Looking for the carbon flaws

Some further ruminations on Electricity Market Reform. I was reported a little while ago by a leading energy monitoring journal to believe that electricity market reform ‘wouldn’t get us to where we want to be’ on energy. True. That’s what I said in the piece I did for the Environment Guardian when the proposals were first launched.  But there’s a bit more to it than that. It’s clear, I think, that as an instrument for shaping the energy market so that it takes us smoothly through the rapid decarbonisation that will deliver – say – a descent from 450 odd grams of CO2 per kilowatt hour now to under 100 by 2025 – EMR won’t step up to the plate and will have to be revisited. But it is, none-the-less far better than what we’ve got now, and elements of the proposals will give some strong impulsions in the right direction – capacity payments to balance the mix of capacity in the new world of variable and decentralized supply, much of which will be low carbon; a contract for difference or a premium FIT on supply, which will give further nudges into the right mix for the carbon numbers to fall reasonably rapidly in the next phase.

It is, though, some of the wider architecture of EMR that looks dubious and likely to become redundant fairly rapidly as the challenges are encountered. That’s I think, my main worry about how it is being cast. And I think some of those worries were echoed in the recent session the Energy and climate Change Select committee held with the ‘Big 6’ energy companies – although it was necessary to read the transcript over again to eliminate some of the apparent surface noise of disagreement, ranging from apparent adulation for all things EMR to fairly jaundiced scepticism. I also had to do a bit of reading because I was present for only part of the proceedings, having been drafted onto a European Scrutiny committee  on Energy policy – where I was able to ask the Energy Minister all sorts of questions on energy topics, but not to take soundings from the Big 6  down the corridor.

The proposals for an Energy Performance Standard were barely mentioned, which I think underpins their essential irrelevance on the levels consulted on as I’ve already posted.

The proposals for a carbon floor price will need to be far better thought out. It will be a tax now, with the mechanism based on adding a charge upstream to the climate change levy. When added to the existing tax that the carbon reduction commitment has become, some people will be paying twice towards a level of carbon intervention that, taking whatever ETS turns out to trade at, may collectively look like a charge level high enough to encourage new nuclear investment (as is clearly the intention). Since, though, much of it will go to government and not energy companies (because it’s a tax) it will probably fall well short of the desired effect, unless the massive windfall that the operators of existing nuclear plants will get (free money on the back of  providing no bidding up to the market price because nuclear comes in as the very base of baseload) will do the investment trick for them instead. As Iain Marchant, the canny CEO of Scottish and Southern observed to the Committee

It [the EMR] has actually been designed to get nuclear built….if you design your market structures with that objective in mind, you get an awful lot of unintended consequences on capacity, other investment, and prices.

One of the possible unintended consequences, and one that I’ve been giving some thought to was also pointed out by Iain: if you put much store on interconnectors for the future and those links with Europe (supergrid, bilateral links, Norwegian storage cables, call them what you will) provide substantially more than the 3% balancing top-ups that they do presently, then the issue of the UK’s carbon price becomes very germane. You cannot set a price (assuming everyone else sticks with ETS) that is much above whatever is the rate set by ETS trading: otherwise, as Iain puts it:

‘if you get a difference of more than about £10 a tonne of carbon between the UK and Europe, you will effectively get investment in Europe …a CCGT ..at the end of an interconnector’.

This may be true, but it is also very limiting on any ambition to hike the carbon price up sufficiently to give EDF and others the comfort on price they seek and will need. Not a point I guess to weld Iain to the by then absent Vincent De Rivas of EDF, who had consistently been championing the rightness of unilateral UK Carbon floor proposals for nuclear build throughout.

Mind you, Iain also said before I arrived (according to the transcript) ‘I actually don’t like giving evidence with these five people. They’re not my friends. I don’t like them’. I think it may have been a joke, but I wasn’t there to hear him say it, and the minute writers regrettably don’t use those smiley or rolly eyed thingies  (emoticons, I think they’re called) so beloved by posters on football forums, so I’ll never know.

Anyway, some way to go before the mist clears on EMR, I reckon, and I’m going to stop now. My head hurts. (Head in hands painful face emoticon here please.)

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