Electricity Market Reform (EMR)
To start with
the leading star of the bill, EMR, which is lauded as a bill to attract £110b
of investment to replace our ageing electricity generation capability, upgrade
the national grid, and ensure that we can cope with rising electricity demands.
Now straight away the idea that by 2020 we will have developed and implemented
a smart grid capable of serving our energy needs and able to cope with the
transition to low-carbon energy generation is, in my opinion, optimistic to say
the least. What’s worrying is that the
bill claims to be a one stop fix for every ill that the energy industry faces.
If we break
down the EMR it details six provisions:
·
Contracts for Difference (CfD).
The showpiece of the EMR touted as instruments to provide
long-term stable and predictable incentives for investment in low carbon
generation. These contracts give energy companies fixed guaranteed prices, which
should be above the standard, for each unit of low-carbon energy generated;
this guaranteed price will be known as the strike price. Now the aim of the CfD
is to negate the risks that may otherwise deter investors; low-carbon energy generation
is commercially expensive and the payback without incentives would be lengthy.
OK to try and explain thinks lets think if someone asks a
farmer to grow some organic veg, the farmer may so no as the cost to set this
up are high. But then if someone was to say to this farmer, I will pay you ten
times the going rate of normal veg for your organic veg. This would give the
farmer the assurance that he will get his money back and then make healthy
profit, CfDs work in the same manner.
Now the CfD will apply to all methods of low-carbon
energy generation; not just renewables but nuclear too, which could hugely
benefit a stumbling UK nuclear renaissance. This is a two-fold point of
contention, firstly it could stifle renewable development, especially smaller
firms, in favour for nuclear, and secondly that government had previously
pledged that there would be no subsidies for nuclear power.
I believe that the CfD doesn’t go far enough in promoting
growth in the renewables sector, and especially in relation to developing
technology, it may encourage certain areas but these may not be best placed.
For example if an energy company, say Windalot, want to develop low yield wind
farms in non-ideal locations the CfD could possibly make this feasible, if the
strike price is high, which would not be the best use of resource. The same
would be if it encouraged further misplaced resource in installing low
efficiency solar panels in a country which receives minimal sunshine...
The other issue of a government u-turn on nuclear
subsidies is only really a shock if you have never looked into the nuclear industry
before. Factors involved with nuclear development, which includes the complex
construction, management of nuclear waste, and most costly safety, means that the
sums don’t balance without some sort of incentive. The government has always
supported nuclear in one way or another despite ever increasing costs; the idea
of that support not being there for the future was always farcical.
The CfD may help boost an uncertain renewable industry
though the benefits should be well managed to ensure that the most appropriate
technologies profit. They will also be a help to the floundering nuclear
industry, which has faced ever more uncertainty over the past year. It also may
help to keep the lights on if it boots energy development. However as the
strike price will not be set until 2013 and implementation started in 2014,
uncertainty may again deter the correct level of investment the industry
desperately needs.
·
Final Investment Decisions (FID) or
Investment Instruments.
These tools are there to plug the gap until the CfD come
into force, with the hope that they will bring forward investment. The scheme
aims at providing significant support to key low carbon projects that could be
delivered over the next two years, however this is at the secretary of state's
discretion. More detail on how this will work is still needed and RenewableUK has
urged developers to enquire if their renewable projects may be eligible. So
FIDs while being lauded as an early incentive to encourage development, their
applicability is yet to be known causing further unease with developers, which
may nullify any potential benefit before CfDs.
·
Capacity Market.
The capacity market works on the premise that the
government set out a prediction on the demands for electricity over a period of
time and the capacity needed to ensure consistent supply. Providers old and new
will be invited to bid for contracts to supply capacity, which will take place
4-5 years before the capacity is required. Upon winning the bid providers will
enter a capacity contract, which will pay the costs to cover their capacity in
the delivery years, if they cannot provide capacity they will face penalty
fines.
A worrying area of the policy however is the section
where wind power is labelled inconsistent and nuclear generation less flexible,
a very sweeping statement indeed, and the fact that it also points to gas
compounds my worries. Properly located wind farms have proven to be very
predictable in their generation output and nuclear power stations are designed
to provide constant base loads. The policy points to fossil fuels as the answer
to peak load capacity needs, when we should be developing other methods, along
with a smart grid, to cope with these peak loads. The move away from fossil
fuels needs to be undertaken at some point so why not start developing the
technology to deal with this now.
·
Conflicts of Interest and Contingency
Arrangements.
These arrangements are in place as the government will
entrust the operation of the EMR to a private company: the National Grid. The
bill will outline powers that allow the government to intervene were there ever
a conflict of interest between parties. So if the National Grid tried to
implement the EMR in a manner that favoured themselves but not the interest of
the country, or in line with the objectives of the EMR, then the government has
the power to intervene. Whether the government would intervene is another
matter as historically they have favoured business over the well being of the
country; we only have to look at a failed car industry to notice that. So think
of the government as Judge Dredd... they are the law... they have the power to
put a stop to anything...if they see fit.
·
Renewables Transitional.
This sets out how the transition from the current system
of Renewable Obligation (RO) will transfer to the new CfD. Existing operators will
be able to choose between the CfD and the RO; and for all new operators, as of
2017, only CfD will be available. So effectively giving existing operators the
choice of what they see as more of a profitable option going forward. The
government also hope this will negate any negative impact to investment while
the CfD is implemented. Those operators that choose to go down the RO route
will receive the full 20 years’ support as promised when taking out the RO. The
2017 date may also be flexible if projects are delayed for reasons of force
majeure.
·
Emission Performance Standard (EPS).
The EPS is in place to prevent the construction of high
emission power plants, with the hope of putting an end to polluting fossil fuel
fired plants that do not conform to the emission standards, particularly coal
fired power plants. It still allows the construction of fossil fuel fired
plants that conform to the standard so still leaves the door open for plants
that use the, currently fictional, Carbon Capture and Storage (CCS) technology
and low emission gas fired plants. Here I’d say the EPS does not go far enough
and should push more towards zero emissions from power generation and not leave
the door ajar for fossil fuels...but it’s a start we’ve all waited for for a
long time and for that we can be a little grateful.
The Rest of the Bill
Along with the EMR the Energy bill is also
made up of the following sections that further detail the reforms:
·
Strategy and Policy Statement (SPS)
o
The
SPS will try to ensure that the regulator, Ofgem, and the Government are both
heading in the same direction. It’s hoped that it will further clarify the
roles of the regulator and the government to ensure that the regulatory changes
and development of the energy sector are prioritised correctly. A sort of
instruction manual for the energy bill to ensure that is operated correctly...
let’s just hope that it’s easier to follow than your average instruction manual!
·
Nuclear Regulation
o
The
government has introduced Nuclear Regulation, which gives the currently-interim
Office for Nuclear Regulation (ONR) statutory footing. As the civil regulator for the nuclear
industry in the UK, and an agency of the Health and Safety Executive (HSE), the
ONR is responsible for the safety and security of civil nuclear activities and
administers nuclear licenses on the HSEs behalf – a role previously undertaken
by the HSE Nuclear Directorate and Department of Transport’s Radioactive
Materials Transport Team.
·
Government Pipe-Line and Storage System
(GPSS)
o
The
GPSS was created to provide a secure oil distribution network for the UK at the
start of World War Two in 1939. As the years have gone one the network has
extended and developed to now cover approximately 2500km of pipe-lines and numerous
storage depots, pumping stations and associated sites. The GPSS provides links
around the country supporting major airports and Ministry of Defence (MoD)
sites and is currently managed on behalf of the government by the Oil &
Pipelines Agency, which is a public corporation sponsored by the MoD. The
Energy Bill outlines the plan to sell off the GPSS to private investors as it is
that government ownership is not necessary to ensure the requirements of the
MoD. The same old argument will surely arise however that if you sell a
commodity to a private firm then there focus will be to make money so the
impact on the MoD and civil airports etc. may be significant, though the
government is keen to play any potential impact down. The fact that we own very
little of our own infrastructure does not seem to concern the government...
·
Miscellaneous
o
The
aptly titled misc. section, which actually refers to a section on Offshore
Transmission. This bit of legislation will allow developers to transmit electricity
form an offshore source to the onshore grid without the need for a licence.
Currently the Electricity Act 1989
prohibits this, which is a significant barrier to an offshore power grid and
development of offshore power generation as some electricity transmission is
seen as necessary before commissioning equipment. Again, a step in the right
direction but bizarrely hidden in the footnotes.
So that is
the Energy Bill summarised, well to a certain degree anyway, although there is
still a lot of uncertainty surrounding it which may impact on the effectiveness
of the bill. After its unveiling it
received widespread condemnation for not going far enough in providing
assurance and direction for the energy sector. The biggest worry was the
promotion of gas fired power plants as their inclusion in the bill could lead
to development in the wrong direction, towards a fossil fuel future. I agree that
to meet emissions targets and to continue to power the country we need a
mixture of nuclear, renewables and, if it can work, CCS, but we should not
direct investment towards a continuing reliance on a depleting resource that is
damaging to the atmosphere and largely dependent on foreign import. I know some
people will say shale gas can provide a viable and reliable supply but
extraction methods are questionable to say the least and the associated emissions
may be more harmful than coal fired plants, not to mention our resource of
shale gas is small at the very best.
The Energy
Bill may be a good start, though may be fatally flawed by one
sentence in Annex D that could render the Energy Bill potentially useless
in its promotion of low carbon energy, “Exceptions: power to make exceptions to
maintain energy security”. This exception could be used to override the bill and
enable the construction of the dirtiest of power plants if they can be deemed necessary
to maintain energy security; a get out of jail free card for the greenest
government ever.
The full two
part entry has been published at the developingengineers
blog.
Follow me on twitter @LMY1985.
