Down with reshuffles!

Rather a lot has been written about the recent Government reshuffle, most of it of the ‘who’s up/down/in/out’ variety. I don’t want to add to that, but I do want to have a brief last word on the process, and what better Department to focus on for that than the Department for Energy and Climate Change. That Department has suffered quite a grievous loss with the departure of Greg Barker. I have had my disagreements with Greg over the years on a number of his policy directions, and one of his main initiatives, the Green Deal, effectively lies in ruins as he departs. But overall I thought he was a great minister for the Department – he fought the DECC corner assiduously, cared passionately about climate change and its consequences, and was quite fearless in pursuing that agenda in government, often against the rumbling and grumbling about it all from many of his own side. He linked and defended the energy and policy priorities of the department on renewables and low carbon energy at a time when it would have been easier to capitulate to the siren voices (also often from his own side) suggesting that the whole process should be put in a bottle and floated out to sea.

But there are two points in this little paean that stand out. Firstly, that Greg came to his post having had a substantial record of commitment and interest in the subject beforehand, and secondly, he stayed in the same post for almost the whole term of the present government. That’s a two edged sword of course in that you often have to deal with the consequences of your own policy initiatives when they return to bite you and not your successor. But it is quite a simple idea that maybe if you are appointing Ministers to positions it would be good if they knew about or had some interest in what they were being tasked with beforehand. And an equally simple idea is that probably, far better policy outcomes are likely to result from square pegs being able to occupy square holes for an extended period rather than almost continuously being uprooted and jammed into some round hole somewhere else.

Certainly, neither of those two simple plans has been in operation just across the corridor from Greg’s erstwhile office. Since this time two years ago no less than four nameplates have been nailed to the Minister of State’s door: Hendry has given way to Hayes, who has given way to Fallon (with two other jobs to occupy him anyway) who has now given way to Matt Hancock, incidentally, all during a time when the brief to steer Electricity Market Reform through all its stages was of crucial importance. I would have thought that just catching up on the vicissitudes of that particular programme probably occupied the waking hours of both of Charles Hendry’s successors until, still immersed in trying to get to grips with capacity payments and Contracts for Difference, they were set free and packed off to pastures new. I’m sure both the new recruits to the Department will be hard working and attentive, but try as I might, I cannot find much of a trail of interest or knowledge about what DECC is doing, other than, perhaps that neither of them like wind farms very much.

But I also ought to say that this is not particularly their fault; all too often it is just how the system works. Posts are allocated and occupied as if they bear no relation to what they are supposed to be about, but instead simply signify (where I came in) who is up, or down, who is in or out, and who is just visiting on the way to somewhere else better and more ‘in’. That cannot help good governance or policy-making, or the welfare of the important Departments subject to the merry-go round.

So my final word on reshuffles is this: that there ought to be less of them. And that there ought to be more Greg Barkers, enabled to do a job in a Department that they value and allowed to stay there for long enough to make a difference in the way that for all his idiosyncrasies and occasional rushes of blood to the head, Greg undoubtedly did.

DECC pokes the bear again on capacity markets

bear

Maybe it’s getting a bit wearisome to keep on pointing this out and I know that I’m getting a bit like a bear that wakes up when prodded with a stick etc. But …yes it’s the capacity market again. The latest is a press announcement from DECC that ‘Britain’s energy security strategy [is] now fully in place.’ This refers, in case you didn’t know, to ‘the amount of electricity generation capacity the government will procure’ through the capacity market, which as long-toothed readers of this blog will know, will be done through a series of ‘capacity auctions’. These auctions will see Britain’s gas fired power stations, present and future, being invited to bid to receive large amounts of money to persuade them to continue to be available to produce power (i.e. not shut down). As the Secretary of State says in his breathless press release, this is so ‘the ticking time bomb of electricity supply risks’ can be averted.

And now we’ve got the figures and the likely cost to consumers. The Government is aiming, the report says without a trace of a smile, to procure ‘a total of 53.3 GW of electricity generating capacity.’ In case you aren’t up with this capacity game, that is, incidentally, TWICE the amount of new gas fired power capacity that DECC estimated in its 2012 Gas Strategy would be needed by 2030. It’s also about 20% more than the total amount of gas capacity the Department estimated would be likely to be installed by that date. So yes, you could say that this is quite a secure amount of gas fired power stations to procure, since it seems that every conceivable source of gas fired power between now and 2030 will get free money to persuade it to be there.

And of course, thanks in passing to the redoubtable Emily Gosden, writing in the Telegraph about the announcement, we know the cost to consumers of this bonanza for gas fired power stations – on average £13 a year on bills. DECC had initially put the figure out as £2 on their press release, but accepts that, well yes, that is net of some very heroic assumptions about what may turn up in advantages on price as a result of the policy, so it really should start at…£13.

Ah but this must all be OK, says DECC because (back to the press release again) the whole shebang has been OK’d by experts: ‘the analysis supporting the decisions made today has been impartially scrutinised and quality assured by the panel of technical experts for the enduring regime’. Well…up to a very small point. When you read the small print of the Panel report, it is made clear that, according to the terms of its establishment, the Panel:

‘has no remit to comment on EMR policy, Government’s objectives, or the deliverability of the EMR programme. The Panel’s Terms of Reference mean it cannot comment on affordability, value for money or achieving least cost for consumers. These matters are excluded from the Panel’s scope and therefore from this report.’

So not much to comment on at all really.

Which I suppose is just as well, because if the panel did have such a remit, it could not have failed to turn up the infamous 2011 impact assessment on the comparisons between a capacity market and a strategic reserve, the option for energy security which in the words of DECC at the time,

 ‘is a targeted capacity mechanism. The system operator tenders for capacity to be part of the strategic reserve. The capacity is then kept outside the market and only deployed at times of scarcity i.e. when there would be blackouts or brownouts in absence of the reserve being deployed.’

Far more sensible you might think, and it has the advantage of ‘being a smaller intervention in the market and of having a smaller impact on bills’ (DECC’s words in 2012, again). Just how much smaller is shown in comparative costings in the 2011 Comparative Impact Assessment, where the proposed capacity market is projected to come out at a cost per year of about what has now appeared.  The strategic reserve comes in at about ONE FIFTH of the cost. It was rejected as an option after a series of ‘qualitative’ analyses, which I know had at least one former DECC civil s
ervant scratching his head at the time when he reported (to me) ‘ all the time during this period it was clear to all of us that the strategic reserve was the right way to go. How we ended up with this, I really do not know’.

Well we have and it’s going to cost us. It strikes me as rather like announcing that you are going to concrete over the Somerset Levels to a height of six feet and then proclaim that ‘a flood prevention strategy is now fully in place’. It really is such a silly long term policy that I cannot believe it will last for the time it will take to procure all this 52.5gw of gas fired power stations. But you never know: stranger things have happened.

No Michelin stars for the fat dud

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The Financial Times ran a piece yesterday, regrettably behind a paywall, that featured the findings of Aurora Energy Research. As the FT quaintly put it, ‘the pot of money ministers have set aside to subsidise UK renewable power is likely to run out much more quickly than previously thought, according to research, placing green energy projects in jeopardy’.

Apparently, the hitherto solid looking pot may turn out to be more like a collapsing bag as uncertainties about just what the pot’s contents may buy burgeon. This is because the sums that will be expended on Contracts for Difference (CfD) will change as the price of energy changes, which the government might have exacerbated anyway by freezing the carbon price floor. DECC doesn’t seem to have taken much of this into account.

To which the correct response should be, I think ‘blimey, you don’t say’ or perhaps more colloquially something like ‘no s*** Sherlock’.

It is good that a research company has now told us that, as an instrument to facilitate and plan investment in renewables, the Levy Control Framework (LCF) is a fat dud, regardless of its efficacy as a method of stopping anyone spending more than a set amount of ‘levy money’ whether what you get for that spend is worth having or not. But a number of people (me included) have been making this point for a long time now. It is perhaps only now that Contracts for Difference are upon us, that the true fat dud-ness of the device can be uncovered.

The point is that the LCF was perhaps not such a fully fat dud when it first came out. After all, it controlled the amount of Renewable Obligation Certificates (ROCs) and feed in tariff (FiTs) payments that could be made. Since both were in fixed sum form you could fairly accurately find out what you might get for what, and importantly, how much you would have in any one year for new entrants based on what you had already committed as fixed amounts. ROCs trading allowed renewables operators additional money from their activities to invest outside the process.

But now, with the more ‘market efficient’ CfD you never quite know what the ‘cost’ of a CfD in any one year will be, since it depends on the relationship over that year between the agreed strike price and the varying ‘reference price’ it seeks to make up the difference between. If you deliberately depress the likely reference price having set a strike price in the first place by, for example, taking some of the increase in carbon floor price out of the equation, then inevitably existing providers will get more money from the ‘pot’ each year. There will then be less from the same pot each year for new entrants.

And worse, as you keep doing that year by year based on a pre-agreed static strike price against a varying reference price, then the margin for new entrants gets smaller and smaller each year.  So that the ability to plan anything new that needs a CfD at a certain time (and contracts specify ‘windows’ within which your CfDs must start, otherwise you lose them, except if you are a nuclear power station) eventually and inevitably, melts away entirely. And to be fair to DECC, who didn’t design the system in the first place, there is nothing you can do about it, once a fixed out turn figure has been set against an inherently variable cost base in the years running up to that agreed figure.

So in terms of planning for renewables to come on stream on the basis of a known underwriting, or as the FT puts it, the sum ‘set aside to subsidise UK renewable investment ‘ the LCF is a complete turkey and has been ever since CfD were invented. If, on the other hand, you don’t care whether much in the way of renewables gets built or that what is built is good value, and you just want to stop whatever it is at the point at which the money stops in 2020, then it looks a bit better.

Except, of course, that come the early 2020’s when new nuclear finally gets off the ground and decides to cash in the monumentally bloated CfD allocation achieved under the ‘investment instrument’ mechanism, the whole edifice will almost certainly come crashing down under the weight of its own contradictions. Which is why, I guess, no-one has attempted to sketch in what might be thought of as some necessary reassurance of what a levy control envelope might look like after 2020.

There, that didn’t need a research report to get straight now did it?