On fat ladies and Kenneth Wolstenhome

fat+lady+sings

I don’t want to rain on anyone’s parade but I am less than impressed by the seemingly premature crowing about how the Energy Bill is ‘now in the statute books’, and that ‘the way is now open for new market arrangements.’ It’s true that the Bill now has royal assent but a quick look at what is in the statute books will underline just how far off we really are from the entrance of the eponymous singing fat lady.

A good way to describe what is now down on paper is to imagine the Bill (sorry, Act) as a wardrobe; it looks OK from the outside but if there are no coathangers on the rails once you open the door. And so you can hardly say that it performs the essential functions of a wardrobe. And as far as the Energy Act is concerned there are precious few hangers currently in evidence. This is because of the extraordinarily high count of consequent pieces of secondary legislation written into it – clauses that require the practicalities of what has been outlined (often in very rudimentary terms) to be set out in Orders. And these Orders will either have to be laid down on the Parliamentary order paper and (hopefully) not objected to, or, more seriously, will be subject to finding an afternoon in a committee room to debate and agree a raft of secondary measures.

The to do list now numbers no less than seventeen affirmative resolutions (the afternoon’s debate) and twenty-three negative resolutions, some of which may need to be fully debated depending on other parts of the Act. Subjects in the queue for debate include: how the Secretary of State is going to decide on a decarbonisation target; the carbon intensity of electricity generation; how to make electricity capacity regulations; the capacity agreements themselves; how auctions are carried out; the settlement body that will oversee them; a huge raft of regulations relating to CfD investment contracts and payments; how to make renewable obligation transitional arrangements; what emission performance standards will consist of; arrangements for altering licences… In short, most of the meaty content of the Act.

Some of this to do list is, of course, bound by time constraints, so one might imagine that some of the entries will need to be on the statute books by the end of the year at the latest. This means that there remain fewer full weeks in the Parliamentary calendar than resolutions that need to be laid down. And this is certainly true as far as affirmative resolutions are concerned; there is roughly one committee session for every eight sitting days up to the end of the year.

That is if they have been written, of course, and the first week back has gone by without anything appearing. So I wish the put-upon scribes and drafters below DECC bon voyage. The only saving thought is that there seems to be very little primary legislation now going through the House because members of the coalition are increasingly vetoing each other’s pieces of pet legislation. And because of this no secondary legislation will appear to compete with the needs of the Energy Act.

Scary Ed or scary George? Investors choose…..

So who’s scaring off investors more? This is one to puzzle over, especially with the emergence on Monday of a letter from a number of global ‘investors in the energy sector’ (covered in the Independent here) that George Osborne’s removal of a decarbonisation target from the Energy Bill  risked the ‘£110bn overhaul of Britain’s energy network’.

Last week, of course we had a similar claim from Centrica and others in some of the national press that Ed Miliband’s proposals for a freeze on energy bills from 2015-17 would lead to exactly the same risk to that ‘£110 billion overhaul’.

I suppose, just to put the cat among the pigeons, we might look at some of the evidence behind these claims. Incidentally the new paradigm for what it will cost for this ‘overhaul’ seems to be more modest in ambition than it was just two years ago, when we were supposedly in for £200 billion (here’s what I said about that at the time).  This figure is now expected to be about £100 billion by the early 2020s ; still a very large number I would agree. All these figures, though, do seem to be derived from various scenarios from Ofgems ‘Project Discovery Energy Investment Scenarios’ – last revised in 2010. These ‘scenarios’ veered between a pot of £200 billion for its ‘green transition’ picture (which envisages that ‘there is a rapid economic recovery and significant new investment globally’) and £95 billion for the ‘slow growth’ scenario (which posits that the ‘impact of recession and credit crisis continues…generation build dominated by CCGT energy efficiency measures have limited impact..’).

So I guess the new agreed investment figure is towards the ‘slow growth’ end of the scenarios. But even so, it is made up of a number of components such as interconnectors, offshore wind, smart meters, onshore/offshore transmission, grid-strengthening and so on, which have little to do with what many consider to be traditional ‘energy investment’. In fact only about a quarter of total investment will come from what we think of traditionally as old-style, centralised power plants. The other three quarters will come from those less-familiar components, with over half the total coming from renewable generation itself.

And the significant feature of these investment figures is that the Big Six utilities will not feature heavily in the investment profile for these categories. Indeed if we look at the balance sheets of the Big Six, four of the six have net debts of more than two thirds of their market capitalisation. This means that they are unlikely over the next period to lever themselves up still further in order to splash the cash for investment in any of the sectors at all. Most of the £110 billion will have to come from elsewhere and will indeed do so.

And, by the way, if there is to be investment coming from the profits ofthe Big Six, it will hardly be damaged by what may or may not happen to their retail arms, which, as we know, Labour want to separate from their wholesale businesses.  The aggregate profit margin made by the Big Six on generation in 2011, as Ofgem records, was 24.4%, whereas for supply it was 3.1%. Whilst of course there is a connection between generation proceeds and supply prices, these figures hardly suggest a drying up of profits on generation. Separate retail companies at that point, with lower returns, would probably value and work best on some form of regulated price and return regime (but that’s another point entirely).

So where does that get us to? Well it looks like most investment will have to come from non-Big Six companies not primarily affected by a retail energy price freeze, but far more affected by larger instability and long term uncertainty. Long term uncertainty in an investment market which is seeking to finance the equipment and transmission that will need to sit alongside the different form of energy economy that we are all supposedly signed up to. And they seem to be the ones signing letters to the Chancellor right now.

Playing spot the difference with carbon targets

spotthedifference

I posted on the ‘Gas Strategy’ a little while ago  – you know, the one that plonks 37GW of new gas plant running at full tilt onto the grid over the next decade or so instead of the much more restrained DECC ‘official’ line that we would need 19GW of new gas plant over the same period running aty about 20% of capacity.

I suggested at the time that someone (probably not a million miles form no 11 Downing Street) might have inserted a ‘box’ into the strategy  setting out how the Government might use the 2014 review of the carbon budget to junk emission targets and carbon budgets. I was wrong. Actually what seems to have happened is that someone has used the exact words of  DECC itself in the Departmental White Paper on Energy (which suggested, in outline that if we’re out of line with what is happening in Europe concerning their targets we will revise our trajectory downwards to align ourselves with them).  I leave you to spot the little weasel word that makes all the difference… and it does somewhat underline the case that a firm target for power sector emissions by 2030 set sooner rather than later is rather important.

Planning our electric future – Energy White Paper July 2011 p.30

The Government will review progress towards the EU emissions goal in early 2014. If at that point our domestic commitments place us on a different emissions trajectory than the ETS trajectory agreed by the EU, we propose, (depending on advice from the Committee on Climate Change and the views of the Devolved Administrations), to revise our budget to align it with the actual EU trajectory.

Gas Generation Strategy December 2012 p.22

We will review our progress in early 2014 and if, at that point, our domestic commitments place us on a different trajectory from the one agreed by our partners in the EU under the ETS, we will revise up our budget as appropriate to align it with the actual EU trajectory. Before seeking Parliamentary approval to amend the level of the 4th Carbon Budget, the Government will take into account the advice of the Committee on Climate Change, legal requirements in the Climate Change Act and any representations made by the Devolved Administrations.