes organised by the Big Six and, incidentally, barely half the headline rate that has been suggested that nuclear power should receive (with nuclear power getting loan guarantees and much longer contracts to boot).
You might ask how the Government is able to get away with this. I wonder too. The renewable trade associations are the obvious candidates to shake the tree about what is happening (or not happening) on the renewables front, but they are probably worried that a more aggressive stance will lead to the disappearance of even the meagre incentives that are already on the table. Certainly some of them are funded through membership subscriptions by companies associated with the Big Six who are anxious to hang on to the excess profits they make from onshore wind power under the Renewables Obligation. They may see it as compensation for losing the income from their power stations that results from having more renewables online. But it is notable that the quiescence of the renewable trade associations stands in contrast to the aggressive and well-resourced campaigns by EDF to push their case for ever-more types of support for the proposal at Hinkley C.
As I commented in the previous blog post, the proposals under EMR will mean that renewable energy subsidies are cut by around 15 per cent under the guise of having more cost-effective contractual arrangements using a feed-in tariff. The headline figures for the incentives are much the same as in the case of the RO, but the terms are very inferior, with less allowance for inflation and the contract length during which the premium prices will be paid reduced from 20 years under the RO to 15 years under EMR.
But as explained in the previous blog post, this will simply mean that the onshore wind developers, who are beholden to the Big Six to get power purchase agreements, will get their income stream reduced by large amounts compared to what happens under the RO. The point is that the RO implicitly gives the Big Six a substantial 'creamed off' incentive to give contracts to supply electricity to the actual renewable developers. The Big Six will still want their cut under EMR, so, in effect, the developers will get their real income stream considerably reduced. This will mean a lot fewer projects going ahead even onshore, and there are unlikely to be many (if any) offshore wind projects going ahead. The Big Six seem to work within tighter margins in the offshore sector, so reductions in support there simply mean that very little development will take place under the incentives available under EMR.
The only way that the feed-in structure could work, for onshore schemes, given the incentive levels offered, would be to offer the contracts directly to the independent renewable developers (including the community projects). But Ed Davey has flagrantly failed to come up with a scheme to do this. Instead he appears to be allowing a system that will continue to allow the Big Six to cream off their excess, unearned, 'economic rent' from the onshore wind sector. The feed-in tariff scheme is effectively only available to the major electricity companies. It amounts to a cruel political joke to compare this contorted so-called feed-in tariff to the German feed-in tariff mechanism scheme when the whole point of the German scheme is to give rights to independent developers rather than the utilities. The ugly British version does the precise opposite! We should call the system something else. I shall call it the 'Big Six Utility tariff'. I encourage all readers to follow suit.
The Government is currently pushing proposals to expand the remit of the small feed-in tariff schemes up from 5 MW to 10 MW, in doing so giving the impression that all is well with community renewable interests. But this is an even worse piece of fantasy than the claim to be funding larger scale renewables. Under the current scheme the rates set for schemes larger than 1.5 MW are so derisory that nobody would ever bother using this mechanism for a project of this size. Extending the remit of the small feed-in tariff scheme is nothing but a smokescreen for a complete failure to incentivise the community renewables sector on a commercial basis.
At the end of this blog post I paste below some links to the tariff structures for pv and non-pv feed-in tariff rates to demonstrate what I mean.
Perhaps the scale of the Government deception is obscured partly because, under the RO, wind power deployment has been booming over the last 2 years. But that fact is itself largely explained by the knowledge among the industry that the good times are coming to and end. EMR will be phased in from next year until 2017, and advance power purchase agreements available for developers are becoming scarce even during the phase-in period. But whereas some renewable energy development has been growing at over 2 GW a year in the recent period, it is difficult to see how development will be more than 500 MW per year after 2014.
We do hear tales of tidal schemes being given planning consent in the Pentland Firth. But there is a lot more fantasy here, because the banks are unwilling to lend to these still innovative projects without loan guarantees. So unless they get the same sort of 'underwriting' loan guarantees that Hinkley C will need to go ahead, none of the substantial wave or tidal schemes will go ahead.
When David Cameron implies that renewable incentives can be cut, far from overstating the case he is actually understating it. The incentives are being cut back drastically, and the Lib Dems are proving to be little more than alibis to provide cover for this reality.
https://www.ofgem.gov.uk/ofgem-publications/58940/fit-tariff-table-1-april-2013-non-pv-only.pdf
https://www.ofgem.gov.uk/publications-and-updates/feed-tariff-scheme-tariff-table-1-october-2013-31-december-2013-pv-only
The bulk of the incentives that are alleged to help new 'green energy' will be bound up with the 'carbon floor price' mechanism, which, since it is really a carbon tax, will serve as a revenue raising device for the Treasury and a cash cow for EDF's old nuclear power stations, but will have no discernable impact on developing new renewable energy schemes. The rest of the incentives will only be spent at a low level since they are set at such a puny level that little development will take place. The Government's 'green deal' for energy efficiency is practically a joke (with a miniscule uptake) whilst the incentives for renewable energy will be sharply reduced compared to the incentives currently available under the 'RenewablesObligation' (RO). On top of this the Government continues with a pantomime presentation about how 'community renewable' schemes will be given extra support whilst the reality is that the incentives on offer amount to much less than schemes organised by the Big Six and, incidentally, barely half the headline rate that has been suggested that nuclear power should receive (with nuclear power getting loan guarantees and much longer contracts to boot).
You might ask how the Government is able to get away with this. I wonder too. The renewable trade associations are the obvious candidates to shake the tree about what is happening (or not happening) on the renewables front, but they are probably worried that a more aggressive stance will lead to the disappearance of even the meagre incentives that are already on the table. Certainly some of them are funded through membership subscriptions by companies associated with the Big Six who are anxious to hang on to the excess profits they make from onshore wind power under the Renewables Obligation. They may see it as compensation for losing the income from their power stations that results from having more renewables online. But it is notable that the quiescence of the renewable trade associations stands in contrast to the aggressive and well-resourced campaigns by EDF to push their case for ever-more types of support for the proposal at Hinkley C.
As I commented in the previous blog post, the proposals under EMR will mean that renewable energy subsidies are cut by around 15 per cent under the guise of having more cost-effective contractual arrangements using a feed-in tariff. The headline figures for the incentives are much the same as in the case of the RO, but the terms are very inferior, with less allowance for inflation and the contract length during which the premium prices will be paid reduced from 20 years under the RO to 15 years under EMR.
But as explained in the previous blog post, this will simply mean that the onshore wind developers, who are beholden to the Big Six to get power purchase agreements, will get their income stream reduced by large amounts compared to what happens under the RO. The point is that the RO implicitly gives the Big Six a substantial 'creamed off' incentive to give contracts to supply electricity to the actual renewable developers. The Big Six will still want their cut under EMR, so, in effect, the developers will get their real income stream considerably reduced. This will mean a lot fewer projects going ahead even onshore, and there are unlikely to be many (if any) offshore wind projects going ahead. The Big Six seem to work within tighter margins in the offshore sector, so reductions in support there simply mean that very little development will take place under the incentives available under EMR.
The only way that the feed-in structure could work, for onshore schemes, given the incentive levels offered, would be to offer the contracts directly to the independent renewable developers (including the community projects). But Ed Davey has flagrantly failed to come up with a scheme to do this. Instead he appears to be allowing a system that will continue to allow the Big Six to cream off their excess, unearned, 'economic rent' from the onshore wind sector. The feed-in tariff scheme is effectively only available to the major electricity companies. It amounts to a cruel political joke to compare this contorted so-called feed-in tariff to the German feed-in tariff mechanism scheme when the whole point of the German scheme is to give rights to independent developers rather than the utilities. The ugly British version does the precise opposite! We should call the system something else. I shall call it the 'Big Six Utility tariff'. I encourage all readers to follow suit.
The Government is currently pushing proposals to expand the remit of the small feed-in tariff schemes up from 5 MW to 10 MW, in doing so giving the impression that all is well with community renewable interests. But this is an even worse piece of fantasy than the claim to be funding larger scale renewables. Under the current scheme the rates set for schemes larger than 1.5 MW are so derisory that nobody would ever bother using this mechanism for a project of this size. Extending the remit of the small feed-in tariff scheme is nothing but a smokescreen for a complete failure to incentivise the community renewables sector on a commercial basis.
At the end of this blog post I paste below some links to the tariff structures for pv and non-pv feed-in tariff rates to demonstrate what I mean.
Perhaps the scale of the Government deception is obscured partly because, under the RO, wind power deployment has been booming over the last 2 years. But that fact is itself largely explained by the knowledge among the industry that the good times are coming to and end. EMR will be phased in from next year until 2017, and advance power purchase agreements available for developers are becoming scarce even during the phase-in period. But whereas some renewable energy development has been growing at over 2 GW a year in the recent period, it is difficult to see how development will be more than 500 MW per year after 2014.
We do hear tales of tidal schemes being given planning consent in the Pentland Firth. But there is a lot more fantasy here, because the banks are unwilling to lend to these still innovative projects without loan guarantees. So unless they get the same sort of 'underwriting' loan guarantees that Hinkley C will need to go ahead, none of the substantial wave or tidal schemes will go ahead.
When David Cameron implies that renewable incentives can be cut, far from overstating the case he is actually understating it. The incentives are being cut back drastically, and the Lib Dems are proving to be little more than alibis to provide cover for this reality.
https://www.ofgem.gov.uk/ofgem-publications/58940/fit-tariff-table-1-april-2013-non-pv-only.pdf
https://www.ofgem.gov.uk/publications-and-updates/feed-tariff-scheme-tariff-table-1-october-2013-31-december-2013-pv-only
Tuesday, 8 October 2013
Will somebody tell the Lib Dems that the Tories have ALREADY cut renewable subsidies
Liberal Democrat ministers are anxious to say that they will stop Tory plans to cut renewable energy subsidies, but this is undermined by the fact that the premium prices paid for renewable energy have already been sharply reduced as a result of Electricity Market Reform (EMR). According to the Lib Dems the Tories cannot cut the rates payable to wind power and other renewables because they are being set in law under the EMR legislation and regulations. See http://www.theguardian.com/environment/2013/oct/07/lib-dems-tory-renewable-energy-subsidies
Well, that makes much less difference than it seems. The Lib Dem claims ignore the fact that the rates payable for wind and solar power are being slashed by large amounts under the EMR settlement - that is compared to what is paid (currently, and until 2017) under the Renewables Obligation (RO).
Under the RO the total income stream payable for onshore wind is around £95 per MWh and £135 per MWh for offshore wind, both payable for 20 years and at inflation adjusted rates according to the Retail Price Index (CPI). Although the EMR rates from 2018, at £90 per MWh for onshore wind and £135 for offshore wind look superficially similar to this they are undermined by three important factors.
The effect of these factors is to reduce the equivalent value to what is now paid through the RO to around £82 per MWh for onshore wind and around £117 per MWh for offshore wind (according to my spreadsheet calculations).
There are two principal reasons for this (about 13 per cent) reduction in the value of the income stream under EMR compared to the RO. First, the length of the period during which the premium price is payable is reduced from 20 years under the RO to 15 years under EMR. Second a different form of inflation adjustment is being used to calculate the future premium levels. The Consumer Price Index (CPI) is being used for EMP uprating which, because of its mode of calculation, fails to keep pace with price increases in the real world. The more accurate RPI is used under the RO.
Then there is the third factor. The story put about in defence of these reductions is that because of the 'firm'contracts available under the EMR, as opposed to the relatively greater uncertainty about future income streams under the RO, means that the EMR payments reduce 'risks' and therefore investment costs. So, it is claimed, the costs of developing projects are reduced.
But in reality this will not happen because of other elements of EMR. You have to remember that the RO has worked on the basis of giving a big cash handout to the Big Six electricity suppliers to give contracts (power purchase agreements) to renewable generators to supply them with electricity. In doing so the Big Six electricity majors could cream off a lot of the income stream under the argument that they were giving firm contracts to the generators (often owned in alliance with the Big Six themselves) and taking the 'risk' themselves. The renewable generators themselves would only get a portion of the total income stream available for renewable projects.
So what the Government has done, in effect, is to remove the 'cream' that was being absorbed by the Big Six. But the Big Six will still want to earn their own cut, but will do so by giving the renewable generators rather less than they were receiving before.
Of course if we had a 'fixed' feed-in tariff this problem would be reduced since independent renewable generators could access the premium price contracts directly, so avoiding having to pay the ''cream to the Big Six. But they cannot do this under EMR because the 'contracts for difference' (CfD) can only be accessed by major electricity companies. See earlier blog posts about all of this.
So, in effect, either the Big Six are expected to give contracts (power purchase agreements) to independent renewable generators and forgo the creamed-off-profits they are used to under the RO, or they will cut the value of the 'firm' contracts that they give to the independents. The outcome is likely to be that the Big Six will just cut the value of the PPAs that they give out to the renewable generators. This means that the annual rate of renewable energy deployment will fall considerably. Many projects that would be built under the RO will now be uneconomic
Of course Ed Davey could have fought harder to ensure that the independent generators had a better mechanism for gaining PPAs, whether through a fixed feed-in tariff mechanism or through the 'green power auction market' (GPAM) proposal. But he has not done this. He has, after various signals suggesting he could do otherwise, come out with a proposal that will allow the Big Six to carry on making their unearned income out of renewable energy project. In effect, he has well and truly sold the pass while claiming to do otherwise.
Ed Davey, by the way, has been claiming that he will not agree to 'underwrite' investment costs Hinkley C. According to press reports, he is about to sell the pass on that one too. If he does will have the ugly prospect of a hamstrung renewables programme whilst a blank cheque being given for new nuclear power. But whatever happens, if Lib Dems claim to be able to stop Tory cuts to renewable funding, they are wrong. They have already not only sanctioned it but connived to see this change hidden behind Treasury smoke-and-mirrors.
Well, that makes much less difference than it seems. The Lib Dem claims ignore the fact that the rates payable for wind and solar power are being slashed by large amounts under the EMR settlement - that is compared to what is paid (currently, and until 2017) under the Renewables Obligation (RO).
Under the RO the total income stream payable for onshore wind is around £95 per MWh and £135 per MWh for offshore wind, both payable for 20 years and at inflation adjusted rates according to the Retail Price Index (CPI). Although the EMR rates from 2018, at £90 per MWh for onshore wind and £135 for offshore wind look superficially similar to this they are undermined by three important factors.
The effect of these factors is to reduce the equivalent value to what is now paid through the RO to around £82 per MWh for onshore wind and around £117 per MWh for offshore wind (according to my spreadsheet calculations).
There are two principal reasons for this (about 13 per cent) reduction in the value of the income stream under EMR compared to the RO. First, the length of the period during which the premium price is payable is reduced from 20 years under the RO to 15 years under EMR. Second a different form of inflation adjustment is being used to calculate the future premium levels. The Consumer Price Index (CPI) is being used for EMP uprating which, because of its mode of calculation, fails to keep pace with price increases in the real world. The more accurate RPI is used under the RO.
Then there is the third factor. The story put about in defence of these reductions is that because of the 'firm'contracts available under the EMR, as opposed to the relatively greater uncertainty about future income streams under the RO, means that the EMR payments reduce 'risks' and therefore investment costs. So, it is claimed, the costs of developing projects are reduced.
But in reality this will not happen because of other elements of EMR. You have to remember that the RO has worked on the basis of giving a big cash handout to the Big Six electricity suppliers to give contracts (power purchase agreements) to renewable generators to supply them with electricity. In doing so the Big Six electricity majors could cream off a lot of the income stream under the argument that they were giving firm contracts to the generators (often owned in alliance with the Big Six themselves) and taking the 'risk' themselves. The renewable generators themselves would only get a portion of the total income stream available for renewable projects.
So what the Government has done, in effect, is to remove the 'cream' that was being absorbed by the Big Six. But the Big Six will still want to earn their own cut, but will do so by giving the renewable generators rather less than they were receiving before.
Of course if we had a 'fixed' feed-in tariff this problem would be reduced since independent renewable generators could access the premium price contracts directly, so avoiding having to pay the ''cream to the Big Six. But they cannot do this under EMR because the 'contracts for difference' (CfD) can only be accessed by major electricity companies. See earlier blog posts about all of this.
So, in effect, either the Big Six are expected to give contracts (power purchase agreements) to independent renewable generators and forgo the creamed-off-profits they are used to under the RO, or they will cut the value of the 'firm' contracts that they give to the independents. The outcome is likely to be that the Big Six will just cut the value of the PPAs that they give out to the renewable generators. This means that the annual rate of renewable energy deployment will fall considerably. Many projects that would be built under the RO will now be uneconomic
Of course Ed Davey could have fought harder to ensure that the independent generators had a better mechanism for gaining PPAs, whether through a fixed feed-in tariff mechanism or through the 'green power auction market' (GPAM) proposal. But he has not done this. He has, after various signals suggesting he could do otherwise, come out with a proposal that will allow the Big Six to carry on making their unearned income out of renewable energy project. In effect, he has well and truly sold the pass while claiming to do otherwise.
Ed Davey, by the way, has been claiming that he will not agree to 'underwrite' investment costs Hinkley C. According to press reports, he is about to sell the pass on that one too. If he does will have the ugly prospect of a hamstrung renewables programme whilst a blank cheque being given for new nuclear power. But whatever happens, if Lib Dems claim to be able to stop Tory cuts to renewable funding, they are wrong. They have already not only sanctioned it but connived to see this change hidden behind Treasury smoke-and-mirrors.
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