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UK energy policy
continues to be a mess. The Electricity Market Reforms, far from sorting out
problems, have created many more. The sub text was always that the new system
had to be able to support nuclear, while not appearing to do so more than it
supported renewables. It has not worked. The Contracts for a Difference (CfD)
system is being used in a way which privileges nuclear over renewables, with a
35 year contract for the proposed Hinkley nuclear plant, compared to 15 year contracts
for renewables, and a promise of £10bn in investment guarantees for
Hinkley. And whereas the
renewables are having to face a new complex series of competitive auctions and
assessments to get access to CfD support, EDF was the only contender for Hinkley,
with a strike price offered which on land-wind and even PV should better by the
time work starts on it in 2015- if it goes ahead. By the time it actually
starts up, presumably after some inevitable delays, in the mid 2020s, offshore
wind could even be cheaper.
This disparity in
treatment has been noticed. In its initial reaction to the proposed CfD subsidy for the Hinkley, the European
Commission said the measures proposed by the UK may not ‘avoid
overcompensation’ and ‘ has doubts on the structure of the CfD for nuclear
which, by its design, duration and scope, has the potential for distorting
competitive conditions.’ It
also doubted ‘whether the combination of aid measures, and in particular of
a CfD with inflation indexation and a credit guarantee, is proportional to the
potential benefits.’ We
now await the ECs detailed analysis. There is no formal deadline for this, or a
final decision date, perhaps it might emerge by the end of the year.
The emerging and
then final EC view on the nuclear CfD may have some impact on the CfDs for
renewables, for which the UK government is also seeking to get EC clearance, so
that early projects can start soon, maybe next year and certainly by 2017, when
the CfD system is meant to replace the Renewables Obligation. That would be
tragic- and unnecessary. The World Nuclear Association admitted that ‘support
for renewable generation forms is specifically allowed under EC guidelines
while no such guideline exists for nuclear power’, but the specifics of the CfD and EMR, which cover
both, have yet to be agreed by the EC. As Alan Whitehead MP put it: ‘by
sticking with the elision of nuclear and renewables within the contract for
difference and investment instrument processes, future renewable underwriting
risks becoming dragged down into a protracted nuclear state aid judgement process. If it was separate, as it was
originally under the Renewable Obligation, it would be clearly derogated from
further state aid examination’. www.businessgreen.com/bg/opinion/2327295/why-the-beastly-eu-has-cried-foul-on-nuclear-state-aid
And,
adding insult to injury, in an unusual move, given all the cut backs, Energy and
Business Minister Michael Fallon implored executives in renewable energy
companies to ‘support our case’ for the EDF Hinkley project by writing to Brussels, since
it is ‘dependent on a positive state aid decision from the European
Commission’. A
unnamed industry source quoted by the Sunday Times (March 16th) said: ‘the renewables
industry is somewhere between bemused and appalled that Michael Fallon has
asked them to lobby for Hinkley Point's [subsidy]. He is living in
cloud-cuckoo-land.’
For the moment
DECC is still proceeding as if the EMR/ renewable CfD arrangements will be
accepted, but as noted above, it has also been shifting the goal post- by
adding an auction process for the renewable CfDs, to increase competitive pressures.
All in response to and endless right wing media came of opposition to green
taxes and all things green. It’s
claimed that the policy changes, new assessment processes and uncertain mood
have lowered the UK attractiveness as an investment location for new renewables
projects. In the latest edition of its quarterly
Renewable Energy Country Attractiveness Index , consultancy Ernst
and Young (EY) says that Britain is ‘in a spin’ because of ‘a combination of prolonged policy
uncertainty, less-than-welcome news that mature technologies must compete for
contracts for difference from day one, and a series of offshore wind project
cancellations.’
And it gets
worse. To curb energy cost rises, the Chancellor has now frozen the UK
unlilateral carbon floor price support (CPF) arrangement. Carbon prices in the
EU Emission Trading system have remained stubbornly low, mainly due to the fact
that, due to pressure from some carbon-intense countries, the overall carbon
cap levels have been set quite high. However when the UK carbon floor price
support system was started in April 2013, with a levy paid by a small extra
charge on all consumers bills, the effective price of carbon was pushed up to
£16 a tonne, with this set to rise to £30 by 2020. Carbon prices don't effect renewables or nuclear directly
but they do benefit these non-fossil energy projects indirectly, making them
more competitive by comparison. That was the aim. Utility Week reported that
according to analysts, the wholesale power price in 2020 would be £5 to £6/MWh
lower with a freeze, compared with original projections and that ‘under the
incoming [CfD] subsidy regime, this would make each contract for difference
more expensive to finance, so the support budget would be used up on fewer
projects’. Not surprising
then, in a joint letter to the chancellor, the Nuclear Industry Association and
Renewables UK (RUK) warned that a retrospective cut would ‘undermine
confidence’ in their
industries- although some greens might say a direct system of support (e.g. a
FiT) that rewarded just renewables, not nuclear as well, would be better.
In the event the
Chancellor ploughed on regardless, capping the Carbon Price Support rate at
£18/ton of CO2 from 2016-17 until 2020, saying ‘this will save a mid-sized
manufacturer almost £50,000 on their annual energy bill. And it will save
families £15 a year on their bills too - over and above the £50 we’ve already
taken off.’ He also
enhanced the compensation scheme for energy intensive to protect them ‘from the rising costs of the
Renewable Obligation and the Feed-In Tariffs’. Otherwise he said ‘green levies and taxes will
make up over a third of their energy bills by the end of the decade’. He also exempted electricity from
Combined Heat and Power plants from the CPF levy. And he claimed ‘this
entire package delivered without
any reduction in the investment
in renewable energy’.
Well not directly, but the CPF freeze will hurt, as will exempting CHP- robbing
Peter to pay Paul. And the overall result will be that CO2 output will rise. www.gov.uk/government/publications/carbon-price-floor-reform
That also looks
likely to be the outcome of the other big green levy cut. To cut energy costs
the government also plan to change the Energy Company Obligation (ECO),
delaying some measures by extending the scheme to 2017. But it’s been claimed
that ECO was much more effective than the hapless Green Deal, which the
government has left alone. See DECC’s consultation: www.gov.uk/government/consultations/the-future-of-the-energy-company-obligation
Under ECO, over 50,000 measures had been installed each month in the second
half of last year, compared to only about 11,000 assessments each month for the Green Deal and very
few actual projects: www.gov.uk/government/publications/green-deal-and-energy-company-obligation-eco-monthly-statistics-february-2014 It’s said
that over 400,000 households will miss out on savings of up to £400 a year on
energy bills due to the national £35 a year per household ECO cuts: www.thetimes.co.uk/tto/news/politics/article4032597.ece
So overall it
looks pretty grim. And there is not much confidence about the longer term, with
no clarity about the post-2020 situation.
DECC’s position is that there should be no mandatory national targets and
the European Commissions seems to have bowed to this idea, in its recent
proposals. There would be just a 27% by 2030 EU wide indicative target for
renewable energy, within a wider EU context of a 40% cut in emissions. That
would leave each EU country free to choose how to proceed- with renewables,
CCS, shale gas, nuclear or whatever the market chose. Welcome to the world of
market chaos. Or rather political chaos. With the last straw being that the
proposed new Ofgem ‘full market investigation’ of energy prices will not cover
the cost of the Hinkley nuclear project, despite that being likely, as SSE put
it, to ‘add considerable costs to consumer energy bills for 35 years.’ Energy Secretary Ed Davey said: ‘The
investigation will not deal with that, because it involves policy on the
generation mix. A mixed, diverse source of low-carbon energy is the best way in
which to protect the consumer’.
A
good input
https://theconversation.com/uk-energy-policy-gets-more-complex-but-goes-nowhere-23272
Also see http://www.carbonbrief.org/blog/2014/03/the-carbon-price-floor-disliked,-divisive-and-about-to-be-frozen/
