Carbon price support- a bungle too far?

As most people will know, we’ve got two instruments in the UK to price carbon into energy use and investment – the EU Emissions Trading System (EU ETS), and the UK’s, unilateral Carbon Price Support (CPS). I’ve always been a strong supporter of the EU system, and was sorry to see the difficulties it encountered last year. I’ve been a less strong supporter of a unilateral UK carbon price – but I have always thought that if there is to be one, it should be sober, stable and related properly to the European carbon price. So it was in this light that last year, in this very column, I drew attention to the astonishing rises in the indicative future levels of CPS set out by the Chancellor in Budget 2013. These I think, were partially in response to what was seen as a permanent collapse of the EU ETS. Of course the unilateral UK carbon price hike all went straight to the HMT coffers.

In last week’s Budget the Chancellor decided to remove some of his own rises on a policy that has, since its introduction in 2011, veered around like a dodgem car in a fairground. Indeed, the reality of the policy has been the exact opposite of what it was intended to do: to encourage ‘further investment in low carbon generation by providing greater support and certainty to the Carbon price’.  The CPS now looks, as it did in 2013, like a ham-fisted piece of financial opportunism in the wake of the troubles of the EU ETS. The policy would have had to be revised at a future date anyway, especially when, as is now beginning to happen, the EU ETS itself is starting to show some signs of life again. The revision actually acknowledges that possible new life by explicitly relating the ceiling to the performance of ETS over the next few years.

I’m personally not crying buckets over the freeze at an £18 ceiling in its own right. What I think is worrying, however, is the way that the Chancellor’s indecision on what the price should be has destabilised investment rather than encouraged it. Returns on Renewable Obligations and subsequently ‘Contracts for Difference’ for renewable energy projects have a built in assumption behind them about a carbon price trajectory that no longer exists. It certainly looks like funds to support new renewable projects won’t go as far as envisaged because larger payments to existing generators are now likely. Even gas power plant investment is based on higher coal prices as a result of the carbon price; now it looks as if coal will be able to run on the system far longer than had been envisaged. And gas power plant investment may be well be affected by this – unless of course the Government puts more money (our bill costs, that is) into capacity payments to persuade energy companies and other investors to build new power stations.

And that I think is the lesson of last week’s announcement. New energy investment and particularly the low carbon energy investment that we so badly need, does require a reasonably stable and long-term investment environment. The news about the terms of investment doesn’t necessarily have to be great – it just needs to be foreseeable and reliable. The Chancellor’s short-term games with the CPS may look good for this week’s news but will, I am afraid, further destabilise the investment environment. And that is what will count, long term, for the low carbon investment policy that the price support mechanism was apparently originally intended to support.

 

This article first appeared in the Environmentalist magazine

 

The tide is turning (and so are the turbines)

Committee Room 20 is about as far as you can go along the corridors of the House of Commons without actually ending up on the roof, so I was slightly surprised to see just how many people, including a large number of Parliamentarians, made the trek to discuss wave and tidal power at the PRASEG meeting on Tuesday. I guess though that the great turn out serves as a weathervane for the justified and renewed interest in the technologies that is currently under way after lots of disappointment that promising early prototype work has not really scaled up as had been hoped.

Well no more long periods of disappointment on this front, apparently. Or at least not as far as tidal energy is concerned. Remarkably, the front runner for full scale deployment doesn’t rely on anything new and untested; as Mark Shorrock, CEO of Tidal Lagoon Power Swansea Bay, put it at the meeting, it’s just a matter of ‘a breakwater, a powerhouse some turbines and a coffer dam.’ Those ingredients, all tried and tested, make up a scheme that is now largely funded, presented for planning and regulatory appraisal and is supported by the vast majority of local people. The project is set for installing and generating 320 MWs of capacity by 2018 and all without serious collateral environmental impacts, or blocking searoutes. An honourable mention at the meeting should also go to the Solway Firth tidal stream project which is aiming to land considerable capacity and roll out full scale turbine power from tidal flow by 2015.  I won’t witter on too much about the Swansea Bay scheme because you can find the techie details of it now in various places such as the BBC’s  piece.

What hasn’t been covered though are any of the longer-term considerations about finances and the reality or otherwise of tidal flow ever actually making a real difference to the UK’s power base.  And that’s been the problem with a lot of wave and tidal so far – promising technologies but between them affording a minuscule power input. So what is the prospect now and how does it compare with the bangs for bucks from other prospects? We might note that Swansea Bay is likely to be able to supply virtually zero carbon power for a hundred years or so. After all, that early experiment (effectively a tidal lagoon) at Lyme Regis, the Cobb, is still standing up well after almost 200 years.

Well, Swansea is the first, but already other sites are being actively investigated, including notably a lagoon at Bridgewater, which would provide inter alia a first-class defence against future flooding in the Somerset Levels. And the price for the power, on the basis of scale and cost, looks to come down in a solar panel-type curve in the future. Swansea being a relatively small project sited out of the strongest tidal flows probably needs a CfD of about £168 per kWh over 35 years. This is relatively expensive, but then it’s already being reckoned that the third lagoon could come in at under £85 per kWh. And this makes it, after capacity payments and all other hidden subsidies are taken into account, cost competitive with gas, something no tide geek would have dreamed of being able to claim just a few years ago. Oh and by the way (1) Swansea reckons to deliver an efficiency of about 90% on the ebb tide and 81% on the flow, which in English means that it can be counted as that holy grail of new energy, the carbon free baseload/back up source.  (2) And by the way some quiet work on wave and tidal CfD levels in DECC  means that both the level and the time scale can be accommodated within present arrangements and with no special negotiations (small gold star to Greg Barker here I think.)

So after several lagoons, and perhaps by 2023, we would maybe have 1.5 gigawatts of baseload -type capacity operating at an average CfD of about £90 over 35 years. But hold on! Haven’t we heard these sort of figures before? Well, yes, indeed we have. On a good day, with binoculars, the people building the breakwater at Swansea can gaze across the Bristol Channel and check out the progress of the concrete mixing at the Hinkley C nuclear power station site (which is funded now on a similar basis). But…two small observations:  firstly, I would wager that Swansea Bay will be quietly garnering the tide and feeding it into the grid whilst Hinkley C  will still be looking for the key to turn the plant on. Secondly, looking through those binoculars much later down the line, whilst people will be hard at work dismantling Hinkley C, protecting the waste ponds on site for 160 years and transporting large amounts of other detritus to a very large (and hopefully very safe) but very expensive hole in Cumbria, Swansea Bay will be …well, like the Cobb, just still there, minding its own business and if we still want it to, producing power for all of us.

Why the beastly EU has cried foul on nuclear state aid

Sometimes the pieces I do for this esteemed journal are, I like to think, about subjects of reasonable significance, and sometimes, I admit, they are about obscure footnotes of dubious significance. Well here’s a piece that is both obscure AND significant. I’m referring to the very recent (and densely unreadable) 70 page ‘letter’ sent to the UK by the European Commission. This particular letter sets out the Commission’s reasons for launching a formal state aid investigation into the arrangements for underwriting (or rather subsidising) the Hinkley C nuclear power plant.  EC documents are usually quite obscure but I think this one is quite significant, because it doesn’t just set out some ‘questions to clear up’ about the structure of investment instruments, 35 year contracts for difference and credit guarantees that make up the deal on the building of Hinkley C power station (and by implication the rest of the future nuclear programme). Instead it systematically dismantles the arguments put forward by the UK government on the issue, and then asks for comments within one month on the pile of rubble that remains.

It is apparent from the document that on this one, they really have got our number. And the document doesn’t spare in levering open the contradictions in the initial UK position: how can the new reactor contribute to security of supply and widening capacity by 2020 if it is not coming on stream until 2023? How will the plant contribute to affordability when the agreed strike price is overwhelmingly likely to contribute to higher energy prices rather than lower them?  How can a deal that was not tendered against anything else reasonably be seen as competitive? How can the deal make a known contribution to decarbonisation when it was concluded before any targets for the decarbonisation of UK supply had been made? Why is all this support necessary when the department itself indicates that nuclear plants could be built without subsidy by the early 2020s anyway? And is the support required really to address ‘market failure’ or to secure a plant (or plants) possibly at the expense of other low carbon investments?

The difficulty of the UK position is, of course, that we are facing two ways on the process. For public consumption in the UK it is not a subsidy issue, because, as the coalition has always famously maintained, new nuclear plants will only be built ‘provided that they receive no public subsidy’.

However for Commission consumption the position is different. There are the UK submits, public subsidies, but these are justified, the argument goes, because the new plant performs a ‘service of general economic interest’. It is this contradictory position that the EU document skewers and then pulls to pieces.

For the time being though, it is business as usual at DECC. Here’s what Michael Fallon, energy minister had to say about the EU letter when questioned about it at Energy and Climate Change Select Committee:

‘The Commission is fully entitled to look at the detail behind the heads of terms and to set out the various questions that need to be answered and they’ve done that now publicly…It’s a perfectly normal process under the state aid rules and I’m confident that when we’ve gone through that process we will, in the end, obtain clearance.’

On the basis of the Commission’s critique, it is difficult to see the investigation will be the ‘perfectly normal’ process the minister asserts. Instead there could be the danger that, in sticking to its contradictory position, the government will not be able to adequately meet the points raised. And it’s possible that situation could seriously set back the process of commissioning and building some or all of the UK’s new nuclear fleet, because at some stage, the government will have to start again with different and more coherent arrangements for support.  Worse, by sticking with the elision of nuclear and renewable within the contract for difference and investment instrument processes, future renewable underwriting risks becoming dragged down into a protracted nuclear state aid judgement process. If it was separate, as it was originally under the Renewable Obligation, it would be clearly derogated from further state aid examination.  Something has to give, I think, and it won’t be just about ‘going through the processes’.

The final irony of all this is that by the time a nuclear plant does actually come on stream, it probably could have been built using a variety of supportive measures on planning, sitting and development assistance that do not constitute subsidy or state aid, as the Department itself sets out. Perhaps the coalition should have stuck to its original intentions.

This article was first published in Business Green.