Electricity Supply – Driven by Politics at the Customers’ Expense?

Guest post by David Porter, former CEO of UK’s Association of Electricity Producers and Energy UK. David has recently published a book chronicling the UK electricity generating industry that he previews here.

Most of what I read in Energy Matters fits nicely in my comfort zone. Some of it, however, collides with my prejudices and at times I am swept out of my depth by the mathematics. Never mind. Many of the subscribers to Energy Matters apply more rigour to today’s issues than those who decide our energy policy; and with policy for electricity supply, in particular. The recent questioning here of conventional thinking about the comparative level of CO2 emissions from gas- and coal-fired power stations, for example – with serious people being prepared to admit that they might have been wrong – is not the kind of thing witnessed very often at the tables where our policy-makers sit. More’s the pity.

17 minute interview with David on Energy Live News.

As a spokesman and lobbyist for the sector for many years, I used to describe electricity supply as ‘vital’. But, that under-valued it and as Bill Shankly might have said, ‘Listen, it’s more important than that’. What most electricity customers want (beware – this is an assertion, not a finding from a research project) is for it to be reliable and affordable. In that respect, public policy for the industry was always meant to be helpful. But, it lost its way. Today – 25 years on from electricity privatisation – industry figures talk openly about the increasing risk of power shortages and customers complain that they pay too much for the reliable supply that they enjoy. Power shortages and higher prices, incidentally, are exactly what many critics of the British electricity privatisation said we would see if the industry were to be taken out of the hands of government. Although the outcome may have been what they expected, the reasons for it are not. Public ownership has gone, but, public policy for the industry has replaced it. In fact, there is a vast amount of it; it is far more exposed to the public gaze than it used to be; is more volatile; is often of questionable cost-effectiveness and is apt to lead to unintended consequences.

One of the more legitimate concerns about electricity privatisation was that the privately-owned industry would face a higher cost of capital that the state-owned industry. The privatised industry would make up for that in other ways, however; for example, by being more efficient and by demonstrating its competence. It went without saying that it would also benefit from a stable regime where it enjoyed the confidence of government. But, governments have not delivered that stability and one day, research will reveal that customers are paying the price. I am not advocating re-nationalisation, of course; simply that greater maturity in energy politics would be a good thing.

At the risk of stating something that – for subscribers to Energy Matters – is patently obvious, electricity supply is an industry that relies heavily on engineering and investment to serve its customers. The industry, of course, has a wealth of expertise in those areas and the people who pay the bills can take some comfort from that. But, in the last 25 years, it has been driven less by what those customers want than by politics – and for most politicians in Britain, engineering is a mystery and their understanding of investment tends to be somewhat hit and miss.

There is also an awkward mis-match between the investment horizon of a steady, long-term, capital-intensive industry and the capricious nature of politics in a five-year election cycle. Investments are more risky because of that. Not that the industry is meant to be risk-free – far from it. But, its ‘normal’ business risks are substantial enough – judgements about long-term demand, choosing the best technology, procuring fuel, securing customers and competing effectively – so, the industry employs bright people and engages good advisers and ensures that most of those risks are manageable. The political risks, however, are harder to cope with and can be even more damaging.

One of the reasons for privatising the industry was to free it from the day-to-day influence of government and make it customer-driven. That was soon forgotten, though. A one-off windfall tax and two or three threats of another (one-off) windfall tax; coal-fired electricity being favoured, then virtually banned; investment in gas-fired generation being encouraged, subjected to a moratorium and eventually rendered too difficult to contemplate; new nuclear power, previously too sensitive politically to mention becoming quite suddenly the ‘must-have’ technology; the EU requirement that, in effect, 30 per cent of our electricity should come from renewables by 2020; an ambitious target for combined heat and power, followed by a huge change to electricity trading arrangements that penalised it; hefty social obligations not just on retailers but on some generation-only businesses; subsidy schemes that arrived on a wave of enthusiasm and were swept away when priorities changed – all this, by governments that often said that they were ‘giving the industry the certainty that it needs to invest’. And when the already unpopular industry was pilloried by the press and the public, many of our politicians joined in and whipped up the anger of the crowd.

I have heard political figures strongly refute charges that governments cause uncertainty by arguing that their energy objectives – at least since the global warming issues arrived on the agenda – have been the same for years. In fairness to them, that is true. So much so, that the energy policy ‘triangle’, which has featured in the opening lines of countless articles, reports and speeches, has become a cliché of energy politics. But, energy ministers and some of the leading figures in the energy industry are apt to cite it in a way that implies that all three of its components can be delivered harmoniously. Two of them – security and prices – could, and probably were. The third – reducing carbon emissions – could also have been in harmony if we had simply priced the emissions and left the companies to get on with investment decisions. That would have been in tune with the aims of privatisation and compatible with the EU’s single market ambition. At first, it seemed that we were doing that through the EU Emissions Trading Scheme (EUETS). But, the EUETS was considered to be undemanding and even with an agreed trajectory for tightening of the cap, was thought likely to take too long to steer the industry into the politically-desirable new investments. The Scheme had hardly got under way, of course, when the EU issued its Renewable Energy Directive. This legally-binding requirement for rapid growth of renewables promptly undermined one of the main principles of the EUETS – that the carbon price should drive a technology-neutral, cost-effective, response.

The three main objectives may be un-changed, but, the political mood changes and the priority order of those objectives certainly changes, usually in response to ‘events’. Power cuts and price rises are good candidates for a change in priorities. But, when times seemed good economically, our government’s desire to assume world leadership on climate change put carbon emissions reduction in pole position. Ministers were able to announce calmly that bills would go up as a result, but, with the implication that we would not mind paying. When the financial crisis hit household budgets, however, the message changed. The Secretary of State told us that implementing the green policies would actually cost us less than continuing with existing policy – in fact, £77 per year less by 2030. The government’s ability to forecast energy prices as precisely as that and so far ahead probably came as a surprise to subscribers to Energy Matters. It did not cut much ice with the customers, though. With energy bills in the news every day, the government accepted responsibility for some of the costs that companies were incurring and relieved them of certain green obligations. There was a real and almost immediate saving of about £50 – rather more meaningful to the bill payers than saving £77 in seventeen years’ time.

We are currently witnessing a massive transition in electricity supply, but, it is neither customer-driven nor centrally-planned. So, it is hardly surprising that we are in a bit of a muddle. Electricity customers are not fully aware of what is going on, but, some of the transition is highly visible. They will have noticed their neighbours’ rooftop PV systems and will have received the same sales calls that I get from PV installers, promising ‘money from the government’. The sales pitches often expose spectacular misunderstandings, but, so what? An Energy Minister in the Coalition government told us confidently that the Feed-In Tariff for PV was a better investment than a pension. And, on their holidays or weekends away, urban folk may have enthused about the wind turbines that they saw in the rural back yard, or, out to sea. But, very few people will have been aware that perfectly good gas-fired power stations – the industry’s rational response to expectations of a few years ago – have been closed because they cannot earn enough to stay in business. It is not that they were uncompetitive, or, that they did not produce electricity when it was wanted – demand is lower than it used to be and some of what remains is taken up by the technologies that our legislators have given preference to and have required customers to pay a premium for.

I spent many happy years representing the interests of a wide range of electricity-producing technologies, from hydro to nuclear power and fossil-fuelled to wind, so this is not an attack on renewable energy per se. It is, however, an expression of unease about the way that large amounts of it were forced onto a system – the physical infrastructure and the market-place – that was not ready for it; with an astonishing lack of regard for the consequences.

When I retired from full-time work in 2012, I wrote a book – Electricity supply: the British experiment – which was published earlier this year. Euan Mearns kindly invited me to summarise it for Energy Matters. But, if you have read this far, you do not need me to do say very much more about it. You already have a good idea of what the book is about.

It begins by describing my experience from 1987 to retirement in 2012 – for 21 of those 25 years as a trade association Chief Executive, representing independent electricity producers (i.e. not the state-owned ones) of electricity, then electricity producers generally (including the ex-state ones) and finally the producers and the retailers. It is the story of a trade association that began life before privatisation in a tiny terraced cottage on a Cornish hillside and eventually, as part of a merger, became ‘Energy UK’ in London SW1.

Although I enjoyed writing the rather folksy stuff, the book also comments on the way that energy policy evolved during those 25 years and highlights some of the problems that have emerged. I knew when I started that there was a risk in trying to combine – between the covers of one book – the story of the growth of a trade association with more serious comment about energy policy. I did make clear in the Introduction that it is not a text book; other, more distinguished authors (Dieter Helm and Alex Henney, for example) have written those already. Instead, it describes how things looked from my desk. More precisely, that means recollections of meetings with government, anecdotes, regulatory battles and encounters in the news media (successes and failures) as the industry contended with 25 years of changing energy policy; from Acts of Parliament to the political mood swings. People that work in the industry, or, who invest in it, will not need telling that those mood swings can often have more impact than fully-fledged legislation.

The spate of reports and announcements that hit the headlines in July 2015 made it clear how much of a muddle we are in. The main stories – the competition investigation, the cooling of support for renewables and the statement from National Grid had no formal connection with each other. But, below the headlines lurked the influence of the ever-present conflicts between the three strands of energy policy – reliable supply, keeping down prices and reducing carbon emissions.

The Competition and Markets Authority found the market to be broadly competitive, that customers were not over-charged, but that they were paying too much. It seems that they did not switch to a cheaper supplier when they might have been expected to. The findings also suggested that vis à vis the government, the independence of the regulator, Ofgem, might have been diminished by legislation, but, the significance of that did not make any headlines.

National Grid’s announcement, about the tight capacity margin next winter, did make headlines, but, few commentators seemed to question why investment in new plant had not come forward when the closure of old oil- and coal-fired plant had been known about for years. They needed only have asked some of the companies which had plans to build gas-fired plant what had become of those plans and why.

Regarding the reduction of carbon emissions and the changes in support for renewables, the government referred to the importance of doing things ‘cost-effectively’ in future. Customers should be pleased about that, but, remind me, was there ever an argument for doing it other than cost-effectively?

The most important relationship for the electricity supply industry is with its customers. Any business gets that relationship wrong at its peril. But, it seemed to become so focused on what government wanted that it may even have thought that the customer was the government; its reputation suffered and it is working hard today to restore it. Government, though, will always be a major presence. It cannot turn its back on energy. But, it is probably fair to say that even after 25 years, it has not learned how best to handle its relationship with a privatised, customer-driven electricity industry. We are paying for that.

David Porter was Chief Executive of the UK’s Association of Electricity Producers and Chief Executive of Energy UK before retiring from full-time work in 2012. The views which he expresses here are his own and should not be associated with any organisation that he works for today, or, has worked for in the past. His book Electricity supply: the British experiment (ISBN 978-1-86151-385-4) was published by Mereo Books and is available from www.mereobooks.com and Amazon.

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36 Responses to Electricity Supply – Driven by Politics at the Customers’ Expense?

  1. rms says:


    Please contact me via http://www.scottishoilclub.org.uk/contactus.htm in case of interest in speaking about this (or just sharing with members at our events).

  2. Leo Smth says:

    Around the turn of the century I attended an ‘alternative energy’ seminar with members of the financial community.

    I had asked enough technical questions to presumably be identified as someone who understood a little of what was being laid before us by bushy-tailed protagonists of hydrogen, bio fuels, and so on. So at lunch I was approached by a man who transpired to be a German Banker.

    “Excuse me, but I haf a question for you – one only: If you could be so kind as to tell me if any of this energy” – waving a hand at the delegates the charts and the canapés – “can exist without money from the government?”.

    I paused, reviewing all the technologies we had been discussing, and all the ones I was aware of, in my mind. “No” I answered “I don’t believe so, or they would all have happened many years ago”.

    “Ach, then I am back to London now: I haf been here before. First they pay us to invest, then when we make a profit, they tell us we make too much and they tax us for it.”

    I have often wondered how he has reacted to Energiewende…

    • Leo
      I understand the thoughts of your German colleague very well. I have a friend who is paid about 45p per kWh via the feed-in tariff, for the PV electricity from the array on his roof. He is not rich and I don’t begrudge him the money, especially when I am drinking his claret. I once said to him, however, ‘They (government) will rat on you.’ ‘They can’t’ he replied, ‘It’s guaranteed and index-linked.’ That is correct, but, it would not stop a future government (perhaps this one?) imposing special taxation on people that are enjoying the benefit of what a previous administration induced them to do.
      Of course,almost by definition, you have to be in the game for a while to see the twists and turns in policy, but, looking back, it is a winding road of the kind that can induce nausea.

      • Graeme No.3 says:

        The government doesn’t have to go “the whole spanish” i.e. end subsidies AND charge PV owners a fee for use of the grid. It could just impose a usage fee “to cover the extra costs to the grid” as is being mooted in Australia. That may mean you have to supply the claret. Just remind him of Machiavelli’s “Put not your trust in princes”.

        I am envious of his rate, I get the equivalent of 23p in South Australia, and I thought the state government was looney to offer that. Well, they are loonies but that is another story.

        • Graeme
          My friend put his system in for the first phase of the feed-in tariff. His rate is ‘protected’ but within, I think, a year of that tariff starting, it was scaled down drastically. So, today, the rates are much lower. So too, of course, is the cost of a PV array.
          But, you are right and something will happen. I have a bottle ready to take round when it is announced.

    • One of the key concepts underpinning renewables subsidies is that of the “level playing field”. It’s argued that technologies like wind and solar have been denied the chance to reach their full potential because of the way the market is rigged – in particular by all those nasty subsidies that allegedly give fossil fuels an unfair advantage. But there’s a simple solution –re-rig the market to subsidize renewables and give them unfair pricing advantages over fossil fuels instead. This will stimulate investment that will lead to technological improvements and cost reductions and ultimately transform renewables into mature and economically-competitive technologies than can stand on their own two feet.

      The flip side of the argument, however, is that subsidies will no longer be needed when this point is reached, and according to the renewable energy industry it’s already there. Onshore wind is now claimed to be the cheapest source of energy in UK. Solar supposedly undercuts all other power sources in Germany. Renewable energy is now reportedly cheaper than coal and gas in much of the US. With cost advantages like this renewables should be able to continue to increase market share without any more government handouts. Time, one would think, for governments to start rolling back the subsidies.

      But look what happens when they do. The screams can be heard from here to Hong Kong. Despite its claims to the contrary the renewables industry knows perfectly well that it can’t survive in an unrigged and unsubsidized electricity market.

  3. Euan Mearns says:

    David, I was wondering what your views are of the 2008 Climate Change Act? We supposedly have a privatised electricity supply industry, but it is operating within a legislative straight jacket imposed by Westminster, Bruxelles, the UN and in my case Hollyrood too. This is about as far removed from a free market as one can get.

    And one of the worrying ironies is that the politicians have legislated, the companies try to act in good faith, but are then blamed by the politicians and the public for their poor performance.

    As you know state ownership of the energy industries is very much on the agenda again in the UK. While I am generally a supporter of public ownership (i.e. PLCs) I do not believe this works for strategic infrastructure. National Grid appears to be a major supporter of the UK Energiewende that requires us to build power lines and inter connectors everywhere. Its very good for their business, paid for by the public, and not in the public’s or national interest.

    • Euan
      On anthropogenic global warming and its effects, I now try to keep quiet. There is much that I find hard to understand – even after discussions with rational and highly-informed people that I have worked with, that think that something should be done. But, I am easily dismissed as not being a scientist, so, I try to keep out of that and stick to what, if anything, should be done on the policy front.
      Even if you accept AGW, the value of the Climate Change Act is highly questionable. It makes no sense, except to certain politicians and ‘environmental’ lobby groups, for the UK to wear a hair shirt when it represents less than 1.5% of the world’s carbon emissions. I think that, the idea is that we become world leaders and sell the laggard nations something when they want to catch up. I have never been able to work out what the ‘something’ is. Not only that, but, if, we price our emissions higher than those of other countries under the EU ‘cap’ we disadvantage our industry and make it easier for the others to emit. The current government is interested in ‘cost-effectiveness’ for green policy. How that will pan out when they have to take a position for the Paris talks in December will be interesting to watch.
      Yes, the companies get a worse press than they deserve. They make mistakes, of course. Big companies, especially, can be clumsy at times. But, they have to be very brave to stand up to government and this can be worrying when you think that sometimes the politicians need telling a home truth (engineering?).
      National Grid has become very important over the years. I am an admirer of National Grid, which does its main job very well indeed. In terms of information and advice, government seems almost to see it as an alternative to the regulator. Of course, it should not lose from the growth of the network, but, presumably it has to be alert to the thinking of the many people who imagine that we shall not need a grid in future. There are, of course, very few people that are in favour of self-production, local production etc that actually want to be detached from the grid. They will expect someone else to pay for the grid, upon which they rely. There will be much anguish about this, one day, especially as the big energy companies are now apt to point fingers at network costs when bills are in the news.

      • PhilH says:

        If the argument that “my contribution to something is only a very small part of the total, so I can be let off doing my fair share” is a valid one, can it be applied to my taxes?

  4. Peter Lang says:

    Your first few paragraphs reminded me of this (which I expect you were very familiar with this, from half a decade ago”:
    Chatham House, 2010, “Electricity – Social Service or Market Commodity?
    Importance of Clarity for Decision-making on Nuclear Build

    • Peter. I remember that and I always enjoy Malcolm Grimston’s work. If you want a market to work, then most public policy decisions have to go with the grain of the market.

  5. Rob says:

    With regards to the building of new gas turbines are you saying that market share is being taken away by renewables and so making CCGT unprofitable. If so what sort strike price would be required to make new CCGT be commercially worthwhile if they acted as back up to our wind turbines with less market share.

    I was told a well known power turbine consultants has been laying off staff surely as our current spare capacity in the grid is so low we have loads of power stations planned. Does anyone know what’s going on ?

  6. Rob. I am sorry, but, I do not know what market price would be needed to justify a new CCGT these days. I do know that It takes almost six years to bring a new CCGT from concept to electricity production, though. So as long as there are old ones that can be kept available with payments through the capacity mechanism, under-writing new ones will always look difficult. Cheaper, open cycle gas turbines are also an option, of course. Note that it is not just the ‘must-run’ renewables pinching market share that hurts the CCGTs. Overall demand has dropped, too.

    • Rob. I should have said that Hugh Sharman would almost certainly know the answer to your CCGT question. If he is looking in, he might comment.

      • A C Osborn says:

        Of course they do not need a “strike price”, just the cancelling of the current RE subsidies to re-create a level playing field.
        Then watch them go.

        • A C Osborn says:

          I should have added that there should also be no preferences given to RE.
          Base Load comes first.

      • Hugh Sharman says:

        David (and Euan!),

        Firstly, many congratulations, Euan, for enabling David’s enjoyable article to be published and the first class interview that I will now relay onto my circle of colleagues.

        I can recommend the book to any energy obsessive such as myself. It perfectly reflects his sunny character, dry wit and deep understanding of recent futile, all-party, political shenanigans and politicians’ empty but costly gesture-type forays into the energy sector. The history is impeccable and unmatched by any other commentator, save Alex Henny and Dieter Helm whom he typically credits so generously.

        The entry of so much intermittent and weather dependent power into the grid on a preferential basis, still delivering only 8% of average, UK electricity supply, has already caused chaos for the owners of most CCGTs. These take on average 2 hours to start and an hour to stop and so are quite unsuited to the sort of load profile that the system now requires of them.

        The generators know this well, of course. They are not investing. As coal is being driven out of business (finally by 2023) and the nuclear story descends into farce while the existing fleet halves by 2023, and all the older CCGTs are decommissioned for the foregoing reasons, the country will face a 20 GW shortfall.

        David is too kind to National Grid which knows all this but is profiting massively from exploiting this knowledge. The subject of another posting, perhaps, Euan?

  7. Graham says:

    Re: Climate Change Act 2008. The EU ETS effectively shifted climate change policy into the EU’s jurisdiction, but the politicians at member state level did not like the loss of power. Faced with the choice of abolishing the relevant ministries or giving themselves unnecessary make-weight work to do, they chose the latter (in both the 2008 Act and the 2009 Renewable Energy Directive). Consumers will be paying for this act of self-aggrandisement for years to come.

    Re: CCGTs. In my experience, it is hard to give a single price as the cost of a CCGT, because it depends on the price of the gas used in generation, which changes all the time. A more stable measure is the ‘spark spread’ (the difference between electricity and gas prices needed to cover all other costs) or the ‘clean spark spread’ (the difference between electricity prices and prices of gas and CO2 emissions required to cover capital and operating costs). Unfortunately, even the clean spark spread is difficult to define nowadays, since not all CCGTs can be expected to run all the time.

    In any case, David Porter is right that cheaper “open cycle gas turbines” (built without the attached steam turbine) are sometimes the most efficient new investments. even though they have higher running costs than CCGTs. They may represent a rational response to today’s demands, which include frequent, short periods of operation when the output from wind and/or solar power drops away. (However, try explaining to the public – or even to environmental lobbyists – that one consequence of renewable energy is an urgent need for less efficient fossil-fueled generation and you’ll soon find the limit to their understanding of economics.)

    • Eddie says:

      It is impossible to predict the economics or politics far enough to say, but of all the technologies out there OCGTs certainly seem to be one that may have an increasing role in the future. Partly *because* there is so much uncertainty that the low capital cost is particularly attractive; partly because the flexibility is useful when faced with intermittent renewables.

      Perversely, the increasing costs of absorbing renewables, particularly for transmission boost the argument for large users to go (at least partially) ‘off grid’. OCGTs, large reciprocating engines and even small nuclear reactors begin to look sensible if it means 10MW+ loads can be met without having to worry about grid costs, despite the grossly inferior efficiency and levellised cost or generation when considered in isolation. Heat applications only tip the balance further towards small on-site generation. Of course, this just shifts even more of the cost onto those industrial users that do need to pay for large grid connections, plus the numerous small consumers that have no choice. The resulting vicious circle will presumably go on long enough that any possible regulatory correction is painful for all involved.

      • Günter Weber says:

        Why is there a need for new power plants at all? Demand is stable or even declining, while production is rising due to ‘forced’ investments in renewables.

        Usually, you would like to build a new plant as a replacement for the old one, if the new one can operate more profitable. As, in general, new plants will be more efficient, they have lower running costs. However, in contrast to plants running already for 20 or 30 years, the new one not only have to earn the running cost plus a small premium. Instead you have also to cover the capital costs for the new investment.

        Plants that work as a back-up have short operation times. So, it is hard to profit from lower running costs, when the also capital costs have to covered by only a few hundred hours of operation time each years.

        Bottom line: Stay with the old plants as long as it is possible. Carbon emissions will not be reduced by new plants, but by reduced operation hours as renewables are ramped up.

        • roberto says:

          “Bottom line: Stay with the old plants as long as it is possible. Carbon emissions will not be reduced by new plants, but by reduced operation hours as renewables are ramped up.”

          One can do what you suggest here only as long as the penetration of intermittent, weather/season-dependent renewables is small… as soon as it grows there is no way that the old-design plants are able to follow the ramp-up and ramp-down rates necessary to keep up with the said renewables… there has been one nice post here on the blog already, about this… scaling up the penetration of RENs and trying to match their sudden decrease or increase… only a large, huge, pumped hydro plant could do that, coupled with a huge, environmentally impacting series of transmission network cris-crossing the country. This is in line of principle, doable… but only technically… economical and social acceptance are still to be checked, and IMHO are very much difficult to get.

          • gweberbv says:


            I assume that this ramping issue is more or less an urban legend. I agree that originally the vast majority of power plants was not meant and not designed for fast up- and down-ramping (fast=within few hours).

            However, at least in Germany it works quite well. Look at this chart: http://energytransition.de/files/2015/07/renewable_powerproduction_week30_2015.png

            On the right end you see German fossil power plants ramping up by about 15 GW within 3 to 4 hours (at a first glance, you might even think it is more than 20 GW – but look at the decreasing exports).

            Obviously, coal plants can do the ramping (after some upgrades, I suppose). They do it well enough to kill the business model of gas-fired plants that were orginally designed for managing the peak load.

          • Hugh Sharman says:

            Hello Gweberby, looking at http://energytransition.de/files/2015/07/renewable_powerproduction_week30_2015.png, you must have noticed that the German system is exporting and importing the main “fast-response” imbalances. Little wonder that Poland and Czech Republic are building those phase-change transformers to get some control within their own systems!

          • gweberbv says:

            P.S. The plot also shows that the grid can manage the fluctuation of renewables between 70% of domestic demand (compare 21. 7. and 26. 7.).

            As long a you have the fleet of fossil power plants at your disposal, everything is fine (after throwing a few billions at the grid).

      • Peter Lang says:


        Perversely, the increasing costs of absorbing renewables, particularly for transmission boost the argument for large users to go (at least partially) ‘off grid’. OCGTs, large reciprocating engines and even small nuclear reactors begin to look sensible if it means 10MW+ loads can be met without having to worry about grid costs, despite the grossly inferior efficiency and levellised cost or generation when considered in isolation.

        This is well demonstrated in a 2014 research report commissioned by the Australian Renewable Energy Agency (ARENA), “Australia’s Off-Grid Clean Energy Markethttp://www.arena.gov.au/files/2014/12/ARENA_RAR-report-20141201.pdf, Executive Summary, pp ii-iii:

        For the purposes of this paper, Australia’s off-grid electricity market is defined as a combination of fringe-of-grid areas in remote locations and off-grid areas, …

        Only 2 per cent of Australia’s population live in off-grid areas, however over 6 per cent of the country’s total electricity is consumed in off-grid areas. Around 74 per cent of that electricity is generated from natural gas and the remainder is mostly from diesel fuel; making it Australia’s most expensive electricity due to the underlying high gas and diesel prices in the remote areas. However, due to lower levels of coal generation, the off-grid market has the lowest average emission intensity of all of Australia’s electricity markets despite only 1 per cent of electricity is generated from renewable sources. An estimated 15,575 GWh of electricity was produced in 2012 by off-grid generation in Australia; supplied from a total installed off-grid generation capacity of approximately 5GW.

        Despite the huge subsidies for renewables and the high cost of gas and diesel in inland areas – due to gas transmission and diesel transport costs – only 1% of electricity is generated by renewables. If RE cannot be competitive in inland Australia with all the financial incentives to renewables and high cost of fossil fuels, what realistic chance has it of supplying a large proportion of global electricity and of significantly reducing GHG emissions intensity of electricity globally?

        It’s also interesting to note that the proportion of the world’s (growing) population supplied by grids is increasing and IEA projects the trend will continue: see the chart here:
        A way to get power to the world’s poor without making climate change worse http://grist.org/climate-energy/a-way-to-get-power-to-the-worlds-poor-without-making-climate-change-worse/

  8. William says:

    Do you think a carbon price sufficiently large to allow non-carbon generation to be competitive is politically feasible? It seems to be accepted as the best way to address the problem of decarbonising industry, but at least in Australia the present government successfully used it as a weapon against the previous gov.

    • Or, is the carbon price – which, as you remind us, is political – in effect, a neat reflection of the extent to which governments believe that AGW and climate change is an issue to be addressed?

      • Peter Lang says:

        Carbon pricing is highly unlikely to succeed in the real world.

        Unless around 80% of global GHG emissions from all sources in all countries are included in the scheme, the cost for the participants is too high. They participants know this and will not sign up to it. Only 46% of GHG emissions are included in the EUETS. If that’s the best EU can do, what chance of the whole world signing an agreement to send them broke. http://catallaxyfiles.com/2014/10/26/cross-post-peter-lang-why-carbon-pricing-will-not-succeed-part-i/

        Furthermore, the net benefit-cost would be negative for all this century. http://catallaxyfiles.com/2014/10/27/cross-post-peter-lang-why-the-world-will-not-agree-to-pricing-carbon-ii/

        Those advocating for carbon pricing use a trick. They show cumulative net benefit-costs rather than cost per year. The chart in the link above shows it plotted per 5-year over this century.

        Furthermore they have to project their projected costs and benefits out 300 years to make their case.

        Many more problems too. They use favourable inputs, such as:

        1. Very low and declining discount rate
        2. Climate sensitivity higher then even the modellers central estimate and about twice the central estimate from empirical studies
        3. High damage function
        4. Unrealistically high emissions for all this century

        There is next to no chance of carbon pricing being implemented and politically sustainable for a century or whatever is required to control the climate..

        • William says:

          You say a tax has to be global, but British Columbia has a $30 per tonne carbon tax that seems to have wide support (being revenue neutral) and which seems not (yet at least) to have damaged its economy. I also don’t buy the analysis in your second link as the studies compare two unknowns. The costs of climate change are not quantifiable and are likely to fall most heavily on countries and regions that have no involvement in the decisions. The ‘cost’ of the tax if implemented so that revenue is returned to people (preferably flat rate, per-person, not offset against tax) is also unknowable because it depends upon people’s reactions, which are not so easy to forecast. Fuel use in BC for example dropped much quicker than economists would expect.

          • Peter Lang says:

            The chart on Part II which shows that the optimal carbon tax would be a net cost throughout this century is simply a replot of the widely report results from the DOCE-2013R model (by William Nordhaus) This is the most widely cited of the IAM models. I add the analysis shown as the red line by simply halving the ‘Copenhagen’ participation rate (which Nordhaus calls ‘optimistic’. I showed in Part I it is unrealistic to highly unlikely to ever be achieved. Nordhaus’ co-worker checked that my analysis is correct (that does not imply they agree with my conclusions, particluarly my last paragraph).

            If you don’t agree with the analysis, you should take it up with the experts in the field: Nordhaus,

            The three main models are DICE, PAGE and FUND. Richard Tol teaches his students how to build and run a simplified version of FUND. They learn how the IAM’s – that estimate social cost of carbon, net costs and benefits of CO2 emissions, net costs and benefits of different CO2-e abatement policies and optimal carbon price – work and get to understand the inputs and outputs. He’s presented a manual for his teaching here and the students follow and implement it step by step. If you are interested in learning about the analysis you can read the manual here:
            Climate Economicshttps://sites.google.com/site/climateconomics/ (you used to be able to read it online for free, but no more)

            You can also download the DICE-2013R user manual here: http://www.econ.yale.edu/~nordhaus/homepage/

  9. climanrecon says:

    I think that the UK defense industry model is worth serious consideration for electricity. The armed forces buy equipment from, and get it maintained by, private sector companies, but they operate it themselves, with mothballing and some held in reserve.

    Why not have an electricity force, that operates power stations bought from private companies? It should be easy to get finance because the income stream from customers is (virtually) guaranteed, no more wooing of fickle and uncontrollable private investors.

  10. Pingback: AWED Energy & Environmental Newsletter: August 24, 2015 - Master Resource

  11. mark hughes says:

    What a lively debate!

    David you are so right to point out the issues when public policy becomes such a driver of what happens in the power market.It puts political risk centre stage.It is important to be careful,deliberate and well-thought-through in a time frame which mirrors the life of the assets we are relying on investors to build to provide security of supply.

    I think it was Stephen Littlechild that published a lovely sarcastic piece on the ludicrous Government attempts to regulate competitive supply tariffs.Less said.

    And Dieter Helm has written powerfully on what far-reaching consequences and unchartered waters the Government has driven us towards in its adoption of the long term CfD and capacity markets where Government procurement is replacing the competitive wholesale market for generation.

    This new paradigm for the GB market plus the big injection of intermittent renewable generation is combining to kill the economics of the generation that was built as recently as 5 years ago, transferring alot of value away from the investors that built such plant.Especially galling when those investors are villified by press and some politicians for “making too much money”.Does anybody check the direction of change in the share prices of these companies before they wonder whether the companies are indeed earning too much money and the implications of investor views on whether the UK is a good place for new power investors?

    It may be(sad to say perhaps) that public policy and procurement regimes is the face of the future to get the transition to a low carbon economy that is needed.In which case,public policy and procurement needs to have some stability,some rules about how changes will be effected and some constraints on change which have passed serious,long-term impact assessments.

    It seems like a long time ago when the Government issued a White Paper introducing the Electricity Market Reform which was going to make the UK the most attractive place to invest in our power markets.Oh dear.

    I would like to end up more constructively.I think we can we get a platform for evolution and development of the industry which works in this new public policy and procurement environment but it needs to be grown on the more(historically typical) debate on the balances we want to strike across the trilemma objectives and pay alot more attention to investor perspectives and long term horizons .

    The executives at the Department of Energy that steered the privatisation process in 1987 and beyond(headed by Willy Rickett and a very able crew) seemed to have the capacity to manage the enormous changes necessary at that time.It can happen now.

    Optomisic to the end.

    Mark Hughes

    • Mark.
      It was good to see you go into ‘constructive mode’. I have to keep prompting myself to do that. After all, ‘we are where we are’ and the people that are currently involved in the industry day-to-day must make the best of it. Willy Rickett’s team was Premier League. But, in fairness,Willy’s people had only two of the trilemma objectives to focus on – security and prices. To make sense of things today – now that we have a third one (CO2 emissions) – I have to conclude that the objectives should be put firmly in priority order. For me, and probably any Energy Minister, the order is security, (with behind it by only the thickness of a fag paper) prices; and finally emissions reduction, if politicians are convinced that they still want to do that. Not making that order clear and not sticking with it is a recipe for muddle, higher costs and higher prices. When we are so desperate for economic growth, and reducing energy bills can improve the budget for every household and business in the land, it would not seem wise to allow the muddle to continue.

      • mark hughes says:

        there is a natural bridge between security and prices in the value of lost load and in theory there is another bridge via CO2 pricing…but as mentioned hitherto in the dialogue, that bridge is a bit obscure and also insufficient.
        I am becoming convinced that Government might go the whole hog on the procurement route and get Nat Grid(or another Central Delivery Body reporting to DECC) to decide what they want in total(even down to overall technology mix) and take the full set of decisions on what gets built and then invite bids for that future portfolio.I know that feels a bit like a return to the past…But muddle is the worst.

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