Wednesday, 6 March 2013
How the electricity balancing mechanism is undermining renewables future
Recent press coverage about allegedly high payments to windfarms to stop generating (to avoid electricity grid bottlelnecks) should be drawing attention to the cock-eyed way that electricity balancing mechanisms are organised. But instead the problems are being made even worse by the way that the Government is introducting the 'contracts for difference' (CfD).
Put simply, renewables are being fitted into a system that is designed to suit (and reward) conventional generators. There is no real effort to improve system flexibility by bringing in opportunties for 'demand response' so that shifting electricity demand can be incentivised at the same time as the wind is blowing or sun shining. Instead the renewable operators are just being given the same incentives as conventional generators to switch off to avoid the grid being overloaded. Most of the money paid to generators to switch off actually gets paid to coal and gas power station operators, not windfarms (although you would not get that impression from the press stories).
Green campaigners stress how 'smart meters' will bring in an age when dishwashers etc will be programmed to turn on and where electric cars will fill their batteries when renewable energy is flowing. But, unbeknown to them, nothing of the sort is happening. Indeed, developments are moving, at considerable speed, in promoting precisely the opposite. Renewable generators, essentially, are being pressed to be just more snouts in the troughs of excessive payments to generators. As discussed later this is being emphasised even further by the terms of the new 'contracts for difference'. But while the renewable generators gain in the short term (albeit at the cost of more sniping from the anti-windfarm lobby), the cost of providing renewable energy is increased and the amount of renewable energy that the system can absorb is constrained.
To put it in a nutshell, the smart meters being installed are totally incapable of helping 'demand response' and the rules governing the electricity market are actually making it even less likely that there will be much more demand response in the future than there is now (and there's not much happening now). I will explain, below, but first let me draw your attention to some recent coverage, first about how anti-windfarm campaigners are highlighting the payments made to windfarms to switch off sometimes
http://www.thetimes.co.uk/tto/environment/article3704842.ece
In this story there are hopeful (but currently very unlikely) comments that matters will be righted by 'demand response' measures. More balanced coverage is given by 'Carbon Brief', but unfortunately the report merely recycles the very naive rose tinted impression that people have got about the prospects for 'demand response'. See Carbon Brief's account at:
http://www.carbonbrief.org/blog/2013/03/why-windfarms-get-paid-to-switch-off
You can see a general description by the National Grid of their arrangements on this issue at:
http://www.nationalgrid.com/uk/Electricity/AboutElectricity/Balancing+the+network/
In order to elaborate on earlier points, we first need to understand that essentially there are currently two routes at the moment to short term balancing of the electricity market between demand for and generation of electricity: the 'balancing mechanism' (BM) and the 'short term operating reserve' (STOR). It is possible for large and medium sized industrial units (typically refrigenration companies) to offer balancing services, since they can contract directly with the National Grid, or, indirectly with the help of companies such as 'Flexitricity' (see http://www.flexitricity.com/core-services/frontline).
However, such services have to compete with the electricity suppliers, who in turn have strong incentives to get money for the power plant that they own rather than make sure renewable energy stays online for as much as possible. And remember, the electricity companies are likely to make much more money out of selling electricity generated by their power stations (or in receiving payments for their power plant NOT to produce energy) rather than making money out of saving supply costs by shifting demand.
Under the present regulations there is simply no agent around with clear enough interests in mobilising or organising ordinary consumers with their dishwashers, refrigerators, electric cars or whatever to engage in demand response. You would think that green energy suppliers would have good reason to do this, both from a marketing and cost reduction point of view (you can help us generate more green energy and save money at the same time!). However, if the green electricity companies are being incentivised to shutdown the windfarms rather than keep them running (which is what is happening at the moment) then they are not going to be very keen on organising demand response campaigns. Yet as the amount of renewable energy increases the need to avoid shutting down renewable energy production will increase. Building interconnectors will help ease the porblem, but this is a slow process. Hence there is good reason why electricity trading regulators at an EU level are likely to stress the need to utilise demand response as the prime method of dealing with increased fluctuating renewable energy supplies. But the EU does not control the regulations to achieve this, although maybe the EU could try harder to influence national regulators to prioritise demand shifting.
You would hope that the UK electricity system would be regulated to take account of the increasing need to balance fluctuating renewable energy supplies, but of course it is not. A high proportion of the people who understand the system are likely to be associated with the Vertically Integrated Large Electricity Suppliers (VILES) who dominate the system. And they are not in a hurry to make themselves alter their ways.
But, in fact, other factors make the situation even worse than this (yes, really!). One is the fact that the wrong sort of smart meters are being installed. Although they will help people (and electricity suppliers) monitor energy consumption better, they are simply not configured to engage in the sort of interactive 'bottom-up' automatised trading that would permit demand response to occur. For that you need something that David Hirst has described as 'flowcost meters'. They can interact with with the short term and future electricity supply market (or, perhaps the electricity supplier's own generation cost structures) and automatically schedule operation of equipment according to consumer timing and cost preferences. However, nobody is installing such equipment, and, to my knowledge, there are not even any plans to do so.
The reason why nobody is installing the right sort of smart meters, is, as implied above, because electricity balancing markets are not regulated in the right way. The National Grid's license should be altered so that they have a duty to prioritise shifting demand to incorporate variable renewable energy before it is contrained. A part of this could be to 'cap' payments to renewable operators at the level of the 'strike price' of the feed-in tariff. The EU should bring in regulations to ensure that demand shifting is prioritised. But it is doubtful whether we can just wait for this to materialise.
This brings us around to the way the Government is implementing feed-in tariffs through the CfD. This does not help. The CfDs pay the difference between the 'strike price' set by the Government of the value of each unit of generated electricity and the wholesale electricity price - except in those (occasional) circumstances when the wholesale price is higher, when the generator will get nothing and actually pay money. Hence the CfDs have the perverse incentive of encouraging renewable energy suppliers to want to stop generating electricity when supplies are most needed (when the wholesale price is high) and get paid to stop generating electricity precise at the time when it would be much better to shift demand. Of course, this perverse incentive would not exist if there was a 'Fixed' FiT used (see earlier blogs on this).
Now, it is possible to regulate the electricity market to give priority to demand shifting and to encourage, first, green electricity suppliers, and then hopefully others, to install the right meters and encourage demand shifting. But we need a review to make this happen - a specific review of balancing regulations with the objective of maximising demand response - and it should not be a review dominated by the VILES. The question is, what interests can pressure for a review to give priority to demand shifting? Well, green NGOs should have a go for a start, perhaps in alliance with consumer groups.
But for the sake of the planet please let us do something improve the present ludicrous situation!
Monday, 4 March 2013
MPs want to give priority to nuclear power over renewables and energy efficiency
In an especially brazen piece of pro-nuclear pleading the DECC Select Committee has effectively said that nuclear power should be given cost priority over all green energy options. They say that EDF and other nuclear companies should have their demands for construction cost 'guarantees' met. They disingenuously suggest that this would have no consequences for consumers. See
http://www.publications.parliament.uk/pa/cm201213/cmselect/cmenergy/117/11706.htm#a13
and in particular where they say:
'54. The UK Guarantees scheme may help to bring forward investment in Hinkley Point C, but it is not clear whether support will still be available for nuclear new build projects that are further away from making a final investment decision (such as the NuGen and Horizon projects). Given the important role for nuclear generation in the UK's future energy mix, the Government should extend this support to all nuclear new build projects, which may require increasing the amount of available assistance to more than £50 billion. (We note that the UK Guarantees scheme does not involve expenditure, as long as the guarantees are not called in.)'
In fact the Government has indicated that this will not happen and that nuclear will treated the same as renewables, but this evidently is not what the DECC Select Committee has in mind. They do say that nuclear should not be paid any more than offshore windfarms, but then efectively propose that the playing field be fixed to give nuclear power an advantage - underwriting plus, presumably, a 40 year contract thrown in (see previous blogs on this). In the para above the MPs have implicitly 'decided' that the Government will give guarantees to nuclear as demanded by EDF - this is not what I have been hearing, but then I am a green energy realist whereas the Committee evidently is stuffed with nuclear fantasists.
There does seem to be a push for nuclear to enjoy an arrangement whereby, in effect, the Government pays for the costs of building the nuclear power stations and then 'sells' the plant back to the private sector. This is touted as being 'cheaper' than nuclear having to 'suffer' the same terms as renewable energy under the proposed CfD system.
Let us summarise some of the issues with this approach:
This would be a potentially very expensive way of doing it for the taxpayer for three reasons:
a) the taxpayer would lose all control over costs. In the case of a CfD system the electricity consumer is only committed to pay as much as is required to pay the difference between the wholesale electricity price and the strike price for the energy that is generated. This money should be used to pay capital and operating costs at the developer's own risk. But if the Government takes on construction risk as well as guaranteeing a premium price and pays whatever it costs (in other words write the developers a blank cheque) to build things, then developers will plough onwards to build plant with much less regard to costs or consequences compared to when the developer has to pay for cost overruns themselves.
b) This scheme has consequences for the public sector borrowing requirment (PSBR) in that until such time as the completed plant was sold back to the private sector the debt would appear on the government's debt record, either increasing public borrowing or leading to cuts in public spending (eg health, education, defence etc). People talk about the Government being able to borrow at lower rates than the private sector - true, but such borrowing comes at a high 'opportunity cost' for government spending - especially in current circumstances. Then, when the plant was sold back to the private sector, the private sector owners would still demand a steep premium to operate the plant. The taxpayer would suffer a double penalty - increased PSBR during what could be a long construction period followed by the electricity consumer having to pay a big premium on their bills. This hardly makes the situation better!
c) This idea privileges nuclear at the expense of what are much cheaper renewable alternatives. Why not do the same for windfarms and solar power arrays, external wall insulation, etc? Why should nuclear power get policy preference here?
In short, this idea only seems good if you regard nuclear power as being much more important than just about anything else in the British economy including renewable energy and energy efficiency - not my idea certainly, nor many other people's I would think.
It is also highly impractical for the Treasury to agree to this sort of thing, for much the same reasons as I have outlined. It would also clearly contravene EU state aid rules and would be unlikely to get EU state aid approval in the context of not at least giving the same benefits to renewable energy and energy efficiency.
In other words, for this to come about requires a rather heavy pressure on a political version of Douglas Adams' 'improbability drive' (for those that are familiar with the 'Hitchiker's Guide to the Galaxy').
So why does the pro-nuclear lobby plough on with such unlikely proposals? For much the same reason as Hitachi has bought its UK option nuclear option, desperation furnishes a belief that somehow a Government will come along that can see the beauty of the nuclear dream above all else in a world where many see it instead as an expensive nightmare.
Thursday, 21 February 2013
Renewables face delays as nuclear costs are hidden
The debacle over funding nuclear power is increasingly likely to delay the renewable energy programme. If so-called 'negotiations' drag on between EDF and the Government the Government may be delayed in submitting a request to the European Commission for consent for its 'low carbon' subsidy regulations to comply with EU state aid rules. Not only does the uncertainty over nuclear funding delay the Government lodging its application to the EU, but the very fact that nuclear power is involved produces a massive complication in what would otherwise be a much shorter administrative process.
Mark Johnston, Brussels based expert consultant and former FOE EU officer comments that the British Government 'has still not submitted its state aid notifications to EU Commission for consideration and possible veto. For big, complex or controversial, state aid cases the Commission can take 2-3 years to decide, which takes the UK up to and beyond its next general election expected in 2015'
The 'negotiations' between the Government and EDF are going nowhere. Indeed they are fated to go nowhere because of the giant differences between what the Government (led by the Treasury) is politically able to offer EDF, and what EDF needs to justify to its shareholders to allow Hinkley C to go ahead. What appears to be happening now is a long winded attempt by both sides (Government and EDF) to enagage in public relations to demonstrate that it is not to blame for the failure to get the nuclear construction programme going.
For its part EDF and nuclear supporters are trying to minimise - in effect hide - the image of just how uneconomic new nuclear power stations actually are. The impression is currently being given that nuclear power needs a strike price of £100 per MWh and that such a figure is comparable to equivalent support that will be available to renewable energy. This is wrong.
The £100 per MWh figure that is said to be demanded by EDF is buttressed by two important extra capital cost subsidies that renewable energy does not receive. One is a demand for a 40 year contract, which has been discussed on this blog earlier. Another is the demand that the Government 'underwrite' nuclear costs, again something which has been discussed in earlier blog posts. Underwriting costs means that regardless of how long or how much it costs to build the nuclear stations, or how much energy they generate, the Government (that is the taxpayer) foots the bill. Under the Electricity Market Reform (EMR) proposals both nuclear and renewable energy will get guarantees about what will be paid for each unit produced, but this is not good enough for nuclear. In addition they need their costs to be guaranteed to be paid, regardless of what they generate. Renewables do not receive such underwriting guarantees. Of course the Government will not agree to 'underwriting', or, most likely, a 40 year contract, or (if it wants consent under EU state aid rules in the next 2 years), more than £80 per MWh for nuclear power.
In other words EDF wants, in effect, a much more privileged position compared to renewables. Without the 40 year contracts (and instead with say a 25 year contract) and without underwriting, EDF would in fact need something around £165 per MWh for Hinkley C to be economically viable - and even this assumes that cost estimates do not rise even further (see discussion on earlier posts about nuclear costs, eg 'Nuclear Power is more expensive than offshore wind').
Delays in getting state aid permission
Unfortunately the price for all of this political grandstanding is delay in submitting a 'state aid' request to the EU Commission needed to approve the Government's reform of the renewable energy incentives programme. The Government can, and should, submit a state aid application directly after the Energy Bill legislation is adopted - but even if the Bill is dealt with quickly, some reports suggest that the nuclear strike price negotiations will drag on, potentially delaying a state aid application.
Added to this are the problems that the UK Government would have in submitting an application that would give nuclear power more incentives than key renewable fuels, especially onshore wind. It may be that the Treasury is insisting on offering nuclear power no more than £80 per MWh precisely because this is the sort of level that needs to be offered to onshore wind. There are exemptions in state aid rules to allow incentives for renewable energy and for environmental purposes in general, but not for nuclear power. Hence any request to give incentives to nuclear power is bound to be contentious at an EU level. This is doubly so if the Government wants to give more incentives to nuclear power than important renewable generation technologies.
However, whatever the motivations behind Treasury thinking, the Government urgently needs to take two very important steps to save the UK renewables programme from collapse in the next 12 months (when EMR is supposed to be phased in).
First, it needs to decouple the application for renewable energy state aid from that of anything applying to nuclear power. The Government needs to apply separately to the EU Commission for 'state aid' consent to pay 'contracts for differences' feed-in tariffs to renewables. Such an application must not also apply to nuclear power. If it must apply for state aid for nuclear the Government should hand in a separate application for nuclear - although, why bother even on narrow economic grounds? If the two applications are rolled together the result is likely to be years of delay.
Second, the Government needs to extend the life of the Renewables Obligation (RO), and also defer the start and phase -in dates of the EMR implementation. If the application to the EU is going to take say, 3 years, then the RO needs to be extended to be phased in from a 2017 (not 2014) start, and the RO itself needs to be extended from its current end in 2037 to 2040.
If the Government does not urgently take forward both these options, including ensuring the availability of good power purchase agreements for independent renewable developers, then its 'decarbonisation' strategy becomes a gas carbonisation strategy instead.
The day after this blog post an article appeared in The Times about delays in getting permission for nuclear subsidies from the EU. See http://www.thetimes.co.uk/tto/business/industries/utilities/article3695520.ece
A summary of this blog also appears in 'Utility Week', see http://www.utilityweek.co.uk/
Mark Johnston, Brussels based expert consultant and former FOE EU officer comments that the British Government 'has still not submitted its state aid notifications to EU Commission for consideration and possible veto. For big, complex or controversial, state aid cases the Commission can take 2-3 years to decide, which takes the UK up to and beyond its next general election expected in 2015'
The 'negotiations' between the Government and EDF are going nowhere. Indeed they are fated to go nowhere because of the giant differences between what the Government (led by the Treasury) is politically able to offer EDF, and what EDF needs to justify to its shareholders to allow Hinkley C to go ahead. What appears to be happening now is a long winded attempt by both sides (Government and EDF) to enagage in public relations to demonstrate that it is not to blame for the failure to get the nuclear construction programme going.
For its part EDF and nuclear supporters are trying to minimise - in effect hide - the image of just how uneconomic new nuclear power stations actually are. The impression is currently being given that nuclear power needs a strike price of £100 per MWh and that such a figure is comparable to equivalent support that will be available to renewable energy. This is wrong.
The £100 per MWh figure that is said to be demanded by EDF is buttressed by two important extra capital cost subsidies that renewable energy does not receive. One is a demand for a 40 year contract, which has been discussed on this blog earlier. Another is the demand that the Government 'underwrite' nuclear costs, again something which has been discussed in earlier blog posts. Underwriting costs means that regardless of how long or how much it costs to build the nuclear stations, or how much energy they generate, the Government (that is the taxpayer) foots the bill. Under the Electricity Market Reform (EMR) proposals both nuclear and renewable energy will get guarantees about what will be paid for each unit produced, but this is not good enough for nuclear. In addition they need their costs to be guaranteed to be paid, regardless of what they generate. Renewables do not receive such underwriting guarantees. Of course the Government will not agree to 'underwriting', or, most likely, a 40 year contract, or (if it wants consent under EU state aid rules in the next 2 years), more than £80 per MWh for nuclear power.
In other words EDF wants, in effect, a much more privileged position compared to renewables. Without the 40 year contracts (and instead with say a 25 year contract) and without underwriting, EDF would in fact need something around £165 per MWh for Hinkley C to be economically viable - and even this assumes that cost estimates do not rise even further (see discussion on earlier posts about nuclear costs, eg 'Nuclear Power is more expensive than offshore wind').
Delays in getting state aid permission
Unfortunately the price for all of this political grandstanding is delay in submitting a 'state aid' request to the EU Commission needed to approve the Government's reform of the renewable energy incentives programme. The Government can, and should, submit a state aid application directly after the Energy Bill legislation is adopted - but even if the Bill is dealt with quickly, some reports suggest that the nuclear strike price negotiations will drag on, potentially delaying a state aid application.
Added to this are the problems that the UK Government would have in submitting an application that would give nuclear power more incentives than key renewable fuels, especially onshore wind. It may be that the Treasury is insisting on offering nuclear power no more than £80 per MWh precisely because this is the sort of level that needs to be offered to onshore wind. There are exemptions in state aid rules to allow incentives for renewable energy and for environmental purposes in general, but not for nuclear power. Hence any request to give incentives to nuclear power is bound to be contentious at an EU level. This is doubly so if the Government wants to give more incentives to nuclear power than important renewable generation technologies.
However, whatever the motivations behind Treasury thinking, the Government urgently needs to take two very important steps to save the UK renewables programme from collapse in the next 12 months (when EMR is supposed to be phased in).
First, it needs to decouple the application for renewable energy state aid from that of anything applying to nuclear power. The Government needs to apply separately to the EU Commission for 'state aid' consent to pay 'contracts for differences' feed-in tariffs to renewables. Such an application must not also apply to nuclear power. If it must apply for state aid for nuclear the Government should hand in a separate application for nuclear - although, why bother even on narrow economic grounds? If the two applications are rolled together the result is likely to be years of delay.
Second, the Government needs to extend the life of the Renewables Obligation (RO), and also defer the start and phase -in dates of the EMR implementation. If the application to the EU is going to take say, 3 years, then the RO needs to be extended to be phased in from a 2017 (not 2014) start, and the RO itself needs to be extended from its current end in 2037 to 2040.
If the Government does not urgently take forward both these options, including ensuring the availability of good power purchase agreements for independent renewable developers, then its 'decarbonisation' strategy becomes a gas carbonisation strategy instead.
The day after this blog post an article appeared in The Times about delays in getting permission for nuclear subsidies from the EU. See http://www.thetimes.co.uk/tto/business/industries/utilities/article3695520.ece
A summary of this blog also appears in 'Utility Week', see http://www.utilityweek.co.uk/
Tuesday, 19 February 2013
Scottish renewable energy targets may be politically unachievable under independence says expert study
Just published by the Political Quarterly is a paper (with myself as lead author) which discusses how independence would make it unlikely that the Westminster Government would continue to pay the incentives required for Scotland to reach its renewable energy targets. These include a target of sourcing 100 per cent of its electricity from renewables by 2020.
The abstract of the paper says:
Political support for renewable energy development, especially offshore renewables, is particularly conspicuous in Scotland and is a centrepiece of SNP policy. However, this is built on something of a paradox because, put simply, without the subsidies paid by electricity consumers in the rest of the UK, the Scottish Government's ambitious targets for renewable energy would be politically unachievable. We argue in this paper that if Scotland does move towards independence, then there could be little reason for the UK to continue paying (much) of the subsidies since the resulting renewable generation would no longer contribute towards UK renewable energy targets. We suggest that the potential scenarios, and their implications, needs to be far better considered in the arguments around the Scottish constitutional position and the broader aims of UK energy policy.
You can read the full paper on: http://onlinelibrary.wiley.com/doi/10.1111/j.1467-923X.2013.02431.x/full
The paper flows from an ESRC project studying the impact of devolution on renewable energy policy. The project was based on collaboration between researchers in the University of Cardiff, Queens University Belfast, Robert Gordon University, and the UNiversity of Birmingham.
There has been widespread coverage of the paper on Scottish independence and renewable energy. See, for example,:
http://www.heraldscotland.com/politics/referendum-news/salmond-told-green-targets-impossible-without-uk-cash.20150454
theguardian
http://m.guardian.co.uk/environment/2013/feb/11/scotland-green-energy-renewables-alex-salmond
Scotsman.com
http://www.scotsman.com/the-scotsman/politics/renewables-targets-unachievable-after-yes-vote-1-2784328
greenwise
http://www.greenwisebusiness.co.uk/news/independence-would-threaten-scotlands-renewables-target-3789.aspx
blue&greentomorrow
http://blueandgreentomorrow.com/2013/02/11/scotland-independence-renewable-energy-uk/
newsrt
http://www.newsrt.co.uk/news/renewables-targets-unachievable-after-yes-vote-1205101.html
News@all-energy
http://www.all-energy.co.uk/en/2013-Exhibitor-Directory/2013-Exhibitor-Profile/2013-Custom-Object-Profile/?coId=7130
The abstract of the paper says:
Political support for renewable energy development, especially offshore renewables, is particularly conspicuous in Scotland and is a centrepiece of SNP policy. However, this is built on something of a paradox because, put simply, without the subsidies paid by electricity consumers in the rest of the UK, the Scottish Government's ambitious targets for renewable energy would be politically unachievable. We argue in this paper that if Scotland does move towards independence, then there could be little reason for the UK to continue paying (much) of the subsidies since the resulting renewable generation would no longer contribute towards UK renewable energy targets. We suggest that the potential scenarios, and their implications, needs to be far better considered in the arguments around the Scottish constitutional position and the broader aims of UK energy policy.
You can read the full paper on: http://onlinelibrary.wiley.com/doi/10.1111/j.1467-923X.2013.02431.x/full
The paper flows from an ESRC project studying the impact of devolution on renewable energy policy. The project was based on collaboration between researchers in the University of Cardiff, Queens University Belfast, Robert Gordon University, and the UNiversity of Birmingham.
There has been widespread coverage of the paper on Scottish independence and renewable energy. See, for example,:
http://www.heraldscotland.com/politics/referendum-news/salmond-told-green-targets-impossible-without-uk-cash.20150454
theguardian
http://m.guardian.co.uk/environment/2013/feb/11/scotland-green-energy-renewables-alex-salmond
Scotsman.com
http://www.scotsman.com/the-scotsman/politics/renewables-targets-unachievable-after-yes-vote-1-2784328
greenwise
http://www.greenwisebusiness.co.uk/news/independence-would-threaten-scotlands-renewables-target-3789.aspx
blue&greentomorrow
http://blueandgreentomorrow.com/2013/02/11/scotland-independence-renewable-energy-uk/
newsrt
http://www.newsrt.co.uk/news/renewables-targets-unachievable-after-yes-vote-1205101.html
News@all-energy
http://www.all-energy.co.uk/en/2013-Exhibitor-Directory/2013-Exhibitor-Profile/2013-Custom-Object-Profile/?coId=7130
Thursday, 14 February 2013
Hinkley C could cost consumers £50 billion under proposed deal
Electricity consumers are likely to pay around £50 billion extra under the deal proposed by EDF in their negotiations with the Government for a contract to build Hinkley C. EDF has revealed that it is asking for a 40 year contract to pay premium prices. See http://www.utilityweek.co.uk/news/news_story.asp?id=198148&title=EDF+aims+to+strike+CfD+deal+in+next+three+months
This 40 year contract length means that consumers will be paying the premium under the 'contract for differences' (CfD) arrangements for more than twice as long compared to what the Government wants to pay developers of renewable energy schemes (only 15 years).
When this 40 year contract length is combined with the premium that EDF is demanding, the amount that consumers would have to pay EDF comes to staggeringly high amounts. If the 3.2 GWe Hinkley C reactor works well with a 90 per cent capacity factor, and EDF is given a 'strike price' of £100 per MWh, then based on todays wholesale electricity prices (around £50 per MWh), this £50 per MWh premium works out at costing consumers around £50 billion extra their normal bills over 40 years.
One can see why EDF is asking for such a long contract - this is because at a contract length of a rather shorter duration (say 25 years) the asking 'strike price' comes out as a ridiculously high figure (hence the reports of £165 per MWh without underwriting). Of course, under EDF's proposed deal the consumer still ends up paying a ridiculously high amount, but it is just strung out over a rather longer period. The 'overnight' cost of Hinkely C is said to be £14 billion. But in reality nuclear power stations cost an awful lot more than the 'overnight' costs.
However,things do not end here. As commented in the previous blog post, EDF wants underwriting as well, so that the taxpayer is highley likely to end up paying for at least part of the plant - especially given the large risks of costs overruns which will be borne directly by the taxpayer. Given EDF 'salami slicing' negotiations strategy one would assume that the Government will end up being asked to underwrite the whole of the project sooner or later (renewable energy developers do not get their costs 'underwritten').
Hence if the Government agreed to the terms that may be demanded by EDF we would have a truly bizarre outcome that the Government will be effectively guaranteeing profits for EDF regardless of whether much generation actually occurs in practice.
Instead, of course, a number of other options exist to supply the electricity at a small fraction of this premium, and renewables will certainly be a lot cheaper in 10, 20, 30 years time. Onshore wind, solar power and offshore wind are cheaper now than nuclear power - but their costs are falling (in sharp contrast to nuclear power) but the consumer will be locked into paying collosal premiums for Hinkley C for 40 years. Onshore wind is likely to be offered no more than £80 per MWh for example, although for a contract no longer than 15 or 20 years at the most.
http://www.guardian.co.uk/environment/2013/feb/18/nuclear-power-ministers-reactor and also:
http://www.telegraph.co.uk/news/uknews/9879257/Government-drawing-up-ludicrous-40-year-contracts-to-persuade-power-companies-to-go-nuclear.html
This 40 year contract length means that consumers will be paying the premium under the 'contract for differences' (CfD) arrangements for more than twice as long compared to what the Government wants to pay developers of renewable energy schemes (only 15 years).
When this 40 year contract length is combined with the premium that EDF is demanding, the amount that consumers would have to pay EDF comes to staggeringly high amounts. If the 3.2 GWe Hinkley C reactor works well with a 90 per cent capacity factor, and EDF is given a 'strike price' of £100 per MWh, then based on todays wholesale electricity prices (around £50 per MWh), this £50 per MWh premium works out at costing consumers around £50 billion extra their normal bills over 40 years.
One can see why EDF is asking for such a long contract - this is because at a contract length of a rather shorter duration (say 25 years) the asking 'strike price' comes out as a ridiculously high figure (hence the reports of £165 per MWh without underwriting). Of course, under EDF's proposed deal the consumer still ends up paying a ridiculously high amount, but it is just strung out over a rather longer period. The 'overnight' cost of Hinkely C is said to be £14 billion. But in reality nuclear power stations cost an awful lot more than the 'overnight' costs.
However,things do not end here. As commented in the previous blog post, EDF wants underwriting as well, so that the taxpayer is highley likely to end up paying for at least part of the plant - especially given the large risks of costs overruns which will be borne directly by the taxpayer. Given EDF 'salami slicing' negotiations strategy one would assume that the Government will end up being asked to underwrite the whole of the project sooner or later (renewable energy developers do not get their costs 'underwritten').
Hence if the Government agreed to the terms that may be demanded by EDF we would have a truly bizarre outcome that the Government will be effectively guaranteeing profits for EDF regardless of whether much generation actually occurs in practice.
Instead, of course, a number of other options exist to supply the electricity at a small fraction of this premium, and renewables will certainly be a lot cheaper in 10, 20, 30 years time. Onshore wind, solar power and offshore wind are cheaper now than nuclear power - but their costs are falling (in sharp contrast to nuclear power) but the consumer will be locked into paying collosal premiums for Hinkley C for 40 years. Onshore wind is likely to be offered no more than £80 per MWh for example, although for a contract no longer than 15 or 20 years at the most.
Note: Five days after this posting the press published stories on this, see:
http://www.guardian.co.uk/environment/2013/feb/18/nuclear-power-ministers-reactor and also:
http://www.telegraph.co.uk/news/uknews/9879257/Government-drawing-up-ludicrous-40-year-contracts-to-persuade-power-companies-to-go-nuclear.html
Of course, the reactors would not come online until the 2020s which mean that the contracts would actually be running well into the 2060s (not just 2050 as implied in the press coverage).......
......................Remember, if you looked at this blog post on the same day it was loaded you were well ahead of the news!
Tuesday, 12 February 2013
EDF demands double subsidy from Government including 'underwriting' as price for Hinkley C
EDF is now demanding a double subsidy of a high 'strike price' for electricity generated and 'underwriting' of at least some of the costs of building Hinkley C nuclear power station. EDF is edging towards the outcome that serious nuclear analysts always knew was the only basis for funding nuclear power - by the Government effectively writing a blank cheque for it. Make no mistake, allowing EDF to have state guarantees for the costs of Hinkley C will, on the basis of previous experience, result in the Government having to pay for those guarantees. This means that billions of pounds will be diverted from money available for hospitals, schools etc towards guaranteeing profits for EDF.
In addition it seems that EDF is also demanding a high 'strike price', that is payment for electricity generated, on top of the Government agreeing to 'underwrite' its construction costs. The newspapers (see below) talk of EDF wanting a '10 per cent' return on Hinkley C. That, of course, would only be possible if EDF gets the state 'underwriting' guarantees (for the whole of the investment, not just part of it) because only then would banks and other lenders be willing to lend money to EDF to allow the rate of return to come down from the around 15 per cent that EDF shareholders would expect if the deal was funded wholly off EDF's balance sheet.
Reading between the lines, it seems that EDF is asking for a strike price of at least £110 per MWh PLUS underwriting its construction costs. The newspapers refer to 'part' of the construction costs, but just as EDF has edged the Government towards more and more incentives being pushed in its direction, the guarantees are unlikely to stop at a guarantee for just 'part' of the construction costs.
We have come quite a long road since Government reports announced in 2006 that nuclear power would cost no more than an average of around £40 per MWh. Now, it seems, if it was funded on the same commercial basis as renewable energy schemes, it would cost over £160 per MWh (see earlier blogs on this). 'Underwiting' nuclear power, that is giving it a Government blank cheque so that any shortfall in the ability of the scheme to repay loans would be paid by the Government, might bring the price down towards £100 per MWH (using city analyst Peter Atherton's figure).
The Government would have to swallow a lot of problems if it did agree to EDF's demand. What could it say to offshore wind developers who, according to the Government, are supposed to reduce their costs to £100 per MWh without any 'underwriting'? What could it say to onshore wind developers who are unlikely to be offered more than £80 per MWh without any underwriting (and renewable generators will be on much shorter contracts compared to nuclear power as well).? What could it say to soalr power companies which have gone bust in droves because the Government, far from 'underwiting' their costs, acutally foreshortened the feed-in tariff programme in 2011. What is it going to say to the millions of people shivering in their homes who cannot afford to pay for properly energy efficient households?
This whole sorry saga exposes the total uneconomic nature of nuclear power and the fact that green energy sources (real gree ones, that is, not nuclear) are much more financially competitive than nuclear power.
I can only repeat what I said in an earlier blog:
'Underwriting nuclear risks would be in direct contradiction to what the Conservative Party said in their pre-election energy policy statement in March 2010, called 'Rebuilding Security – Conservative Energy Policy in an Uncertain World'. The Conservatives said: ‘we agree with the nuclear industry that taxpayer and consumer subsidies should not and will not be provided – in particular there must be no public underwriting of construction cost overruns’. Note the statement: 'in particular there must be no public underwriting of construction cost overruns'. Whatever the interpretation off the term 'subsidy', there is not much wriggle-room there! Mr Hayes, which part of the phrase 'there will be no public underwriting of construction cost overruns' don't you understand? See the page 18 of the pdf document at: http://www.conservatives.com/News/News_stories/2010/03/Conservatives_propose_radical_overhaul_of_Britains_energy_policy.aspx - if this (now) embarrassing document is still on the web by the time you get to it!
But it gets worse for the Government's record. Ed Davey, in a moment of clarity, declared on May 22nd this year, just as the Energy Bill was published, that: "There will be no blank cheque for nuclear - unless they are price competitive, nuclear projects will not go ahead." See http://www.bbc.co.uk/news/business-18144412. '
Indeed on the BBC Sunday Politics show Ed Davey appeared to repeat these sentiments when he commented that 'In the past the Government has paid too much for nuclear power'. But will Ed Davey stick to his guns, or will the powerful nuclear industrial/engineering complex steamroller the Government into another disastrous nuclear investment? I bet that Ed Davey will not be steamrollered (partly because the Treasury seems to agree with him), but this prediction itself flies in the face of the immense influence that the nuclear power lobby has in this country.
If EDF does get its way, then the country will have been fooled over the part 7 years. First we heard that nuclear power was so cheap all it needed was a bit of planning support and maybe a carbon floor price. Then we heard that this was not enough. It needed some 'low carbon' incentives, taking money that would otherwise go to renewables, on the assumption that of course 'more cost effective' nuclear power would wipe the floor with renewables in competitive 'auctions' of contracts. Then we heard that, after all, new nuclear build would need higher subsidies than most renewables would actually get. Now we hear that not only will nuclear power require higher 'strike prices' than other renewable energy sources but it will need the state to guarantee payment of its construction costs as well! This is a process that Tom Burke has described as 'salami slicing'.
Is the British public going to be taken for a bunch of complete fools?
If you want to read the sanitised version of EDF's strategy, you can read it as reported in the Times and the telegraph in reports published today below:
http://www.politicshome.com/images/1.1.Front_Pages/FT_110213.jpg
http://www.thetimes.co.uk/tto/business/industries/naturalresources/article3685179.ece
http://www.telegraph.co.uk/finance/newsbysector/energy/9863994/EDF-eyes-UK-government-help-for-nuclear-reactor.html
In addition it seems that EDF is also demanding a high 'strike price', that is payment for electricity generated, on top of the Government agreeing to 'underwrite' its construction costs. The newspapers (see below) talk of EDF wanting a '10 per cent' return on Hinkley C. That, of course, would only be possible if EDF gets the state 'underwriting' guarantees (for the whole of the investment, not just part of it) because only then would banks and other lenders be willing to lend money to EDF to allow the rate of return to come down from the around 15 per cent that EDF shareholders would expect if the deal was funded wholly off EDF's balance sheet.
Reading between the lines, it seems that EDF is asking for a strike price of at least £110 per MWh PLUS underwriting its construction costs. The newspapers refer to 'part' of the construction costs, but just as EDF has edged the Government towards more and more incentives being pushed in its direction, the guarantees are unlikely to stop at a guarantee for just 'part' of the construction costs.
We have come quite a long road since Government reports announced in 2006 that nuclear power would cost no more than an average of around £40 per MWh. Now, it seems, if it was funded on the same commercial basis as renewable energy schemes, it would cost over £160 per MWh (see earlier blogs on this). 'Underwiting' nuclear power, that is giving it a Government blank cheque so that any shortfall in the ability of the scheme to repay loans would be paid by the Government, might bring the price down towards £100 per MWH (using city analyst Peter Atherton's figure).
The Government would have to swallow a lot of problems if it did agree to EDF's demand. What could it say to offshore wind developers who, according to the Government, are supposed to reduce their costs to £100 per MWh without any 'underwriting'? What could it say to onshore wind developers who are unlikely to be offered more than £80 per MWh without any underwriting (and renewable generators will be on much shorter contracts compared to nuclear power as well).? What could it say to soalr power companies which have gone bust in droves because the Government, far from 'underwiting' their costs, acutally foreshortened the feed-in tariff programme in 2011. What is it going to say to the millions of people shivering in their homes who cannot afford to pay for properly energy efficient households?
This whole sorry saga exposes the total uneconomic nature of nuclear power and the fact that green energy sources (real gree ones, that is, not nuclear) are much more financially competitive than nuclear power.
I can only repeat what I said in an earlier blog:
'Underwriting nuclear risks would be in direct contradiction to what the Conservative Party said in their pre-election energy policy statement in March 2010, called 'Rebuilding Security – Conservative Energy Policy in an Uncertain World'. The Conservatives said: ‘we agree with the nuclear industry that taxpayer and consumer subsidies should not and will not be provided – in particular there must be no public underwriting of construction cost overruns’. Note the statement: 'in particular there must be no public underwriting of construction cost overruns'. Whatever the interpretation off the term 'subsidy', there is not much wriggle-room there! Mr Hayes, which part of the phrase 'there will be no public underwriting of construction cost overruns' don't you understand? See the page 18 of the pdf document at: http://www.conservatives.com/News/News_stories/2010/03/Conservatives_propose_radical_overhaul_of_Britains_energy_policy.aspx - if this (now) embarrassing document is still on the web by the time you get to it!
But it gets worse for the Government's record. Ed Davey, in a moment of clarity, declared on May 22nd this year, just as the Energy Bill was published, that: "There will be no blank cheque for nuclear - unless they are price competitive, nuclear projects will not go ahead." See http://www.bbc.co.uk/news/business-18144412. '
Indeed on the BBC Sunday Politics show Ed Davey appeared to repeat these sentiments when he commented that 'In the past the Government has paid too much for nuclear power'. But will Ed Davey stick to his guns, or will the powerful nuclear industrial/engineering complex steamroller the Government into another disastrous nuclear investment? I bet that Ed Davey will not be steamrollered (partly because the Treasury seems to agree with him), but this prediction itself flies in the face of the immense influence that the nuclear power lobby has in this country.
If EDF does get its way, then the country will have been fooled over the part 7 years. First we heard that nuclear power was so cheap all it needed was a bit of planning support and maybe a carbon floor price. Then we heard that this was not enough. It needed some 'low carbon' incentives, taking money that would otherwise go to renewables, on the assumption that of course 'more cost effective' nuclear power would wipe the floor with renewables in competitive 'auctions' of contracts. Then we heard that, after all, new nuclear build would need higher subsidies than most renewables would actually get. Now we hear that not only will nuclear power require higher 'strike prices' than other renewable energy sources but it will need the state to guarantee payment of its construction costs as well! This is a process that Tom Burke has described as 'salami slicing'.
Is the British public going to be taken for a bunch of complete fools?
If you want to read the sanitised version of EDF's strategy, you can read it as reported in the Times and the telegraph in reports published today below:
http://www.politicshome.com/images/1.1.Front_Pages/FT_110213.jpg
http://www.thetimes.co.uk/tto/business/industries/naturalresources/article3685179.ece
http://www.telegraph.co.uk/finance/newsbysector/energy/9863994/EDF-eyes-UK-government-help-for-nuclear-reactor.html
Wednesday, 6 February 2013
Get your MP to support motion against nuclear subsidies!
On February 7th a motion tabled by a cross party group of MPs questioning subsidies for new nuclear power stations is to be debated in the House of Commons. Please send an urgent message to your MP to urge them to support the motion!
The motion reads:
That this House notes that both the
Coalition Agreement, and numerous ministerial statements, have committed the
Government to provide “no public subsidy” to new nuclear; further notes that
negotiations are currently ongoing between DECC and new nuclear suppliers to fix
the strike price in advance of the legislation on Energy Market Reform; is
concerned by wider issues of subsidy and transparency and in particular that
this process pre-empts the legislation; is further concerned that new evidence
suggests that this constitutes an unjustifiable subsidy to a mature industry;
therefore calls on the Government to pause the process while the Public Accounts
Committee examines whether the Contract for Difference being offered to new
nuclear power generation offers genuine value for money.
Proposed by:
Martin
Horwood, Mike Weatherley, Caroline Lucas, Martin Caton, Andrew Stunell, Zac
Goldsmith, Mike Weir, Andrew George, Tessa Munt.
If the Government was really far sighted it might take this opportunity to announce that the subsidies would be reserved for fuels and technologies with a real future - energy efficiency and renewable energy - rather than the futility of offering money to an energy source that cannot get anywhere without being bankrolled directly by the state.
Centrica, the electricity and gas major, has recently made the long-awaited announcement that it is pulling out of the proposed Hinkley C nuclear power station construction project in which it had a 20 per cent share. The rest of the option is held by EDF. This is covered in the BBC report below: http://www.bbc.co.uk/news/business-21319031
Coming hard on the heels of this news are warnings from the CEO of EDF that even EDF may formally withdraw from the project, hinting that negotiations with the UK Government about a 'strike price' for sales of electricity generated are not going to the company's satisfaction. See:
As predicted in this blog earlier, this Government will not find it politically possible to give sufficient subsidies to allow Hinkley C to go ahead. It would need to give higher subsidies to nuclear power than even allegedly expensive renewable fuels like offshore wind and solar pv (never mind onshore wind which is very cheap by comparison). Yet without such high subsidies EDF will not be able to invest in the project for the simple reason that their shareholders will expect them to put their money into ventures that can earn them more money with greater certainty. Of course what the nuclear industry craves is a return to the old days when the Government, or some nationalised industry, gave them a blank cheque so that they could spend taxpayers money without limit and accountability and then say that nuclear power is cheap. However, those days are gone, at least under this Coalition Government, and under a Labour Government.
It has been a bad week for nuclear power. Councillors in Cumbria rejected plans for a nuclear waste repository - and Cumbria Council were the only local authority which has even given the idea serious thoughts. See:
In a third stroke of 'bad luck' this week, the Public Accounts Commitee announced that a very large bill has accumulated for dealing with nuclear waste. See http://news.sky.com/story/1047184/nuclear-build-centrica-pulls-out-of-project
I am sure all this will not stop the brilliant nuclear power public relations team from keeping the show on the road through its usual fantasy stories. But reality is rather more negative. Recently, at the 'Feeding Renewables' Conference I organised, I bet Martin Alder £100 that there would be no construction of any nuclear power stations before the next General Election. I am expecting to win my bet!
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