Friday, April 3, 2009

Market power undermines the future

The Crisis - What’s gone wrong?

Global economics are in disarray, and even market enthusiasts like Lord Browne are now saying something must be done. The energy market, like other markets, has become increasing competitive as regulatory mechanisms have been relaxed over the years. In response, the big energy companies have either tried to develop monopolies (e.g. EDF, E.ON), or more recently, to back away from what they see as risky investment in things like renewables (e.g Shell, BP). So the UK renewables programme has been hit.

In response the government has tried to reduce the risk by imposing a draconian new planning system - so that opposition to new projects (renewables, but also of course nuclear) can be squashed. The energy minister has added moral persuasion as an extra pressure- being opposed to wind is ‘antisocial’. This stream roller approach is likely to create a lot of resentment and will possibly make the situation worse.

The government has also continued with the Renewables Obligation, which provides over the odds support for the most competitive projects e.g all on-land wind projects, regardless of their efficiency, still get 1ROC/MWh, which wates a lot of money that could be spent on other projects.

What they could have done is adopt a Feed In Tariff (FIT) across the board - that, with a system of price degression as used in Germany, would have matched funding to projects and reduced risks for all projects, including for new areas of renewable development, like wave and tidal power. Instead all we’ve got is a promise of a FIT just for small projects (under 5MW), and not until next Spring.

It’s not clear if this makes too much sense. Grant aid has been suggested as a better approach for small community projects, although not along the centralised lines adopted in the disastrous now abandoned Low Carbon Building Programme. A more decentralised approach could be more effective- perhaps via local part-private, part-public Energy Service companies (ESCO’s), who can develop projects based on local knowledge within a loosely competitive market framework.

At the national and international level the governments focus is on reducing risk in terms of ‘security of supply’. This seems to be interpreted very narrowly- as mainly concerning gas and oil supplies. A more creative approach would be to look to the opportunities that could be opened up by a pan-EU supergrid, linking in new renewables resources from around and outside the EU- as opposed to trying to rely on diminishing and polluting oil and gas reserves in politically unstable or dubious middle eastern areas.

There is some EU enthusiasm for the supergrid idea, but in terms of new energy options, the UK and French governments, and the big German and French power companies, seem more interested in nuclear power, possibly since they think this will allow them to maintain (respectively) their political and market control. Evidently they see the idea of opening up markets to North African solar (CSP in Morocco Algeria, Tunisia etc), or wind power from the near east (Turkmenistan, Kazakhstan etc have huge potential wind resources), as more problematic. Odd that, since they seem quite happy to rely increasingly on these areas for oil and gas. But maybe they think these resources can be more easily controlled. And certainly these conventional fossil sources fit more comfortable with current technological and market arrangements- short term and climate threatening though they may be.


  1. Great post - but I've got two questions, one easy and one more difficult:

    1. Will the new banded ROCs help to shift subsidy to technologies that are more risky, and thereby encourage a wider range of renewables?

    2. If major energy companies are more concerned with short-term control of oil and gas, how can market regulation be reconfigured to promote CSP, the Supergrid, etc? Your ESCO suggestion seems promising, but these companies wouldn't have the international reach or clout to work on major international projects.

  2. The new banded ROCs will help offshore wind a bit and in theory also wave /tidal (all of which can get 1.5ROCs/MWh) but so far none of the many projects in the later category have been deemed eligible for ROCs, or even for support from the Marine Renewables Deployment Fund. AD biomass also gets 1.5 ROCs and some biomass CHP 2ROCs and may start to move ahead.

    The big utilities mainly hate the supergrid idea since it would increase competition - and also since they may be asked to pay for it! I was keen on windfall tax to return some of their excess profits to support projects like this.

  3. Events move on-

    Quotes from EDF's submission to the UK governments renewable energy staretry consultation:

    ‘As the intermittent renewable capacity approaches the Government’s 32% proposed target, if wind is not to be constrained (in order to meet the renewable target), it would be necessary to attempt to constrain nuclear beyond what is practicable’.

    'EPR nuclear plant design can provide levels of flexibility that are comparable to other large thermal plant. However, there are constraints on this flexibility (as there are for other thermal plant). For example, the EPR can ramp up at 5% of its maximum output per minute, but this is from 25% to 100% capacity and is limited to a maximum of 2 cycles per day and 100 cycles a year. Higher levels of cycling are possible but this is limited to 60% to 100% of capacity’.

    ‘A lower volume of intermittent renewable electricity generation and higher volume of renewable heat generation by 2020 would create a better investment climate for all low carbon technologies, including nuclear and CCS’.

    E.ON were more circumspect:

    ‘The high levels of variable and relatively unpredictable wind and other renewable generation envisaged by Government will have very significant effects on the wholesale power market. Prices will become more volatile. At periods of low demand and high wind generation, available renewable and nuclear capacity may exceed demand requiring nuclear or renewable generation to be curtailed. This will lead to wholesale prices falling to zero or to negative prices. This will affect the economics of either or both plant types’.

    all from ‘UK Renewable Energy Strategy: Analysis of Consultation Responses’ Prepared for: Dept of Energy and Climate Change