Wednesday, 3 July 2013

Energy Policy: Reductio Ad Absurdum

It is hard to know where begin a post on UK energy policy just now, though I feel vaguely obliged to try.  Last week there were flurries of straws in the wind, adding up to what ought to be unavoidable recognition of the failure of the programme initiated by Ed Miliband when in power as Energy Secretary.  His predecessor, John Hutton, was considerably more realistic but Miliband adopted a fantasy green agenda - arguably, part of Gordon Brown's overall scorched-earth strategy which we wrote about at the time - and with very few modifications the coalition swallowed it whole.

Now we have an updated forecast of reserve capacity which shows we can easily be up the proverbial creek by 2015 - no news to anyone reading C@W, I realise - and Ofgem scurrying for short-term fixes.  Cue hysteria in the mainstream media (save for a curious silence in the Guardian).

The government and regulators will, of course, succeed in preventing large-scale black-outs, and probably even rolling brown-outs, although there could well be the odd isolated incident.  How will they do this ?  By throwing money at the problem, of course, because no politician will ever allow the lights to go out.  Switching off large industrial customers, revving up diesel generators, paying the owners of mothballed gas-fired power plants to re-commission them, prolonging the lives of old nukes a bit - it isn't even very difficult.  But it is far more expensive than it should be, and we shall all pay for it.

Perhaps - just perhaps - someone will also quietly finish off DECC's mad green + nuke agenda: because that is what all this ad-hoccery amounts to. The real problems are going to happen 2015-2020, when both Cameron and Miliband both hope to be holding the reins.  So we might hope for a bit of belated realistic policy-making from now on.

They seem to have got the bit between their teeth on shale gas - (which, by the way, will bring forth the most astonishing amount of green fury).  Some reckon that Ed Davey has lost faith in EDF's ability to come up with the nuclear goods, and not before time: EDF have given enough compelling evidence of their uselessness. Michael Fallon, the new safe-pair-of-hands energy minister (actually, minister for just about everything, it seems) seems pretty robust and clear-sighted.  But he bullshits like the worst of them, and it's worth a few minutes to watch him in action against Andrew Neil (second item in this programme) - who asked a bunch of the right questions but allowed himself too easily to be fobbed off with Fallon's confident sophistry and bluster

It would be fun to fisk the whole interview but, sorry, I just don't have the time.  Or energy.  Sorry.

ND

18 comments:

rwendland said...

ND, I'm unclear on how much of the current lack of investment in new gas plant is down to huge uncertainty over the amount of nucs to be built. Do you have an insight on that?

Currently the possibility is that the 3 nuc builders will build somewhere between zero and 18GWe of generation capacity - at the high end that's the majority of UK baseload, leaving little space for others who need to generate overnight for the ROI case.

Although it will take ~10 years for the first to come onstream, and probably ~25 years for all, it still seem likely a big consideration for a new 20 year life gas plant ROI.

To clear this uncertainty logjam, the govt needs to come clean on how much subsidy and risk capital guarantees will be allowed for the nucs, both for EDF and the other 2.

The 3 possible nuc builders:

EDF: 0 to 6.6GWe (upto 4 EPRs @ 1.65GWe at Hinkley and Sizewell)

Horizon/Hitachi: 0 to 8.1GWe (upto 6 ABWRs @1.35GWe at Wylfa and Oldbury)

NuGeneration: 0 to 3.6GWe (3 AP1000s or 2 EPRs near Sellafield)


NB, an aside. As UK peak demand is only ~2 hours a weekday in winter, it strikes me measures like revving up the standby diesel generators for these peaks shouldn't be as expensive as some suggest. Am I wrong there?

Nick Drew said...

current lack of investment in new gas plant - down to huge uncertainty over the amount of nucs to be built?

no, I don't think so: I have worked on a couple of potential projects recently (ones with S36 consent, where the licence-holders are seriously assessing whether to go ahead) - and nuke uncertainty (which, incidentally, in the medium-term is as much about life-extensions on the existing fleet) isn't in the top 3 concerns

these are

(1) spark-spread, currently negative most of the time, and potentially suppressed for a long time if German experience is anything to go by, and US shale exports are not forthcoming soon-ish
(2) uncertainty over how / if the EMR Capacity Mechanism will work, and how it will interact with the commodity market: but a feeling that the longer the 'investment strike' goes on, the bigger the 'bribes' will be to build new ones (and take moth-balled ones back into service)
(3) inability to get project finance, which is of course largely a function of 1 + 2

the only full-sized CCGT project given the actual go-ahead in the past 2 years (3?) is ESB's @ Carrington. But ESB is state-owned, so this not really representative of the market as a whole

Diesel - well, peak-shaving costs are often high on a per-unit basis, but absolutely small in the overall scheme of things. The endless optimisation challenge of how demand-spikes are most cheaply met is a difficult one. There is no doubt that demand-side response has a role to play. Turning up rolling reserve can be very cost-effective. I think the issue is that we are no longer looking at peak-shaving a handful of times a year and more like a routine operation. Suddenly, sub-optimal measures will start to cost a lot of money. Germany is a horrible warning on this.

I really can't believe routine use of diesel is optimal. It is, however, easy! And then there's the emissions ...

Clive said...

Yes indeed, was fantastic to see Michael Fallon taken apart by Andrew Neil. Normally these political shows are brainless, but some researcher had the nous to look up on the National Grid's website the generation mix for a couple of days. Negligible wind last week but guess what, the baseload remained the same. It was of course met be King Coal, the nukes and gas.

So Fallon waffled and, as you say Nick, BS-ed about how when the wind does blow it's all okay and we shouldn't read too much into a June day when it's nice an sunny.

At which point I almost squealed with delight as Andrew Neil pulled up another day's chart from March (which was unseasonably cold)... a March day when, ah-hem, the wind didn't blow then either.

Again, you're spot on Nick, there's a couple gigawatts at the very least of non spinning reserve, mostly oil, some co-gen gas, a smidge of diesel. All of which can be brought back into service given a lead time of a few months or so. And the nuke end-of-life is just a paper exercise and can be reversed / stalled at (political) will. And industrial use peak lopping is par for the course, they get this reflected in their tariff.

But yes, someone (oh, that someone is me isn't it ? at least in part...) will have to pay.

What's even worse is that in this matter, all the politicians of all the political persuasions have shown themselves to each be as bad as the other.

Next time, can I vote "None of the Above" please ?

Clive said...

@rwendland said...

Yes, the diesel (and the other off-line installed generation capacity) can be brought online relatively quickly, certainly in time for the Winter peak.

It is though horribly, horribly expensive -- far too expensive to be kept as spinning reserve. Even ignoring the cost, the equipment isn't designed to be used for long (as in weeks and weeks of continuous use) periods. The capital equipment operational life is usually less than 10 years in normal "sporadic" use... that drops further in constant, flat-out, use.

Like I mention above, it's possible, it may even be necessary... but at a cost.

Electro-Kevin said...

I dread to think of the brain-drain that is going on at the moment re energy technicians.

I expect we'll hire them back freelance on mega spondoolicks.

rwendland said...

BTW National Grid are quite sniffy about the OfGem report that kicked this all off, they seem to imply OfGem (IMO) is arse-covering and over-emphasising the worst-case:

“We have been working with DECC and Ofgem to consider what measures we can take and are proposing two new balancing services to help us manage the day to day operation of the power networks. We are consulting on these two services with the industry. This does not mean that disruption is imminent or likely, but Ofgem, DECC and ourselves believe it appropriate to consider what measures could be taken in case margins deteriorate further”.

I was reading somewhere that backup diesels are much more reliable in an emegency if run for a few hours every month. So I think orgs with big backup diesels are quite keen to sign up to the National Grid Short Term Operating Reserve, as it pays for firing them up now and again. Still v.expensive per MWh, but if only for 5pm to 7pm weekdays on windless winter evenings, in the big scheme of things a small cost to the Grid. Not clear it is worth getting too excited about.

BTW EDF stated last year it it expects 7 year life extensions on all the old AGR nucs, including the already life-extended ones. So that is going to hit later than most of the think-tank projections are assuming. Of course there is still the risk of something going wrong causing a fleet wide shutdown, which would be difficult for the National Grid to handle.

Demetrius said...

As someone with a long interest in disasters and catastrophes they are many and various, more predictable and less so etc. What is the case with this one is that so many of us have seen it coming. The real worry us beyond the actual power but in the highly complex interconnected supply, distribution and communication systems that underpin all our lives.

Clive said...

@ Demetrius

The problem for me (and this isn't a CU post on the blog so I'm safe in saying this) is that we've had 20 years of a policy (that's a very generous terms for it) that goes something like:

The Free Market is The Way The Only Way and The Undisputable Best Way and Can Do No Wrong and Nothing Can Be Allowed to Get in The Way of The Free Market. Ever.

In the "bad" old days of the CEGB and the regional boards (it was before my time by my dad worked there, so I know it was NOT a panacea but I can understand the strengths and weaknesses of the arrangement) there was up to 10GW of surplus generating capacity. This could be substituted as input material prices ebbed and flowed. And it provided redundancy.

But now we have The Free Market. The Free Market believes that any single megawatt of excess capacity isn't "lean" and a "waste of resources and capital". So we're, naturally, tending towards zero "float" (excess capacity) because no-one wants to pay for it.

Like I say, I'm not ignorant of the inefficiencies of the system pre-privatisation. But when the bill for the marvellous Free Market solution finally comes in (and yes, someone will need to make allowance from the green nonsense; that's not the market's fault) it will be I'd wager higher than was the case under the old "inefficient" CEGB. Oh, and (apart from the strikes :-) ) the lights never went out.

Nick Drew said...

Clive, if you want to have a bash at the market you are most welcome to use our comments pages - but you have to take on me as well!

you say you know about the inefficiencies so I don't need to wheel out my extensive fund of outrageous monopoly-company gold-plating stories. Free-marketeers know all about the need for reserve capacity, in any aspect life, not just in business and not just in energy. But optimising excess capacity isn't easy - going right back to the Dutch who needed to figure out how high to build the dykes - the trade-off between higher capital expenditure now and higher costs later.

It does deserve optimising, though, because it's our bloody money: and the old nationalised-industry rule of thumb - "if in doubt, build three" - just ain't acceptable: there is a cost-effectiveness test for everything

I am adamant that the free(er) market in gas and power worked wonders in shaking out genuinely wasteful excess capacity. But I'm the first to agree (a) it could go too far (though as noted above this is difficult to calibrate); (b) while it's fairly easy to see one-way gains in gas, with electricity the whole picture is clouded by the policy overlay of the decarbonisation agenda

It's exceptionally difficult now to disentangle what might be cases of yer actual market failure, and what is just crass green policy-making and wishful thinking. Here's a great example of someone whose brain fundamentally lacks syncromesh: Vince Cable, in a government paper that came out under his name in 2010:

A key cause of market failures in green infrastructure is the inherently risky nature of the investments ... key sectors of the green economy lack a track record of performance. Uncertainty can exist around construction costs, technology reliability and performance

Most people would say avoiding 'investment' in that type of thing is just good business-sense !

Clive said...

But Nick, how do you propose to prevent against fraud ? Assuming for a moment one of the bulk suppliers is interested in maintaining "spare" capacity, they naturally want to get the maximum return on that asset. And since they gain only when it is called into service, there is an incentive to provoke circumstances where the grid has no alternative but to buy from the supplier. Doing an Enron, in other words.

Of course, they'll (possibly) get found out eventually. But that can take a fair old time. Very tricky to spot though.

Budgie said...

Clive and ND - we do not have a free market in electricity supply.

It is not a case of a bit of pesky green agenda on the side that distorts the functioning of the market, the whole thing is driven by, imposed by, government interference.

Yes that is largely driven by the CAGW agenda but it is the dreadful, demoralising, enervating, stultifying effect of the government control itself that does it. Believe me - I know about governmental control.

Nick Drew said...

Budgie - don't I know it ! It was getting to be quite good 2000-2007ish but has taken many knocks since; and if/when the Energy Bill becomes law, the last vestiges are gone

Clive - there used to be all sorts of outrageous gaming (fraud is an ugly word ..) under the rules for how the England & Wales 'Pool' system recognised & remunerated capacity 1990-2001

but the planned Capacity Mechanism will reward capacity directly, i.e. there will be capacity payments (as well as payments for electricity qua energy produced)

(and, incidentally, there are already various types of capacity-type payments made under the STOR system and other tools of grid management which you can look up on the National Grid website: I don't know that fraud is considered a big problem)

so the precise type of fraud you envisage shouldn't (shouldn't) happen - but there will be other highly dubious gaming without a doubt

there are two big capacity-payment mechanisms in existence: New England (which seems to work OK, but it's still early days) and the two western Russian grid zones that are the most market-oriented - which does NOT seem to work OK at all ...

who knows what the UK model will be ? they are 'consulting' on the details as we speak

Blue Eyes said...

Clive, if you are worried about anti-competitive behaviour (as we all should be, all the time) then you should be arguing for better competition policy in the industry (and all others!) not vertical integration and nationalisation.

There is virtually no industry yet devised by humankind which can be run better by central planning than a properly-functioning market.

hatfield girl said...

@Clive and @Blue
Is it the politics of power supply or technical aspects of power supply being discussed? Control over the power supply has been at the centre of UK politics since Heath - well much longer than that of course but subject of immediate political manipulation for control since then.

But wouldn't central planning be technically ideal for power supply and technical choice of mix?

Nick Drew said...

HG - Clive & BE will no doubt give you their own answers, but mine is this:

putting aside the politics of power and Power and central control(Communism = Socialism + Electricity etc) ...

The ethos of central-controllers is exactly that only 'optimisation' by a central planning agency can efficiently allocate scare resources - both in terms of hour-by-hour despatch of power, and making longer-term investments

and, a priori, this can be made to sound very logical

but in practice the efficacy of central planning mysteriously turns out to be inferior to bilateral trading arrangements in an open, competitive market - which is of course an entirely different paradigm and mind-set in every respect: left brain (theorising, grounded in abstractions) vs right brain (empirical, grounded in reality)

I could elaborate at enormous length, both conceptually and (perhaps more tellingly) based on hard experience. The differences in results are often much more extreme than centralisers believe possible: they are strongly inclined to believe that bilateral trade cannot be the basis of a complex system like a gas or power grid at all, never mind more efficient - the efficiencies, when they are realised, leave them stunned (how is this possible ?

I'll make just two more points:

(1) one of the clues lies in the words "efficiently allocate scare resources". Central planning = monopoly, and monopoly in something of high utility value (& there's nothing higher than electricity) = no-such-thing-as- scare-resources! The Central Controller (sic) of the old monopoly British Gas once said to me over a beer: I don't understand - we're safe, we're reliable: what's the problem ? The idea of cost-effectiveness never occurred to him, notwithstanding all his linear-programming optimisations

(linear programming - a very apt phrase for such a man)

(2) while I can point to excellent examples of very large, very timely long-term investments being made by 100% private money with no subsidies and stimulated by response to market price-signals + ordinary business judgement (new UK gas import facilities 2000-2010 being a magnificent case-study) ...

... I must acknowledge there is a phenomenon of investments being made in assets that are easiest to finance. On a good day this coincides well with some God's-eye view of what 'optimum mix' might be. On a bad day there can be divergence.

But this is a detail to ensure I'm not seen as blinkered: please, be aware that gigantic and enduring efficiencies have always been made when well-designed market frameworks supplant centrally-planned regimes

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