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.)

DECC pokes the bear again on capacity markets

bear

Maybe it’s getting a bit wearisome to keep on pointing this out and I know that I’m getting a bit like a bear that wakes up when prodded with a stick etc. But …yes it’s the capacity market again. The latest is a press announcement from DECC that ‘Britain’s energy security strategy [is] now fully in place.’ This refers, in case you didn’t know, to ‘the amount of electricity generation capacity the government will procure’ through the capacity market, which as long-toothed readers of this blog will know, will be done through a series of ‘capacity auctions’. These auctions will see Britain’s gas fired power stations, present and future, being invited to bid to receive large amounts of money to persuade them to continue to be available to produce power (i.e. not shut down). As the Secretary of State says in his breathless press release, this is so ‘the ticking time bomb of electricity supply risks’ can be averted.

And now we’ve got the figures and the likely cost to consumers. The Government is aiming, the report says without a trace of a smile, to procure ‘a total of 53.3 GW of electricity generating capacity.’ In case you aren’t up with this capacity game, that is, incidentally, TWICE the amount of new gas fired power capacity that DECC estimated in its 2012 Gas Strategy would be needed by 2030. It’s also about 20% more than the total amount of gas capacity the Department estimated would be likely to be installed by that date. So yes, you could say that this is quite a secure amount of gas fired power stations to procure, since it seems that every conceivable source of gas fired power between now and 2030 will get free money to persuade it to be there.

And of course, thanks in passing to the redoubtable Emily Gosden, writing in the Telegraph about the announcement, we know the cost to consumers of this bonanza for gas fired power stations – on average £13 a year on bills. DECC had initially put the figure out as £2 on their press release, but accepts that, well yes, that is net of some very heroic assumptions about what may turn up in advantages on price as a result of the policy, so it really should start at…£13.

Ah but this must all be OK, says DECC because (back to the press release again) the whole shebang has been OK’d by experts: ‘the analysis supporting the decisions made today has been impartially scrutinised and quality assured by the panel of technical experts for the enduring regime’. Well…up to a very small point. When you read the small print of the Panel report, it is made clear that, according to the terms of its establishment, the Panel:

‘has no remit to comment on EMR policy, Government’s objectives, or the deliverability of the EMR programme. The Panel’s Terms of Reference mean it cannot comment on affordability, value for money or achieving least cost for consumers. These matters are excluded from the Panel’s scope and therefore from this report.’

So not much to comment on at all really.

Which I suppose is just as well, because if the panel did have such a remit, it could not have failed to turn up the infamous 2011 impact assessment on the comparisons between a capacity market and a strategic reserve, the option for energy security which in the words of DECC at the time,

 ‘is a targeted capacity mechanism. The system operator tenders for capacity to be part of the strategic reserve. The capacity is then kept outside the market and only deployed at times of scarcity i.e. when there would be blackouts or brownouts in absence of the reserve being deployed.’

Far more sensible you might think, and it has the advantage of ‘being a smaller intervention in the market and of having a smaller impact on bills’ (DECC’s words in 2012, again). Just how much smaller is shown in comparative costings in the 2011 Comparative Impact Assessment, where the proposed capacity market is projected to come out at a cost per year of about what has now appeared.  The strategic reserve comes in at about ONE FIFTH of the cost. It was rejected as an option after a series of ‘qualitative’ analyses, which I know had at least one former DECC civil s
ervant scratching his head at the time when he reported (to me) ‘ all the time during this period it was clear to all of us that the strategic reserve was the right way to go. How we ended up with this, I really do not know’.

Well we have and it’s going to cost us. It strikes me as rather like announcing that you are going to concrete over the Somerset Levels to a height of six feet and then proclaim that ‘a flood prevention strategy is now fully in place’. It really is such a silly long term policy that I cannot believe it will last for the time it will take to procure all this 52.5gw of gas fired power stations. But you never know: stranger things have happened.

Time for some turbo-expander expansion?

Things are stirring in the gas capacity market. Just last week, Centrica announced that it is to sell three of its largest combined cycle gas power stations, totalling 2.7 GW of capacity. Instead it will concentrate on investing in ‘smaller, more flexible’ power stations. Cornwall Energy, in their ever perceptive ‘Energy Spectrum’, speculate that, among other things, the capacity market auctions may be beginning to look a little lop-sided; existing power producers are disadvantaged by accumulated losses on plant, whilst new entrants can be ‘neutral’ on losses. These new plants can gaining long term contracts to build new whilst older plants close down to cut their losses. Maybe, Energy Spectrum ponders, it is quite possible that Centrica is hoping to gain some value from existing plant rather than mothballing it as it faces up to the wacky world of the capacity auctions. (N.B. Cornwall Energy didn’t say that last bit – I did. And it is indeed going to be a very wacky world if existing plant is demolished to make way for new plant doing roughly the same thing, simply because the capacity market makes that an apparently rational short-term choice for participants. I set it out here a few weeks ago.)

At the same time, some new entrants may be beginning to emerge. One, Stag Energy, is looking to build just the sort of – I guess – ‘smaller more flexible’ power stations that Centrica might have in mind. They have a proposal in the pipeline to construct a 299MW open cycle plant in Suffolk (that’s about a quarter the size of one of the plants Centrica is putting up for sale).

The above isn’t exactly what I wanted to write about this week but it does set what I do want to scribe on into some relief. Because if the gas industry really wanted to develop some quick, small and flexible new capacity, it could do to pay some close attention to its own gas supply lines. This is what one of the gas distribution companies, Scotia Gas Networks has done, albeit in a small way. They have put four interesting bits of physics together and produced some power out of them, more or less for free.

  1. Gas transmission pipes compress gas from the receiving points to very high bar pressures (up to 50 times atmospheric pressure) to transport it around the grid
  2. In order to draw off this gas into the distribution system, it must be radically depressurised, down to the 2 bar that we get through domestic gas pipes
  3. This process wastes huge amounts of kinetic energy as the reducing valves do their job
  4. Using turbo expansion valves (invented around a hundred and fifty years ago) much of this wasted energy can be captured and put to work making electricity

And voila! Free electrical power ensues, with a relatively short payback period on the fairly high initial capital costs of the plant to do it.

Scotia Gas Networks has been running the only such plant in the UK for a year or so now, at St Mary Cray in South London. It has a capacity of about 7MW altogether, combining a turbine and a CHP plant. Not much, granted, but there are about sixty or so pressure reduction stations around the UK, each of which could have such a plant operating at the point of pressure reduction. In other words such a scheme would create a rather larger cyber power plant running on nothing at all than the proposed actual power plant from Stag Energy running on the gas that comes through the pipelines in the first place. So shouldn’t turbo-expanders surely be in the frame for some of the billion-pounds-a-year capacity payments?

Ah but turbo expanders are not renewable, so they can’t get Contracts for Difference. Neither do they qualify as demand reduction so they won’t get to go into the DSR capacity auctions. And they are certainly not the shiny, new gas fired plant run on new style ‘capacity-paid-for’ gas that the auctions themselves seem set to bring about. Turbo expanders are just very efficient, and they make good use of what is there already, so they wouldn’t get anything. Which is a shame because with a modest amount of capacity payments behind a turbo expander scheme, turbo-expansion valves could get a turbo charge. Maybe even through Centrica’s future investments.