Carbon price support- a bungle too far?

As most people will know, we’ve got two instruments in the UK to price carbon into energy use and investment – the EU Emissions Trading System (EU ETS), and the UK’s, unilateral Carbon Price Support (CPS). I’ve always been a strong supporter of the EU system, and was sorry to see the difficulties it encountered last year. I’ve been a less strong supporter of a unilateral UK carbon price – but I have always thought that if there is to be one, it should be sober, stable and related properly to the European carbon price. So it was in this light that last year, in this very column, I drew attention to the astonishing rises in the indicative future levels of CPS set out by the Chancellor in Budget 2013. These I think, were partially in response to what was seen as a permanent collapse of the EU ETS. Of course the unilateral UK carbon price hike all went straight to the HMT coffers.

In last week’s Budget the Chancellor decided to remove some of his own rises on a policy that has, since its introduction in 2011, veered around like a dodgem car in a fairground. Indeed, the reality of the policy has been the exact opposite of what it was intended to do: to encourage ‘further investment in low carbon generation by providing greater support and certainty to the Carbon price’.  The CPS now looks, as it did in 2013, like a ham-fisted piece of financial opportunism in the wake of the troubles of the EU ETS. The policy would have had to be revised at a future date anyway, especially when, as is now beginning to happen, the EU ETS itself is starting to show some signs of life again. The revision actually acknowledges that possible new life by explicitly relating the ceiling to the performance of ETS over the next few years.

I’m personally not crying buckets over the freeze at an £18 ceiling in its own right. What I think is worrying, however, is the way that the Chancellor’s indecision on what the price should be has destabilised investment rather than encouraged it. Returns on Renewable Obligations and subsequently ‘Contracts for Difference’ for renewable energy projects have a built in assumption behind them about a carbon price trajectory that no longer exists. It certainly looks like funds to support new renewable projects won’t go as far as envisaged because larger payments to existing generators are now likely. Even gas power plant investment is based on higher coal prices as a result of the carbon price; now it looks as if coal will be able to run on the system far longer than had been envisaged. And gas power plant investment may be well be affected by this – unless of course the Government puts more money (our bill costs, that is) into capacity payments to persuade energy companies and other investors to build new power stations.

And that I think is the lesson of last week’s announcement. New energy investment and particularly the low carbon energy investment that we so badly need, does require a reasonably stable and long-term investment environment. The news about the terms of investment doesn’t necessarily have to be great – it just needs to be foreseeable and reliable. The Chancellor’s short-term games with the CPS may look good for this week’s news but will, I am afraid, further destabilise the investment environment. And that is what will count, long term, for the low carbon investment policy that the price support mechanism was apparently originally intended to support.

 

This article first appeared in the Environmentalist magazine

 

The tide is turning (and so are the turbines)

Committee Room 20 is about as far as you can go along the corridors of the House of Commons without actually ending up on the roof, so I was slightly surprised to see just how many people, including a large number of Parliamentarians, made the trek to discuss wave and tidal power at the PRASEG meeting on Tuesday. I guess though that the great turn out serves as a weathervane for the justified and renewed interest in the technologies that is currently under way after lots of disappointment that promising early prototype work has not really scaled up as had been hoped.

Well no more long periods of disappointment on this front, apparently. Or at least not as far as tidal energy is concerned. Remarkably, the front runner for full scale deployment doesn’t rely on anything new and untested; as Mark Shorrock, CEO of Tidal Lagoon Power Swansea Bay, put it at the meeting, it’s just a matter of ‘a breakwater, a powerhouse some turbines and a coffer dam.’ Those ingredients, all tried and tested, make up a scheme that is now largely funded, presented for planning and regulatory appraisal and is supported by the vast majority of local people. The project is set for installing and generating 320 MWs of capacity by 2018 and all without serious collateral environmental impacts, or blocking searoutes. An honourable mention at the meeting should also go to the Solway Firth tidal stream project which is aiming to land considerable capacity and roll out full scale turbine power from tidal flow by 2015.  I won’t witter on too much about the Swansea Bay scheme because you can find the techie details of it now in various places such as the BBC’s  piece.

What hasn’t been covered though are any of the longer-term considerations about finances and the reality or otherwise of tidal flow ever actually making a real difference to the UK’s power base.  And that’s been the problem with a lot of wave and tidal so far – promising technologies but between them affording a minuscule power input. So what is the prospect now and how does it compare with the bangs for bucks from other prospects? We might note that Swansea Bay is likely to be able to supply virtually zero carbon power for a hundred years or so. After all, that early experiment (effectively a tidal lagoon) at Lyme Regis, the Cobb, is still standing up well after almost 200 years.

Well, Swansea is the first, but already other sites are being actively investigated, including notably a lagoon at Bridgewater, which would provide inter alia a first-class defence against future flooding in the Somerset Levels. And the price for the power, on the basis of scale and cost, looks to come down in a solar panel-type curve in the future. Swansea being a relatively small project sited out of the strongest tidal flows probably needs a CfD of about £168 per kWh over 35 years. This is relatively expensive, but then it’s already being reckoned that the third lagoon could come in at under £85 per kWh. And this makes it, after capacity payments and all other hidden subsidies are taken into account, cost competitive with gas, something no tide geek would have dreamed of being able to claim just a few years ago. Oh and by the way (1) Swansea reckons to deliver an efficiency of about 90% on the ebb tide and 81% on the flow, which in English means that it can be counted as that holy grail of new energy, the carbon free baseload/back up source.  (2) And by the way some quiet work on wave and tidal CfD levels in DECC  means that both the level and the time scale can be accommodated within present arrangements and with no special negotiations (small gold star to Greg Barker here I think.)

So after several lagoons, and perhaps by 2023, we would maybe have 1.5 gigawatts of baseload -type capacity operating at an average CfD of about £90 over 35 years. But hold on! Haven’t we heard these sort of figures before? Well, yes, indeed we have. On a good day, with binoculars, the people building the breakwater at Swansea can gaze across the Bristol Channel and check out the progress of the concrete mixing at the Hinkley C nuclear power station site (which is funded now on a similar basis). But…two small observations:  firstly, I would wager that Swansea Bay will be quietly garnering the tide and feeding it into the grid whilst Hinkley C  will still be looking for the key to turn the plant on. Secondly, looking through those binoculars much later down the line, whilst people will be hard at work dismantling Hinkley C, protecting the waste ponds on site for 160 years and transporting large amounts of other detritus to a very large (and hopefully very safe) but very expensive hole in Cumbria, Swansea Bay will be …well, like the Cobb, just still there, minding its own business and if we still want it to, producing power for all of us.

Interconnection: small perturbations in a flat line graph

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There has been a veritable flurry of activity on the interconnector front over the past couple of months. No interconnectors as such, or even the prospect of new interconnectors in the near future, but quite a deal of fluffing of feathers and (sort of) discreet nest building moves that suggest that maybe there might just be something in it all.

There was the departmental paper ‘More Interconnection: Improving Energy Security and Lowering Bills’ in December. Before that, The Guardian reported in October that the Icelandic President was getting very excited about a possible 1000km interconnector following the signing of a statement of intent between the UK and Iceland. Such an interconnector could supply perhaps 1.5% of the UK’s electricity needs by the early 2020s. There was a proviso on his excitement however: that the UK would guarantee the cost of £4.3bn for the line to be laid and connected.

Then this month, in a less than generally noticed footnote to his letter to Ofgem about gas prices, Ed Davey asked Ofgem to ‘indicate what benefits there might be for competition and for consumers from further steps towards completion of a Single European Energy Market of which interconnection could play an important part’.

I’ve long thought that interconnectors (for electricity that is) are a real no-brainer as far as our future energy security is concerned. Britain is almost an energy island as well as being an, er, actual island; we can only source about 5% of our supply via interconnection.  Even at this measly level (Germany, for example, is able to source 14% of its supply through interconnection) interconnection makes an enormous difference to our putative supply margins (as I set out some time ago at the height of the ‘lights are about to go out’ scare of last year).

Ofgem doesn’t count interconnection as part of our national supply margin because, well, interconnection could go two ways, although analysis of the Brit-Ned interconnector last year showed that 99% of the time flow was into the UK. If it did count it, the regulator cheerfully records, the doomy-sounding 5% margin in 2015 would look like a far healthier 10% gap. So imagine what a relatively easily achievable doubling of interconnection would look like. You might even not have to build quite so many new gas fired – or even nuclear – powered plants in the future.

So why the snail-like progress because of course you couldn’t even start to argue that an Iceland interconnector might go two ways – what would a country that can hardly move for hydro power and a population the size of Cardiff want with ever importing electricity? The clue, I think, is in the Icelandic President’s reported ‘ask’ of the UK government: that the project is somehow underwritten in order to go out to tender. Tricky, because in recent years the assumption has always been that interconnectors should essentially be ‘merchant undertakings’  at no risk to consumers. Furthermore it was assumed that the money to pay off the investment should come from what the December DECC strategy paper calls ‘price arbitrage opportunities’. Another way to put it is that interconnectors should make their living out of speculation as to price differentials between the UK and Europe. But with moves towards a more integrated and liberalised European energy market the likelihood of these differentials decreases. Perversely therefore, greater connectivity on a merchant basis and a level energy playing field means a lower likelihood of additional interconnection being achieved. The full bullet point in the DECC strategy paper incidentally, reads: ‘questions as to whether price arbitrage opportunities adequately capture the benefits of interconnection including security of supply’.

So the little flurry of late is therefore pretty interesting. Because, as can be seen in the language of Ed Davey to Ofgem and in the way the case for  interconnection is put in the strategy paper, it is apparent that feelers are being put out towards a different way of doing things. Stupid question I know but could it be that ‘arbitrage opportunities’ really do not reflect the value of interconnection to UK security of supply, and that, subject perhaps to EU competition regs (see ED’s coded reference in his letter to Ofgem above), a real case might be made to underwrite such projects from the public purse?  That probably wouldn’t be difficult, since the EU has recently designated no fewer than three UK-continent interconnection proposals as ‘European projects of common interest’. This designation is not a million miles from what the UK Government has tried to put to the EU Competition Commissioners about another project not likely to come on stream until well after a number of interconnectors could be up and running, namely Hinkley C power station. That project will have tax breaks and an underwritten power price behind it but a problematic route to travel with EU Competition Commissioners.  Interconnection, on the other hand, currently has no assistance of any sort riding on it but does have a loudly banging and waving open door from the EU.

As I’ve said, it’s a clear no-brainer and wildly in the national – and EU – strategic interest to pursue. It just needs a little prejudice-swallowing to get going quite rapidly. And sort of well done to DECC for beginning to raise the possibility of such a turn around, albeit in deep code. It would be good just to get underwriting in the public interest out in the open and get on with it, though, wouldn’t it?