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. 

Demand side management and the Energy Bill – better late than never?

We’re on the very last lap of the Energy Bill in the House of  Commons  – this week it will be bundled up in all its now sprawling complexity, and sent off to the House of Lords to see whether they return it more or less intact back to the Commons for final assent. And, as reported in Business Green last week, at the very last moment, the Government has rushed some demand side reduction amendments onto the order paper for that final discussion. Not before time, one would have thought. There have been general noises of good intentions coming out of DECC on the need for the Bill to reflect the requirement to reduce demand as well as secure the ability to meet whatever demand arises on the energy networks, but until late last week no solid policy measures had been forthcoming. I put down some amendments at the Committee stage of the Bill to try and move those good intentions forward, and received some warm words in return, but now here the new measures actually are.

What seems to have happened is that, when the Bill was first published, no-one gave any thought to how to go about supporting or rewarding the verifiable and permanent reduction in industry or domestic supply. Some furious paddling below the surface over the last few months has at least resulted in the outline of how a scheme would work, which is reflected in the amendments.

In truth, there are big questions to resolve. If you provide, say, a Feed In Tariff type of payment for reducing your domestic or commercial demand, how can that be verified? And more importantly, how can one be sure that any reduction is not transitory while the support lasts, and doesn’t drift up again in the long term? Should support perhaps be concentrated on quantifiable ‘things’ that can be put in place without further verification, but which we know will reduce demand – like voltage optimisation programmes, replacement LED lighting, or super- efficient circulation pumps? If this were done, how do you avoid paying people for improvements they may well have undertaken anyway? And , if you do go down a path of reward, what heading do you provide it under? If it becomes part of the ‘Contracts for Difference’ that will be replacing  the Renewable Obligations (and which is ‘capped’ in total by Treasury) won’t any payments simply eat into what might be there to assist renewables coming to market? Might you just be exchanging one advance in clean energy for another retreat?

Moreover, wouldn’t more progress in demand side reduction be made if we regulated for reduction rather than rewarded it when it happens?  Could, for example, new building regulations which placed an emissions standard on new boilers produce dramatic demand reduction and efficiency results through the adoption of mini CHP boilers in the same way that condensing boilers swept the market after the last revisions?

And then there is the question of the Department’s allocation method of choice – auctioning. How would the fragile flower of demand side reduction fare against far more developed capacity proposals from those who aim to supply exponentially but at least with some security? Limited experience of auctioning elsewhere in the world seems to show that demand side reduction bids usually fare very badly, and are easily ‘squeezed out’.

So it is worth looking at the extent to which the Department has resolved some or all of these problems before concluding that at last the Energy Bill will balance concerns about supply and demand in its pages.  Two cheers, I think go to the decision to place any reward scheme under the ‘capacity market’ head. This heading in the bill is not ‘capped’ and will provide for a grand ‘auction’ of capacity, on present reckoning in 2014 or so.  It looks as if the Department will look to rewarding permanent reduction by auction bid perhaps through aggregators undertaking to run such schemes and pass payments on. Two cheers for that too, but a big question mark must remain against whether any of this will really happen. Will there be, by 2014, sufficiently robust plans developed which will enable anyone to get anything out of a general ‘capacity auction?  And, of course, there is the small matter of the design of capacity markets themselves. It will be up to Government to decide whether  forward projections of the tightness of capacity against demand really do warrant an auction. If it is felt that a new plant coming on stream or a suitable extension in plant life will maintain a decent capacity margin over that period, then there simply won’t be an auction – and on present arrangements, any demand side reduction support goes down the plughole with it.

So I imagine all eyes could be on very undeveloped proposals in the amendments to have some kind of ‘pilot auction’ restricted only to demand side measures preceding any general auction. Energy minister Greg Barker, I see from the Business Green report, thinks this  process will  then ‘unleash energy efficiency into the capacity market’. Optimistic, I think, and highly dependent on whether the initial ‘pilot’ auction is a reasonably generously funded , all-encompassing exercise which does put a rocket under Demand Side Response, or is, as too many ‘pilots’ turn out to be,  localised, underfunded and incomplete.

Personally I think the establishment of a permanent standalone auction market for demand side response which is not tied to other capacity auction arrangements is a sine qua non for making the new provisions work.  That isn’t  by any definition a ‘pilot’.  There is clearly still quite a long way to go in getting these matters right and with the late arrival of any measures at all, we’re clearly running out of time to do so.

This article was first published in Business Green. 

Energy Bill: Not Enough Target Practice

It’s the half way stage in the great Energy Bill marathon in Parliament. The Committee stage is done but there will be a chance to make final amendments at Report Stage, and then it is off to the Lords for the whole process to be repeated.  So where does the bill now stand? Not many amendments were taken on board in Committee, but it has to be said that the Government introduced a number of changes after the draft bill received a bit of a mauling from the Energy and Climate Change Select Committee. Improvements to the accountability of the system operator, promised amendments on demand side reduction and some greater clarity on the system for underwriting renewable and low carbon energy production have all been written into the bill, or will be shortly.

But for all that, there is still a sense of ‘work in progress’ surrounding the Bill, and a key area is that of  the certainty or otherwise of having a decarbonisation target on the face of the Bill. Originally the Government claimed that such a target was unnecessary, but have since moved somewhat by introducing changes to the Bill that allow the Secretary of State, if he or she felt it necessary, to set an unspecified target range after 2016 and the setting of the fifth carbon budget by the Committee on Climate Change.

I argued in Committee that this change was essentially too vague: the Secretary of State could after 2016 decide to do nothing, or set a target that did not relate to the real needs of low carbon energy generation. I then moved, unsuccessfully, an amendment that placed an industry wide level of 50g CO2 per kwh emission level from electricity generation by 2030.  So is that the end of the matter? I’m not sure it is, since there are moves afoot to put forward a cross-party amendment  to be discussed later in the Bill’s passage that requires the Secretary of State to put an early target range in to the Bill based on Committee on Climate Change ‘s recommendations.  Since the Committee wrote to Secretary of State Ed Davey recently stressing the need for a meaningful target, it would not be hard to gauge what that might be.

The need for a target in the Bill is real, and is not just a theoretical aspiration. It has received support not just from the more expected quarters but from across the business and investment community.  It is about, in essence, framing all the contents of the Act as it will become in terms of the direction of travel of energy policy, so that investors can be clear about the future landscape in which they are raising funds and laying down concrete.  This is certainly the view of Ernst and Young, for example.  In their recent Quarterly Renewable Energy Review they specifically raise the lack of a clear target on the Bill as ‘casting doubt over the UK’s commitment to cut carbon emissions by 2027 and (leaving) investors with a sense of uncertainty.’

The Bill has been signposted as ‘transformative’. Events over the next few months will determine whether it will indeed provide the means to drive the low carbon economy forward effectively or will instead provide a useful, but far less certain outline ‘framework’ for longer term commitments, as Ernst and Young describes its current state.  Watch this space.

An edited version of this article was first published in the Environmentalist.