Tuesday, May 22, 2012

The new Energy Bill is everything the UK doesn't want

The draft Energy Bill, published today, will do nothing to help energy efficiency or make it easier for new renewable energy companies to enter the market place.

It is too complicated, biased towards the Big Six, gas and nuclear, and still contains many uncertainties.

Even the Institute of Directors thinks so. Corin Taylor, its Senior Economic Adviser said:
"Businesses need clean, secure and affordable energy, but we're concerned that the draft Energy Bill may fail to deliver. We need to see a technology-neutral approach adopted as soon as possible, so that the cheapest low-carbon energy sources are prioritised, but the Bill confirms that the Government will try to pick energy winners for at least another decade.

"It looks like an overly-complex way of delivering much-needed investment in Britain's energy infrastructure."

Joss Garman, senior energy campaigner for Greenpeace, slammed the Bill for failing to do anything about energy efficiency, “the fastest and the cheapest way to bring down both bills and emissions, and said it will make it "harder to invest" in renewable energy, particularly for small generators.

“The coalition has decided to throw billions of pounds at the failing nuclear industry, which is going to send household bills even higher," he said, adding that by encouraging greater "dependence on burning expensive imported gas to generate electricity", this "will increase bills for families and businesses and see money going to countries like Qatar and Norway instead of back into the British economy.”

Dr Neil Bentley, CBI Deputy Director-General, said there are still many unknowns. “We are still some way from having a detailed picture of how the electricity market will look in the future," and that it was now up to Parliament to ensure that it "not only gets it right, but does so as a matter of urgency".

“The clock is ticking to create the market certainty that will unlock billions of pounds of private sector investment, generating many new jobs across the UK, and securing an affordable supply of energy," he added.

Which? executive director Richard Lloyd is sceptical and said he "wants to see more evidence and the small print before we can judge whether this will work for all of us who are expected to foot the bill”.

"Contracts for Difference could see potential savings for consumers but the Government must be honest about the cost that this investment will involve," he added, at the same time calling for reform of the retail market and "an effective energy efficiency strategy".

The IPPR also says that a "tax on the emissions of power companies contained in today’s Energy Bill will do nothing to reduce carbon emissions while piling more cost on to the shoulders of already hard-pressed consumers in the UK, and threatens to damage the reputation of policies aimed at tackling climate change". It says it will waste £1 billion and argues for a different approach to raising the carbon price and raising certainty for investors that would see the creation of a European Carbon Bank to manage the price at an EU-level.

The Institution of Engineering & Technology (IET), the non-profit engineering body, also expressed surprise that "no reference is made to reducing demand in the announcement made today".

The chief mechanisms for promoting low carbon generation and keeping the lights on are the feed in tariffs with contracts for difference (FIT CfD) and the creation of a capacity mechanism. But how will they work?

What is FIT CfD?

It is a type of power purchasing agreement between the generator and the purchaser that guarantees a price over a period of time, with a top up, equal to the price difference between the cost of producing the electricity and the current market price.

They are intended to help provide a guaranteed, fixed return on investment to compensate for the high initial cost of constructing low carbon generation plant.

The Bill's impact assessment admits that “only low-carbon projects that are able to secure FIT CfD contracts will be able to participate in the market".

For intermittent generation like wind and solar power, pre-selling a day ahead in the electricity market, a common practice, would give it a low price. You might think this was an advantage for renewables, but it is not if a higher price is required to repay investors.

The Bill allows for FIT CfD contracted plant to receive a top-up price to compensate for this perceived disadvantage. But as the price of constructing new plant comes down, this policy could actually prevent some types of renewable energy from being as competitive as they otherwise would be.

However, it should remove or improve the situation where wind farms are currently paid not to produce electricity, which has been seized on by anti-wind farm protesters as a reason to oppose them.

In a future Britain where a FIT CfD package is implemented, there will be savings in carbon costs as decarbonisation will be more rapid than without the package.

Generation costs would also reduce as there will be reduced output from gas plant and more from coal-with-CCS (carbon capture and storage) plant (coal is cheaper than gas).

This assumes that CCS materialises as an installed technology for coal-fired plant. This is not an inevitable outcome if gas plant becomes relatively cheaper due to the introduction of the much-criticised low Energy Performance Standard (EPS) for generation plant of 450g/kWh being proposed by the Bill, that would let gas plants be constructed without the need for expensive carbon capture and storage.

It's a gamble. The modelling used by DECC argues that by the latter half of the next decade, assuming nuclear power stations come on stream and are in budget, then consumer costs for electricity will be reduced if fossil fuel prices are high. The question is, whether anyone believes this will happen.

If this low carbon generation does not arrive, more fossil fuels will be burnt and the UK will spectacularly fail to meet its carbon emission targets of 50g CO2/kWh in 2030: it will be 190g CO2/kWh.

Under FIT CfD, consumers will be shielded from longer-term wholesale price increases, but, equally, if prices go down their bills will not.

And in the long run, prices from renewable energy installations are bound to reduce as the technologies mature, as Ed Davey admitted in a television interview with Andrew Neil on Sunday, i.e., consumers could end up paying more than they would otherwise.

More damagingly, the impact assessment says, "changes in wholesale prices only affect the amount of support paid out by Government; hence the price risk is borne by Government balance sheets."

If the price to guarantee the building of new nuclear power stations is on the Government balance sheets, then this is the very definition of a public subsidy and will not be permitted by Brussels.

Assuming it does proceed, then overall revenue expectations for generators would be based upon the agreed FiT CfD strike price.

For nuclear power, a ‘strike price’ of over £150 per MWh (assuming a 70% capacity factor), or, at the very least, £135 (assuming 80% capacity factor), would be required by a credit rating agency in order for EDF to achieve is nuclear build plans, according to Dr. David Toke, Senior Lecturer in Energy Policy at the University of Birmingham.

This is more than the figure of around £130 per MWh that offshore wind farm owners are currently being paid; which is made up of two ROCs, worth around £42 per MWh each, plus the wholesale electricity price, around £45 per MWh.

It would mean that consumers would be paying more for their electricity just to support nuclear power.

Capacity market

With the proportion of wind power expected to rise to 25% in the next 10 years, increased capacity is required to cater for days of high demand and low wind.

The capacity market is a strategy being proposed by the Government to find the cheapest way of meeting this demand for extra generation capacity.

It is based on the assumption that 19GW (around 20%) of total generation capacity is expected to go off-stream between now and 2020, compared to around 6GW that closed in the last decade.

However, EDF has announced this week that it is to ask the Office for Nuclear Regulation if it can keep open its existing eight nuclear power stations for a further 10 years.

If this were to happen, there would be plenty of time for extra gas and renewable capacity to be built, which would preclude the need for new nuclear power stations.

In particular, the capacity market strategy favours the construction of new gas plant, with the impact assessment for the capacity market containing an example of how it will benefit a typical new Combined Cycle Gas Turbine plant. It would receive the highest revenues: a total of £275 per kilowatt. This is likely to stimulate the building of new gas-fired power stations.

A capacity market is a significant intervention in the market with potentially substantial administrative costs for businesses.

This will disproportionately affect small generators and new entrants in the market, in other words favour the status quo of the Big Six.

This is not likely to go down well with anyone except the Big Six themselves.

In summary, in their current form, the proposals do not guarantee lower bills for consumers, do not support energy efficiency, and seem artificially to favour nuclear power and gas power generation with no guarantee of meeting the UK’s carbon emission reduction goals. There is also no guarantee that they will be permitted by European Union rules.

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