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.

 

The knowns, the unknowns and that fabulous nuclear contract (with apologies to Donald Rumsfeld)

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We know both are Donald...

We know both are Donald…

How can we characterise the much trumpeted ‘deal’ on Hinkley C now that it has (unlike poor Tian Tian’s baby) actually emerged?  Well it’s not much of a deal I guess, more a kind of semi crayoned-in statement of intent and a very expensive one at that.  The bit we do know is that if all the bits that aren’t yet crayoned in (e.g. all that stuff about state aid approval) are in the fullness of time, then we’re stuck with an upwardly indexable ‘Contract for Difference’ payment of £89.50 per mwh. Or if EDF don’t build any more reactors, a payment of £92.50 for, er, 35 years.   A deal where you get more payouts if you don’t deliver anything else than if you do is a new one to me but there you go.

At the moment there seem to be a lot more things that we don’t know than things we do know about this deal. Like, for example, exactly what form the contract to enable financial closure will look like. We do know that  ‘the government is in negotiations with NNB Genco ( a subsidiary of EDF) about a potential investment contract which might enable [their] final investment decision on the Hinkley C new nuclear power plant project’ because it says so on p.58 of the recent Electricity Market Reform: Proposals for Implementation document.

Perhaps we should turn to the Energy Bill (part 4, to be exact) to find out more about this contract. Well it will almost certainly be one of the special ‘varied’ investment contracts that the government is proposing to offer so that very large projects thinking of financial closure before CfDs come on line can get the certainty they need. The advantage of this kind of contract can be seen in the name; you can vary the terms (i.e. the strike price) subsequently if you’ve agreed to do so when you sign it. You also don’t need to tell anyone what you’ve agreed if it’s commercially confidential at the time. The amount we’re in for when the magic date of 2023 arrives could therefore be substantially higher than what we currently think we’re in for (that £92.50 for example).

So we don’t really know that then I suppose, but other things are a bit more certain, aren’t they? Like that 2023 date. Knowing that could be important, couldn’t it, because if you’ve signed an investment contract as an IOU for CfDs at a future date, it might be important to know when you can cash that IOU in. Important partly because it will be such an enormous amount of cash (this we do know).  Let’s say (kindly), that in its first year of operation as a new entrant, Hinkley C runs at about 80% capacity, then it will get, assuming a reasonable relationship between strike and reference price, about half of the £2.4 billion represented by strike price x output – just over a billion pounds.  That represents pretty much ALL the available CfDs for new entrants in any one year on the basis of the existing levy control framework. So if you are a renewable developer you might want avoid planning to start producing in 2023 because you won’t get a look in.

So do we know that for certain?  Well not really. Because it’s worth bearing in mind that EDF originally planned to start producing power at Hinkley C at the end of 2017 (and I’ve got the timeline chart they produced  in 2009 on my wall to remind me). Furthermore, the two other schemes they’re building in Europe are now either massively behind schedule, over budget or both.  So the point at which all those CfDs get hoovered up could be over a much longer timescale than we think. This might be a bit destabilising for everything else over that period.

But we do know they’ll have that investment contract in their pocket, don’t we, so it will be all right in the end, won’t it? Well…that depends on what we don’t know:  the terms for performance in the contract.  If it’s a standard CfD contract it will have a window in it to deal with reasonable variation in the project coming on stream and a longstop date, perhaps a year after the window closes. At the point of the longstop date you clearly can’t go on hanging around and hoping, so the contract is dissolved and that’s the end of you. We know this because it says it in the DECC Electricity Market Reform: Delivering UK Investment document that was issued this summer.

So we might reasonably assume that some sort of window and longstop arrangement will be in the varied investment contract once it’s signed. Ah but if there’s a serious prospect that EDF might lose their precious pile of CfDs because they’ve gone beyond the ‘longstop’ what then?  Well they might just not sign up in the first place. So the contract probably won’t even have the same sort of longstop in it as standard CfD contracts will, making it an even more unstable bomb under all other projects in the early 2020s than it is now.

Indeed, you might have to draw up what will look like a complete stand-alone contract, without the provisions likely to be set out in standard CfD contracts, to get the scheme away in the first place. But then won’t that look like special treatment for nuclear even more than an extra-lengthy, hyper-costly contract already does?  And won’t that be even more likely to trigger an adverse state aid rejoinder from the EU than is likely at present?  And that is where we were at when we started this piece.

So we don’t really know that much, do we? And what we do know is not a pretty sight.

 

 

 

 

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.