Tuesday, December 1, 2015

Energy policy: market power versus political intervention

The UK’s energy policy has become increasingly market driven, in the belief that competition will reduce costs. All the support systems for renewables, from the early NFFO through to the Renewables Obligation and then the new Contracts for Difference (CfD) system, are all based on market competition- in the case of the CfD, via competitive contract auctions. That has contrasted strongly with what was done elsewhere in the EU, in Germany especially, where guaranteed-price Feed in Tariffs  (FiTs) have ruled. One result is that much more capacity has been installed, for example over 70GW of PV and wind in Germany, than in the UK (24GW total so far), which remains near the bottom of the EU renewable energy league table, despite having a better renewable energy resource base than almost any other EU country.   

However things are changing- though not for the better. In the UK, the new Tory government is trying to remove the last vestiges of direct support for new renewables, via further cuts to the small FiT than was introduced after much grass roots pressure. Though  that’s also happening elsewhere- FiTs have been cut across the EU, and are being phased out in preference to market based systems, including contract auctions, as in the UK. In part this is since, it is argued, renewables are becoming cheaper and do not need high levels of FiT support, with its impact on costs to consumers. There is some truth in that. The initial pass-through cost to consumers (for PV especially) was relatively high and some of the new technologies are becoming near competitive with conventional sources in some markets- although it has to be remembered, those sources also get subsidies (in fact much more that renewables), so it's not a level playing field. Although some renewables may prosper in the new competitive regime, others will not, especially the newer, less developed, options, and the end result of the cut backs could be a slow-down in the growth of renewables, due to what some see as a premature, and indeed punitive, removal of support.  Certainly, in the UK, that seems to be the intent of the removal of exemption for renewables from paying the Climate Change Levy (CCL).

While all this might be seen simply as the result of shift to the right, earlier on there was some speculation that the Cameron government was actually prepared to intervene in markets quite strongly. The hard right obviously saw the CCL and the FiTs as  unwarranted interventions, but, despite their competitive element, they were also not happy with the CfD for renewables, or with the capacity market that was said to be needed to maintain back-up.  In part this was since the hard right didn’t like renewables, even cheaper renewables like on-shore wind, sometimes due to concerns about local property values and views, but more generally since the new disruptive technologies were undermining profits in the conventional energy system.  So there was a multiple ideological backlash. The CCL was mangled, the CfD toughened up even more, with on land wind excluded, FiTs revamped and large solar blocked via new planning rules.

This harder line approach has spread to Germany, which is in the process of dismantling the FiTs and creating a new market-based system. It has also decided not to set up a separate capacity market. Instead all will be run through a direct competitive market. So, if anything, it has, in some respects, gone further right than the UK. This raises many questions: can price signals and competition really hold it all together, and ensure that enough balancing capacity, including demand management, is available?  And also stimulate energy saving? And reduce imports? www.bmwi-energiewende.de/EWD/Redaktion/EN/Newsletter/2015/07/Meldung/white-paper.htm

The main countervailing influence, the state imposed block on nuclear in Germany apart, is the belief that the EU Carbon Trading System (EU-ETS) will help restore some sort of balance, squeezing coal out. So far, with the carbon caps set much too high to stimulate much trading, that is something of a fantasy, although it is shared by the UK, which has even introduced its own unilateral top-up system, to try to force the price of carbon up. That seems a desperate interventionist attempt to breathe some life into the system- maybe so as to help nuclear survive. It rather undermines the basic attraction of the EU ETS, such as it is- that it is a market mechanism, creating a price for carbon and, in theory, stimulating trading in it. Interestingly, that has not endeared it to the right in the USA, who often see emission cap and trading systems as just a carbon tax. The US left (if such a thing really exists!) has instead mostly focused on local renewable quotas or, nationally, on direct emission regulation, and Obama’s new state-wide Clean Energy Plan goes a long way in that direction, aiming for a 32% cut by 2030. That is a brave intervention, but maybe will face the same sort of political problems that have emerged in the EU with the ETS- resistance by states/countries with high carbon dependence. 

What seems clear from most of the battles so far, is that, given powerful vested interests, markets don't work and intervention is hard. But it is not a static system: increased concerns about the costs of climate change and air pollution, and the rapid reduction in renewable cost, is accelerating the challenge. With the energy market also changing (not least by the rise of prosumers), some key energy/engineering companies are abandoning their fixed positions. Siemens, RWE, E.ON and so on have all now embraced renewables (and dumped nuclear), in the hope of maintaining profitability. They may look to competition still, but may also expect the market to be less skewed and for interventions to be more consistent. Political change is also always possible, so that new directions may yet emerge, even the UK!  Jeremy Corbyn has certainly outlined a radical new approach, via direct state intervention and new policy directions to support a more ‘open, competitive and sustainable energy market’: http://www.theecologist.org/blogs_and_comments/commentators/2978777/jeremy_corbyn_the_green_britain_i_want_to_build.html