CCS – Norway to the rescue?

This piece originally appeared in BusinessGreen on 9th May 2016

I’m still coming to terms with the supreme act of folly that constituted the government’s recent decision to ditch the entire carbon capture and storage programme just at the moment when the two projects that could have led to early full scale capture and sequestration demonstration were about to submit their detailed proposals for the use of the funding for the projects. And, in one instance at least, with indications of considerable international investment for future development in the pipeline.

The National Audit Office has launched an investigation into the decision to end the competition early, at the request of the Shadow Secretary for Energy and Climate Change, Lisa Nandy. However, with one stroke of a pen, the prospect of becoming a world leader in CCS technology with all its consequential advantages for future supply has gone, leaving the UK with a few million pounds invested in some very marginal research efforts, and precious little else.

Despite this, the government is still making generally supportive pro-CCS noises, although that has not extended as far as producing a revised CCS strategy which was the subject of some amendments moved by the opposition during the passage of the Energy Bill, and rejected by the government. Activity has been restricted to the insertion into the Bill of some mildly more favourable approaches towards the prospects for a future North Sea sequestration industry, and the establishment of a CCS task force under the redoubtable chairmanship of Lord Ron Oxburgh.

So we might say that CCS, as far as the UK is concerned, is not dead, but merely resting. But we really do need some kind of roadmap as to what direction UK CCS is likely to take now that the pilot projects are gone. Indeed, we already know that the text of the Fifth Carbon Budget – which the Government has to respond to and (hopefully) accept as our future climate change action framework – will contain some very strong assumptions about the relationship between effectively operating CCS by the early 2030s and the maintenance after that point of viable decarbonisation plans.

I do not know what the Oxburgh task force is going to say, but one area they will undoubtedly be thinking about is whether we can pull out at least some of the momentum from previous programmes by perhaps sharing the load for full CCS with one or more international partners. Here, by coincidence comes a prospect for just such a possible international partnership right in our backyard, or more precisely in the Norwegian zone of the North Sea oil fields.

I recently met with Statoil, the Norwegian state energy company with long experience in CCS activity, and at the meeting, they outlined to me a project they were embarking on with the support and commissioning of the Norwegian government, namely to identify and establish a repository from among the depleted fields relatively close to the Norwegian coast. They are looking at several depleted fields and will be reporting formally back to the Norwegian government in June.

The government itself has said that it wants to get at least one fully operating full scale plant up and running by 2020. Sequestration in the first instance would be by ship, not by pipeline, and the facility is envisaged in the first instance as one to sequester emissions from Norwegian heavy industry, but the potential is far larger than that: it really calls out for some international collaboration to establish the full chain of capture, transport and sequestration, with at least the latter two being substantially de-risked by the activities that are already in the planning stage. It opens the prospect, with such co-operation, of the UK concentrating on establishing capture clusters that are within reach (by ship) of the chosen Norwegian field and are capable of exploring the commercial aspects of such clusters (such as hydrogen production and possible enhanced oil recovery) whilst a partner looks after the potentially more tricky issues around transportation and sequestration.

It would require some investment by the UK. But it would probably need far less investment than envisaged in the original plans for the pilot projects, and would, for that smaller level of investment, revitalise the CCS momentum in the UK. I would like to think that the government is, at this moment, actively engaged in the process of early phone calls that could give this collaboration life: I will certainly be pressing ministers to do so at an early date. After all, if a stroke of a pen can cut our CCS programme, the dial of a phone might equally revive it again: well, that and an indication from Treasury that the reinvestment of even a fraction of the money captured and sequestered from the pilot projects might be on the cards. How about it? Tomorrow, perhaps?

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.