Hurry, hurry – there is only a month left to take part in DECC’s (Department of Energy and Climate Change) consultation on proposals for UK electricity market reform. And since the outcome might shape it for decades to come, it is an unusually important listening exercise.
It might also be more genuine than most. There is nothing ideological or dogmatic about the consultation document. It is addressing genuine challenges that would be pretty much the same whoever was running the country.
The three objectives, as before, are to ensure security of supply, affordable energy bills and carbon reduction. It is, as always, a tricky balance to get right. And at present, it is the requirement to meet carbon targets that is causing the greatest angst.
According to the consultation document, on present trends, by 2030 carbon intensity will be twice as high as recommended by the UK committee on climate change, even if renewables-based power generation reaches 35% UK-wide. And by the end of the present decade, security of supply risks will have become very real. This, we are told, is because there is too much uncertainty among the investors who are required to provide the billions which will replace Britain’s ageing power generation capacity, a quarter of which will be obsolete by 2020. Hence the need to provide them with some comfort, particularly on future carbon prices.
That analysis seems reasonable. One of the big problems in formulating policy is that the lead-in times for the various technologies vary enormously. By the time they come on-stream, the market conditions could have changed dramatically. At least some of that risk has to be ironed out before the many billions go in.
The UK Government is proposing two new mechanisms – a carbon price floor underwritten by the Treasury, and a feed-in tariff which would involve long-term contracts and top-up payments to low carbon generators when the wholesale price is low. That means for all the technologies that can contribute to carbon reduction.
Indeed, the latter measure would be particularly beneficial to the nuclear industry. I could never see how new builds would happen unless there was an insurance policy against future market conditions. The recent memory of what happened to British Energy because of a brief period of low and unsustainable wholesale prices is too bitter.
These mechanisms would replace the renewables obligation which has served the industry pretty well since it was introduced in 2002. While I retain some proprietorial pride in that innovation, and the kick-start it gave to renewables, I am quite prepared to see it replaced, so long as it is by a new system that is demonstrably better. That remains to be proven through the consultation.
The other crucial condition must be that short-term investment in renewables is not blighted by uncertainty. To address this, DECC is proposing that the switchover will not occur until 2017, and that all projects established under the system of ROCs (renewables obligation certificates) will continue to work that way for their lifetime. That is fair and sensible.
Even so, however, each project developer will be doing his own calculations between now and 2017 – is it better to get under the ROC’s wire or wait for the new arrangements? As far as renewables are concerned, the fact that such uncertainty is inevitable should be a factor in determining whether or not the change is justified.
There is a huge Scottish interest in the outcome of that discussion. ROCs have served the renewables sector north of the border pretty well, and the ability of the Scottish Government to vary the regime according to specific needs and priorities is valuable, particularly in giving wave and tidal a fighting chance to prove themselves. It is important to preserve that right under whatever system of support.
It is unfortunate that the Scottish Government’s initial response to the consultation document did not concentrate on that issue of substance. Instead, we had a tediously predictable anti-nuclear rant from Alex Salmond with rhetoric against “subsidies for new nuclear power in England and Wales”, not to mention “the bottomless pit that is new nuclear power”. How to win friends and influence people…
I was amused to note that Scottish and Southern Energy struck a somewhat different tone – welcoming “a framework which encourages delivery of all of the key generation technologies needed over the next two decades – renewables, thermally-efficient gas-fired power stations, nuclear and carbon capture and storage”. But then both SSE and ScottishPower are investing in nuclear new build, though not, sadly, in Scotland.
What the UK Government has rightly recognised, as did its predecessor eventually, is that we are going to need all of these technologies in order to meet the three challenges – security of supply, affordability and carbon reduction. Scotland can aspire to a greater emphasis on renewables within that mix, but only because we have a British market to sell into.
And that takes me to the question of transmission charging. The review being undertaken by the regulator Ofgem must be seen as complementary to the EMR consultation. It is surely unthinkable that Ofgem will not conclude that the cost-reflective principle has to be abandoned, in favour of one which recognises the essential case for getting power generated by Scottish renewables in the north of the UK, to markets in the south.
My own guess is that the vast majority of that power will continue to be generated onshore rather than offshore, where the economics are still uncertain, no matter how many ROCs or equivalent are thrown at them. At some point, the relative costs of what each low carbon technology can deliver will become a much bigger issue than has been the case so far. And the feed-in tariff would help to clarify that.
These arguments all lead back to the same conclusion – that Scotland should certainly concentrate on renewables, but not exclusively so.
We too need the balanced basket of technologies, both as generators and consumers.
