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?

 

Breaking news: Government to legislate on non-zero carbon housing

Parliament debates the Queen’s Speech extensively each year. This time we’re talking for over a week. It is supposed to be a debate on the ‘gracious address’ delivered by the Queen while she balances that weighty crown on her head.

We all know that she is reading out not her own words, but the government’s. What we don’t know (but can sometimes suspect) is what she thinks of the words she is reading out, but we certainly do not debate the notion that some of the words might be more than tendentious and are actually false. That might detract from the formal status of ‘the gracious address’ I guess.

But this year, in the middle of the speech, there was just that – a straightforward falsehood, and here it is. There will be legislation, she said, that: “Will allow for the creation of an allowable solutions scheme to enable all new homes to be built to a zero carbon standard.”

I imagine we were expected to react positively to that line. After all, we are going to have to radically renovate the millions of poorly insulated homes that will still be standing in 2050 up to a highly efficient level. So what better than to pass legislation to ensure that the new houses we build are fit for purpose from the word go and will not be subject to another round of retrofitting in the fullness of time?

That is how the proposed legislation is being spun, and indeed the Lib Dems are assiduously claiming credit for the zero carbon homes commitment being there at all; their coalition partners didn’t want it in, but they resisted and won.

All very well, of course, except that since 2007 there has been a mechanism (the Code for Sustainable Homes) which moved house building up through the code levels (1-6) so that, as building regulations were revised, new homes would be ‘zero carbon’ by 2016. This would not have been a prescription for exactly how houses should be built, but a palette of measures, within rules that were the same for everyone.

But since then efforts to dilute and dissipate that process have gathered pace. 2011 saw a new definition of what a ‘zero carbon’ home was, which retreated from a number of measures that had previously been included in the definition. Then there was an examination of what constituted ‘allowable solutions’ to the question of whether all zero carbon qualifying measures had to be attached to the house in question. Could measures be ‘off site’ or even further, could developers do work elsewhere that compensated for the fact that the house to be built was not in itself ‘zero carbon’?

This has resulted in the proposals now being put forward for legislation, which would allow builders to contribute a limited amount of money on a time limited basis to offset the level to which the house would be built: code level four. So this means that new houses marginally above present building regs will be acceptable if some money goes elsewhere. But of course the non-zero carbon home stands long after the money has stopped being provided.

Oh, and by the way, a substantial element of new build from ‘smaller builders’ will be exempted altogether. These new houses will merely be required to keep up with building regs as they are.

What you might conclude from this, then, is that in the future anything like genuinely zero carbon homes will be built only with the goodwill of the builder, and that the whole purpose of the legislation is, otherwise, to drive new build away from zero carbon standards, and permanently so.

And you might conclude that, if changes including the most recent proposals had not been made, we would be in better shape to establish zero carbon home building by 2016 than we are now. In other words no legislation would have been better than this legislation.

But of course it’s still about ‘zero carbon’ homes isn’t it, because that’s what’s in the ‘gracious speech’. So it can’t be simply untrue and facing 180 degrees in the opposite direction from the original intention, can it?

This article was first published in Business Green.