Coal Consultation: The Government’s final final final response

The Government has just produced its final final final response to the consultation it set in process over two years ago about ending the presence of unabated coal by 2025.

The response sets out in passing how the government is going to do this, and what measures it is going to put in place to ensure that coal really is off the system by 2025. This is quite welcome because judging from what is in the press, and from government inclusion of the target elsewhere in its documents – it’s a done deal.

Coal is coming off. That’s it. Yippee.

In the Clean Growth Plan, there is just one mention of the plan – ‘we confirm the Government’s intention to phase out unabated coal generation by 2025’.

Now don’t get me wrong. That is a really good thing. I would have liked to see that ambition achieved a little earlier, and in a way that does not encourage coal plants, through what they are getting from the capacity market to run for as long as they can up to 2025.

But the knowledge that finally, all coal is off the system and will not come back except if a plant, at its inception, is fully abated through Carbon Capture and Storage is important to achieve step changes in emissions.

Just as there will be no or very limited space for unabated gas on the system in the 2040s, there can be no space for unabated coal now, with its emission level some seven times what we will have to achieve by the early 2030s.

But does the detail in the response to the coal consultation actually achieve that in practice?

I have my doubts.

The mechanisms for making the commitment real, hinge on first what the government proposes to do about introducing an emissions performance standard (EPS) that impacts so fundamentally that coal cannot operate, and secondly on a reasonable conviction that coals banishment does not create a capacity crisis in 2025 – i.e. that there will be sufficient alternative capacity on the system to make up for what is coming off.

Both contingencies are dealt with in the Government’s paper, and both deserve some examination, because neither are quite what they seem.

It’s not a ban on coal power

The 450gm/CO² per kWh proposal is a modification of what was in the 2013 Energy Act, as a ‘deterrent’ against the building of new coal fired power stations. That Act set out an EPS of 450g for any plant in any year, and might have deterred some plant from build – but the level set was so broad that future builders of coal plant may not have been deterred, because the formula set out in the bill meant that, provided they kept their running hours down, they could easily keep under the annual limit. Since then, a coal power plant not opting in for various modifications under the Large Plant Directive has been limited to 1500 hrs running a year, or about 17% of installed capacity.

The proposals set out in the 2018 document take that rather flawed proscription a little further with an ‘instantaneous’ 450g limit. This is essentially the retrospective EPS proposed by Labour during the passage of the 2013 Act, and means that a plant cannot escape the effect of the EPS by planned running hours over a year. Rather than being an actual ban on coal in power stations, it instead erects a higher hurdle against coal use.

In order to keep below the generous 450gm per kWh limit it is possible to co-fire, mixing coal with biomass, either within burners, or even by firing each burner with different fuel. A typical power station will have a number of burners (4-6) which operate separately but together constitute the ‘unit’. This means a power station co-firing would have to use only a small majority of non-coal to stay below the limit.

Some commentators on this have downplayed such suggestions, citing the non-qualification of coal for carbon tax exemption and the probable reduction in support for co-firing from government in the future as reasons for discounting scenarios in which coal survives as a fuel through co-firing. Those assessments look fairly sound under present circumstances but…

The emergency provision caveat

Here we come to the second evasion within the new strategy, and it is important that the two are considered together.

The report says the Secretary of State should have ‘the power to suspend or amend the arrangements in case there were significant and imminent concerns about security of supply’.

As is pointed out, there is an emergency provision for raising the EPS in place in the 2013 legislation, using similar concerns as the trigger. The document states that the new emissions intensity limit proposals should follow the model set out in the 2013 legislation, which allows for the emission limit to be either modified or suspended under ‘emergency ‘conditions. These are broadly that capacity to ‘keep the lights on’ appears to be lacking.

What might that mean in practice?

We know that the capacity margin debate is less than precise these days, because of the reality of the various ways in which supply and demand can now be balanced.

However, it is the old measure of ‘capacity’ that the Department seem to have gone for in their appraisal of what an ‘emergency’ might look like in the Impact Assessment handily provided alongside the new report.

This among other things appraises what is a ‘likely’ scenario for old style capacity measures up to about 2025, and in so doing, makes the quite astonishing calculation that capacity margins will probably be OK, because the capacity market will ensure some 7.5 gigawatts worth of new mostly combined cycle gas turbine (CCGT), built out to 2025, something it hasn’t been able to do so far.

Will coal plug the gas gap to 2025?

We already know from the pre-qualification for the next rounds of capacity auctions (i.e auctions for capacity in 2018/9 and 2022-23, the so-called T-1 and T-4 auctions) that there is some but not huge amounts of CCGT plants in for the auction.

There is also a preponderance of existing plants bidding for one year contracts, with ironically a large representation from coal eager to gain capacity contracts to keep them in business over the next few years.

It is ironic, by the way, because it is likely that these continuing coal fired plants that have been allowed into the auction, being old and amortised, will bid very low into the auction, driving the overall ‘clearing price’ down, freezing out new plants seeking longer term contracts, which need a higher clearing price to be viable. Allowing coal to do this drives away the very CCGT plants that might avoid the need for the ‘emergency provision’. Ho-hum.

We will know whether some or any of these gas plants does in fact get a contract when the auction is held in February – but the prospects do not look good. Just one small CCGT plant has been supported over four auctions.

Coal could make a comeback

So the likelihood is, on present policies, that there WILL be a scenario which predicates the ‘emergency’ set out in the escape regulations, at which point coal would, presumably be allowed back on the system in some form.

And what you might then ask would this form take?

Well it wouldn’t of course be simply firing up present coal burning plants – with one exception – and for various reasons it is almost certain that all but one plant will be off the system anyway before 2025. Indeed some are already considering whether to convert to gas firing before that point.

And anyway, the provisions of the ‘emergency relaxation’ appear to specify that relaxation would be for specific periods (although 2013 legislation looks to, in principle a longer term cancelling or widening of the EPS under particular circumstances).

What might then be the candidate for such relaxation…?

Well, co-firing looks to be the one: it is relatively easy to change the mix: plants that are in operation can relatively easily be repurposed: which is why scepticism about the role that co-firing might play in the survival of coal on the system might be, in the longer term a little misplaced.

A real coal phase out

The takeaway is, I think, that coal is by no means destined for certain retirement in 2025 according to the formulations set out by the Government.

Wouldn’t it perhaps be easier and more certain simply to produce a one (or maybe two) clause Bill that simply says something like ‘from the 31^st March 2025 no unabated coal may be burned in any power station or similar plant in the UK’?

After all the government tells us that the ponderous EPS system they have suggested needs primary legislation in the not too distant future: it might save a lot of people a lot of time and effort to phrase that necessary legislation in these terms – and we would know for certain something that we know has to be certain – that for the future unabated coal would have no place on the power system, and that we shouldn’t have to worry about its high emissions and heavy pollution coming back to haunt us in years to come.

A small rant on a large hole in our climate policy

Here’s a small rant about something in the Budget last month. It has to be a small rant because this item featured in the Budget in a very small way – the Chancellor didn’t mention it in his speech, and it necessitated ferreting through the Red Book to find out anything about it. But it is going to impact on renewables and their development in a very big way, so much so that I am really surprised that there has been so little comment or reaction. So what is the nugget deep in the Budget causing all this trouble? Well, it is the supposed announcement (long-heralded to be coming in various future Budgets) about the future direction and composition of the Levy Control Framework, on which I’ve written stuff here, here and elsewhere on several occasions.

The waiting game…

Briefly, the Levy Control Framework is the arrangement devised originally between DECC and the Treasury (but mostly the Treasury) setting out how renewable energy support (ROCs, Feed-in-Tariffs, Contracts for Difference) would be both secured and controlled in total. The control framework for what was then DECC was a bit of a Faustian bargain with Treasury. DECC got some certainty about the funding for the deployment of wind – both onshore and offshore – solar, biomass and to a limited extent, some emerging technologies such as wave and tidal that could play a big role in the UK’s low carbon plans over the next decade.  Treasury got to control the total amounts that went in – after all, these are sums that arose from levies on customers, and bills would rise to accommodate them. David Cameron’s “cut the green crap” episode, accompanied by attacks on the funding of onshore wind and solar, was partly in response to that concern.

And the Levy Control Framework had its problems, as I’ve documented here – it was a very heavy and inefficient mechanism when things became overspent. It embodied a mechanism – at least for Contracts for Difference – that had the perverse effect of rewarding those inside it against those applying to get in when market prices went down (as they have done lately), rather than constantly up, as the framework design assumed they would. It had been set up to come to an end in 2020, and general discussions floated around about what the next iteration would be for 2021-2025. This was important to know because developers invest on an eight-year cycle at least, and need to know what there will be in terms of support when they go to financial closure on their plans. So the Government stalled for a very long time over what should happen to the framework after its first five years were over. Sums of about £7.6 billion in expenditure on renewable support were pencilled in up to 2020, and suggestions were put around (partly by the Climate Change Committee) that one might anticipate about £9.8 billion by 2025. But the budget was plainly ‘overspent’ well before that date – partly because of the unanticipated popularity and efficiency of some renewables, partly because the figures on strike price, reference price and the market were moving the wrong way by 2017, and partly because renewable underwriting comes in 15-year contracts. This means that pretty much all the renewables so far contracted are still ‘in’ the system because the tail of financing that follows their inception is still very much in play (an important effect, by the way, to which I will return shortly).

So Budget 2017 was about the last date by which something had to be decided as the cliff-edge of 2020 loomed – so what was it to be? The Government had, in any event, already borrowed some £700 million from the 2020-25 total to finance offshore wind auctions for delivery from 2021 onwards – so we knew (or thought we knew) that there had to be some kind of framework in train, albeit, one hoped, with some kind of corrections to the manifest problems of its first iteration.

It turns out in the Budget book that the Government’s solution to all this is not to have a Levy Control Framework at all from now on. This is announced in a curious section in the Red Book which says in the same paragraph that “Government will continue to support low carbon electricity as it becomes more cost competitive”, but “in order to protect consumers there will be no new carbon electricity levies until the burden of such costs are falling”, and then “on the basis of the current forecast, this means that there will be no new carbon levies until 2025”.

The detail of this apparently self-contradictory paragraph is set out in an accompanying document from Treasury rather misleadingly entitled Control for Low Carbon Levies. Difficult to see how you ‘control’ levies that don’t exist, but hey. In the document we find that there are two ‘new’ levies that are protected, but the first one is, well, an old levy: namely the remaining £557 million of the £730 million that had been set aside for less established renewables, announced in Budget 2016 and partly spent on an initial auction for offshore wind. Oh and the other ‘protected’ new levy – not surprisingly, perhaps – is that for the outrageously generous CfD for Hinkley C power station, which won’t come on stream until 2027 or thereabouts. Both levies will add considerably to the pile already committed, and will run through the period 2024-2028 (and well beyond) which makes the claim in the document and in the Red Book hard to swallow – what do they mean by “no new levies until the burden of such costs are falling”?

The ‘protected’ levies will, in themselves, make that burden rise rather than fall in the period up to 2025 and indeed well beyond, just at the time one might expect some of the obligations to fall. This is because some very early ROs will start peeling away, having exhausted the fifteen-year period over which they were awarded and hence paid out as part of the ‘burden’. The document includes a helpful, but I think quite misleading, chart showing how the call on the Levy Control Framework flattens out at around 2023 and, presumably starts to fall thereafter, which I imagine gives rise to the claim that the burden might start to fall after 2025. This is inherently unlikely, not just because the CfD part of the graph will NOT be flat after 2023 as depicted (after all, we know that the effects of the £557 million will be chugging through) and in the light of what are still-existing commitments coming in around 2021 or so (from the previous auctions on offshore wind, for example).

So the marginally soothing words in the new ‘control’ that “it does not rule out future support for any technology” are almost certainly meaningless if we are to consider the words “no new carbon levies until the burden of such costs are falling” to be definitive. That is, the ‘control’ actually tells us that there will be no new support for low carbon technologies, other than the £557 million already earmarked, until well into the latter years of the next decade. Further-from-market technologies, don’t wait around in the hope than sometime soon support will be restored – it has effectively gone for good, unless a future change of Government revisits the controls.

The small glimmer of hope that some further-from-market technologies might be holding onto is that they could get a slice of the remaining £557 million before the shutters come definitively down. After all, the last auction for wind coming on-stream for 2021 registered remarkably low strike prices, and procured 3.34GW of offshore, when the supposed original target for the whole £700 million was 4GW: so there might be space. On the other hand, central estimates of generation capacity up to 2025 appended in the low carbon levies report (p.5) set out virtually no movement in installed capacity for any of these further-from-market technologies, nor for small and large scale solar PV or onshore wind, past 2019. The one exception to this is offshore wind – which goes up vertiginously from an installed capacity in 2018-19 of 8.48GW to a massive 14.04GW by 2024 – making it likely that this projected capacity will be procured from its only possible source: the remaining £557 million, with limited room in the total for other technologies. I asked a written Parliamentary Question on what technologies would be eligible to bid in for the £557 million and received an answer that it would be: offshore wind, advanced conversion technologies, anaerobic digestion, biomass with combined heat and power, wave, tidal stream, and geothermal.

The list is revelatory not just for what it includes but for what it excludes: unless one crams all sorts of things into one slim definition, the tidal impoundment technology of the Swansea Tidal Lagoon looks to be ineligible for any auctions arising from the last remaining funding source.

Which reflections give rise to the other big hole in the proceedings: no evidence of any thought or action about alternative funding or support streams for any of this. It is arguably a fair starting point to worry about the effect of apparently ever-rising levies on customer bills and consider the alternatives, although the peculiar definitions of what is a levy in this sorry episode seems to give the green light to continuing escalation of levies on customer bills so long as they don’t involve renewables. ECO and smart meter levies and of course the continuing and mounting ‘levy’ effect of the governments quixotic quest to secure new gas-fired power stations through the Capacity Market – these are all apparently very different from the levies designed to promote future renewables. Except of course they have exactly the same effect on customers’ bills, and therefore ought, in any rational consideration of levy futures, to be included in any review. It looks as stark as this then: the entire future of all technologies that might be considered to need some form of support in the medium term is in that one small remaining pot. Indeed, if the definition of the levy burden curve really does mean that there will be no new levies well past 2025, then any new nuclear (the delayed probably Kepco-based future reactor at Moorside, for example) would also look to be caught up in the ‘no new levies’ trap.

So the grand conclusion of this rant is this: the Government has basically closed the door on pretty much all new renewable development except for its chosen vehicle of future low carbon power, offshore wind. Some will survive, of course, where they are close or on market parity, as small scale and some field solar may be. Onshore wind, if it is actually allowed to regain a foothold with some beneficial changes in the presently-oppressive planning regime, may have some future, but even the vaunted ‘subsidy-free’ CfDs possibly applied to onshore wind still have a cost element attached to them and need to be funded from somewhere.

And then finally, we should perhaps turn to the recently-published Clean Growth Strategy, supposedly containing the answers to the policy questions of how we are going to decarbonise across energy housing, transport, industrial and agricultural sectors sufficiently to meet our agreed Carbon Budget targets. The plan doesn’t work of course, since it admits in its own pages just how far short of reaching those targets present polices and the new policies contained in the plan leaves us. Yet, with the policy landscape crying out for those new policies that really will fill the gap, here is another wantonly-dug hole in existing policies that could do something about (as it’s headed in the report) ‘delivering clean smart flexible power’ covering 21% of UK emissions. We cannot continue to preach low carbon power and swear to discharge our climate obligations if we keep knocking away the wherewithal to do anything about it, and that is what the Government has just done by closing the Levy Control Framework down, whilst pretending not to.

 

On writing notes during Budget speeches

This piece originally appeared in BusinessGreen on 27th November 2017

I’m now a veteran of many Budget Day speeches in Parliament, and one thing I’ve noticed over the years is just how many members are sitting (if you can find a seat that is), with notebook or piece of paper on knee, scribbling away as the Chancellor makes his speech.

They could of course check for themselves what the Chancellor has said later in Hansard, but I think it is more than this. It is about checking off for themselves the points the Chancellor might be making that tick their own personal lists – and indeed, I’ve seen members do exactly that, as the speech progresses.

Well this year, I found myself in just that position. My particular ‘tick’ was the announcement that the Chancellor would make about the future of the Levy Control Framework – the financial arrangement that supports and controls the amount of support renewable energy gets through ROCS, feed-in tariffs, and now Contracts for Difference (CfDs). The framework runs out in 2020 – so what is to come next? How will further renewable power roll outs be supported up to 2025?

We’ve been promised an announcement in the Budget for some time – and indeed, the government has effectively ‘borrowed’ the £700mn it announced for support of offshore wind (£200mn of which has already gone from auctions on offshore schemes deliverable in 2021-22) from the putative forward framework up to 2025.

But what would the rest of the picture look like? Clarification has become quite urgent, since it is schemes in the planning stage now that will need to know the regime for their roll out – which inevitably takes a few years to complete.

So when would my ‘tick’ arise? I sat through the jokes, the housing section, the piece on Universal Credit and even the bits in it that were supposed to be about green issues – air quality, clean air plans the possible plastic bag tax – “because we can’t keep the promise to the next generation to build an economy fit for the future unless we ensure our planet has a future”, as the Chancellor said. Ah surely, here will be my ‘tick’ any moment, I thought, because how much more important to the green economy of the future can you get than the proper roll out of renewable and low carbon energy?

But my pen stayed sheathed until the Chancellor sat down. There was no mention of what was to happen to the Levy Control Framework.

At which point of course, one does the next best thing, which is to rush round to the Vote Office, get the Budget documents and find out what is going on below the radar level of the Chancellor’s Speech. And there it was, not mentioned by the Chancellor, but clear in its simplicity: para 4.5.1 of the Budget book. There will be no replacement for the Levy Control Framework – that is “no new low carbon electricity levies until the burden of such costs is falling. On the basis of the current forecast this means that there will be no new carbon levies until 2025”.

The answer to the question about what the future Levy Control Framework looks like is “there will be no Levy Control framework because there will be no levies”.

The bald facts are accompanied by a marginally more explanatory document alongside the Budget entitled Control for Low Carbon Levies – a slight misnomer, since there will be no levies to control – which does clarify that the remaining ‘borrowed’ money for support of offshore wind will be regarded as an existing levy and therefore not covered by the new rule, as will the as yet unlevied allowance for Hinkley Point C power station coming on stream in 2026 or so. Otherwise, nothing.

So one thing is clear: there will be no more support for solar, onshore wind or indeed further-from-market technologies such as tidal and wave. It also looks as though any future application for nuclear CfDs will logically be resisted under this rule.

As for the 2025 date and the “burden of costs” caveat set out in the new non-Levy Control Framework? Well, I don’t know whether it is deliberately supposed to be obfuscatory or not, but a system that has inherent in it 15 year tails on the ROCs and CfDs already in place is not going to reduce its costs until those tails have passed through, which is a much longer timescale than 2025, so probably no such support for a number of years to come after that date.

Moreover, depending what the Chancellor means by ‘levies’ there is the possibility that plans to extend the Energy Company Obligation (funded by a levy) to tackle energy efficiency in buildings as set out in the government’s Clean Growth Strategy will not happen either.

Altogether then, a mighty axe blow at the fundamentals of the next phase of renewable deployment. It looks to me that a substantial part of the UK’s renewable industry will have to shut down, unless ways to introduce technologies wholly free of underwriting can be introduced.

All of which, I suppose, was why it wasn’t mentioned in the section in the speech about the planet and its future, because it seems this represents precisely the opposite of such a sentiment, and in a serious and long term damaging way. It will teach me to sit in debates with notebook at the ready, though, and perhaps make me just a tad more cynical about the difference between what is in a Budget, and what the chancellor says is in it when he tells us about it in Parliament.