Quite a few things have happened since I last produced a piece just for this blog (nailing up articles I have written for publication elsewhere don’t really count). We have had an ‘energy reset’ – Amber Rudd’s November speech on ‘a new direction for UK energy policy’ (more of that in a moment) and the results of the second capacity auction in the middle of December (you know, those auctions that were supposed to secure lots of new gas fired power stations to replace all those others going out of commission – more of that in a moment). By the way, I’m now not the Hon. Member for Southampton member of Energy and Climate Change Committee, but the Hon. Member etc. Shadow Energy Minister. This means that I will continue to ruminate about energy and climate change policy, with one difference: previously you knew that my ramblings on an assortment of renewables, climate change and energy topics were definitely not Labour policy, now you have to assume that they are not (and you’d normally be right). I hope that’s clear.
Looking at those and other recent events, you might think then, that with the establishment of that new direction in UK energy policy set out in in that speech entitled – ‘a new direction in UK Energy Policy’ that, into 2016, there will be… er, a new direction in Energy Policy. Try as I might, I can’t actually find one, though. Or rather, I can’t exactly piece together the link between where we are now, what it is we’re all supposed to be looking at on the horizon as the weather vane swings, and how we actually travel along the path marked ‘direction’ towards that indicated horizon.
I think the horizon marker is still supposed to be ‘a low carbon future,’ but by means of a very different mix of energy than that which was supposed to have informed previous low carbon programmes, and still does seem to inform bodies that might know a thing or two about this, such as the Committee for Climate Change. And the horizon is now illuminated by the phase out of coal by 2025 at the latest (hooray!). Well, not quite… The government will be ‘consulting’ on a phase out of coal from the system by 2025, and the alternative much lower carbon emission source is largely going to be gas. If this happens, it will keep the emission figures going down for some time, even as other more nailed-on ways of doing it, such as onshore wind and solar, are to be tipped overboard (with the exception of offshore wind, providing it is a bit cheaper). Oh, and there’s going to be a lot more low carbon nuclear, although I suppose it hardly bears mentioning that even after the wining and dining of the Chinese Premier, no financial closure has yet emerged on the (seven years delayed) Hinkley Point plant: but there will lots more after 2025, apparently.
So how do you get to that horizon by these means? The means are not immediately apparent, because although gas is of course lower carbon than coal, it too will largely have to come off the system by the early 2030s (as the CCC reminds us) if carbon targets are to be met. And that timescale is well within the period over which the developers of the many new gas fired plants that the Secretary of State is anticipating might now be built will need to run the plant to get their investment money back. So even the formula that the Secretary of State sets out for her review of coal on the system doesn’t quite add up. She says, in a rather passed over, but significant line, ‘let me be clear: we’ll only proceed if we’re confident that the switch to new gas can be achieved within these timescales.’
Well, I’d start to smell a rat (or a gas leak) at this point, were I cynically inclined. If coal is to come off the system, then there has to be enough gas already on to replace it, even though the quantities of gas envisaged themselves recreate the problem further down the road that we are trying to make progress on in the shorter term. Hmm…
But there’s also the further problem of whether new gas can indeed come onto the system in time to cover for coal’s removal. Right now –and here the capacity auctions shamble onto the stage – there is not much evidence that they will. As I’ve previously outlined, the capacity auctions were confidently expected to establish a chain of new build through competitively priced 15 year capacity deals: but nothing much emerged from the first auction to suggest that such deals would emerge. One deal only was struck – which now seems bogged down in investor uncertainty, and won’t be on line by 2018. This year NO new large capacity cleared inside the final price: one new power station, Carrington, got a one year deal, but is largely built anyway. The new capacity that did get longer term deals largely consisted of small diesel sets, widely estimated to produce emissions, if used at all extensively, round about those of coal.
Worse, it looks as if the existing capacity that missed out on short term deals may close or be mothballed, as some of last year’s non-paid capacity has done, which even suggests that, when the next auction takes place, there may not be enough in to make an auction work. And all this is leading to some odd, and I think possibly portentous alternative decisions. National Grid has extended its 2.5GW of contracts that have been held on standby this winter outside the market under the SBR (Strategic Balancing Reserve) to a whopping additional 3.6GW for next winter. In other words, an incipient strategic reserve for gas supply that may scoop up some of the plant that has not got into the market and might close into a reserve that can come on stream to cope with the consequences of plants closing (if you’re still following me…).
So the pathway to ‘the switch to new gas’ looks ever more weed-strewn as new plant already permissioned does not get developed because of low and uneconomic gas-to-electricity prices and new plant entered into the auctions gets frozen out through a consequent low clearing price for existing capacity.
The Secretary of State, in the ‘reset’ speech was clear, though, about what she wanted. ‘It is imperative’ she said, ‘that we get new gas fired power stations built, we need to get the right signals in the electricity market to achieve this’ and so… ‘we are consulting on how to improve the Capacity Market… and after this year’s auction we will take stock and ensure it delivers the gas we need.’ I wonder, though, quite what will come out of the ‘taking stock’? What kind of changes to the Capacity Market might there be, Secretary of State, that fix the problem? It is apparent that capacity auctions as they stand have failed to do what they were set out to do. The level at which next year’s auction would have to clear to get new gas build even partly on track would now be so high even if it could be manipulated to do so, the consumer would wince far harder than if he or she had been subjected to a modest consequence of, say – more solar. On the other hand, a ‘new plant only’ auction might run into state aid rules.
The central problem is, I think, that there are precious few ‘right signals’ that can be injected into the market over the next few years (unless something unanticipated happens to gas prices – say they suddenly went up almost vertically over the next year) which will sort out the mess we have got ourselves into, within the constraints of the market arrangements as they are presently set up. A ‘solution’ will have to come from outside the market, which I guess is what National Grid are quietly working on, constrained, though, by the length of standby contracts that can be issued and the paucity therefore of committed longer term takers. Alternatively, it might come from government commissioning new gas plant outside of the market and then leasing the results into the market for a specified period. Either ‘solution’ might start to get the right amount of new gas onto a changing system whilst not burning the renewable boats that the present ‘reset’ looks as if it is doing.
My fear right now is that staying within ‘market signals’ will have only one outcome as the wreckage of the Capacity Market is reviewed. This is that it will be decided that, well, sorry and all that, it worked to put Britain in a good place as far as the Paris talks were concerned, but in the end we can’t get coal off the system by 2025 after all, because you know, we’ve got to stick with the market and keep the lights on. And that would be indeed a ‘new direction for energy’ indeed, but not one that I would want to contemplate in the same sentence as the Secretary of State’s ‘as we transform to a low carbon economy’ at the head of the ‘reset’ speech. We need to sort ends and means out; surely.