On Wind, Cameron and Machiavelli

Guess who's who

Learning from the greats?

So from 2015 onwards, if the Conservatives run the country, there will be no more onshore wind turbines. Or there might be, if developers of onshore farms, or even single turbines, can raise the funds with no underwriting whatsoever (an almost unique position now to be in if you’ve read my recent posts on gas, nuclear and everything else that is now being underwritten), get past a local planning hearing, get a connection slot etc.   So it’s pretty inconceivable that, given these hurdles, any projects will get off the ground.

Dave’s minder in DECC, Michael Fallon, says rather disingenuously that there are enough onshore wind projects ‘in the pipeline’ to reach targets for deployment up to 2020. What he doesn’t mention is that these are largely sketched-in plans which are still a long way from reality. Many of them have no guarantee of funding and even those that do will undoubtedly have the plug pulled on them in a climate of uncertain underwriting, vanishing onward prospects and collapsing supply chain. So it’s therefore likely that onshore wind generally would rapidly roll up, just as it starts to compete with other forms of energy supply on an effective basis and cements its place as the most cost effective form of large scale renewable energy production. ‘Irrational and illogical’ says Good Energy’s CEO Juliet Davenport.  Good stuff in the blog Juliet, but not quite right; you obviously haven’t been reading your Machiavelli. Dave has, I think. Here’s the old cynic giving advice to his prince on new-fangled notions:

 

“It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new.”

 

And as if by magic, an infographic turns up sourced from DECC surveys, which shows that the vast majority of the British public sort of quite like onshore wind, whilst a little, very shirty group (the little angry red people in the corner of the chart)  splenetically don’t. And since they are the people who write to local papers, form committees and, incidentally in some cases, run the hollowed-out local Conservative associations, Dave has clearly opted to listen to Niccolo, and not to everyone else.

But of course, there is the small matter of him being allegedly onside in the great low carbon energy/climate change debate, as he was keen to tell the Liaison Committee in the House when questioned by them recently:

The point I would make is that I support the carbon budgeting process and the Climate Change Act, which I think is a good framework

was his response to gentle questioning from Select Committee chairs. Which leads the excellent James Murray, in a great blog piece  to make the point that if you a) stand by climate change and, in principle, to low carbon energy targets but b) pull the rug from under the most successful and economic component of those targets, you ought to c) set out what you are going to put in its place. He’s quite right, of course, since it would take rather a lot of ‘something else’ in place of onshore wind to get low carbon energy deployment back on track.

I can’t help feel though, that there isn’t a great deal of appreciation around about just what ‘quite a lot’ comes to and  how extensive ‘something else’ would then have to be, so I’ve tried to do a few, immediate sums.

Out to 2020, DECC’s UK Renewable Energy Roadmap tells us that, taking account of attrition in development, there will be about 9.1 GW of new onshore added to the 6.6GW already operational. National Grid’s Gone Green scenarios for development out to 2030 adds another 2GW to that total post 2020. So let’s assume, for the reasons I’ve set out, that much of this of this presently assumed development doesn’t take place with a new onshore regime and that the additional 2GW of capacity after 2020 certainly doesn’t get built. On a reasonable estimate, that’s about 8GW of otherwise accounted for capacity that’ll be lost. And yes, I know that relative capacity margins mean you can’t make a strict comparison, but even after that, that’s something like four nuclear power reactors or five gas-fired power stations worth.  But of course, if you really do believe in the need for low carbon power as part of your carbon budgeting process, then the replacement capacity would have to be found. Not from gas and …er…not nuclear, because you can’t magic up two new plants in six years, but maybe from …what? Biomass, tidal impoundment? Hmm, all these technologies have underwritings far higher per kWh than onshore does, so presumably you’d need to adjust that Levy Control Framework ceiling considerably. So it’s looking improbable that Dave will do what James outlines in his piece, and try to make it all fit together logically.

But then James probably hasn’t read his Machiavelli either. Niccolo has some good advice on this dilemma as well. He tells his prince:

“It is unnecessary for a prince to have all the good qualities I have enumerated, but it is very necessary to appear to have them. And I shall dare to say this also, that to have them and always to observe them is injurious, and that to appear to have them is useful; to appear merciful, faithful, humane, religious, upright, and to be so, but with a mind so framed that should you require not to be so, you may be able and know how to change to the opposite.”

 

….which is probably what Dave will now do.

 

They think it’s all over, but it isn’t!

It’s all getting a bit complicated. Energy policy which needs, one way or another, long-term vision and a reasonable level of security seems to be going short-term and getting bumpy. Not so much as a result of the opposition’s intervention on energy prices but because of increasing “differentiations” between coalition partners.

Left to their own devices, Lib Dems would probably have placed a 2030 carbon reduction target into the Energy Bill, the inclusion of which would have been an important stabilizer in energy policy for the next ten years. But instead, in the Bill’s latter stages in the House of Lords, the Lib Dems bent to the Conservatives’ and George Osborne’s view: that the Bill should only include the possibility of the Secretary of State setting a target and, in any case, not before 2016. 1 – 0 to the Conservative end of the Coalition.

The Lib Dem end has, however, been a little more robust on “green levies”. The term “green levies” refers to the package of measures supporting renewable deployment, climate change, energy efficiency programmes and anti-fuel poverty action. Rattled by the opposition’s high profile assault on the price of energy bills and their proposal to freeze prices for 20 months after 2015 (assuming they win the election), the Prime Minister suddenly announced a review of green levies at Prime Minister’s Questions two weeks ago. Cue complete chaos within the government as to what would be in or out of the newly-minted review.

Lib Dem ministers made it known that the “green” part of the so-called green levies (the Renewables Obligation, Contracts for Difference and Feed in Tariffs for small-scale renewables) would not be up for review.  Among other reasons, this was probably because most obligations of this kind are already almost fully subscribed and any retrospective “reviewing” could result in serious legal difficulties. Conservative ministers, and indeed the Prime Minister in a subsequent PMQs, then stated that all green and associated levies, such as Energy Companies Obligation (ECO), carbon floor price (CFP) and Warm Home Discount, will be included in any review.

Well finally, last week, we had a definitive picture: green levies will not be in the green levy review. 1- 1 you might say.

However this leaves some serious deep defending still to be undertaken. If, for example, the Chancellor’s own policy of just a year ago, the CFP, is still “in”, what happens if it’s reviewed? With a reviving European emissions trading system and the fact that the CFP doesn’t actually save any carbon, this policy might look like a candidate for the chop, thereby delivering a reduction in customers’ bills. But CFP creates about a billion pounds per annum for the Treasury and will raise far more over the next few years, as the already-embodied plans for price increases come into force.

And then there is ECO (also launched by the government) which requires a £4.3 billion commitment per year until 2015. This scheme will be responsible for the retrofitting and insulating of thousands of homes and therefore a long term reduction in bills. However, in the short term, the scheme is adding about £60 to an average dual-fuel bill.

The big energy companies have dangled two enticing possibilities in front of the review’s decision makers. One of these possibilities is to place ECO into general taxation, rather than it being an obligation on energy companies and – honest – they’ll knock the same amount off bills almost immediately and the government will have a result. But of course, if ECO is to be preserved, this plan would be at the cost of another billion pounds plus on the Treasury balance sheet. This would be roughly equivalent to the billion pounds of income that would be lost if the CFP was to be given the chop.  The other tempting carrot is simply to delay the implementation of ECO for eighteen months. This would result in a similar bill reduction and the transferal of the funding headache neatly and squarely to whoever is in government after 2015.

So it looks like it’s going to be ECO that’s “reviewed” but it’s unclear as to whether it will be chopped, incorporated or delayed. Whatever option is taken, that old uncertainty that has beset the Energy Bill and was evident in the hovering on carbon targets, looks set to creep in, to the obvious discomfiture of those who had thought ECO would be getting under way and were planning for its advent.

Who then will be the 2 – 1 winner? My money is on a partial incorporation and downgrading of ECO to produce some sort of short term reduction of bills. This will, of course, successfully trash both long-term certainty and the chance to save money structurally and in the longer term through the improvement of our energy-incompetent housing and building stock.

But then in football they say you sometimes have to substitute an attacker for a defender to retrieve a losing game. But you might just concede another goal if you do.

This post first appeared on e2bpulse.com.

Indexing: the cuckoo pushes another fledgling out of the nest…

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The news that the UK Government has apparently agreed yet another wheelbarrow-full of money in underwriting to get  the one remaining near-term nuclear power plant prospect off the ground (here) might come as no surprise, but raises quite a few questions nevertheless.

The news is that DECC has, it seems, decided to ‘index’ whatever ‘strike price’ is agreed with EDF for the output of its proposed Hinkley C power station. We don’t know what ‘strike price’ will eventually be negotiated with EDF as a baseline for its power, but indexing, as Ronald Vetter, of CF partners points out (here) will increase the amount of our collective cheque to EDF for its power considerably. Vetter calculates that, on a strike price of £95 over 35 years, the unindexed cost of £86 billion rises dramatically to around £143 billion (assuming CPI of about 2% per annum over the period).

The questions are (in addition to why DECC or anyone else thinks it is a good idea to escalate its subsidy of nuclear to this extent):

  • If this is going to be standard for nuclear (I assume that any other parties coming for a strike price negotiation, if they do, will want the same), then why should large offshore wind generation not have the same facility afforded to it? After all, the sector will be looking for the same investment instruments from the Energy Bill. And CfDs and investment instruments are not a ‘subsidy’ for nuclear because they are also available for other low carbon energy sources aren’t they?  So if DECC does extend the ‘indexing’ principle to offshore wind, it will of course inflate the cost of CfDs considerably. However if the department doesn’t, it will surely expose them even more to ‘state aid’ enquiries from the EU. It must, surely, be sauce for both goose and gander, I would have thought. It will be interesting to find out whether this view is shared by those at the CfD helm.
  • On the assumption that there will be a levy control framework in place at the time nuclear comes on stream with this new arrangement, how will everyone else’s CfDs be managed?  The point of the levy control framework is that it places a cap on the amount of payments that can be allocated to both CfDs and continuing ROCs payments up to 2020 – about the time Hinkley C will supposedly come on stream.  I have been trying to clarify how much the present 2020-21 cap of £7.5 billion (present prices) works out in terms of money available for new entrants each year. I got a sort of an answer to this from DECC (here) when they told me that they calculate that about £1.1 billion will be available for new entrants in 2020-21. My own very rough figures, depending on what commitments will be undertaken in previous years, comes to a bit less at about £900 million, which I’ve posted about previously (here). If Hinkley C were to come on stream in 2018 (as was originally planned) then, by 2020-21, it would already have eaten up a lot of the money earmarked for new entrants, through the effect of its indexing. This would leave less in the coffers than potential entrants might be expecting, thereby making their plans to enter the market at that point very uncertain. The Levy Control mechanism only works if we know the total of existing forward commitments in relation to new money, and, importantly, that IT STAYS THE SAME.

The sort of good news is that, of course Hinckley C will not come on stream, I shouldn’t imagine, until the present term of the ‘levy control mechanism’ has expired. Which is a good thing, because otherwise it would wreck it.  But then there’s the question of whether a new control framework might be put into place to give some sort of certainty to low carbon energy investment from 2020 onwards.  I wouldn’t hold your breath on this one; the prospect of designing a control framework that can function while EDF is scooping an unspecified sum of ‘new entrant’ allocation off the table each year for 35 years will be, to say the least, dim.