The Department of Energy and Climate Change (DECC) has now published, with the devolved administrations, a white paper on Electricity Market Reform. It has also published a Renewables Roadmap, on how the UK can meet its share of the EU renewables target. Chris Huhne has said that theproposals add up to the greatest transformation of energy since the privatisation of the energy industry. He is right that the ambition is transformative, and includes some sensible regulatory measures which prove that DECC does not share in the deregulatory zeal that dominates several other departments (including Defra). (The electricity and gas regulator Ofgem has also moved from a position of promoting free markets to promoting regulated and managed markets.) But anyone who has followed UK energy policy over recent decades knows that political ambition does not always – or indeed often – lead to significant change. Despite regular speeches from politicians extolling renewables, and numerous plans, the UK – windy, wet islands – is third from bottom in the European league table of energy got from renewable sources. Plans – or roadmaps to use the current policymakers’ jargon – require delivery. The UK and Scottish, Welsh and Northern Irish governments appear serious in intent. But the potential role of local government – which elsewhere in Europe and also in parts of North America has led energy transformation – is overlooked in this week’s publications.
Electricity market reform
The electricity market reform has four key measures: a Feed-in Tariff Contract for Difference, an Emissions Performance Standard, a carbon floor price and capacity payments.
The Contract for Difference approach involves a mechanisms to provide low-carbon electricity generators with long-term contracts and guaranteed prices. This insulates the low carbon generator from very low wholesale prices. It is called Contract for Difference because if low-carbon sources are more expensive than fossil fuels without carbon capture and storage (CCS) the generators will get a higher price for the low-carbon electricity, and if low-carbon sources are cheaper than dirty fossil fuel generation (which is not inconceivable, but also not likely any time soon) they will get less. This is a sensible approach which will support renewables, CCS and new nuclear.
An Emissions Performance Standard, which already exists in California, limits the permitted level of greenhouse
gas emissions from any new power plant. The Government has proposed a level (450g CO2/kWh), which cannot be met by a coal station without CCS, but can be met by a new gas station without CCS. So there is a danger that this will encourage another ‘dash for gas’. Gas stations emit only around half the greenhouse gases of coal stations per unit of electricity. But they aren’t low-carbon enough: about four times as carbon-heavy as nuclear stations and sixteen times as carbon-heavy as wind. The white paper states that:
“It is clear that fossil fuels without CCS, especially gas, will also continue to have a key role to play in the coming years.”
The carbon floor price is not new: it was announced in the Budget this spring. It will start at £16 per tonne of carbon in 2013 and move to a target of £30/tonne in 2020. A floor price will be more effective than the EU emissions trading scheme has been without a floor price. But that would not be hard, and it’s unlikely that a price of £30/tonne (assuming the target is reached) would be enough to channel serious investment into low-carbon options.
The capacity payments will give money to generators simply for having capacity available, whether or not it is actually used. This is intended to ensure that there are power stations available to ‘keep the lights on’ when intermittent sources are
not generating much: the sun isn’t shining and the wind not blowing (or blowing too hard). Again, this will favour gas
stations, since these can be turned on and off more easily than coal or nuclear stations can.
So another dash for gas is a real danger. To be fair, DECC has announced that a grant will be made for a gas CCS
project, and secured money in the spending review for this. However, that will be just one project and the government is giving planning consent to many new gas stations without either CCS or combined heat and power (as its Labour predecessor did).
There is some encouraging text in the white paper about demand-side projects like electrical energy being allowed to
bid into the capacity mechanism. DECC is also prodding Ofgem to ensure better liquidity in the market, which sounds very nerdy but could mean that smaller generators and suppliers can compete in the market.
The renewables roadmap is an encouraging document. It begins by stating that the government’s aim is to meet the UK’s target under the EU renewables directive, which is to get 15% of total energy (electricity, heat, transport fuel) from renewables by 2020. Last year the UK got 3.3% from renewables, so a fivefold increase in a decade is needed. The government should be commended for sticking to the target, even though the Conservatives are no fans of EU rules and regulations and right-of-centre think tanks such as Policy Exchange are arguing that the renewables target should be renegotiated.
The document lists eight technologies that will help the UK to meet the target, but puts particular emphasis on offshore wind, promising 18Gw of offshore wind by 2020. (The UK currently has 1.5 Gw of offshore wind in operation and 2Gw under construction.) The political attractions of offshore are obvious for a government which favours localism and has most of its parliamentary seats in rural areas. The NIMBYs don’t live offshore. However, offshore wind farms are more difficult and more expensive to construct than are onshore ones. The government is setting up a task force with industry to identify ways to bring offshore costs down. One obvious starting point would be to build some ships to take the turbines out and instal them. There’s a major global bottleneck in the supply of such ships, and the UK does have some history in shipbuilding.
Land-use planning is the main reason why the UK has done so badly so far on renewables. Other important reasons are lack of access to the electricity grid (and in some places, notably mid-Wales, lack of a grid to access) and lack of regulatory stability, which puts up the cost of capital for investors. The SNP has done well on the electricity grid by giving permission for the construction of the Beauly-Denny line down the centre of Scotland, so the UK and Welsh governments should follow their example.
On regulatory stability, the UK has been damaged by the ongoing debate between the renewables obligation and the German-approach of a Feed-in Tariff. Ed Miliband appeared to end this discussion when he was Energy Secretary and accepted that the two approaches could be combined: renewables obligation for large infrastructure and feed-in tariff for small. The coalition initially said that it would stick with this approach, then re-introduced all the regulatory instability in proposing the contract for difference approach. The roadmap does recognise the danger and proposes transitional arrangements. All existing capacity will continue to be eligible for renewables obligation certificates, at the rate in force when they were constructed. Once the contract for difference feed-in tariff is operational, developers will be able to choose whether to have the obligation or the feed-in tariff, until March 2017 when the renewables obligation will end for new capacity (but continue to be paid for installed capacity). It isn’t clear whether these measures will be sufficient to deliver regulatory certainty, but the government has at least sought to address the problem.
An essential means to maximising regulatory certainty and increasing the chances of meeting the 2020 target is
to avoid unnecessary delays. The electricity market reform will be implemented through primary legislation, so has to go through Parliament. This is clearly unavoidable, and is anyway welcome. And the fact that there are no significant cross-party differences on energy makes serious delay unlikely. However, there are also several references to ongoing or future consultations in the roadmap. Consultations do often cause unnecessary delay. Charles Hendry, now Energy Minister, has an excellent soundbite in opposition: he accused the Labour government of “the Jungle Book vultures’ approach to consultation”. One can only hope that in office he isn’t succumbing to a similar approach.
The main weakness of both the renewables roadmap and the electricity market reform white paper is the lack of
articulation of the potential role of local government. In August 2010, Huhne announced that local government would be allowed to sell renewable electricity – they had previously been banned from selling electricity so that they would not ‘complicate’ the privatisation of the CEGB. And earlier this month, Huhne met with new electricity suppliers, including Co-Op Energy and renewable generators such as good Energy and Ecotricity. He said after that meeting “we need more suppliers”. He’s certainly correct in that: the UK electricity market is totally dominated by the ‘big six’ (Centrica, EDF Energy, Eon, RWE npower, Scottish Power, Scottish and Southern). In other parts of Europe, notably Germany, Austria and the Netherlands, and in parts of the US and Canada, local government is a major player in both energy efficiency and energy supply, as our Repowering Communities book (now published by Earthscan) explains. Local governments, community organisations and co-operatives are achieving many admirable things, helping overcome local opposition and – because they do not have to pay shareholders – able to charge lower tariffs. Yet knowledge of these examples among UK policymakers is pretty thin on the ground. As is too often the case, the view here is that once someone has a bright idea the Brits have to re-invent the wheel.
Chris Huhne spent six years as a member of the European Parliament, so can’t fairly be accused of this attitude.
The other DECC ministers also seem conscious that the UK has much to learn from other countries. So with luck the plans to help UK local government to become energy and climate leaders, learning the lessons of their continental and North American counterparts, are under preparation by DECC officials and will be published soon.