Wednesday, July 1, 2009

Connect and Compete

Competitive markets, liberalisation and privatisation were touted as being the way to cut prices, stimulate innovation and improve services. In the energy sector the reality has proved to be very different. The privatisation of the UK’s nationalised electricity sector meant the replacement of the Central Electricity Generating Board by National Power and Powergen and the creation of a dozen or so new regional electricity supply companies- from the old regional boards. That was meant lead to competition in a new liberalised market context. But reconcentration rapidly occurred, plus vertical and horizontal buy-outs. The UK power sector is now dominated by oversees companies- Germany’s E.ON and RWE, and the French EDF.

Despite continued resistance (e.g. France has dragged it feet on the privatisation of EDF) the European Commission is still adamant that competition is the way ahead, and it is desperate to create a fully competitive single EU energy market. That is one reason why it has backed the pan- EU ‘Supergrid’ idea, linking up markets and generators via a High Voltage Direct Current (HVDC) grid network across the EU. However, the big EU utilities seem less keen. In addition to improving the overall efficiency of energy production and use across the EU, the Supergrid could make it possible to balance the variable inputs from smaller-scale/distributed renewables like wind farms around the EU. But it may also threaten the market power of some of the large utilities- most of who are much more keen on large scale centralised nuclear.

David Andrews, the co-ordinator of the Claverton Energy Group, a network of UK energy practitioners, says that ‘Many commentators believe that the Supergrid, whilst good for energy consumers, is not necessarily good for the big utilities, since it will make many of their existing power stations obsolete, mean fewer new power stations have to be constructed, and lead to less sales of power station fuels by again selecting the most efficient stations this time at a transnational level’. He concluded ‘It is for this reason that it is believed by many commentators that the Supergrid cannot be merely left to market forces’.

There seems little chance of EU taking on a major role in actually setting up a supergrid - as a shared public asset. It’s more likely just to offer grants to the private sector and then seek to regulate the new market. Some smaller specialist companies do seem interested- e.g. the pioneering Irish Airtricty, and the newly established Mainstream Renewables, along with Norwegian transmission company Imera Power. With 150 million euoro’s on offer from the EU for a North Sea Supergrid linking up offshore wind farms, that’s not surprising.

There has also been interest shown in another supergrid type project- the installation of focussed solar thermal ‘Concentrating Solar Power’ plants in North Africa, linked back to the EU by undersea HVDC power grids. It’s an ambitious idea- 400 billion euros for 100GW of CSP capacity. But with one possibility being the availability a new lucrative EU ‘Feed In Tariff’ for imported solar power, Deutsche Bank, insurer Munich Re, Siemens and utility giants RWE and E.ON. seem to be keen to explore it. So it could be that the big companies will get involved with some Supergrid type projects- if a new market emerges and profit is available. In which case, it will be vital for the EU to regulate how it’s done- to ensue that its done right. For example, what would be the terms of trade offered to the North African countries hosting the projects?

Of course, for the big utilities, the attraction of the supergrid may not just be for linking in to desert solar and North Sea wind: they may also see it an answer to the problem of finding a market for the excess power that would be produced at low demand periods by a large new EU nuclear programme. If it’s a private grid, what’s to stop them?

These issues are all pending- it will be a while before the supergrid gets going. But a small example of how things can go without a wider longer-term perspective is already emerging in relation to the current series of the UK’s off shore wind farms. Most of these project are now being sited several miles off the coast, linked to land via sea-bed marine cables. There are various ways in which these could be arranged. So far however it seems to be a case of each offshore project having their own parallel (and very expensive) links back to shore. In some cases that seems likely to involve duplication of effort, with links to rival projects running close to each other, in parallel. It would arguably be more rational and cheaper overall to have a network of offshore links, with possibly a single link back to shore for each region, offering a common service for each project to use. That is even more the case as we go further out to sea with more wind farms, and would be vital if we also build links across the North Sea to the continent- as part of the EU supergrid concept.

However, in a submission in March 2009 (FBEN 29) to the new Energy and Climate Change Select Committee, E.ON commented: ‘A super grid connecting offshore wind farms to adjacent countries is an exciting proposal, but it is unclear whether this is the most cost effective route for connecting new offshore wind. Timely delivery of the supergrid will be an issue. For example, round three offshore windfarms should not be delayed because the connection of a zone is dependent upon a wider interconnection project’.

Ofgem, the energy regulator, has also noted that the advantages with the parallel ‘point to point’ radial approach is that it ‘allows generators to proceed individually and avoid delays due to third parties’, but it has said that it’s also happy with the more integrated network approach. Ofgem nevertheless got a pretty rough ride on this issue at last years BWEA wind conference - it was argued that the proposed grid regime would not encourage joined up networks, and that change was needed to ensure collaborative development and a strategic approach. Do we really need a host of separate lines just to protect competition in the short term?

That was certainly an issue for Green MEP Claude Turmes, who was the European Parliament's lead negotiator for the Renewable Energy Directive. Speaking at the UK Renewable Energy Associations annual conference recently, he claimed that the competitive tender process favoured by Ofgem was delaying grid connections for offshore wind projects: ‘The UK approach, imposed by Ofgem, for competitive bids for chunks of 40 km cables for offshore, is not very productive, to put it mildly. You have to get rid of Ofgem's over-liberalised idea, by which you can have competition on grid installation.’

It’s the same old story- competition often undermines progress, and buttresses the power of the powerful, while weak regulation does little to alter the situation.