On budgets, Mrs Lincoln and wind power

This piece originally appeared in BusinessGreen on 24th March 2016

Well it wasn’t a very green Budget, was it? I know that to ask this question in light of the other rather explosive elements of the Budget is to pose a modern day version of the question ‘other than that, how was the play, Mrs Lincoln?’ Nevertheless, I would have thought that, with all the rhetoric surrounding the outcome of the Paris climate change summit in December, there might have been rather more ‘getting on with it’ measures in the Budget.

As it was, under the box marked ‘energy’ we were treated to the abolition of the Carbon Reduction Commitment, and some compensatory tinkering with the Climate Change Levy, a pledge to enhance interconnection levels, albeit at no cost to Treasury UK, and a commitment to allocate £780m to support offshore wind and ‘less established renewables’ over the next period of the Levy Control Framework (LCF).

That bit sounds quite green, I grant you. The idea that there will be further CfD auctions between now and 2020 is not new – Amber Rudd mentioned that there would be new auctions last October. But the source of the £780m for offshore wind looks like it be from the next LCF phase, since it will be for plant becoming operational after 2021.

Policy Exchange has tried to work out where the LCF will stand by 2020 – and they suggest that, whilst the cuts to onshore wind and solar might have pushed it below the 20 per cent ‘headroom’ level above the £7.6bn allocated for it by 2020, it is still ‘overspent’ by about £1.2bn – a sum that, on present definitions, DECC will have to ‘claw back’ within future limits that are as yet unset.

Whether the LCF is really overspent and what its consequences might be is a matter of conjecture, since its calculations are now so opaque that it does require some reasonably heroic assumptions to get inside its workings. This is a conclusion shared, apparently, by the Office for Budget Responsibility when it notes in its ‘Economic and Fiscal Outlook’ accompanying the Budget that the complexity and commercially sensitive information used by DECC ‘reduce the transparency of the forecasting process’.

So what might be available for onshore wind after this initial allocation – which is essentially a downpayment for future wind deployment in the 2020s – remains very uncertain.

We ought to note in passing that the formula set out for these future auctions by its definition excludes any onshore wind or larger solar from bidding for the remainder of the LCF. They are not, after all, ‘less-established renewables’ so that is the end of them, it seems, as far as Contracts for Difference auctions are concerned. This seems quite perverse, since they are by far the cheapest renewables around currently, and in any all-in auction would certainly come in substantially below the £105 per MW hour that Treasury envisages will be the maximum cap for offshore wind that the next auction will be set against.

So how much offshore wind would these auctions up to 2020 procure for delivery in the early part of the next decade? RenewableUK’s estimate, immediately after the Budget, is that the sum might account for about 3.5GW of installed wind between, say, 2021 and 2025. Mind you, this estimate is based, it seems, on the assumption that all the remaining LCF levy funding will go to support offshore wind, and not some of the other ‘less-established renewables’ mentioned in the Budget Red Book (how, for example, Swansea Bay or indeed any tidal energy might be fitted into the framework remains unclear). However, it does give us a clue as to what is still supposedly out there for the LCF to accommodate in the 2020s if we ever get to hear what the next LCF framework level is actually going to be, which I have to say would have been useful and comforting to hear in this Budget.

Amber Rudd, in her energy reset speech in October, hinted strongly and to some approval from renewable groups that there would be room for perhaps 10GW of new offshore wind in the 2020s – subject, she said, to ‘the cost reduction we have already seen accelerating’, leaving something like 6.5GW outstanding on a promise to be accommodated by the 2020-25 LCF, if and when it turns up. In light of the continuing claims of overspending on the LCF as it stands, this looks to be quite a tall order, unless the basis on which the LCF is set is changed.

So, some offshore wind to come in the early 2020s, at the expense of no further onshore or solar developments related to CfDs. And then a cliff surrounded in fog as to how any further developments might be accommodated, even at the Treasury’s putative suggestion (in the Red Book) that limits for offshore might be pushed down to £85 per MWh for projects ‘commissioning after 2026’.

Not a very green Budget, then. But it could have been a little greener if we were party to the great mystery of our time: namely, how the LCF will be managed over the next 10 years. Someday we will find out, and at that point we might (or might not) be a little happier about things.

On Capacity Markets not working – it’s worse that you might think…

IPPR has published a report this week which tells us ‘why the Capacity Market is not working, and how to reform it’. A very good piece of work, which is well worth a read. I’m not going to go into an exposition of the report and its findings, because you can do that for yourself here. I’m sure the authors of the report were too busy putting the finishing touches to their opus to notice a question I put to the Minister of State for Energy in the last DECC oral questions before Easter Recess. I asked her, since the Department has not published an impact assessment for its latest consultation on proposals to ‘reform’ the capacity market and bring forward a year’s new capacity purchase this winter, what she thought the cost to bill payers of this would be, and whether she thought it would have the effect of actually procuring more long term contracts for new power stations (the original main purpose of capacity auctions).
 
This last part is, after all, primarily why the capacity auctions are not working, which is that, so far, auctions have succeeded in procuring precisely no viable 15-year capacity contracts to ensure the building of new gas-fired power stations. Ministers have been, how shall we say it, a bit (inadvertently) misleading in their portrayal of the situation. The Secretary of State said in Parliament a month ago that 12 gas fired power stations had been ‘commissioned’. The Minister of State told the house last Thursday that, since 2010, ‘six new combined cycle gas turbine have been commissioned’. Well, setting aside for a moment the apparently extremely elastic definition of ‘commissioned’ apparently in use, what we ought to focus on is who is actually financially closing on projects and starting to build them, which is, in my book, how you get to ‘commission’ a power station (i.e. get it to produce electricity).
 
Well, yes, there are a number of planning permissions for sites out there, and there are companies who have, over a period, expressed some interest in putting some bricks on those sites. But in reality, only one power station currently is nearing ‘commissioning’ (Carrington, in Manchester). One other, Trafford, received a long-term capacity contract in the first capacity auction, but seems at present to have no serious investment coming in, which I understand was the purpose of the low bid into the auction, and doesn’t look like it will go ahead any time soon. So I will be attempting to clear up the small matter of Ministers’ use of the English language after Easter Recess, but the reality, whatever is whistled in the dark, is that there are no new power stations firmly ‘commissioned’ as a result of capacity auctions.
Bid image.jpg 
And this is at a time when the Government has set the requirement that a number of new gas-fired power stations be commissioned as a prerequisite for the final closure of all coal-fired power stations by 2025, and is faced with the closure, or mothballing, of further gas and coal-fired power stations right now.
 
So, I didn’t get an answer at all to my first question, which I knew more or less (and more on that below) and I did get a firm assurance from the Minister that all is well, because ‘old plants are struggling to continue’ and ‘by bringing forward the Capacity Market, we are giving them the certainty they need to ensure security of supply’. So no answer, really, to the second part either.
 
Indeed, as the IPPR report points out, running a capacity auction that sprays around money to all-comers (including coal and nuclear power stations) in order to get them very kindly to agree not to close and be available to supply power if it is needed, isn’t a difficult task in its own right, provided you relax the rules so that everyone can get a piece of the pie. And that you purchase sufficient capacity so that lots of existing power plant ‘clears’ the auction at a relatively low clearing price, but at a high overall price for customers. IPPR estimates that so far, £2.8 billion has been spent on ensuring that this happens.
 
The central problem with the design of the process though, is that an auction which gives out free money like this almost inevitably ‘clears’ at a price way below that which investors in new plant (who have to do something – i.e. build a plant at their eventual risk) can get a foot in the capacity door.
 
And it is made worse by the design of the auction, which roughly works on the basis that a desired amount of capacity to be procured (whether old or new) is announced and then everyone (existing and new capacity) bids what they think they can do the job for. The auction then winds down with new lower bids until the right amount of capacity is reached at the lowest bid price. The bid that gets in through the door last then establishes the ‘clearing’ price, which everyone else, whether they bid half that amount in the first place, miraculously then gets as their ‘capacity’ price. And those low bidders, who know they can’t lose if they have plant with very little outstanding debt on it, pull the clearing price down in the process, and further slam the door for new plant, which will have debt attached to it.
 
So, with this rather barmy design on board, the Government is then faced with the prospect of trying to work out how to raise the ‘clearing’ price sufficiently in future auctions to bring new plant developers through the door. At the moment, due to gas and electricity prices and the longer term prospect of being unlikely to be able to run plants at anything like their theoretical capacity, it is fundamentally uneconomic to build and operate new plant, so that price difference will be quite large. Some commentators suggest ‘clearing’ prices would need to be £25-30 higher than the current level of £18 to get any new development into the process.
 
The new proposals to ‘reform’ the Capacity Market try to fix that by consciously trying to drive the ‘clearing price’ up by purchasing more capacity in an additional early auction. And of course if the ‘clearing price’ goes up substantially, then so does the amount of ‘free money’ spraying around the system to everyone else, other than those new plants which may or may not be commissioned for the future. And so does the cost to bill payers of the whole sorry process, since all this is financed by a levy on companies just like the levy for renewables that the Government is so worried about currently. Some estimates put the additional cost of the new auction at about £2 billion with a corresponding increase of £20 on customer bills… and all for a process which just might, but probably won’t, procure any new capacity, which is what the original idea was all about.
 
I have for a long time been advocating that, when the process all started, it should have been engineered on the basis of a strategic reserve of capacity outside the market (i.e. the government essentially purchases the potential output of some older plant and holds that in reserve for difficult times) rather than trying to persuade the market to perform somersaults through the capacity auctions we have now. A notable side effect of the Government’s latest proposals will be that the modest foray into ‘strategic reserve’ territory by National Grid, with its far cheaper contracts for plant to act in this way – known as the ‘contingency balancing reserve’ – will be axed in order to make way for the new auction.
 
It is right of IPPR to point out just how unfit for purpose the present system is, but I wonder to myself whether even the remedies that they propose to reform the system might not be enough, and whether the design is even more broken that the report lays out.  I rather think we will need to go back to some basics about how the market will work for the future and what role Government should have in ensuring that plant is procured under the running and eventual decommissioning terms implied by the decarbonisation of the system that the Government still says it is committed to. But hey, I’ve run out of space for a readable blog note: perhaps more of that at a later date.   

 

Carbon Capture and (no) Storage?

This post originally appeared in BusinessGreen

Yet another Energy Bill is trundling through the House of Commons and this time I’m leading for the Opposition on the Committee Stage. That’s not the big news: it is just that, unlike previous energy bills in which I have taken part as a committee member, this time I appear to have to do most of the talking. The Bill, in part, gives legislative substance to the Government’s decision to row back on the ending of the Renewables Obligation for onshore wind (and pretty much flatten onshore wind in England in the process) but it is largely about oil, gas and the North Sea.

There’s some quite uncontroversial stuff: setting up an agency to get the best out of the later stages of the North Sea’s oil and gas industry and enhancing co-operation between companies in the use of infrastructure for exploitation of marginal fields.

It is also looking at decommissioning, which in a mature basin such as the North Sea with an estimated 80 per cent of reserves already used, is something of an industry in its own right. This is perhaps not surprising, with now over 4,000 wells to be plugged, almost 300 fixed platforms to remove and over 20,000 km of pipelines to deal with there is a £35bn industry in development. But the danger with decommissioning is that, if it proceeds without care and strategic oversight, not only might infrastructure that can assist small new fields (which is mostly what the North Sea will consist of in coming years) come off stream, it will also squash what looks to be a substantial new long term industry for a depleted North Sea. Namely the ‘storage’ end of the Carbon Capture and Storage process.

Whilst CCS has suffered a grievous setback with the cancellation by the government of investment in two UK pilot projects, we all know that it has to develop in the UK and Europe rapidly over the next 30 years if we are to get anywhere near to achieving decarbonisation targets both in energy generation and energy-intensive industrial processes.CCS image

The likely effect of the end of the CCS pilot projects will be that we will be using imported technology to establish UK CCS, rather than using British developments and supply chains; but that’s another matter. CCS, I am sure, will be coming on stream in the UK. Uniquely in Europe, we have the perfect repository for UK-sequestered carbon and indeed, a repository that, with the exhaustion of the more mature fields, can transition to putting carbon back into the ground not just for the UK, but with capacity to do so for much of the rest of Europe. In fact, there will be a future for the North Sea as the site of a major industry long after most or all of the oil and gas has been lifted out.

But if we have in the meantime speedily capped wells and removed from the North Sea the very infrastructure that can facilitate this potentially huge industry, we might end up looking… well, just a little short-sighted when we come to working out what to do with all the carbon we are capturing.

That’s why I’ve being trying to get attached to the Bill at least a watching brief for the new Oil and Gas Authority on what the implications of unplanned decommissioning will be for future CCS activity. And by the way, we also moved a new clause into the Bill which would commit the government to introducing a proper strategy for CCS development over the next 20 years. CCS is certainly not dead in the Department of Energy and Climate Change (DECC), but its continuing activity after the sudden end of the two CCS pilots amounts to a few small grants for research and development, some roundtables on future prospects and, as I have been told, the assurance that new gas-fired power stations are to be ‘CCS ready’.

It is not anywhere near the coordinated strategy that we need over the next few years, and certainly not a route that even starts to encompass the real structural work we need to do – such as regulating decommissioning properly against possible reuse of facilities – to make a clear route to widespread CCS possible. The Bill continues: and let’s hope that it emerges at least with a firm nod in the direction of CCS development. Right now I’m not completely optimistic about that prospect.