Blowout week 27

UK energy news this week was dominated by the publication by DECC of the last strand of their energy policy. The document and its attachments struck me as preposterous (see first link below). Does anyone believe that £2 per household will buy 53 GW of back up generating capacity? Does anyone believe that the UK has superior energy security to Canada? I did a bit of digging to find out who lies behind this drivel emanating from DECC:

Edward Davey, Secretary of State for Energy and Climate Change, first class BA degree in Philosophy, Politics and Economics from Oxford.

Michael Fallon, Minister of State for Energy, MA in classics and ancient history from St Andrews.

Baroness Verma, Junior Minister at DECC, attended school and university. A successful business woman she “started her first business at the age of 19 in high fashion, supplying high street multiples”.

Cameron needs to get a grip and replace this trio with individuals appropriately qualified for the job. He could start with an engineer.

Canada in trouble as UK takes top security spot: Britain’s energy security strategy now fully in place

Ed Davey said: Britain is a world leader in energy security – leading in the EU and ahead of every other G7 country. Today’s announcement – coupled with our record amounts of investment in renewables and electricity infrastructure, our revival plans for the North Sea and the most healthy pipeline of investment projects in new generating capacity and interconnectors ever – means we will remain a world leader.

Fashionable energy security: Maintaining UK energy security

Energy security is about making sure consumers can access the energy they need at prices that are not excessively volatile.

Can XL not do this in advance?: Integrating Variable Renewable Energy in Electricity Markets: Best Practices from International Experience

Economic, environmental, and security concerns associated with conventional fuel supplies have strengthened support for clean energy technologies among governments and the private sector on a global scale; yet questions persist about how to effectively integrate large amounts of variable renewable electricity generation

Is that Green Energy companies paying tax?: UK green taxes hit record high of £43 billion

UK households and businesses paid a record £43 billion in green taxes last year, new official figures show.
The Treasury’s revenues from environmental levies increased by £1.7 billion last year, from £41.3 billion in 2012. They have soared from £30.4 billion in 2003.

An expensive coker!: ExxonMobil defies adverse market with $1bn investment in Europe

ExonnMobil will invest $1bn in its oil refinery in Antwerp despite pressure on the European industry from low demand and cheap competition.
The US supermajor plans to build a new coker which will convert heavy oil into useable fuel in an attempt to meet predicted future demand.

Only fools forecast energy prices: Green energy budget faces squeeze as power prices forecast to stay flat this decade

Wholesale power prices are likely to stay at recent low levels for the rest of the decade, ratings agency Moody’s has forecast, in the latest sign that the Government’s green subsidy budget may be exhausted sooner than planned.
Ministers have forecast that wholesale power prices will rise to £63 per megawatt-hour (MWh) in 2020, driven by a looming crunch in spare power capacity and increasing gas prices.

More bad corporate behaviour: British Gas and Sainsbury’s Energy embroiled in mis-selling scandal

British Gas has become the last of the Big Six energy suppliers to be tarnished by the mis-selling scandal, after it emerged the company had misled thousands of customers through face-to-face sales.
The supplier, part of energy giant Centrica, has now agreed to pay compensation to customers who were provided with inaccurate information when signing up for tariffs.

£2 buys you 53GW of idle capacity!: Ministers must stop misleading consumers over true policy costs

Forecasting commodity prices is a mug’s game. Unfortunately, it’s also central to every Government’s prediction on that most sensitive of subjects: the costs of its policies on consumer energy bills.
On Monday, Ed Davey, the energy secretary said that a new “capacity market” to keep the lights on by keeping power plants on retainer would add £2 to consumer bills.
In fact, his department eventually admitted, it will add £13 in subsidies from today’s levels. However, it believes it will also prevent future power price rises, cutting these hypothetical costs to consumers by £11. Consumers will therefore pay just £2 more than they “otherwise would have”.

It is not the lights that are dim: Households’ lights could be dimmed in winter 2015-16 as Britain faces power crunch

Households’ lights could be dimmed for up to nine hours during the winter of 2015-16 as Britain’s spare power capacity falls to as little as 2pc, Ofgem has said.
The energy regulator said there was an “outside chance” that National Grid would need to reduce voltage for consumers, as one of a series of measures it may use if there is insufficient power to meet demand.

Subsidy upon subsidy: Consumer energy bills to rise to keep power plants open

Consumer energy bills will rise in order to pay retainers to dozens of power stations to guarantee they are available to keep the lights on, ministers have announced.
Under a so-called “capacity market”, ministers plan to recruit more than 53GW of power stations – enough to meet 80 per cent of Britain’s peak demand – to ensure they can fire up when needed.
Households will each pay an average of £13 a year to the power plants, to guarantee they are ready on the system from 2018-19.

I’m lost for words…: Norway to reap £1.6bn subsidy from UK consumers for offshore wind farm

Two Norwegian state-controlled energy companies are in line to receive £1.6bn in subsidies from UK consumers, after deciding to invest £1.5bn in building a wind farm off the coast of Norfolk.
Statoil and Statkraft said they would begin work on the Dudgeon offshore wind farm after receiving a contract from the UK government, guaranteeing they will be paid roughly triple the current wholesale power price for every unit of electricity the project generates.

Thank goodness cold winters are a thing of the past : Ofgem: Margins to tighten but disconnection risk down

The energy regulator’s annual capacity assessment said that margins are set to be at their lowest level for the winter of 2015/16, due to the closure of old power stations.
The latest report stated that the capacity margin could drop to about 2 per cent during 2015/16 before picking back up to between 4 per cent and 12 per cent in 2017/18.

Yet another 73,000 homes to be powered by the wind: Harestanes wind farm near Moffat officially opens

One of Scotland’s largest onshore wind farms has been officially opened near Moffat in Dumfries and Galloway.

Scottish Power Renewables is behind the 68-turbine Harestanes scheme which it says will meet the annual electricity needs of more than 73,000 homes.

I thought wood was made of carbon: UK’s pioneering low-carbon heating scheme helps just 79 households

The much-delayed government scheme to encourage Britons to switch to low-carbon heating has helped just 79 homes install renewable heat technologies in the two months since it launched, it has emerged.

Greg Barker, the climate minister, trumpeted the scheme as the “first of its kind in the world” when it was launched in April, but already there are fears it will go the way of the green deal – the government’s energy efficiency programme that achieved very low take-up.

Costs soar: Green energy cost hits record high as expensive turbines built at sea

The cost of generating green electricity has hit a record high as subsidies are handed to expensive offshore wind farms and household solar panels, new figures show.
The annual bill for consumers to subsidise renewable technologies has soared to more than £2.5bn as more turbines are built and households install panels on their roofs.

My selection of stories posted by Luis de Sousa At The Edge of Time. Luis writes:

News out of Iraq is slowly drying out. The foreign media has access to the Kurdish region, Baghdad and little else. From the newly occupied territories the jihadists are themselves the only reporters available, with gory contents regularly feed to the internet. The Baghdad government launched a counter-offensive last weekend, and although it has failed so far to gain any relevant territory, it seems to have halted, or at least delayed, the advance of the Islamic State (formerly known as ISIL).

Where will it all end? Can the jihadists content themselves with the Sunni territories or will they seek further expansion? Their organisation and capacities do not cease to surprise, how far can they really go?

So far their methods and efficacy have alarmed everyone else in the region, even Sunni majority states such as Saudi Arabia. For us living here in the so called West, life seems to go on exactly as before, but in fact the world has become a different place the past few weeks.

I am just posting a couple of links from Luis this week on basis that interested readers can go over to his blog to access the full content if they so wish.

Sleeper cells in Baghdad: Iraq chases Baghdad sleeper cells as ‘Zero Hour’ looms over capital

Iraqi insurgents are preparing for an assault on Baghdad, with sleeper cells planted inside the capital to rise up at “Zero Hour” and aid fighters pushing in from the outskirts, according to senior Iraqi and U.S. security officials.

Begins to look like Vietnam: 480 U.S. troops now in Baghdad as officials move to secure access to airport

The United States has deployed 300 more troops to Baghdad in the last two days, with some of them assigned to secure Baghdad’s international airport, the Obama administration announced Monday.

One senior U.S. official, speaking on the condition of anonymity because of the sensitivity of the subject, told McClatchy that the troops were moved to Baghdad after American officials determined that Islamist fighters had consolidated their grip on the western outskirts of the capital in recent days. The movement “convinced us this would be prudent,” the official said.

The last week on Master Resource:

The “Yes” vote in Scotland I believe shares this sentiment: Independence Against Big Government

The Founding Fathers explained how intolerable an absolutist and highly centralized government in faraway London had become. This distant government violated the personal and civil liberties of the people living in the 13 colonies on the eastern seaboard of North America.

B’but Man must be affecting climate: $10,000 Bet on Climate Change: Asking the Wrong Question

“Physicist offers $10,000 to anyone who can disprove ‘man-made global climate change’”, the headline at Daily Kos (June 22, 2014) proclaimed. “Climate change deniers using same methods as tobacco industry, says physicist.”
Wow! It’s put-up or shut-up time for climate skeptics like us at the Cornwall Alliance, right? Ten grand ripe for the picking!

Many more stories worth reading on Master Resource, you don’t need me to post links to all of them here. I saw a patch of blue sky today, temperatures have soared to 15˚C and it’s not raining, so I’m off to light my grill 🙂

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16 Responses to Blowout week 27

  1. Roger Andrews says:

    Euan: You might add Bryony Worthington, the climate change expert from Friends of the Earth who largely wrote the Climate Change Act, without which you wouldn’t be in the mess you’re in, to your list of responsible parties. She has a degree in English Literature from Cambridge.

  2. Most of the 54GW of balancing capacity exists now, the £2 is the cost of making sure it is available when needed e.g as an incentive to retain gas plants that might otherwise be closed or kept offline. Some new plants may be needed in time. The new capacity market should help new supply, storage and demand management projects find a niche

    • Euan Mearns says:

      Most of the 54GW of balancing capacity exists now

      Would you care to provide some actual numbers. 54 GW certainly wasn’t built as “balancing” capacity. How was it financed? How much debt is outstanding? But at least you have put your hand up and said you believe that £2 per household per annum is sufficient to provide the owners with say 10% return on capital even though their plant may stand idle for some / all of the time. Some of it has to stand idle almost all of the time.

      My bet is that many of the owners scoff at this business opportunity, close plant, claim losses against taxes on other parts of their business, and the UK will face growing capacity deficit. Then expect the £2 to increase in increments to something like £200 per household per annum.

    • Roger Andrews says:

      How much of this 54GW is being forced to shut down under the EU Large Plant Directive?

  3. Luís says:

    Hi Euan, just a clarification: my first impression was this “ballancing” bill being 2 £ per household per month, in which case it would be a bit more credible. In total how much will it amount to per yer?

    • Euan Mearns says:

      The latest impact assessment shows that the Capacity Market will lead to a £2 increase in the average annual domestic electricity bill

      If we assume on average 2 persons per household, UK population = 63 million we get an annual budget of £63 million pounds to keep 53 GW of capacity on standby. £1.19 million per GW.

      I think the actual DECC calculation came out at £13 per annum but Davey decided to deduct a theoretical £11 per annum in future rises in the price of FF that are not going to occur as a result of his policies (or something to that effect). At £13 per annum we have a capacity budget of £410 million and that does not include the commercial and industrial sector. Adding the latter, I guess we begin to push towards a £billion added to bills which begins to sound like a realistic number.

      What I imagine will not be built into their calculations is that the power companies will want to have the same return on capital already deployed. And so if you own a CCGT with current load of about 50% and that load drops to 25% you are going to want to increase your prices to recover this loss.

  4. Ben Elsworth says:

    Guys, it strikes me that there are a lot of comments coming out on the capacity mechanism, but not a lot of understanding going on. You can get a very simple summary of the mechanism on the DECC page https://www.gov.uk/government/news/electricity-market-reform-capacity-market-design and from there go into as much detail as you like by following the consultation and decision document links.

    I’m not going to repeat the stuff that is there, but I’ll add a few comments:

    1. The price cap of £75/kW/year is set by being enough to pay for construction and operation of an OCGT with a 15 year amortisation. It would not cover the non-variable costs of a CCGT, however the auction is technology neutral – a CCGT is eligible to bid and use the capacity payment as one element of revenue (alongside traditional spark spread capture). In practise however, market expectations are for only OCGTs to bid for new-capacity payments in the first auction.

    2. There is quite a lot of existing older CCGT capacity that has to reduce NOx emissions by end 2015 to comply with the Industrial Emissions Directive or else go onto either limited life derrogation (17,500 hours then closure) or restricted running hours. From a system perspective it is cheaper for this plant to retrofit NOx abatement and stay open, but these are the older CCGTs and they are marginally economic – or in some cases loss making. The system has been designed to keep them around and give them a reason to do the retrofit – they will still be bottom of the merit order and face fairly low running hours but at least some of the fixed cost will be me covered.

    3. It is my opinion that the £11/household/year of notional savings estimated by DECC is, as you say, completely made up to fit the political narrative that £2/hh/year is an insignificant price to be paying for energy security. In reality the £11 number is unknown, but in all probability would be many many times that much (i.e. this scheme will save us all money as well as increase security) but it is too politically embarrassing to say that. From 2016 all coal plant except Drax and Ratcliff (and possibly Lynemouth) will go on one or the other restricted running scheme. If the old CCGT did that too (i.e. did not retro-fit) there would still be enough capacity to meet peak load, but mid-range and shoulder periods would start to attract a significant scarcity premium, especially from 2018 (when the CM payments start) as IED-opted out coal hours may become scarce by then. The OCGTs will also put a cap on peak prices which, although high, will be an awful lot lower than could have been the case if load shedding had been the only alternative.

    The practical world we live in today is that merchant plant financing is dead. The big 6 suppliers have been beaten to a pulp politically and the only way they can survive on small margins is to reduce risk. That means no long term PPAs, and no risky investments in power plants – hence stalemate. This scheme will allow independing financing of OCGT capacity without PPAs being needed, it will be a lot better than nothing.

  5. Ben Elsworth says:

    Guys, it strikes me that there are a lot of comments coming out on the capacity mechanism, but not a lot of understanding going on. You can get a very simple summary of the mechanism on the DECC page https://www.gov.uk/government/news/electricity-market-reform-capacity-market-design and from there go into as much detail as you like by following the consultation and decision document links.

    I’m not going to repeat the stuff that is there, but I’ll add a few comments:

    1. The price cap of £75/kW/year is set by being enough to pay for construction and operation of an OCGT with a 15 year amortisation. It would not cover the non-variable costs of a CCGT, however the auction is technology neutral – a CCGT is eligible to bid and use the capacity payment as one element of revenue (alongside traditional spark spread capture). In practise however, market expectations are for only OCGTs to bid for new-capacity payments in the first auction.

    2. There is quite a lot of existing older CCGT capacity that has to reduce NOx emissions by end 2015 to comply with the Industrial Emissions Directive or else go onto either limited life derrogation (17,500 hours then closure) or restricted running hours. From a system perspective it is cheaper for this plant to retrofit NOx abatement and stay open, but these are the older CCGTs and they are marginally economic – or in some cases loss making. The system has been designed to keep them around and give them a reason to do the retrofit – they will still be bottom of the merit order and face fairly low running hours but at least some of the fixed cost will be me covered.

    3. It is my opinion that the £11/household/year of notional savings estimated by DECC is, as you say, completely made up to fit the political narrative that £2/hh/year is an insignificant price to be paying for energy security. In reality the £11 number is unknown, but in all probability would be many many times that much (i.e. this scheme will save us all money as well as increase security) but it is too politically embarrassing to say that. From 2016 all coal plant except Drax and Ratcliff (and possibly Lynemouth) will go on one or the other restricted running scheme. If the old CCGT did that too (i.e. did not retro-fit) there would still be enough capacity to meet peak load, but mid-range and shoulder periods would start to attract a significant scarcity premium, especially from 2018 (when the CM payments start) as IED-opted out coal hours may become scarce by then. The OCGT will also put a cap on peak prices which, although high, will be an awful lot lower than could have been the case if load shedding had been the only alternative.

    The practical world we live in today is that merchant plant financing is dead. The big 6 suppliers have been beaten to a pulp politically and the only way they can survive on small margins is to reduce risk. That means no long term PPAs, and no risky investments in power plants – hence stalemate. If this scheme will allow independent financing of OCGT capacity without the need for PPAs, it will be a lot better than nothing.

    • Euan Mearns says:

      Ben, what you are saying is that we are going to replace our current generating system with off shore wind, the most expensive way of generating electricity we have at present. AND we are going to replace energy efficient CCGT with less efficient OCGT and this is going to drive the price of electricity down and enhance energy security. I’m afraid I sense some Doublethinking here.

      AND

      The big 6 suppliers have been beaten to a pulp politically

      That worries me….

    • Roger Andrews says:

      “The Capacity Market works by offering all capacity providers …. a steady, predictable revenue stream on which they can base their future investments. In return for this revenue … THEY MUST DELIVER ENERGY WHEN NEEDED TO KEEP THE LIGHTS ON, OR FACE PENALTIES.” (my caps).

      Six years after the passage of the Climate Change Act and the lights are already in danger of going out and the govt. has to threaten providers with penalties to keep them on.

      So much for renewables. And for free market solutions.

      • Ben Elsworth says:

        Roger, generators are being explicitly paid to provide generation capacity when most needed, it hardly seems inappropriate for the government to ask for its money back if they fail to do so.

        I also think your comment about renewables is slightly unfair. Generators are just as worried about high gas prices as they are about low power prices, and have suffered through years of over-capacity and low spark-spreads that have very little to do with renewables, which still play quite a minor role on the UK grid. Their appetite and capacity for investment is extremely low, partly due to this and partly due to the political hammering that they have taken making them more risk averse – since almost any amount of profit is seen as greed. Similarly banks and other lenders are still unwilling to provide debt other than to projects backed by cast iron tolling agreements which are simply not available in today’s market.

        • Ben:

          “generators are being explicitly paid to provide generation capacity when most needed, it hardly seems inappropriate for the government to ask for its money back if they fail to do so.” This is of course perfectly appropriate, but it wasn’t my point.

          My point was that six years ago the UK committed to cut its CO2 emissions by 80% by 2050 using strategies that a) heavily emphasized wind power and b) assumed that left to its own devices and given the right incentives the market would deliver the desired results. The EMR, which among other things “recognises the need for huge investment in gas and coal plants”, implicitly acknowledges that this strategy has failed. The market hasn’t delivered and the govt. has had to jump back in.

          “Generators …. have suffered through years of over-capacity and low spark-spreads that have very little to do with renewables.”

          I don’t know about the UK but renewables are blamed for the losses being suffered by generators in Germany: “The problem is well documented: high penetrations of renewables with legal priority over fossil fuels are driving down wholesale market prices — sometimes causing them to go negative — and quickly eroding the value of coal and natural gas plants.”

          http://www.greentechmedia.com/articles/read/this-is-what-the-utility-death-spiral-looks-like?utm_source=Daily&utm_medium=Headline&utm_campaign=GTMDaily

          • Ben Elsworth says:

            But Germany’s renewable energy capacity is well over 80 GW – more than German peak demand even though of course it never all generates at once. Once you account for technical constraints and regional effects – and times of low demand – of course there will be a few occasions per year when generation needs to be forced off via negative pricing.

            The UK’s renewable capacity is barely 20 GW versus a 60 GW peak, and we have never encountered negative prices. Low spark spreads are not helped by the presence of wind and solar but fundamentally what happened was that coal supplanted gas at the top of the merit order – something that was never supposed to happen – because coal prices plummeted, gas prices stayed high and the EU ETS fell apart. A massive wave of gas CCGT new-build (about 11 GW) hit the grid at the same time between 2009 and 2012. It was far too much, all financed in the giddy days of 2004 – 2006, nobody believed coal would ever compete with gas again but, hey guess what? It did. But after the famine, comes the feast.

          • Roger Andrews says:

            Ben:

            Fair comment on the differences in scale between Germany and UK. However, as I understand it well over half of UK generating capacity is owned by German, French and Spanish companies, all of whom seem to be suffering from the same disease, all of whom are in it for the money and none of whom sing “Rule Britannia” at board meetings. So I’m not sure the low market penetration of renewables in UK necessarily insulates it from the “death spiral”.

          • Ben Elsworth says:

            Hi Roger, you are right to highlight the (relatively) weak balance sheets of the big 6 energy suppliers as a major contributory factor to the lack of investment and failure to provide PPAs to independent generators. Certainly in the case of RWE and EOn the Energiewende in Germany has weakened them tremedously, but I couldn’t say that for the other 4, all of whom have done pretty well out of renewables but have suffered for a wide variety of other reasons, many of which are also attributable to politics.

  6. On a totally unrelated subject, proof that mitigation and not emissions reduction is the solution to climate change.

    The island nation of Kiribati, threatened with inundation by rising sea levels, has bought itself a replacement island:

    http://www.ryot.org/island-nation-kiribati-preparing-mass-evacuation-underwater-soon/745509

    And it cost only $8.8 million.

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