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.)

Blimey ! It’s as bad as it was in 2007 (only it wasn’t…)

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The papers are full of the reshuffle and the ‘brave’ appointment of conspiracy theorist Norman Baker to a new post in the Home Office. An interesting development; a  Government now with a conspiracy theorist in charge of conspiracies and a climate change denier in charge of climate change policy.  Ho hum.

One possible conspiracy Norman might investigate early in his new role which I increasingly believe must be based on some sort of conspiracy (well I don’t really but this fits in quite well with the drift of this piece so stay with me on it) is the ‘blackout Britain’ riff beloved of our national newspapers and other media outlets in response to well… pretty much any report on grid capacity, energy supply, price control or whatever.  We know, of course that the proposal by Ed Miliband last month to freeze energy prices was greeted immediately with a chorus of ‘blackout Britain’, and here we are again today with the response to National Grid’s ‘Winter Outlook 2013 report. The report, which is produced ahead of every winter, sets out in sober form the prospects for gas and electricity supply over the coming winter months.  It’s a reasonable read – gas storage a little up from last year; electricity demand continues to decrease; no major planned generation outages; 3.8gw of interconnector capacity available this winter: some concern about the long term effect of tightening margins if proposed plant investment does not take place.  National Grid, therefore is according to Chris Train (Director of Markets at National Grid), ‘confident …that consumers will continue to receive the energy they need reliably efficiently and safely’.

No that can’t be right, surely, what Mr Train must be saying (in code, of course) is that ‘UK faces winter power rationing’ or that there are ‘fears over winter energy supplies in biggest threat to lights going out in six years’ – just a sample of some of the headlines today.  Of course there is not a shred of evidence that the headlines are true or accurate but, wait a minute, here it is – all the evidence the hacks need. It’s on page 62 of the detailed National Grid report.  The killer chart is as follows:

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What this represents is a helpful attempt at context by National Grid, aiming to present the workings related to the 2013 winter outlook backwards in time by applying similar methodology to capacity assumptions to 2005/2006. If you do that, you’ll see, as National Grid itself states, ‘increasing forecast margins driven by increasing generator capacity and decreasing demand forecasts. ‘ And then you might conclude (as National Grid states) that ‘the last two years see forecast margins decreasing due to a decrease in generation capacity’. In other words, the margin, using current methodology, lies at about the same as it did in 2007/2008. In 2007/2008, this margin had increased to a significantly higher level than in previous years and even then stood above the level regarded as fully acceptable by a number of other European grids.

Ah so it IS true that ‘the threat of blackouts is the highest for seven years’. Except that there wasn’t a threat of blackouts seven years ago. A minor point, though in the bigger scheme of things; someone somewhere must be briefing the press that when Mr Train says ‘it’s all OK for next winter’, what he really means is ‘we’re all doomed’. And why might that be, I wonder? Nothing to do with the supposedly pressing need to build lots of new gas fired (and maybe even coal fired) power stations surely?

Oh, and by the way, I know you’re dying to find out what National Grid actually said about supply in that terrible winter of 2007/2008 against which this winter is being compared.  It was this:

Provided the electricity market continues to make plant available in response to the appropriate price signals, demand should be able to be met in full even under severe conditions’.

And they were right, of course.