Further shift of renewable incentives towards nuclear power planned by Government

In what will be a further cut in incentives for renewable energy and shift towards funding of much more expensive nuclear power stations, the Government is preparing to 'auction' contracts for onshore wind and solar power. The auctions work by giving contracts to those bids that will involve the lowest premium prices to be paid for electricity generated.

The 'auctions' for onshore wind are a back-door method of cutting windfarm deployment by at least a half since at least half of windfarms which receive contracts will never be built because they will not be given planning consent. The system is notorious in the wind industry in the UK because it was used in the UK in the 1990s and resulted in no more than 30 per cent of projects that won contracts in the 'auctions' actually being built. Reasons for this low-take up included planning failure but also the tendency for bidders to put in optimistically low bids to obtain contracts which could not be implemented when the project economics became better known.

Far from increasing the number of windfarms (as the anti-windfarm Telegraph coverage implies) history, and logic, suggests that the number of windfarms and solar power projects will be dramatically cut. Unlike the present system of fixed tariffs for each particular technology, the quantity of capacity auctioned is strictly controlled, and no account is made for projects which fail to be built.

This move can also be seen as part of a more general trend towards shifting funding of 'low carbon' energy sources away from renewables and towards nuclear power. Nuclear power, through Hinkley C, is also poised to receive much more generous terms than renewable energy, and this move will exacerbate this trend still further.

Hinkley C is set to receive £92.50 per MWh for a 35 year contract with 65 per cent loan guarantees. Onshore windfarms will receive (from 2018) £90 per MWh but only for a 15 year contract and with no loan guarantees. If windfarms were given just 20 year contracts to receive premium prices (as applies under the Renewables Obligation which is being replaced by Electricity Market Reform) and also 65 per cent loan guarantees then the 'equivalent' price (to £90 per MWh on existing terms) would fall to around £70 per MWh - around a quarter cheaper than Hinkley C.

It is often claimed that windfarms require 'back-up' services. In fact such services are relatively cheap, and a lesser known fact is that considerable reserve capacity also needs to be built (and will be paid for by the system not the developers) to safeguard against system effects of sudden breakdowns of nuclear power stations, not to mention other in-kind incentives for nuclear power (including insurance liability).

You can see a report on this latest Government shift towards nuclear power and away from green energy at:

http://www.telegraph.co.uk/earth/energy/renewableenergy/10517240/Green-energy-cost-cutting-plans-may-lead-to-more-onshore-wind-farms.html
and issues with offshore wind....http://about.bnef.com/press-releases/uk-offshore-wind-build-out-not-certain-despite-price-increase/

Why doesn't Labour criticise nuclear funding deals?

Tom Greatrex, Labour's energy spokesperson, has criticised me and my other academic colleagues for arguing that it is now plausible to talk about Scotland having independent control of electricity policy. See http://www.heraldscotland.com/news/home-news/energy-experts-in-u-turn-on-union.22875552

But as I have told him, in an email message, a big part of the credibility behind a sustained new nuclear build-up (and hence the argument for Scottish electricity independence) is precisely because Labour appears to be giving full backing to continued efforts to roll out nuclear power stations. In its most recent policy document, for example, 'Powering Britain: One Nation Labour's Plans to Reset the Energy Market', Labour talks about continuing the system of contracts for difference for nuclear power. There is no criticism of the cost of the Hinkley C deal, or indication that Labour departs from the Government's desire to continue to give, to future nuclear power plant proposals, loan guarantees, ultra long (35 year) contracts as well as premium prices much the same level as given to Hinkley C (£92.50 per MWh).

I wrote to Tom Greatrex saying the following:

Dear Tom,

I can understand your dismay at seeing a group of academics taking a new line which does not fit in so well with the 'Better Together' campaign. I have not taken this step lightly. A key reason for this (among others), but perhaps the biggest of all, is the policy of giving large premium prices to nuclear power in the shape of Hinkley C and the Government's projections to build three twin reactors by 2030. Now if Labour had cast doubt on this plan and said it would not give anything like the strike price and loan guarantees and contract length to this or other nuclear projects this this Government are doing, then obviously there would be less argument in support of the contention that in the medium and long term very great costs would be incurred by the British consumers - and Scottish consumers of course. There would be more to spend on renewables instead or energy efficiency for the same diversion of consumer and taxpayer resources.

However, Labour appears to be conspicuous in its desire to maintain a consensus position over the projected level of nuclear funding. If it was not then you would be able to reduce the strength of the argument that we present.

The other point I would make is that having Scottish control over clean energy incentives is easily absorbed in what has been called a 'devo-plus' agenda as well as full independence. 

Best Wishes,

David Toke 

Also see an article of mine on the subject of Scotland and electricity independence in 'The Conversation' at

http://theconversation.com/scotland-benefits-by-paying-for-its-energy-not-uks-mistakes-21200

Scottish electricity consumers to get lower prices in an independent electricity system - and meet Scottish renewable energy targets

As the Press release from the University of Aberdeen says:

An analysis of the effect of recent UK government policy decisions on nuclear energy suggests that Scottish consumers could face lower prices in an independent Scottish electricity system. The report is entitled Is an independent Scottish electricity system good for renewable energy and Scotland? 

The full report can be accessed at: http://issuu.com/therobertgordonuniversity/docs/the_dreud_report_2013

A collaboration of five academic experts from different UK universities have studied the effect of two new policy developments at Westminster on the Scottish renewables industry, and the consequent impact on prices for electricity consumers in Scotland as part of the UK, and as an independent Scotland with its own separately managed and financed electricity system.

The Scottish Government is set against nuclear power plant being given planning consent on Scottish soil, and has ambitious targets to supply 100% of electricity consumption in Scotland from renewable energy by 2020.

At the beginning of 2013 the group had published a paper on the prospects for renewable energy in the context of the debate about Scottish independence (Toke et al 2013). The conclusion at that time was that it would likely be rather more expensive to reach the Scottish Government’s renewable energy targets in the case of an independent Scotland as opposed to Scotland remaining within the Union, and this would push up electricity prices for Scottish consumers.

The research project Delivering Renewable Energy Under Devolution (DREUD) was funded by the UK’s Economic and Social Research Council (ESRC) from 2011-2013 and conducted by Cardiff University, University of Birmingham, Queens University Belfast, and Robert Gordon University.

However since the paper was published there have been significant developments in UK energy policy. As a result the authors have changed their conclusions with respect to the prospects for renewables – and consequently prices - in the case of Scottish independence, or ‘devo plus’ circumstances, where Scotland has an independently managed and financed electricity system.

Their new report has looked at the implications of the UK Government’s recent decisions on new nuclear power and Electricity Market Reform for the prospects of renewable energy in Scotland.

Dr David Toke, Senior Lecturer in Energy Politics previously University of Birmingham and now Reader in Energy Politics University of Aberdeen, is lead author of both reports. Dr Toke explains:  “Two new factors radically change the context of our earlier analysis. On October 21, the UK Government announced a ‘deal’ for a new twin nuclear reactor at Hinkley C, and possibly a second twin reactor at Sizewell C. This will increase prices for UK consumers for over 30 years. However this increase would not have to be paid by consumers in an independent Scottish electricity system.

“The second development is that in June 2013 the UK Government announced incentive levels and terms for renewable energy from 2017/18 as part of its Electricity Market Reform (EMR). The level of these incentives seem unlikely to support major deployment of Scottish offshore renewable resources. The incentives for offshore wind and also tidal stream and wave power payable from 2018 under EMR have been significantly reduced, and they are critical for offshore wind schemes in deeper waters. If operating an independent system, Scotland would be free to set its own incentives for development of offshore and onshore renewable schemes. Furthermore the cost of these and other technologies such as solar pv is likely to reduce, while English and Welsh consumers are still paying premium prices to support the new nuclear power stations.

“We previously argued that that, relative to remaining with the Union, Scottish Independence could substantially increase the cost to Scottish consumers of achieving its renewable energy targets. However, having reviewed the impact of the Government’s recent decisions on nuclear power and incentives for renewables, we believe that this is no longer the case. Moreover, the notion of Scotland having its own renewable energy support mechanism (and indeed its own electricity market arrangements) is no longer necessarily detrimental to the prospect of renewable energy in the long term. On the contrary, on the basis of the evidence we have considered, we believe that Scotland’s renewable energy programme would now benefit from having an independent electricity system and support arrangements for supporting non-fossil fuel sources of electricity.”

ENDS

Notes to editors

The full report Is an Independent Scottish Electricity System now a good solution for renewable energy?  is available as a pdf from Communications at University of Aberdeen

Contact Shaunagh Kirby on 01224 273108 s.kirby@abdn.ac.uk

The authors of the report are: David Toke (University of Aberdeen, previously University of Birmingham), Peter Strachan, (Robert Gordon University), Richard Cowell (Cardiff University), Fionnagala Sherry-Brennan (Cardiff University), Geraint Ellis (Queens University Belfast) 

Chinese demand right to build UK power plants as price for Hinkley C

The still tentative nature of the Hinkley C 'deal' is being emphasised by reports that the Chinese government are demanding a cast-iron commitment from the UK Government to let them build Chinese owned power plant in the UK. If the UK Government agree, this will be yet another step down the slippery slope towards paying a higher and higher price for the sake of keeping face on its badly thought-out new nuclear build programme.

See http://blogs.ft.com/nick-butler/2013/12/01/hinkley-point-is-the-new-nuclear-deal-on-or-off/

What could be next? We already know from answers to Parliamentary Questions that the Government have not ruled out altering the strike price, which means that future prices could be increased as costs overrun. We know that the Government will be hooked up to payout on its agreement to give loan guarantees if the plant does not start generating on time and loan repayments fall due with no income stream to pay them.

However we are unlikely to know for sure how much the plant will cost and how much the Government will be paying for many years yet. Indeed the whole project could be delayed for a long time by haggling at the European Commission. Their permission is required for state aid if the Hinkley deal is to go ahead, and that permission could be a long time coming. The EU law says that the UK Government can only formally demand a response after 18 months, after which the Commission is duty-bound to give a ruling within a further two months. In fact the 18 months falls dues around 3 weeks or so before the 2015 General Election. This means that it may well be up to the next Government to take a final decision over Hinkley C. Negotiations at the EU may bring demands for a revision of the deal, something that the UK Government will resist since it is likely to unravel if the terms are made tougher for the developers.

The leadership of the Government, guided I am told through the cabinet office, is determined, despite doubts in the Treasury, to force through the nuclear deal in order to satisfy critics of the Government's credibility on its energy policies. But in reality nuclear power does nothing to stop blackouts. This is because putting more nuclear online simply leads to the same amount of planned gas generating capacity being cancelled. Also it makes balancing the grid with a large proportion of renewable energy more difficult since nuclear power has to be kept running as much of the time as possible. Nuclear power saves carbon emissions, but so do renewables of course, support for which is set to start tapering off from 2017 under the Government plans.

It does seem implausible that the Government would carry on funding a sizable renewable energy programme at the same time as a nuclear one. Otherwise, with three twin reactors planned for 2030, electricity prices will rise by over 10 per cent with both a renewables and a nuclear programme, or just 7 per cent with just new nuclear being funded (with the nuclear prices rises lasting some 35 years, much longer than the incentives for renewables).

So the Government's price for its nuclear programme will include hefty price rises for an increasing size of the UK electricity market being owned by the Chinese Government.

Wind Power history blows away Ed Davey's excuse for giving short contracts to renewables

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.

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/

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.