Tuesday, April 1, 2014
UK energy mess gets worse
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/