Saturday, June 2, 2012

EMR uncertainties

The Electricity Market Reforms (EMR) are a key to the governments energy plans, but have still to be consolidated in legislation. There was media speculation about delays due to the complex proposals for ‘Contracts for a Difference’ (CfD) that are meant to  provide support for nuclear, renewables and CCS. It seems that, in order to get the new contract auction market process operating,   DECC  would have  to set an  initial ‘strike price’.  That’s an interventionist approach and not something DECC is keen on. DECCs energy markets director general Simon Virley said "We want to move to market-based systems and tendering as soon as we can, which means we need to have more than one player in any one market. And we need to have technologies at a sufficient state of maturity to be able to bid into those auctions."

However, Dr David Toke from Birmingham University calculated that the strike price  would have to be set at  around £150/MWh to make new nuclear viable,  more than  offshore wind now gets. See his May 5th entry: Even that might not be enough to entice potential investors into nuclear: it may be a 50 year old technology, but the proposed  new plants (EPR and AP1000)  are as yet unproven and, as  the first EPR construction projects  in France and Finland have ilustrated, costs can escalate alarmingly. Credit rating agencies have already down-graded some companies considering investment  in new nuclear - it’s seen as increasingly risky. 

Centrica and Gulf Suez are looking decidedly wobbly on their proposed involvement as result. E.ON and RWE took the hint and pulled out of the Horizon project- which was focused on reactors at Oldbury and Anglesey. RWE said “The global economic crisis has meant that capital for major projects is at a premium and nuclear power projects are particularly large scale, with very long lead times and payback periods. Even more tellingly, E.ON said : ‘We have come to the conclusion that investments in renewable energies, decentralised generation and energy efficiency are more attractive – both for us and for our British customers.’

With DECC evidently still hoping that new backers will be found (perhaps from China)  to replace E.ON and RWE, but  EDF, the main surviving nuclear backer,  pressing for a speedy resolution, you can see why getting the EMR sorted  is very sensitive-  many see the  main aim of the  EMR as being to  provide support for nuclear.  Meanwhile Greenpeace's senior energy campaigner, Joss Garman, urged ministers to resist any calls for a delay to the legislation so that renewable energy projects could get proper backing. "With a desperate need to leverage investment into securing clean, affordable energy supplies, and with families and businesses feeling the squeeze because of gas-fuelled energy bill hikes, it's astonishing the government seems to be de-prioritising its energy market reforms. Ministers must stop dithering and take decisive action to reduce our risky and expensive over-dependence on gas, and to get both energy bills and pollution levels under control."

Gaynor Hartnell, REAs chief executive however felt that if there was a delay and revamp of the EMA, it would give the government the opportunity ‘to reconsider its plans for renewables and gives them the priority they deserve. They can deliver early CO2 savings in the transition to a low-carbon economy and their build out should create 400,000 jobs by 2020.’

In the event, the EMR bill was tabled for debate in the next parliamentary session. But who knows what will actually emerge as that unfolds? It does seem odd to tie the fate of renewables to that of nuclear (and indeed CCS). Some say that, rather than the CfD pretending to be a Feed In Tariff, a separate premium price Feed In-Tariff for renewables, with proper price degression, would be best as the replacement for the RO. As for nuclear, let it sink or swim, unaided, while for CCS, well the debate continues. Not everyone thinks it’s worth the effort- it’s expensive and technically a  long shot. And who would want to insure against the risk of accidental CO2 release over thousands of years?

Lots of unknowns. And to add to them , as it stands, the EMR issue and the fate of the competing technologies will remain uncertain for some while-  with 2014 as the earliest CfD start date.  DECC has issued draft proposals but they contained little new just the news that the CfD contracts would be made with National Grid not, as some investors had hoped, the government.  So there would be no government guarantees.

Following the elections in 2012, nuclear power is now being challenged in France, increasingly on economic grounds, this leading to potential knock-on impacts for the UKs already diminished  EDF-led nuclear programme. Will the UK really be able to go against the tide and be the only country in the EU with a major nuclear expansion programme?