I’d like to tell you about a new system of fixed underwriting to encourage the building of new energy plants. There will be an auction and the successful bidders will get fixed sums for 15 years. This will come at a cost to consumers though – the cost of underwriting will be recovered from energy companies, who will pass on these levies to their customers. Within a short time, the scheme could add an estimated 2.2 per cent to domestic bills and an even higher amount to non-domestic bills.
“Yes, yes” you’d reply. “We know all about that. Not new. Contracts for Difference. Renewables. All this money paid out just to make them work. But didn’t David Cameron deal with all this when he reviewed all those expensive green levies?”
Well if you had replied as above, you’d be wrong, because what I’m describing are the new capacity market arrangements that we’re now all signed up to, which start at the end of this year. And of course, State Aid rules permitting, they will subsidise, not expensive renewables, but supposedly cheap gas-fired power stations, that energy companies and others are not building at the moment, or are ‘mothballing’, because they don’t make enough money from generation.
These capacity payments have been deemed necessary in order to secure promises to build new gas-fired power stations and keep them ready to supply power (but not actually to supply power – if you actually produce electricity and sell it you get a separate pot of money). This new arrangement has to be for gas-fired power because it is ‘dispatchable’ – that is you can turn it on and provide electricity when you need to do so.
But can’t biomass, or for that matter, tidal lagoon power stations, do that you might ask? Well yes they can, but they are renewable, and therefore not eligible because they get the money you thought I was talking about, although they get paid for actually producing power, and not just for hovering around ready to do so.
Still with me? Well if you are, you might be asking now how much this is all going to cost, and whether customers really are going to pay. Well they are, and it is estimated to cost a billion pounds a year from now on; hence the estimate of a 2.2 per cent increase in customers’ bills by the early 2020s – roughly what currently goes on bills as a result of green levies.
But of course, you will say, there is no doubt a cap on this new expenditure. After all, there is the Levy Control Framework that controls the amount of money that can go on paying contracts for difference and feed-in tariffs for renewables isn’t there? Well, no there isn’t any sort of control framework for the capacity mechanism actually. And that’s because it has been decided that capacity payments are not quite the same as renewable underwriting, and anyway, you’ll get your money back in the end through more available (and hence less price-volatile) supply. Not, of course, to be confused with those arguments that DECC used to put out that, in the end, energy prices would be cheaper because renewables, after the expense of construction, would benefit from free fuel whereas gas prices would keep going up. Because we all know, don’t we, that renewables are expensive and need to be controlled, whereas gas is cheap and the money is only going on plans to keep it so.
But surely, you might say, isn’t this getting wildly out of hand? Why hasn’t someone stepped in, like Mr Cameron did with those green levies and demanded that costs be cut, and we, the consumers, get better value for money? Well there was a plan to commission the building of ‘strategic reserve’ power stations that could come on stream at times of supply stress and high prices, so that prices and supply would be contained within reasonable bounds. This would have cost, it was estimated, about £350m a year, but that was rejected in 2011 in favour of the… er… much more expensive option, because it will (for reasons that are still beyond me) be better for all of us in the end. Even though, when the comparison was made, it was suggested that the more expensive option would cost customers about a third of what it is now estimated to cost.
However, that is where we now are and I don’t suppose much can be done about it, at least in the short term. The one good thing I suppose is that when anyone comes up to you in future and demands that expensive renewable subsidies are cut, you can just shake your head sagely and say ‘capacity market’ and that will be the end of the argument.
This article was first published on Business Green Plus.