Monday 20 October 2014

Energy: Large-scale Unintended Consequences

Wherever you look, 21st century energy policy has been hatched by people who know far less than they need to about the subject in hand.

It's sometimes necessary to disagree with the 'experts'.  Prior to liberalisation of the energy markets, the experts - all wedded to the extremely comfortable monopoly model - declared with absolute certainty that gas and electricity were inevitably and essentially matters for monopolies to control.  Not really commodities at all: something magical and different.  Competition ?  Trading ?  No, these were simply impossible.  Trust us.  We are as efficient as it is possible to be. (© Denis Rooke, 1985)

On that, the experts were utterly wrong.

But that doesn't give a licence to greenish, or green-appeasing politicians and civil servants, to announce that electricity grids can be run on windfarms and wishful thinking for zero CO2 emissions, when people who genuinely know better can prove otherwise.  Sadly this is not enough to stop them giving it a try, armed with vast amounts of our money.  But it ain't gonna work: and the harder they try, the more bizarre will be the unintended consequences.  To list a few that had already made themselves apparent a year or so back:
  • Germany, which has gone further and faster than any country (and, some would say, with the least planning) has seen record levels of expenditure on renewables, record high power prices to residential customers, and, yes, rising CO2 emissions
  • ... and, yes, rising CO2 emissions in the UK also
  • ... and around 50% of 'renewable' energy in the EU coming, not from the antiseptic, sunlit windfarms / solar farms / hydro plants of the brochures, but filthy biofuels, whose only claim to reducing CO2 emissions comes from the fact that they are deemed to do so, irrespective of the truth (which is that in most cases they don't)
And now we have the UK 'capacity market' in the electricity sector, being introduced this year to rectify the problem that in an era when no-one moves without a subsidy, no-one seems willing to build unsubsidised power plants to relace the coal stations that are closing with each passing year.  I may write on the technicalities of this 'market' another time, but for now we need simply to look at the recently published details of who are bidding into the auction process for being awarded 3-year or even 15-year wads of 'capacity payments' (i.e. standing charge contracts) for the 'new capacity' they promise to bring onto the UK grid.  

A fair chunk (by volume) of the bids are made by would-be developers of new CCGTs (large gas turbines in their most efficient configuration).  This is what the government hoped for.  But new CCGTs are costly, and unlikely to win at auction, because even more capacity is on offer from other sources, e.g. bids from companies offering to put old, mothballed CCGTs back into service (again, anticipated and welcomed by DECC).

Then come the unintended consequences.
  • one of the largest 'new build' CCGTs is in fact two-thirds already built, and starts up next year anyway, whether it gets a capacity contract or not!  (The capacity payments don't start until 2018)
  • a large chunk of the bids comes from owners of existing coal plants, offering 'new capacity' by way of eking out extended and better performance from their ageing kit
  • the biggest bidder is bloody EDF, hands out again, pretending that its long-announced life-extension projects for its existing UK nukes are also 'new capacity'.  Again, these are money-for-old-rope projects that will go ahead anyway

Needless to say, this is not what DECC or the greens initially expected from the capacity market, though the logic of it had begun to dawn on them over the summer.  The howls of outrage greeting the coal projects in particular are hilarious to hear.  Anyone could have told them: it's always cheaper to refurbish existing capacity than build new plant.

Looking back at several years' worth of C@W energy postings, I find I have invoked reductio ad absurdum several times: and it is time to roll out this venerable tool of formal logic once again.  The absurdities are there for all to see.   The logicians' answer is that the original assumptions must be wrong.  That's the correct conclusion, and one we urgently need DECC to draw.



Elby the Beserk said...

"That's the correct conclusion, and one we urgently need DECC to draw."

Well, you can forget about that, Nick!

rwendland said...

I take your point that the generator companies are manipulating things, and lobbying, to maximise subsidies and profits.

But assuming we do need capacity payments to provide a generation reliability reserve, is it really a problem that it goes to extending the life of old non-baseload kit, otherwise uneconomic? Isn't that what we need to cover the ~5 hours per day of morning & evening peak demand of around 6GW above the usual daytime demand, in the most cost-effective way? It is in these 5 hours we risk outages.

We don't want capacity payments to go to new efficient kit, which should be operating most of the day, if not baseload. The basic MW/hour price should cover building these.

NB re "Germany, which has ... record high power prices to residential customers", remember our discussion about the Eurostat data a few months back. Taking tax out of the numbers (eg most of EU changes full ~20% VAT rather than our 8%), Germany residential prices are at about EU average, and well below UK prices:

The Eurostat table of "Medium size households" average electricity prices for 2013 lists for the major countries (in Euros per kWh), and the % difference from UK price is:

0.1752 +5.7% Spain
0.1658 0.0% UK
0.1498 -9.7% Italy
0.1493 -10.0% Germany
0.1373 -17.2% EU-28
0.1333 -19.6% Netherlands
0.1155 -30.3% Poland
0.1007 -39.3% France

And for 2014H1 untaxed UK domestic prices have increased to the most expensive of the large EU countries, and German prices have fallen a bit:

0.1826 0.0% United Kingdom
0.1771 -3.0% Spain
0.1539 -15.7% Italy
0.1435 -21.4% Germany
0.1284 -29.7% Netherlands
0.1107 -39.4% Poland
0.1064 -41.7% France

These figures suggest to me the UK leccy market is not working well.

Nick Drew said...

assuming we do need capacity payments to provide a generation reliability reserve

I have nothing in theory against a well-structured capacity market, though they are notoriously difficult to get right

(this one has aleady failed by its own standards, in that it has failed to attract much demand-side response)

I'm just not sure we need one, as an empirical matter (and if we do, I'm very sure the government ain't the right ring-master: or the Grid)

if the market had been left alone, I'd say enough capacity would have come forward as a matter of course, just as (by some inexplicable miracle) it does with gas, oil, coal etc), and with electricity between 1990 and now

but the endless tinkering, and in particular the endless direct subsidies, have buggered the ordinary workings of a market - so we shall never know

developers have learned to stand back and wait for someone to throw subsidy-money at them

the EDF bids are the proof of the inanity of the thing, for me: does anyone seriously believe they weren't going to do those extension projects anyway ?

rwendland said...

Yes, I'm not sure we needed capacity payments either - there seem quite a lot of end-of-life CCGT plant built in the 80/90s that could easily be reconfigured as OCGT to run profitably for the expensive 4 or 5 hours most weekdays. My point is that if we do have to have capacity payments, I'd expect it to mainly go into retaining old plant a few years longer part-time.

I agree the long-planned EDF nuke life extensions are ridiculous claims on capacity payments. My thought is that capacity payments should have been restricted to plant that only runs 30 hours a week or less on average, ie standby levels of use, subsidising the idle time of necessary backup capacity - excluding the EDF nuke life extension which is baseload.

Nick Drew said...

they should leave it to thee & me, eh Mr W ?

Sebastian Weetabix said...

Hmm. All I remember from CEGB days is that the leccy was plentiful, cheap and reliable, all owned here in the UK, and you city parasites weren't able to 'financialise' it or otherwise rip us off through bullshit carbon trading and CFDs.

You have your work cut out to convince me privatisation of electricity, gas and water was a good thing.

Nick Drew said...

all I remember ...

that's the point, SW - it wasn't cheap!

price fell consistently all through the 1990's, unil 2004, see chart 2.1.2 here

everyone conveniently forgets! your bloody golden age of CEGB was no such thing

though it's a persistent meme, I grant you

(and don't blame carbon trading on the City: it was an imposition made by politicians. Thank the City for making it an efficient market, thereby trashing the price of CO2!)

Umbongo said...

Oh yes, those of us who lived through the 50s, 60s and 70s recall how wonderful British Rail was and the Post Office telephone "service" and, while we're about it, exchange control.
What a crock! Politicians interfere constantly in a market. The market consequently fails to work properly which provides the poor of understanding with the meme of "market failure" thereby justifying more political interference.

Budgie said...

Umbongo - you are right, it is the politicians constant direct interference with the market that causes both the problems with the market and its subsequent "failures".

"Prior to liberalisation of the energy markets .... that doesn't give a licence to ... green-appeasing politicians and civil servants, to announce that electricity grids can be run on windfarms and wishful thinking ....". But that is the point, ND, the "liberalisation" consisted solely of the government ceasing to own the means, without ceasing to directly interfere. We don't have a free market in electricity as is quite evident, and as I have said before.

Sebastian Weetabix said...

@ND: a gentleman would cut & paste, not link to 88pp of bullshit from DECC!

We have moved from a reliable public monopoly with plenty of reserve capacity to a poorly regulated private sexopoly with excessive costs that is about to fall over. Which didn't stop me having £150,000 of National Grid shares in my SIPP. Might as well line up at the trough.

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