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.

And another thing that’s not in the Budget…

This article originally appeared in BusinessGreen on 13th March 2017.

I suppose it is the prerogative of the Opposition to bang on about what is not in the Budget as a response to what actually is: “If only the government had put X, Y, Z in the Budget/put this tax down/helped this group of people, all would be fine, but they didn’t.” Writing this on Budget day does tempt me in that direction, but I will resist it… almost. What I want to bend your ear about is something that was not in the Budget, but should have been, because, well, the government said it would be.

The Levy Control Framework (LCF) -the arrangement that funds and caps underwriting for renewable energy development – comes to an end in 2020. No extension of the framework has been in sight for some time now, which is potentially very destabilising for renewables investment since it is now 2017, and it takes rather more than two and a half years to get a renewables project up, running and generating. Not knowing whether there is going to be any support in place when your project seeks backers – who, not unreasonably, will want to know how it is going to be funded and supported – tends to kill off those developments. Rather important, then, that we know what the next stage of the LCF will look like both in terms of what will be funded and to what extent.

The government seemed to recognise this at the time of the last Autumn Statement. Whilst they couldn’t tell us at the time of the statement what the control total for 2025 was going to be, we would be told soon. “The government is considering the future of the Levy Control Framework…” the Treasury red book told us (except rather confusingly it happened to be a green book on that occasion) “…which it will set out at Budget 2017”.

About time, too many people thought, especially since the LCF was running into some serious deep waters.

Shortly after the Autumn Statement, the National Audit Office reported on the overspend that had gathered in the early stages of the 2015-2020 phase of the LCF. The control total of spending (on Renewable Obligation Certificates and latterly Contracts for Difference) was supposed to be £7.6bn by 2020, but turned out to be a projected £9.1bn – £1.5bn over the cap. Since the rules of the Levy Control Framework require any overspend to be clawed back very quickly from future years, there arises an immediate conundrum for the future of the framework: will any new control total announcement include the fact that £1.5bn needs to be clawed back from new spend, since all (or most) of the £9.1bn will have to go on continuing payments for 15-year ROC and CfD contracts.

The overspend has been attributed to some rather predictable variances: offshore wind has proved to be rather more efficient than envisaged, meaning that it will collect more payments from more output. And energy prices have been going down and not up, meaning that the difference between the ‘strike price’ (the overall total sum the operator gets) and the ‘reference price’ (the money the developer would get from selling the output) is widening, meaning more money from the LCF for existing schemes and less available for new entrants.

A rather badly designed scheme is going into its next phase more or less bankrupt, and unable to take on new commitments. Except that… the government has effectively borrowed some £700m for new entrants from the next phase of the (as yet unannounced) scheme by holding auctions for new offshore wind over 2018-19 which will pay out in CfDs in the early 2020s when the winning schemes are up and running.

So, regrettably – but perhaps unsurprisingly – in view of the almighty mess that is the LCF at this moment in time, the government has not actually included a new programme and control total in the Budget. Instead, the red book (and it really is red this time) says: “the government recognises the need to limit costs to businesses and households as the UK decarbonises its energy supplies. The existing Levy Control Framework has helped to control the costs of carbon subsidies in recent years, and will be replaced by a new set of controls. These will be set out later in the year.” Which rather suggests that the government looked over the cliff at the LCF, decided that it was too horrible to contemplate, agreed that something else should replace it, hasn’t figured out yet just what, but BEIS and Treasury officials are hard at work with hot towels round their heads thinking about what it should be. They have now given themselves until “later in the year” to find something.

And that’s the end of the Levy Control Framework for now. But all is not yet lost. As we have been reminded by the Chancellor, there will be TWO Budgets this year, as the Budget day reverts to the autumn. So perhaps the prediction in the Autumn Statement will turn out to be true: there will be an announcement in “Budget 2017”, only not in the Budget we all thought the statement meant. So all they’ve got to do is figure out a new scheme, hide the overspend, work out how new entrants can get paid, honour the money committed in advance to the next round of offshore wind projects, and all will be well. Just you wait until the next Budget. It’s bound to be in there.