Good news – now you see it, now you don’t

This piece originally appeared in BusinessGreen on 5th September 2017

There is always, as they say, good news and bad news. But it is rare, particularly in government circles, for apparently calculated bad news to cancel out good news quite so effectively.

So first, to keep to the old saying’s formulation, the good news.  This is that government seems now to have seriously ‘got’ the rapidly changing nature of the energy landscape and is producing plans to ensure that an energy transition which deals with all these disruptive changes can be managed effectively: smart grids, storage, self-generation, demand side management, low cost low carbon generation, and many more significant and important changes to how electricity in particular is generated, transmitted and used. The document that sets this out, published jointly with Ofgem, and entitled ‘Upgrading our Energy System: Smart Systems and Flexibility Plan’was published on July 24.

It both acknowledges the profundity of the energy revolution and seeks ways to harness it so that systems are both updated and made fit for the purpose of that revolution, and among other things calculates just how much consumer benefit will arise from getting it right. Government and Ofgem estimate that benefits will be between £17bn and £40bn in the period up to 2050. So roll on (or roll out) battery storage, aggregation of small scale generation, Demand Side Response, time of export tariffs and all that. The government is on your side now and plans to make the changes to the system that properly maximises the effect of these changes.

OK, the document is very light on detail, and there are many steps to be taken to implement what will be complex changes – but good news, I’m sure you’d agree.

And now the bad news… well, almost on the same day, Ofgem (also joint author of the aforesaid sunny uplands document) announced its ‘final decision’ on an issue that had been bugging precisely those people in the energy sector working away at that revolution – the storage companies, the distributed energy entrepreneurs, the local energy generators and so on – for a year.

The issue is simply this: do those kind of companies get an advantage that distorts the market by producing and using their power locally, since they arguably do not pay their share of the costs that otherwise would accrue to them of sending electricity up and down the country to its final destination? The added cost to high level transmission of these small (100MW or less) distribution connected generators is not high – perhaps £2 or so per megawatt hour. However, Ofgem thinks it is a serious distortion of the market and has decided that from 2019, everyone will have to ‘pay their way’ as if they were all big power stations connected to the National Grid system and sending out power across the country.

A small difference to transmission costs, but certainly a huge difference to the economics of those small power generators – a loss perhaps of up to 40 per cent of their revenue. Battery storage will face a loss on presently predicted revenues of over £56 per KWh – all making the viability of many of these new forms of power questionable, both in terms of present operation, and the fundability of new entrants, bidding perhaps into the capacity market, for support.

Or to put it another way, a dagger to the heart of precisely those forms of generation which are supposed to be supported and developed by the government in its damascene conversion to the merits of a distributed and smart system.

So why has this happened? Well, I don’t want to dwell on conspiracy theories too much, but the recent debate about the extent to which Ofgem can really act entirely independently of government in respect of energy price caps is perhaps instructive.

BEIS says it has the powers and could introduce a cap: Ofgem says it would need the signalling of a firm intention by the government to proceed before it realistically could act. What seems to be happening is that Ofgem is being leaned-on by government to come to the aid of the big energy producers who, among other things, are stubbornly failing to invest in new gas-fired power plants even when the considerable carrot of huge capacity market payments are dangled in front of them.

The capacity market, as is now well known, has had almost £6m of carrots consumed by largely big operators for existing plants without a single significantly sized new power plant being procured. Not having all those pesky new generation (in both senses of the word) outfits competing in capacity auctions, and in some instances withdrawing from established contracts because they are no longer viable, certainly shifts the landscape for large generation to use the market for its own long term investments more effectively.

But… at what long term cost? If indeed such short term thinking about how to prop up a failing market system for old capacity shoots new capacity squarely in the foot, then that is bad news indeed. And certainly bad news for the feasibility of the government’s new planning on distributed and local energy in the future.

Advertisements

What isn’t cool about cooling…

This piece originally appeared in Business Green on 18th July 2017

At last, heat has made it to the front page. The Cinderella of energy decarbonisation (electricity and transport being the two ugly sisters) now seems to be being taken far more seriously. Much discussion swirls about just how far heat is lagging in decarbonisation targets, and what needs to be done about it, with some renewed emphasis on heat decarbonisation strategies by the Committee on Climate Change and (I hope) some greater urgency on reshaping the Renewable Heat Incentive so that decarbonised heat options can be supported and progressed.

But what about Cinderella’s even more neglected twin, cooling? What is being done, or should be done about cold? And, by the way, is it a problem that ought to register on the decarbonisation radar? The problem recognition dial certainly still flickers around the zero mark, but a problem it certainly is. And as the climate changes, it will register more. This is because we’re living more and more in a world characterised by cooling demand – air conditioning in offices and shops, refrigeration for transport of food and perishables, and, of course, straightforward refrigeration in homes. Pretty much all cooling is undertaken by very old technology, vapour compression refrigeration, which uses refrigerants – usually hydrofluorocarbons (themselves a potent greenhouse gas) and huge amounts of electricity and sometimes even diesel to drive the refrigerants around to do their work.

The use of this old technology is already expanding fast as evidenced by the number of refrigerated vans driving around, spilling out far higher levels of NOx and particulates from their refrigeration units than the truck itself actually does. TheDemand for these technologies is projected to expand much further.

Already, air conditioning and refrigeration account for about 20 per cent of electricity supply, and this looks set to rise sharply as the UK increasingly adopts US levels of domestic air conditioning penetration. National Grid expects the UK’s use of domestic air conditioning to rise from a few thousand units today to perhaps six million by 2040, entailing a huge rise in electricity demand, along with seasonal and daily demand spikes that will distort present patterns of electricity use.

So, quietly, many of the gains we look set to make in energy efficiency and lowering our use of electricity may be offset by our appetite for cold – an appetite that somewhat ironically is likely to grow as the world heats up.

The debate on heat has swung markedly in recent years away from the earlier assumption that heat (delivered mostly by mineral fuels) could be decarbonised by electrifying everything. Awareness of the huge daily and seasonal variation in demand and the barely conceivable amount of new electricity capacity we would need to reliably supply all heat demand by electrical means has prompted a re-think in several quarters.

This has caused many to now see decarbonising heat as a portfolio job – some green gas injection, some electricity, some efficient district heating, and perhaps a move in the longer term to a hydrogen-based gas economy. However, creeping up behind all this effort looks to be the next possible consumer of improbable levels of new electricity demand: cooling. And at present there is next to no discussion (Prof. Toby Peters and Birmingham University, I honourably exclude you from this) on whether and how it might be possible to defuse this trend, other than by telling everyone that air conditioning will be banned and perhaps we should stop refrigerating all our food to boot.

There are possible ways forward for cooling that change the paradigm of refrigerants plus electricity, and come out at a far lower carbon cost. These include changing the refrigeration motors on vehicles to cold producing engines run on liquid gas, or capturing the cold from the transport of liquefied natural gas and reusing it for domestic cooling purposes, or engineering ‘night storage’ of cold during low demand hours for use at high demand times.

But right now, in the absence of any plan on cold decarbonisation or incentives like the RHI to aid their development and deployment, they will probably fall by the wayside as the march of electrically-generated, greenhouse gas-based refrigeration and aircon continues unchecked. Perhaps after the heating strategy and the RHI we should look to a Cooling Strategy and an incentive to get changes underway – I’ve come up with the ‘Inhibiting Cooling Electricity Carbon Ramping Incentive Measure’ (ICECRIM)… but maybe someone out there has got a better acronym.

The mysterious case of the £22 billion in the night

I asked a written Parliamentary Question about Hinkley C power station at the beginning of this month – or more specifically, a question about compensation clauses in investor agreements with EDF and other parties to the Hinkley C agreements. Here’s what I asked, and what was said in reply:

Q: ‘To ask the Secretary of State for Business, Energy and Industrial Strategy, what assessment he has made of the risk that the UK’s withdrawal from the European Atomic Energy Community would trigger compensation clauses in the investor agreement in relation to Hinkley Point C power station’

A: ‘We remain firmly committed to bringing forward the UK’s first new nuclear power plants in a generation.

The Hinkley Point C contracts make provision for compensation in certain defined circumstances. The details of when these apply are set out in the agreements.

The consequences of the intended withdrawal from the Euratom Treaty will be closely monitored and the department is in close consultation with the industry about its impacts.

The Government will continue to support Euratom and to ensure that the UK continues to meet its international safeguards, and nuclear non-proliferation obligations and support its thriving nuclear industry’.

Naturally, the answer provided did not really address the question, but there were some interesting asides: confirmation that there are provisions for compensation in Hinkley contracts – but no further indication of what they are and under what circumstances they might be activated.

So what is this all about then, and why did I ask the question in the way that it was formulated? It starts with a small entry in the National Audit Office’s recent report on Hinkley C power station. The headlines coming out of the report are about the circumstances under which the eye-watering underwriting that the project has received came about (in the way of Contract for Difference payments) and how it might have been different, but tucked away in the report is this aside:

‘Withdrawal from Euratom night be interpreted as a change in the law that could result in an adjustment to the terms of the HPC (Hinkley Point C) CfD, or an event that could trigger the compensation clause in the SoSIA. At the time of the decision to withdraw from Euratom, the Department had not performed any assessments of the effects of withdrawal or the risks arising from this decision.’

Hence the question; and the answer indicates that essentially, no, the Department hasn’t looked at the implications of Euratom withdrawal for Hinkley C agreements.

They might be well advised to do so, because looking at all the documents mentioned in passing in these exchanges, it looks quite alarming.

We know, first of all, about the apparent decision to leave Euratom – that is contained, remarkably, in the letter sent by the UK government to the EU commission informing them of the UK’s decision to trigger Article 50. Despite Euratom being a separate treaty, and requiring no action in parallel with anything issued about Article 50, the UK government has apparently decided that, because of the fact that Euratom’s dispute procedure is notionally governed by the European Court of Justice, leaving Euratrom should be put in, to be on the safe side. Whether Parliament at a later stage successfully rows back from this commitment is, for the time being, beside the point: right now the position appears to be that we have given notice that we are leaving Euratom contemporaneously with leaving the EU.

The other certainty we have is that there are in place binding agreements about liabilities arising from the construction and operation of Hinkley Point C power station. These cover a whole range of liabilities and circumstances, and are essentially designed to give some certainty to the construction and operation process; but also to the circumstances under which Hinkley C might not go ahead, or be stopped once it is operational.

The chief agreement here is the ‘SoSIA’ mentioned by the National Audit Office. This stands for the ‘Secretary of State Investor Agreement’ entered into between the (then) Department of Energy and Climate Change and a host of others, including EDF and the China Nuclear Power Corporation in September 2016 (here).

Nothing much about this agreement has, as far as I am aware, ever surfaced in Parliament, except for a ‘Departmental Minute’ that appeared a year earlier, in October 2015 (here). This minute, which starts with the disclaimer that,

‘It is normal practice, when a government department proposes to undertake a contingent liability or commitment for which there is no specific statutory authority which is significant in relation to the organisation’s… expenditure, for the Minister concerned to present a departmental Minute to parliament giving particulars of the liability created and explaining the circumstances

goes into some detail about contingent liabilities that are outstanding on Hinkley C.

This minute was virtually impossible to interrogate at the time: I tried to do so when it came out and really got nowhere. Important, I thought at the time though, because of what the Secretary of State said about the implications of the agreement she was about to sign, and subsequently did. Here is what she says in the minute about compensation in the event of a shutdown of Hinkley C

Under the SOSIA, in certain, highly unlikely, scenarios e.g. HMG permanently prevents the construction or operation of the facility or a reactor or where there is a political shut down of HPC by a UK, EU or international Competent Authority, payments could be up to around £22bn excluding non-decommissioning operational costs that may be incurred after any shutdown.  However, the liability to make payments under the SOSIA is almost entirely within the control of HMG.’

Alarming but unlikely, eh? Well… looking at the actual SoSIA agreement (and it is, I assure you, an absolutely impenetrable read) it doesn’t all look quite as unlikely as the minute suggests. Granted, the agreement does provide for compensation in the event, say, that the government decides, essentially politically, that Hinkley C is not a project they want to proceed with and wants to bale out: that is what is known in the agreement as a ‘Qualifying Effective Shutdown Event’. It may well be that this was the sequence of events that surrounded the decision by the incoming Conservative Government under Theresa May to pause the signing of Hinkley C CfD financial closure just as it was due to take place, with a Chinese delegation apparently stranded in the UK, having anticipated that they would witness a signing. Instead the whole thing was placed on pause whilst the Government reconsidered the position: perhaps summarised roughly as [Theresa May] ‘my God this is a turkey of a project, and will cost us a fortune. How can we get out of it? Let’s pause to think about it’ (a few days later…) [Advisors] ‘sorry PM, we’ve had a look at the agreement your Energy Secretary of State signed with these people and it looks like it will cost you £22 billion if you pull the plug – and you won’t get a power station either’.

But there is more in the agreement than this: what is defined in the agreement as a Qualifying Shutdown event includes (and I quote)

‘a Government Authority (a) applying, implementing or changing the Law which is in force from time to time (b) applying or exercising its powers in that way or (c) applying, implementing or changing policy or guidance which has effect from time to time’

…all of which sounds as if a Government deciding to change a ‘law… or policy or guidance’ where that change centrally affects the ability, in a number of ways, for the Hinkley C project to proceed smoothly could well be defined as a ‘Qualifying Shutdown event’ if they went through with it. This could well trigger the ability of the injured party to walk away with a large amount of compensation, perhaps, as the Secretary of State says, of up to £22 billion.

Nuclear reactor running shoes

But still unlikely, eh? Well, one could be forgiven, in the light of the many recent delays, cost rises, refinancing attempts and board meetings to give renewed backing to the Hinkley C project for thinking that certain elements of EDF and their backers may well have more than a thought passing across their collective brows… They may think that, after all, pursuing the building of Hinkley C until the bitter end could well bankrupt the company, especially in view of the almost terminal troubles they are encountering with sister reactor builds in Flamanville in France, and in Finland, and might a way not be found at some stage to pull out of the deal? Of course the Secretary of State Investor Agreement works both ways: they are effectively bound into the deal by the agreement; and if they walked away would be liable for all sorts of penalties.

And what if a magical get-out-of-jail card came along in the form of a stupid government action that allowed EDF and its backers to walk away from a project they continue to have serious doubts about, but on the basis of a rich reward (all their money back and more) for doing so? Might temptation present itself at the massive expense of the UK taxpayer?

I should say here that there is no fully formed indication that EDF are planning to do anything at the moment except continue to pour concrete and get the scheme under way. However, it is reasonable, I think, to point out that there has been a history of questions raised on the other side of the Channel about the progress of the scheme, in terms of the French regulator, EDF board and other actors and, of course, continuing questions about the progress being made on the aforementioned sister projects. It is therefore not beyond imagination to suggest that such an option might appeal under these circumstances.

Unlikely, I know, but perhaps not so remote a possibility as was originally envisaged when the SoSIA was first drawn up, well before a referendum was considered, and Euratom was just another of those things one did in Europe that made things work well across the Community and internationally. Now withdrawal from the EU and Euratom looks real, and the clauses recklessly entered into look rather luminous. I certainly think there ought to be some more urgent investigation of what this all means from the Government point of view, and it really is up to BEIS to get on with it, which is why I will be asking further questions to try and tease such an approach out. Or maybe they have, but they’re just not telling anyone, which would be rather in line with what has occurred so far in this whole process of ‘guaranteeing’ liabilities and agreements for getting Hinkley C over the line.