On Pyhrrus and his campaigns

Well that went well, didn’t it? At least Ed Davey thinks so. I’m referring here to the results of the first capacity auction, the final results of which were posted earlier in the month. Here’s Ed responding to an intervention on the subject that I made during the recent Energy Prices debate in the house:

 

‘The results of the capacity auction were far better than we had predicted. The closing price – the clearing price – was significantly lower than we predicted, so there will be a lower impact on consumer bills.’

Hmm I’m not sure crowing about the low clearing price of the auction as a mechanism for protecting consumer bills (when that was nowhere in the specification of the auction) is a wise, long-term line to take. A bit like a general reporting that ‘our invasion force failed to land on the beaches and we were repulsed with huge losses. But we only sent ten ships, a far lower number than we had anticipated, so there’s a considerable saving to the taxpayer to take into account in evaluating the success of the operation’.

So were the results any good overall? Let’s start with what DECC thought the auctions were about when they set them up. Here’s what they say in the capacity auctions section of their website:

‘The Capacity Market will ensure security of electricity supply by providing a payment for reliable sources of capacity, alongside their electricity revenues, to ensure they deliver energy when needed. This will encourage the investment we need to replace older power stations and provide backup for more intermittent and inflexible low carbon generation sources.’

And we also need to know that the idea of launching an auction for implementation in 2019 was primarily so that new power stations would have some investment security when they come on stream.

Well, yes, payments have gone out in the first auction to some generators, which one supposes will mean that they don’t switch off their generating capacity when it might be needed. Except to say that almost a fifth of the cleared capacity is coal plant which DECC is supposed to be running off the system in a few years, and extraordinarily, 7.8GW of nuclear power (which can’t be switched off without long term consequences even if the owners (EDF) go into a sulk) so that aspect of the ‘auction’ most certainly is free money with no gain in supply security. Most of the rest is money to existing gas plants, some of which arguably might have decided to mothball themselves if they hadn’t got a payment from the auction.  On the other hand, almost 4GW of gas plant didn’t succeed in clearing the auction, being displaced both by coal and (haha) nuclear. One might think that this will now INCREASE the likelihood that this plant will be mothballed in the not too distant future, decreasing overall energy security rather than making it more robust.

But leaving that all aside, what about the other aspect of what DECC thought they were doing with the auction – ‘encouraging the investment we need to replace older power stations etc.’? Well here the news is uniformly bad. Let’s remember that the same Department projects in its gas strategy that some 26GW of new capacity will be needed to provide that backup by about 2030. One power station (Trafford) that appeared to be in the process of commissioning anyway got a fifteen year capacity contract. The other station being currently commissioned (Carrington) did not.

So, to sum up, nuclear and coal did well, existing gas got shedloads of money, new gas got virtually nothing – oh, and demand side response measures got about 1% of share out. More fiasco then triumph, I think.

 But it is the central aspect of investment in new plant that is squarely in the ‘fiasco’ bracket. Let’s suppose, as they are scheduled to do, the Department tries again next year with another auction, which may procure some more I year contracts. Where does that leave new plant? It is, I concede, something of a paradox that the Government is bringing forward mechanisms to pay developers of gas fired power stations to run at relatively low levels of output, in order to balance the system that, by 2030, will be predominantly populated by non-gas generation. This is for the very good reason that if it does not, then we will forever be locked not just into high carbon generation, but generation at levels that by themselves will bust any targets on overall CO2 emissions we might set for the country.  We will need this backup, but it is beginning to be evident that capacity auctions are perhaps not the best method of ensuring that it is there. Maybe the drop in oil prices and the following (partial) drop in gas prices will come to the rescue of new development, in which case capacity auctions aren’t likely to be needed.

I wonder if longer term, new gas plant will need to be publicly built and then rented out to operators. At least then we’d know the plants were there, and by the way, that when we didn’t need them, they could be removed in an orderly fashion. Or we could (heaven forefend) revisit the idea of a strategic reserve of gas plants.

As for doing things in the present way the phrase ‘one more victory such as this and I am ruined’ springs to mind. He lost in the end (Pyhrrus, that is.)

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Cough Up to Keep the Lights on

There’s a capacity crunch in electricity supply on its way; according to a number of our leading newspapers, the lights are due to go out in 2015 or thereabouts.

This is based on, among other things a rather more nuanced report by OFGEM about the narrowing of margins (installed capacity against likely highest demand peaks) by 2015. Looking at that report, and the energy landscape more generally, it is striking just how far off-beam the capacity crunch claims are. Lurid headlines and a good scare story maybe, but not borne out by the reality of what is being said. For example, OFGEM, for reasons of certainty, does not include the contribution that electricity coming into the country by interconnectors can make to the margins – a potential substantial difference in time of tight domestic generation.

But there is also a wider, rather peculiar dimension to the whole debate. Because in terms of installed capacity across the country right now, that is, power stations that are operational and able to supply, there is nowhere near any sort of capacity crunch looming. There certainly will be a tightening of capacity much later in the decade, as old coal plants close down or run very restricted hours under EU environmental requirements. Although with the extensions agreed for four nuclear plants until at least the end of the decade, that tightening will be less severe than originally thought, and a large amount of renewable capacity will be coming on stream at that time.

The problem lies, really, with a combination of how the grid takes on the power that can be produced at any one time, and whether producers actually feel it is worth their while to produce. Both conventional and renewable producers are, effectively paid not to produce or dump what they can provide at times when balancing is an issue, because there exists virtually no capacity in the system to store what is produced for use at more effective times. Gas fired power stations buy gas in to produce electricity to sell. If the difference between the two prices is poor in their eyes, as it is now, then they simply won’t produce. This has led over the past few months to a number of power stations, perfectly able to produce over the next period, being “mothballed”; that is put under care and maintenance awaiting a better level of reward from electricity production.

So a good part of the capacity crunch is not about capacity per se, but about how the market works in supplying electricity to those who need it, at the right price and at the right time.

This then leads to some rather odd -sounding solutions. The Government, in the Energy Bill, is proposing to introduce a capacity market which will allow producers to bid for a fee at auction to be ready to supply (but not necessarily actually produce) if they are required to do so by the grid. This is a potentially very expensive system which may produce better reliability, but at the cost of a potentially high double payment for being there (they may well have been ready to produce anyway) and income for producing (which they might have done anyway). The alternative is to develop a strategic reserve of plants that can be brought into production when the market doesn’t or won’t produce; either new build or a buy up of older “mothballed” plants. This purchasing of mothballed plants is potentially a much cheaper but non – market solution that I among others advocated in Parliament during the passage of the Bill.

The Government has set its face against a strategic reserve – and is instead set to proceed with capacity auctions in 2014 – for plant to be available in 2018-19. Not the most effective way to proceed, you might think, if you are worried about a crunch from mothballed plant non-availability in the years preceding those dates.

And then …well I never, a proposal has popped up in the last week from National Grid to pay producers a capability fee in 2015 and 16 to keep plants that otherwise would be mothballed primed and ready to go. If all else fails and, as National Grid puts it, emergency actions would otherwise be required they would come on stream regardless of utilisation price. Remarkably like a version of the rejected strategic reserve in fact.
The only problem with this proposal is that, because it is being advanced under the Electricity Act and not the new legislation, it will only be operable for two years or so. Or perhaps until the more expensive capacity market gets under way, risking the creation of some possible up-front costs without keeping the benefit of available plant outside the market in the longer term.

I’m afraid to say that we (consumers that is) may well end up paying over the odds to ensure that we keep the lights on when if we had designed our strategic supply systems a little differently, we would not be facing such a problem in the first place.

This article was first published in Utility Week.