How the great wheel of life turns full circle

May 2009. DECC (sec of State Ed Miliband) announces that it is proceeding with an ambitious smart meter roll out programme. Roll out will start in 2013 and will be complete by the end of 2020.

September 2009 Opposition claims roll out is ‘far too unambitious’. Suggests Roll out could be accelerated to 2017-18.

May 2010. Coalition Government formed.  ‘We will roll out smart meters ‘in coalition document.

September 2010 Business Green: ‘minister mulling ambitious new target for smart meter roll out’: – 2018 is the likely date.

May 2011 DECC: New roll out plan announced. Roll out will be completed by the end of 2019.

May 2013.DECC announcement:  Smart meter roll out delayed – Programme will now be complete by the end of 2020. 

Carbon Floor Price, skunk works and committee room fourteen

And so back to Parliament to hear what her Majesty has in store for us this session. I see that the word ‘climate change’ creeps into the Most Gracious Speech, immediately above the words ‘other measures will be laid before you’. I also observe that our Energy Secretary of State has been busy during the brief recess, announcing that he and eight other energy and environment ministers from EU states have got together to produce a strong statement demanding that the commission and the European Parliament get together to sort out the EU Emissions Trading Scheme by the end of July, latest. That’ll be the revival of the proposal to relate the future price of traded allowances by ‘backloading’ large numbers of them which was ambushed in the EU Parliament just recently by among others , a large cohort of British Conservative MEPs.  So it’s good to see whose side our Government is on, then, even if some of the major coalition partners MEPs aren’t.

However, even as the ink dries on the message of hope from Ed and pals, a subtler message wafts towards us from the Committee Corridors, where the remaining clauses of the finance bill will be debated next week. One of those, clause 197, is, on the face of it, a simple clause to uprate the Carbon Floor Price. But then, looking a little further we see that the next clause introduces a whole new schedule which junks all the previous legislation on carbon floor price and replaces it with new provisions. In short, the Carbon Floor Price will, by the end of next week have been fully decoupled from what might happen to the European Emissions Trading Scheme, even as some members of the Government work to retrieve EU ETS.

To see just how much the decoupling will consist of, we need to wind back to the Treasury (yes, I’m afraid it’s them again) response to consultation paper  that came out in 2010, heralding the introduction of the first floor price this spring (2013).  And here’s the chart that showed how the floor price had been constructed – an aim of moving up to a price of £30 a tonne of CO2 by 2020, with the initial ’tax’ per tonne in the UK coming in at £4.94 – rather higher than the £1 suggested in the original consultation, but as you can see, shadowing the EU ETS upwards with an increment of about £2 per year.

All that nonsense has long been junked, though. What has happened since is that, each year the ‘indicative’ rates forward from the starting point get tweaked, and that then becomes the real price the year after. Thus in 2010, the price per tonne was £4.94 for 2012-13, £7.28 for 2013-14, and £9.80 for 2015-16.  Then in budget 2012, the second year figure morphed into £9.55, and finally, upstairs in Committee Room 14 or whatever, they will be putting the final nail in the coffin of the 2010 paper by putting into place a ‘real’ next year figure of, yes, £9.55 and then a new ‘real’ price of £12.06 per tonne for 2015-16 and a whopping ‘indicative’ £14.86 for 2016-17.

We might think a carbon floor price is a good thing, combined with EU ETS, but entirely separate from it, and predicated on a virtual zero price for the next three years out? Not so sure. Obviously, from Treasury’s point of view  it is good business raking in vast sums of money with no hypothecation on the pretence that (as the HMRC budget note tells us)  ‘the carbon floor price is designed to encourage additional investment in low carbon generation by providing greater support and certainty to the carbon price.’ All said with a straight face, of course, but we need to remember that the Carbon Floor Price, so long as EU ETS exists, does not save an ounce of CO2, since the allowances that would have been traded simply go elsewhere in Europe, probably to the longer term detriment of the system itself.

So to summarise, in case anyone’s got a bit lost by now:  Treasury (and by the way the nuclear industry for reasons set out here) get lots of free money based on a projected virtually nil price for ETS and its replacement with a tax, no carbon is saved from being emitted, and the claim can be made that this is all ’encouraging investment in low carbon power’. All quite neat, except of course, unless the EU ETS allowance trading price recovers, as Ed Davey is clearly determined that it should. I wouldn’t bet anything at all on the chances of those indicative figures coming down in the event of that happening: indeed the business up in committee corridor next week, which will probably be passed, is to ensure they don’t. Well done once again, George.

How to make money from the lights going out

What might you do as an energy company faced with a promise from the government that, if capacity availability for power generation looked a little tight over the next few years, you might get paid for delivering capacity, either from new or existing plants? That promise has, of course been made through proposed mechanisms for a capacity market in the Energy Bill, due to come back to the House of Commons for its report stage very shortly. The government will have a careful look at capacity margins four years out from say – 2014, and will, if it is deemed necessary, provide the wherewithal to hold a ‘capacity’ auction, so that the winners of the auction undertake to provide the capacity necessary to keep margins healthy and the lights on.  The size of the wherewithal – just how much money will be in the auction pot (paid for by consumers in the end) will be a central part of the process.

So if , let us say, those margins were to look really dreadful in 2014 and for some years to follow, you might expect the pot size to be large, and the money going to companies to keep the lights on by agreeing to provide capacity quite substantial.  You would, I imagine want to secure as much of that pot as possible to underwrite your generation.  And if the capacity payment might be available simply if you guaranteed to supply, whether or not you actually built new plant, then you might be tempted to pull some of your existing plant off-line for a time, so that margins would look tight, and then bring it back online once more once the capacity payments started flowing. You might even put  some of your plants into ‘deep mothballing’ with a suggestion that, unless things got better you would certainly knock them down in due course, but you might just be persuaded not to do so by a large enough pot in a capacity auction. And then, assuming all that happened, the lights would not go out, capacity margins would look much better, the wisdom of the auctioning system would be acknowledged, and life would continue, except some people would have got a lot of money for doing what they may well have done anyway.

I know, it sounds theoretically possible but a bit improbable, doesn’t it? Surely something as close to ‘gaming’ as that wouldn’t happen, just as the Government gears up to finalise the details of its capacity auction programme?  Well I merely report the occurrence of what looks remarkably like that scenario, in the announcement at the end of last month  by SSE that they intend to  deep mothball some plants, reduce capacity radically at another, and delay the next construction moves at other plants until ‘at least 2015.’ Oh, and by the way, suggesting  in the same announcement, that there ‘is a very real risk of the lights going out’ as a result of the ‘capacity crunch’ that may be arriving.

Now I’m sure that there are some very good reasons – spark spread, investment conditions, uncertainty around the wider implications of electricity Market Reform etc. for taking the decisions that SSE have around their gas plants over the next few years.  And I’m sure that one of the solutions put forward in the announcement – that the Government brings forward capacity payments for existing plant to 2014 from the present projected 2018 is a reflection of that and nothing to do with the putative gaming of the upcoming capacity auction market.

But just in case I’m wrong, I am after all going to pursue the idea of an amendment in the report stage of the Energy Bill that gives the Minister the power to bring forward a ‘strategic reserve’ system of margin maintenance, quite possibly through literally buying up those mothballed or delayed plant and holding them outside the market for the rescue of tight margins at a later date.  Studies show, by the way that such a programme could be much cheaper to undertake than the possible huge amount of money that might be need to be thrown at capacity auctions if the system becomes seriously ‘gamed’ in the way I have described.  It would be nice to think that the government could switch to a ‘strategic reserve’ way of keeping margins healthy if it turns out that  auctioning isn’t quite the way forward some people think it is. Or alternatively, if we are to have auctions, and only auctions, we might hope that they will proceed cheaply and efficiently, without anyone trying to rig the process to obtain advantage thereby.  I wonder which one might be the more prudent course of action?

This article was first published in Business Green