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UK energy market not reset: competition rules

By Dave Elliott

Energy and Climate Change Secretary Amber Rudd was batting on a sticky wicket when she came to launch her ‘energy market reset’ plan. A leaked memo had made clear that, far from the UK being on track to meet its EU defined mandatory 15% by 2020 renewable energy target, as she had claimed, it would fall short by around 50 TWh per year by 2020, – nearly 25% under the target. Rudd didn’t spell it out in the ‘Reset’ speech, but her options are limited: more biofuels, buying in green power and credits from abroad: ‘every-thing but wind and solar’, as the Ecologist magazine put it:

The Ecologist quoted the policy options she had as follows: ‘to maintain our commitment to achieving at least 30% of electricity generation from renewables; to meet the 10% sub-target for renewable fuels in transport; and to continue support for the deployment of new renewable heating installations after the current funding settlement ends in 2015/16.’ All of those aims are problematic: the 30% renewables target, because of the cuts in support for wind and PV; the 10% transport fuel target, because of costs, land-use and sustainability issues, with most of the easier, cheaper less invasive options (using biomass wastes) having already been accounted for in the heat plan; and the heat target, given the slow progress made on the Renewables Heat Incentive. The panic option is to buy in green power from abroad via the inter-connectors e.g. Norwegian hydro. All of this since the cost of missing the target could be huge – there would be large EU fines.

Arguably, a bit of a mess. Indeed Rudd told the Energy and Climate Change Select Committee ‘I recognise we don’t have the right policies, particularly in transport and heat, but we have four to five years and I remain committed to making the [2020] target’.                                                                                          

What is she proposing? In her ‘reset’ speech she said we need a course correction using the tools we have already developed through Electricity Market Reform. We know competition works. It keeps costs low and can deliver a clean and reliable energy system. We want a consumer-led, competition focussed energy system that has energy security at the heart of it and delivers for families and businesses. We want to see a competitive electricity market, with government out of the way as much as possible, by 2025.

So it’s all about reasserting the power of competitive markets to sort everything out: ‘clean technologies will only be sustainable at the scale we need if they are cheap enough’. That meant there would be no more ‘blank check’ subsidies: we will not support offshore wind at any cost. Further support will be strictly conditional on the cost reductions we have seen already accelerating. The technology needs to move quickly to cost-competitiveness. If that happens we could support up to 10GW of new offshore wind projects in the 2020s.’ Some sort of commitment was thus made. But it was limited: ‘If, and only if, the Government’s conditions on cost reduction are met – we will make funding available for three auctions in this Parliament. We intend to hold the first of these auctions by the end of 2016.

As for the other renewables, she said ‘when costs come down, as they have in onshore wind and solar, so should support. For instance, we have enough onshore wind in the pipeline to meet our 2020 expectations. That is why we set out in our manifesto that we would end any new public subsidy for onshore wind farms. The costs of solar have come down too. Over 8GW of solar is already deployed and even with the costs controls we have proposed we expect to have around 12GW in place by 2020.’

The implication is that the cuts and blocs will remain, subject to ongoing parliamentary battles, but with all being well since ‘these technologies will be cost-competitive through the 2020s’. She didn’t say whether that applied to nuclear but did say it, and gas, was ‘central to our energy secure future’. Nuclear was ‘safe and reliable’. Following on from Hinkley, ‘in the mid 2020s’, there were plans for ‘a new fleet of nuclear power stations, including at Wylfa and Moorside. This could provide up to 30% of the low carbon electricity which we’re likely to need through the 2030s’. But coal was out: ‘we will be launching a consultation in the spring on when to close all unabated coal-fired power stations. Our consultation will set out proposals to close coal by 2025 – and restrict its use from 2023’. It has certainly become an issue, still providing 30% of UK electricity, dirtily and increasingly unreliably: Now coal may finally go – but to be replaced by shale gas! That was urgent anyway since ‘we currently import around half of our gas needs, but by 2030 that could be as high as 75%’. Though, wherever it comes from, getting more from gas will also need some extra effort: ‘In the next 10 years, it’s imperative that we get new gas-fired power stations built. We need to get the right signals in the electricity market to achieve that. We are already consulting on how to improve the Capacity Market. And after this year’s auction we will take stock and ensure it delivers the gas we need’. So the capacity market is seen as a top-up device, not as a way to support the development of new smart grid, demand side response balancing systems.

What about longer term? Although Rudd did cite the 2020 smart meter roll-out programme as a good new innovation, she seemed less keen on some other smart energy options. She noted that some argue we should adapt our traditional model dominated by large power stations and go for a new, decentralised, flexible approach. Locally-generated energy supported by storage, inter-connection and demand response, offers the possibility of a radically different model’. But she insisted ‘it is not necessarily the job of Government to choose one of these models. Government is the enabler. The market will reveal which one works and how much we need of both’. Aren’t markets magic! Though evidently they do need a bit of tweaking at times: ‘we want intermittent generators to be responsible for the pressures they add to the system when the wind does not blow or the sun does not shine’ since ‘only when different technologies face their full costs can we achieve a more competitive market’. Sounds like a new indirect tax proposal! Or a job for smart meters…

Will it all work? Rudd’s new ‘market reset’ plan offers little respite for the beleaguered renewables industry, offshore wind apart. Even the Swansea Tidal Lagoon, featured oddly in the last budget, is stalled: its start has been put back a year to 2017, due to the slow progress of talks over how it might be funded e.g. via the CfD: and

Just pushing gas and nuclear, and dumping coal and most renewables, is hardly a new market reset. It may not even do what is claimed to be the aim – to cut cost. The Citizens Advice Bureau says the CfD block to on-shore wind may cost us £0.5bn, over the term of the CfD contracts so far awarded, since more expensive sources will have to be used to meet the 2020 target:

By contrast, Prof. Keith Barnham from Imperial College London has claimed that if the cut funding was reinstated and AD (anaerobic digestion) biogas speeded up, the UK could go nearly all renewable at low cost by 2020:

Clearly under Rudd’s approach, that’s not going to happen, and although her proposed coal phase-out was welcomed by most greens, there were some negative reactions to the rest of her plan:   and

And even more negative reactions to the government’s subsequent sudden announcement, following the autumn spending review, which allocated £250m to nuclear research and small modular reactor (SMR) development, that the £1bn Carbon Capture and Storage competition was being abandoned. Are SMRs and a bit of smart grid/storage work to be our only surviving areas of innovative effort?

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