A boring treatise on why building a load of gas fired power stations isn’t as easy as it looks.

Yes, I’m afraid this piece is very long and probably quite boring, and you can skip to the denouement if you like, which is *here, but you might need to read through the stuff above it to allow it to make sense. So good luck, and start **here if you are really determined.

**Last week the Energy and Climate change Committee tried out a new method of getting its enquiry programme underway – it invited a number of industry and interest group stakeholders to discuss in some detail what the priority enquiries might be and how they could be set up. An interesting initiative which perhaps deserves a bit more airspace, but for the purpose of this piece, (and I hope the purpose will become apparent sooner rather than later) participants opined quite extensively about the fact that there does not seem to be an ‘energy plan’ and that the committee might spend some time investigating whether there is, and if not, why not (I paraphrase a little….)

This certainly seems to be true when we look at the inability of anyone to stick the recent series of random pokes , swipes and casual extinctions that have characterised Government ‘policy’ into any coherent framework of a plan for the future. Surely there has to be more to energy policy than that – there must somewhere be some sort of framework within which these measures can be placed, or at least held up against and measured (as in if you do x, then the effect is y and that means you need to do more of z to make up for it.)

So there’s the purpose of the piece – and with it come two curiosities.

The first curiosity is that there is, in effect ‘a plan’ in place at least as far as generation is concerned – carefully set out, consulted on, debated in Parliament etc. – namely the National Policy Statements for energy, agreed in July 2011 which are supposed to inform and be the reference point for all applications and decisions on large power infrastructure and plant. There are six of them covering fossil fuel generation, renewables, nuclear etc. and an ‘overarching statement’ which pulls them all together. They are supposed to ‘remain in force…unless withdrawn or suspended by the Secretary of State’ As far as I am aware, that hasn’t happened, so I guess they are in force at least for the time being.

And they make interesting reading. ‘Onshore wind farms’ we are told in passing ‘will continue to play an important role in meeting renewable energy targets’, and I am sure Lord Bourne failed to read the section on offshore wind when he took his recent lunatic decision on the Navitus Bay offshore windfarm recently.

The ‘overarching policy statement’, among other things, sets out the mix of generation and the indicative installed capacity that the policy statements envisage. ‘As part of the need to diversify and de-carbonise electricity generation, the government is committed to increasing dramatically the amount of renewable generation capacity’ the statement says, and it sets out just what new capacity we are likely to need by 2025. (What you need to know is that ‘installed capacity’ of about 1 gigawatt – or 100 megawatts) is about the flat out capacity of one newish gas-fired power station. What actual electricity is produced from this installed capacity is another matter, but you need to have a known amount of installed capacity to be sure that you can deal in terms of production with all eventualities.) We will need, it says, 113gw of capacity compared with 85 gw now, and of this 59 gw would be new build. Within that, the statement says ‘around 33gw of the new capacity by 2025 would need to come from renewable sources’. 26 gw would be non-renewable capacity, and the statement says (at the time) 6gw was under construction leaving some 18gw to come ‘from new non-renewable capacity’ – and finally, it concludes ‘government believes that new nuclear power should be free to contribute as much as possible’ because they want as much as possible of the 18 gw to be ‘low carbon’.

Well, we may or may not get to the 33gw of new renewables capacity envisaged in the NPS. Currently about 13gw of wind, 7.8gw of solar and 3gw of biomass are operational, with another 13-14 gws with consents and under or awaiting construction. But with the likely curtailment of most wind, some of this may not get built and certainly the pipeline of plans awaiting consent won’t. DECC is now estimating that about 30gw or so will be deployed by the early 2020s, with not much more to come after that. A shortfall in the 33gw projected capacity will all come essentially now because Government has deemed both onshore and offshore too expensive to underwrite, either through Feed in tariffs or Contracts for difference, and the supply chain will probably simply dry up.

We also know that nuclear will certainly not step forward to provide capacity – 2.3gw if that, from one power station by the mid-twenties.

So that leaves, pretty much one technology –gas, to fill in all the gaps. I know, of course that capacity margins between gas and wind are not the same, but we might come to that in a moment. The sums indicate perhaps 20-25gw of new power stations between now and 2025, which it seems is more or less now ‘the plan’ if Amber Rudds DECC blog of August 11th is anything to go by. ‘Gas’ she said ‘has a huge role to play, because moving too quickly to zero carbon energy risks driving the bills of hardworking people too high lots of new low carbon generation cannot be relied upon in the same way that gas fired power stations can’ – and to boot associated the new drive for shale with the indigenous powering of these new plants.

And here’s the second curiosity. Such a ‘plan’ would involve constructing perhaps 18-22 CCGT plants over the next ten years. All doable in terms of construction periods, except that it appears no-one, at present prices and conditions is very willing actually to build them. The government, it must be said is aware of this and with much trumpeting of the need to procure new plant, introduced capacity market auctions – essentially offering to pay people to build plants that might or might not actually supply electricity: fifteen year ‘capacity payments offered at auction. There were no takers this last year except for one putative plant that probably won’t get built: the vast majority of capacity payments went instead to plant that already exists (including coal and nuclear plants!) that would be likely to produce anyway. Ten more auctions to go – twenty plants to build.

Perhaps one of the key long term reasons that investment in new gas plants looks brittle is that even if wind is banished from the national generating asset books in future, there will be sufficient supply to make it likely that gas plants will be running at far lower loads than hitherto, with DECC suggesting in the gas strategy that plants will be running as low as 27% capacity, interestingly about that of offshore wind, which rather (and I said I would raise this earlier) puts the relative capacity margin argument into a new light. The return on investment will therefore need to be gained from this sort of prospect, but even on more generous assumptions on load the figures do not look good. Which takes us to the main reason right now, which is that, with the prevailing price of electricity as against gas price, they are not a viable commercial proposition. Estimates of the cost per mwh of new build gas from DECC and the Committee on climate change recently suggest that they would need a return of about £68 a mwh of electricity produced to cover investment compared with the present market range of electricity at £40-45 per mwh. In other words, unless electricity prices shoot up and remain permanently up, gas plant developers might be looking at a ‘gap’ of perhaps £23-28 per mwh that might need to made up from somewhere to facilitate the pouring of concrete into the ground.

Which in turn brings us up against the sheer unlikelihood that capacity auctions will in the foreseeable future ever approach that sort of 15 year underwriting to persuade building to take place. Indeed, Policy Exchange estimates that the last Capacity auction (clearing as it did at overall at £19.40 per mwh) represents in real terms a ‘subsidy’ to a would-be new build gas plant of about £4 per mwh. It no wonder that existing plants with amortised costs gobbled up short term contracts leaving virtually all new build far from the ring. In short, unless future capacity auctions clear at much higher levels, giving far more free money out to existing generators in the process, then they are not likely to be more successful at securing new build than the last one.

*The denouement: And here then, is a tentative conclusion from all this: that if the government indeed has a ‘plan’ to remove future wind from the equation and go for gas instead, than it looks like on present mechanisms, the amount of obligated subsidy falling on consumers and therefore increasing bills will come to something like the subsidy level that the government has cited as one of its main reasons for pulling the rug under wind (and solar, of course): because we all know, don’t we that capacity payments have an identical feed through effect on bills as do Renewables Obligations , feed in tariffs and contracts for difference , however we may decide to classify them as inside or outside the famous Levy control Framework. Oh, and of course there will be a much higher carbon emission outcome than had we continued to use that amount of subsidy to continue with wind and other renewables.

We will certainly continue to need gas in the system for a very long time, and the real challenge lies in how we develop a ‘goldilocks’ path of enough new build to sustain a reducing requirement over the next fifteen years, whilst not locking ourselves into generation paradigms which harm our path to long term carbon sustainability in generation. But that looks like quite a different ‘plan’ than the government apparently has in mind for us right now

Sort the Levy Control Framework out: a message from the beach

(This article originally appeared on Business Green, 20th August 2015)

This piece will no doubt hit BusinessGreen readers as they prepare for, are on (if you read BusinessGreen whilst on holiday), or sadly, have just returned from the great annual British fortnight of doing not very much by the sea. Just to enter into the spirit of things, I can confirm that this is being penned as I gaze out across the pine trees to the azure strip of sun dappled ocean set against smokey grey hills beyond, etc, etc.

But what I want to think about briefly is what is to happen when we all return, and specifically, whether this autumn will see what is increasingly a success story for Britain, the deployment of renewable energy of all shapes and sizes halted in its tracks, or whether it can continue on a path to ensure that climate change targets are met and that clean energy continues to supply larger portions of the UK’s energy needs over the next decade.

What will happen in the autumn will, I am becoming increasing convinced, make that difference, and the signs right now are that on present trajectories, deployment will come to a halt. Or rather it will appear to spin out for a while as the remainder of the momentum that has built up in the system passes through, but essentially it will be moribund for the longer term future, and will take considerable new effort and new policy initiative to revive. All of which could be very bad news for longer term targets, and certainly for the discharge of whatever obligations the UK will be taking upon itself as part of the – hopefully successful – Paris climate change talks in December.

The big deal here boils down to one central question: does the government want to fix the problems now being encountered by the operation of the Levy Control Framework (LCF) which governs much of renewable deployment, or does it intend to see it just fade away and take the renewables industry with it? The obvious occasion for the fixing to take place will be the spending review that is due to be presented to the nation by the chancellor at the end of November. The indications of the substance of the review are, (announced by the chancellor in July) that it will be a non-spending review – as heralded by his announced request that all ‘unprotected’ government departments, including DECC, should prepare plans to cut either 25 or 40 per cent of current expenditure. But the LCF rather stands outside these considerations, or at least should.

It was, after all, introduced to a barely noticing world in 2011 as a mechanism to control essentially variable ‘expenditure’ on renewables by DECC (the amount awarded to a renewable generator in support does not vary but the amount ‘paid out’ through the contract for difference mechanism does, depending on the general price of energy) by stating a fixed sum that expenditure should amount to by 2015 and then by 2020.

The renewables industry generally welcomed, or did not kick up much of a fuss about the framework at the time because, well, it seemed like a lot of money, and 2020 was a long way away. The very success of renewable deployment over the intervening period and the expense of underwriting the cumulative allocation of CfDs each year now means that on present reckoning, the LCF, as I have long been pointing out, will be bust and essentially non-operational for any new renewable deployment between now and 2020. This means no new support for anything now seeking to deploy unless that deployment is already covered by an early investment agreement or has squeezed in through the recent auction of CfDs the operation of which is now in doubt for the foreseeable future.

But it all seems a bit odd talking about DECC overshooting its targets for the LCF and there being no new expenditure left in the budget when the LCF is not really about expenditure at all. No budgeted money changes hands between the exchequer and DECC, and neither does any change hands between DECC and renewable generators. You will no-where find the LCF accounted for in DECC departmental expenditure, or in Treasury accounts for that matter: it lies outside both, since it relates to the allocation of the theoretical effects of levies which go to support the underwriting of renewable expenditure, and are only controlled by Treasury because the expenditure on consumers bills which would result from such levies is classified by the Office for National Statistics as ‘putative tax and spend’.

In short, it is a very strange instrument indeed: and the Chancellor’s decision on whether to let renewables twist in the wind by maintaining the theoretical ‘cap’ where it is, or ease their development by altering these parameters, is not about ‘spending’ but about the notional, and eventual effect on bills of the short and medium term cost of renewable deployment.

The Chancellor could, therefore, without an effect on his overall spending plans, change the way the LCF functions and create the room within it to ‘fund’ new deployment. Or he could, with at most a notional effect on bills (offset by energy price differences anyway) raise the ceiling on the cap and create headroom for new projects immediately.

I will be trying to persuade the Chancellor over the next two months to take one of these two routes in the autumn: because I know that the do-nothing option, is not in reality that. It is a do something route, that something being the smothering of the next stage of vital renewable energy deployment and, ironically, the inflicting of longer term fatal damage to the ability of the clean energy industry to use the support to, eventually, stand on its own feet.

The Chinese nuclear fairy gets set to wave her wand…..?

According to the papers, we are finally going to get financial sign off for the first of what are supposed to be a new fleet of nuclear power stations in the autumn – albeit laced with a huge slug of state funded finance from the Chinese government: so to sum up, Hinkley C power plant, which will of course be built, it is claimed without any public subsidy or state finance (except the credibility busting sum of  EDF being awarded £92.5 per megawatt hour of electricity produced  for the next 35 years– about twice the current price of electricity currently) will be constructed largely with state finance from China and run by a state financed French energy company.

Amber Rudd, our new Energy Secretary of State, appears to be rather more openly on the side of the ‘subsidy admitters’ than her predecessors were  – she told me two weeks ago in In an energy Select committee hearing that

‘We have to have secure baseload, so you should not be surprised…that we are prepared to pay more for that in order to make sure nuclear is part of the mix’

An admission that sounds to me very like confirming a conscious decision to subsidise new nuclear, which is of course the subject of a challenge to the EU from the Austrian Government – that the UKs nuclear programme contravenes EU state Aid rules. It quite flagrantly does, I think we will quietly have to agree, and it really now depends on whether there is a ‘policy fix’ on state aid shortly, or whether the challenge, which is by no means ‘weak’ as the Government dismissively tells us (see here for an appraisal of the Austrian challenge) is allowed to run through a proper process of examination.

So to sum up (2) – the Chinese and French state sponsored new nuclear reactor propelled towards financial close by lavish state underwriting of its eventual output may well go ahead providing it is deemed not to contravene EU state aid rules: and will simply collapse if the challenge succeeds.

So that’s our new nuclear programme sorted out, subject to these small matters? Well not really, because it is worth remembering that Hinkley C is supposed to be a part – the first part- of that new nuclear programme, the importance of which was underlined very recently in a largely unnoticed update of the Government’s ‘Low Carbon Technologies’ plans.

According to this document, ‘most nuclear power stations are due to close by 2023’, so a new fleet is needed to maintain the nuclear mix (nuclear currently supplies about 19% of electricity) It is going to be OK, however, because, as the document says, ‘Industry plans 16Gw of new nuclear power’, on five of the eight sites agreed to be suitable, and effectively given free up front planning permission, by the 2011 Nuclear National Planning document. Those would be the sites that were appraised by the planning statement as being able to be developed by 2025 –because, as we were sternly warned by the report ‘failure to develop new nuclear power stations significantly earlier than the end of 2025 would increase the risk of the UK being locked into a higher carbon energy mix for a longer period of time than is consistent with the governments ambitions to decarbonise electricity supply’.

Right then: we’ve got to get a new fleet built by 2025 to have any chance of keeping nuclear in the mix and replacing those that will inevitably close before then- and the next question, is how are we doing?

Well here’s something else worth remembering: Hinkley C was, when the nuclear policy Paper was written, supposed to be producing electricity by the spring of 2018 – planned, permissioned financed and constructed by that date. The new planning document staunchly stands by that fairytale date, more or less – ‘the aim’ it says, ‘is to have the first new nuclear power stations generating electricity from around 2019’ . That is not what ministers now say, however – in DECC questions three weeks ago, Andrea Leadson the new energy minister, told us all that ‘ we are committed to the next wave of new nuclear projects…and we hope to be able to be able to meet 35% of power needs from nuclear by 2028’  That’ll be the ‘plans’ the  industry has coming to fruition by then, I would imagine –  but  not quite what I received as a written answer from DECC a week later when I asked about the new nuclear timetable – ‘ we expect ..these new power stations to come into operation during the 20’s and early 30’s’ signed off as answered, I might add by one Andrea Leadsom.

So to sum up (3) Hinkley C is now delayed by more than five years, and will probably be delayed further. Even assuming everything on the remaining permissions and the build goes very speedily, it is probably asking a lot for power to come out of the plant before 2025. – the date by which all the new fleet was supposed to be in place. And then, if 35% of power is to be supplied from nuclear by 2028, magically, all the other sites will have to be completed  by then (which means all will have to be approved, financially closed, and commenced with building by about 2017).

So I guess we will need to hold tight and wait for the flurry of announcements about definite build programmes on Wylfa, Sizewell, Oldbury etc. over the next eighteen months.

And then finally summing up (4) not a snowballs chance in hell that all this will happen. Instead of a complete nuclear programme by 2025, the likelihood is that there will be one plant, or maybe not even that operational at that point. (The estimable  Prof. Catherine Mitchell, from Exeter University has produced a highly recommended blog piece on this and other energy planning issues by the way.)

Time, you might think, for a plan B. what about filling in now almost certain low carbon generation gap, at the very least, with much more easily deployable, speedily buildable, better financeable, lower subsdisable real renewables? Oh, we’ve just taken most of those programmes out and shot them. Bit of a mess then, really.