Two reverse ferrets on energy policy

British journalists use the expression ‘reverse ferret’ when identifying changes in an organisation’s stance on an important issue. An important feature of a good reverse ferret is that the abrupt switch must never be acknowledged.

In the last week the Department of Energy (DECC) reversed five years of British policy in two crucial ways. First, it has abandoned any pretence of technology neutrality in sponsoring additions to electricity generation capacity and now supports nuclear and gas in preference to renewables. Second, it has indicated that gas powered generation is no longer assumed to be accompanied by Carbon Capture (CCS) by 2030.

A successful reverse ferret is usually accompanied by a decoy: a story that distracts journalists attention while the U-turn is carried out. In this case DECC allowed a minor competing story about the rate of change in wind subsidies to attract press coverage. Masterly work, at least if you don’t worry too much about climate change.

The end of the orthodoxy of technology neutrality.

In its Carbon Plan of December 2011, published less than eight months ago, DECC wrote ‘In the 2020s, the government wants to see nuclear, renewables and CCS competing to deliver energy (meaning electricity) at the lowest possible cost. As we do not know how costs will change over time, we are not setting targets for each technology..’.

This summarised the energy policy of the UK government. It would set not targets but treat each potential source of low carbon electricity equally. Whichever technology forced down costs fastest would end up as the dominant provider of electricity. That’s all changed. The ministerial announcement on support for renewables on 25th July reduced support (as expected) for wind and for large scale solar PV.  Onshore wind now gets 0.9 Renewable Obligation Certificates (ROCs) worth about £40 a megawatt hour. PV will no longer be eligible for ROCs and will have to rely on the feed-in tariff of about £68 a megawatt hour, a figure which will be cut to about  £41 by  2015. (In both cases, these subsidies will be supplemented by payment for electricity, probably at about £45 per MWh.)

Where does this leave onshore renewables compared to nuclear? Nuclear will benefit from a different form of subsidy, the so-called ‘contract for difference’. In all important respects this is a feed-in tariff disguised to enable government ministers to be able to claim that nuclear receives no direct subsidy. The Times recently reported that the nuclear industry was demanding feed-in tariffs of £165/MWh. Denials rapidly followed from both government and electricity generator and the level at which the tariff will be set will probably be around £130/MWh. This support will continue for several decades.

Total payments for low-carbon electricity

Onshore wind £95/MWh
Solar farms £123/MWh (falling sharply to around £96 by 2015)
Nuclear £130/MWh

 

Nuclear power is going to be subsidised far more heavily than low-cost renewables.. This may well be a logical decision by government. Without baseload nuclear power, guaranteeing electricity supply is going to be very tricky. But let’s be clear: nuclear is going to receive a higher rate of financial support, guaranteed for longer, than the currently lowest cost renewables. In order to make the nuclear renaissance happen, we now see huge subsidies to draw in EdF and Chinese money. Financial neutrality has gone. We now have an industrial policy that incentivises one technology against another.

Support for gas

Until a few months ago, government policy documents routinely asserted that almost all electricity production would be low-carbon by 2030. The amount of CO2 emitted from power stations would have to fall to an average of a fifth or even a tenth of current levels. If gas or coal were used, they would have to be accompanied by CCS. The December 2011 Carbon Plan said ‘Fossil fuels without CCS will only be used as back-up electricity capacity at times of very high demand’.

That commitment has gone. The 25th July ministerial statement said ‘We do not expect gas to be restricted to providing back up to renewables’. If gas remains cheap ‘we expect it to continue to play a key role ensuring that we have sufficient capacity to meet everyday demand and complementing relatively intermittent and inflexible generation’.  It is only ‘in the longer term (that) we see an important role for gas with CCS’. The statement didn’t admit this, but the carbon targets for 2030 have in consequence been abandoned.

Accompanying the new explicit support for gas was a nice sweetener for the offshore exploration industry. A fund of £500m was announced to back investment in less financially attractive gas fields. We should put that in context. The current support regime for marine renewables is expected to provide £50m for wave, tidal and offshore wind R+D over the next four years. In other words, offshore renewables will get one tenth the help given to offshore gas.

That’s how it stands – high and guaranteed support for nuclear and subsidy for gas. Renewables are to have financial help withdrawn. These extraordinary reverse ferrets were largely ignored by the press, which focused on whether the UK Treasury or DECC ‘won the battle’ over the precise level of support for onshore wind. Did Chancellor Osborne or Energy Secretary Davey beat the other into pulp? A great tactic from the DECC press office, ensuring that a minor skirmish attracted attention while huge policy changes were left unnoticed.

 

  1. Mark Brinkley’s avatar

    Chris,

    I thought the point of CFDs was to guarantee a minimum price paid for nuclear electricity, rather than setting a subsidy level as with ROCS and FITs. And the last I understood (thanks to Alan Whitehead) was that the CFD price is going to be around 16.5p/kWh. As no new nukes will be on line for many years, it remains to be seen if this is ends up being a subsidy or not.

  2. Casey Cole’s avatar

    Chris,

    Won’t large scale wind also be able to take up CFDs? In other words, whatever is negotiated for nuclear will have to apply for wind.

    Para 1.35 in the RO banding review:

    “After the introduction of the new FiT CfD scheme (the first contracts for difference are expected in 2013 or 2014), new renewables developers will have the choice between support under the RO and support under the FiT CfD, until the closure of the RO to new generation, including additional capacity, from 1 April 2017.”

    So while CFD is unarguably a support mechanism for nuclear (all DECC protests to the contrary), it’s an equal benefit for large scale renewables.

  3. Chris Goodall’s avatar

    Casey,

    Like you, I understood the CfD regime to be intended to be technology neutral. This feature appears to have been dropped – perhaps accidentally. The proposed support levels for wind and for solar at mid-decade are now well below the minimum necessary CfD levels for nuclear. So if wind and PV were to be included in a universal CfD regime the payments would represent a substantial increase on today’s proposed levels. Having cut onshore wind support to 0.9 ROCs (about £40/MWh) I don’t believe DECC is going to include wind in a universal CfD scheme in five years time that would dramatically *increase* the degree of subsidy.

    Chris

  4. Chris Goodall’s avatar

    Mark,

    DECC officials will always deny that the CfD regime is a ‘subsidy’. However I think this is playing with words. Offering a high and guaranteed price for anything is, in effect, a subsidy. ROCs and FiTs are also subsdies. The point I was hoping to make in the article was that the prospective CfD rate for nuclear implies a much higher subsidy than for renewables, which is a reversal of previous neutrality.

    Chris

  5. Pete Larson’s avatar

    A few points I think it worth noting:
    1) “Financial neutrality has gone”: it’s odd that you raise this in relation to nuclear, having just discussed the RO. Financial neutrality went when the RO banding was introduced – not all renewable technologies receive the same support. It’s particularly relevant as off-shore wind – the only renewable technology that can be deployed at a scale similar to nuclear – receives 2 ROCs per MWh, i.e. twice the support that onshore used to receive.
    2) “Where does this leave onshore renewables compared to nuclear? Nuclear will benefit from a different form of subsidy, the so-called ‘contract for difference”: this is misleading. The CfDs are for all low carbon technologies including onshore and offshore wind, CCS and nuclear. CfDs are not just for nuclear. By the time nuclear comes onstream (early 2020s) new renewable projects will not receive the RO, they will also get CFDs (from 2017 onwards the RO is closed to new entrants).
    3) It’s impossible to know at this stage what the CfD for nuclear will be. Firstly a thorough cost discovery process has to be run where DECC will scrutinise all costs put forward by developers. Secondly until the CfD life is established (i.e. how many years the payments will be made) there’s no way of knowing the £/MWh figure. You say “Nuclear power is going to be subsidised far more heavily than low-cost renewables”, and whilst it’s true that nuclear projects may get higher strike price than low-cost renewables, it’s highly unlikely that they’ll get a higher strike price than high-cost renewables (i.e. off-shore wind). Given we need a significant amount of offshore wind to come anywhere close to our renewables and C reduction targets, nuclear will therefore not be the most expensive generation on the system, so the consumer will be better off than otherwise.
    4) “I understood the CfD regime to be intended to be technology neutral” – this is your misunderstanding, as it was never the intention to be technology neutral in the early stages of the CfD mechanism. As the RO is not technology neutral it would be a retrograde step to replace it with a scheme that was more broad in its technology scope and then less sophisticated at the same time. The EMR consultation document (December 2010) talked extensively about “differentiation in support to low carbon technologies” and “technology specific auctions” with the intention of moving to technology agnostic auctions at a later stage (not something that could be achieved through the RO). Later publications (the EMR White paper, the Policy framework) have all indicated technology or project specific strike price setting. There is no suggestion that this has been dropped as you suggest. All documents are available on the DECC website, most of them at http://www.decc.gov.uk/en/content/cms/legislation/white_papers/emr_wp_2011/emr_wp_2011.aspx.
    5) “the prospective CfD rate for nuclear implies a much higher subsidy than for renewables” – you have dropped your “low-cost” prefix here, which makes the statement (likely to be) untrue. It is not a fair comparison to compare nuclear with the low cost renewables. The key test is surely to be whether nuclear is cheaper than the most expensive renewable technologies which will need to be deployed at scale to meet our renewable and carbon challenges. That is offshore wind – which is not “low-cost”.
    6) Re. subsidies, DECC made an extensive statement about “subsidy” in 2010 (http://www.decc.gov.uk/en/content/cms/news/en_statement/en_statement.aspx) where (then Secretary of State) Chris Huhne said “To be clear, [no public subsidy for nuclear power] means that there will be no levy, direct payment or market support for electricity supplied or capacity provided by a private sector new nuclear operator, unless similar support is also made available more widely to other types of generation”. Whether you agree or not, I thought it sensible to include the original statement.

    I do hope that’s of some use and provides useful input to the discussion, for you and subsequent readers.

    Regards,

    Peter

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