Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by Andrew ZP Smith
1. Summary Bullet-Points
The Draft Bill’s aim of largely decarbonising the grid “by the 2030s” conflicts with the Committee on Climate Change’s target of a largely decarbonised grid by 2030.
Single fixed-price feed-in tariffs would be more economical than the proposed CfDs.
There will be no need for additional baseload capacity: what will be needed is plant that is capable of providing a fast slew rate: the proposed capacity mechanism addresses the wrong problem, and will cost money and fail to provide energy security.
Starting with a low carbon floor price and rising slowly can exacerbate emissions. Rising quickly so that the carbon floor price soon reaches the marginal carbon damage cost provides the most economically optimal solution.
Vertical integration within the electricity market creates illiquidity and excess rents: ending the vertical integration of the six largest utilities would create greater liquidity and a more competiitve market.
The proposed “regulatory backstop” leaves space in the grid for heavily-polluting plant to function up to 2044.
Full-lifecycle greenhouse-gas emissions from CCS can be too carbon-intensive for the decarbonised grid.
If CCS works, the proposed exception from the Emissions Performance Standard [EPS] is redundant. If CCS does not work, than the proposed exception from the EPS will result in excess emissions and a distorted market.
Contracts for difference will not will not deliver the stable and predicatable economic environment that is claimed.
The Draft Bill leaves the permanence of “permanent” CO2 storage undefined, and without anyone being held responsible to guarantee its permanence, leaving a substantial potential liability unallocated.
The proposed Strategy and Policy Statement should include a mandatory section on addressing climate targets.
The Committee on Climate Change should be included among the statutory consultees for Draft Strategy and Policy Statements.
The Draft Bill does not take the opportunity to provide a legislative framework for loan guarantees for the development of new onshore and offshore wind: such a framework would deliver the government’s aims of reducing the costs within those industries, and reducing the size of CfDs required there.
The Draft Bill and associated Electricity Market Reform provides public subsidy for new nuclear, in defiance of the governing parties’ pre-election promises, and in contradiction to the stated intention on the website of Number 10. The public underwriting of its unlimited liability alone, amounts to a public subsidy somewhere in the range £11–£5,400 per MWh.
2. Comments on the Draft Energy Bill Summary:
3. p10, paragraph 5, is in direct conflict with what the Committee on Climate Change has said is necessary for the UK to meet its legal carbon commitments. The CCC’s target is for a largely-decarbonised grid by 2030. The Draft Bill’s Summary says that the aim is for this to happen “by the 2030s”. This is in effect a slippage of a decade, for a target that isbe less than two decades away, and indicates a significant lack of commitment in the Draft Bill to deliver what is urgently needed. Furthermore, this delay will cost Britain money, as it prolongs the period during which we are dependent on imports of fuels for our electricity supply, and holds back the development of the UK renewable industry, leaving our international competitors to seize the market.
4. p12, paragraph 9, the claim that CfD have been chosen over a less cost-effective Premium Feed-in Tariff neglects to mention that a direct Feed-in Tariff (aka a single fixed-price scheme—see, for example, Doherty 2011) would be simpler and more cost-effective than either of those.
5. p28, paragraph 54: given the increasing amount of wind, and possibly nuclear, on the grid by 2030, there will be no need for “baseload capacity”: what will be needed is plant that is capable of providing a fast slew rate. Subsidising CCS on the basis of it providing baseload therefore creates a market distortion that is highly counter-productive: if CCS is ever to reach commercial scale and be able to deliver clean power without public subsidy for its open liability (three conditions that are each doubtful), then it must provide ramping-up and ramping-down balancing services: subsidies, through CfDs or other instruments, should therefore be targetted at delivering those balancing services.
6. p30, paragraph 63: The description of the working of the proposed capacity mechanism echoes very closely the same discredited “predict and provide” methodology that led to a substantial resource misallocation in transport [SACTRA 1994]. As identified above, future energy security requirements are not about capacity per se, but about providing suitable slew rates at sufficient capacity, to balance the grid.
7. p32 paragraph 70: the Carbon Price Floor is very welcome in principle, as a means of pricing in the negative externality of damages from greenhouse gas emissions. However, the introductory price is very low, and the ramp-up rate is too low. One of the risks that goes with having a carbon price that starts low and ramps up too slowly is that it brings forward investment & expenditure on fossil-fuel extraction and consumption, exacerbating the negative externalities.
8. It is noted that industry will take some time to adapt to higher carbon prices: nevertheless, competitive advantages will accrue to those countries that introduce a high carbon price sooner rather than later: the laggards will be buying their clean-tech from the front-runners. It is within our power which of those we choose to be. Furthermore, the longer the negative externality persists, the worse the misallocation of resources is. It is therefore in the best interests of the country to introduce as soon as is practicable a carbon price that is consistent with the damage costs. In Hope 2011, the marginal damage cost is estimated at US$50–100/tCO2e. The Stern Review gave a mean estimate of the social cost of carbon of US$85 per tonne of CO2. Given the large amount of infrastructure already in place that is only economically viable thanks to the unpriced negative externality, a carbon price that exceeds the marginal damage price is required, to get us to something like an efficient allocation. Given this, Britain should be aiming towards a carbon price of around £70 per tonne CO2e by 2020, with suitable measures to prevent border leakage.
9. p33–34, paragraphs 74–75: the government’s protracted attempts to tinker with CfDs and PPAs seem to be a convoluted way at slowly rediscovering the single-buyer model of the market: a model that could implement direct (single fixed price) Feed-in Tariffs and deliver all our targets in a timely and economically efficient manner. It would seem that DECC is attempting to co-opt Churchill’s description of the USA, for itself: that it “can be counted upon to do the right thing, but only after it has exhausted all the alternatives”.
10. p34, paragraphs 76–79: Within the electricity industry, the vertically-integrated for-profit companies are able to drive the amount of liquidity that suits them. The clear answer is to break up this for-profit vertical integration: other measures will only tinker around the distorted market.
11. Comments on the Draft Bill
12. Draft Bill, section 6 (Part 1, Chapter 1): one of the flaws of the CfD scheme is that the reference price may not represent the price realised by the generator, and thus the instrument will not deliver the stable and predicatable economic environment that is claimed to be the purpose of the instrument. This is further cause to support a direct feed-in tariff, the fixed single price: a mechanism that proved so successful for the rapid deployment of photovoltaics that the government attempted to adopt unlawful means to curtail it. A direct feed-in tariff, a fixed single price, combines CfD and Power Purchase Agreement [PPA] into a single instrument, and would genuinely deliver a stable and predicatable economic environment for the development of affordable, secure, low-carbon electricity generation.
13. Draft Bill, section 36 (Part 1, Chapter 7): this is claimed in the summary assessment to be a “regulatory backstop supporting decarbonisation”: however, it allows for the construction of new plant, however polluting, as long as it runs at a sufficiently low capacity factor. A coal plant running below an annual 40% load factor would meet this Emissions Performance Standard. Its usefulness as a regulatory backstop, given the statutory rate of emissions is set to 2044, is therefore very dubious. Given the Committee on Climate Change’s target of the electricity system being largely decarbonised by 2030, it is very hard to see why any date beyond 2030 for such a high emissions threshold is acceptable.
14. The explanatory notes for Sections 36–37 cover the emissions of some upstream processes for CCS. I suggest extending this principle to all upstream processes for fossil fuel plants, as these emissions (for example in the case of shale gas) could make the plant more damaging than a plant that would breach the Emissions Performance Standard by originating all of its greenhouse-gas emissions at the generation plant itself. In order not to incentivise plant designers and operators to “hide” emissions in upstream processes, the Emissions Performance Standard should include all upstream processes. The full-lifecycle greenhouse-gas emissions from CCS can be too carbon-intensive for the decarbonised grid [Cockerill 2008].
15. Draft Bill, section 37 (Part 1, Chapter 7): If CCS works, then there is no need for exception (as proposed in this Section) to the proposed Emissions Performance Standard (Section36). If CCS does not work, then there is no role for CCS, and again the exception from the proposed Emissions Performance Standard for demonstration CCS plant is unnecessary. Either way, the proposed exception of demonstration CCS plant from the Emissions Performance Standard is unjustifiable.
16. Draft Bill, section 38 (Part 1, Chapter 7): In definition (c), reference is made to “such carbon dioxide (or substance) that has been captured, by way of permanent storage”. However, no reference is made as to who is to guarantee that the storage is indeed permanent; nor whose responsibility it is to provide ongoing monitoring and maintenance to ensure permanent storage; nor who should bear the consequential liability if the storage turns out not to be permanent. To avoid perverse incentives, the CCS industry itself should bear the full liability for any failure of “permanent” storage of CO2 and other greenhouse gases.
17. Draft Bill, section 40 (Part 1, Chapter 8): I regret to note that the proposed Strategy and Policy Statement does not yet have an obligation to include a delivery plan for interim carbon budgets, and for national and international climate targets.
18. Draft Bill, sections 43 and 44 (Part 1, Chapter 8): I propose adding the Committee on Climate Change to the list of statutory consultees for the first and subsequent consultations.
19. Missing from the Bill
20. The government has within its grasp the means to radically reduce the cost of new low-carbon electricity generation plant. By providing backing for financing, it could, at no net cost to the public sector, significantly reduce the unit cost of energy from this plant, by reducing the finance rate paid by project developers. Generators such as onshore and offshore wind have a well-understood asset base that, once operational, can achieve full value if resold; and as most of their cost-base consists of up-front capital investment, as there is no fuel, and as the scrap value of the materials exceeds the cost of decommissioning them. There is therefore minimal risk to the public finances of providing guarantees for financing for onshore and offshore wind. Such a provision would reduce the levelised costs to internationally competitive levels, giving positive results for the taxpayer, the electricity bill-payer and UK industry.
21. On Nuclear Subsidy
22. It is disappointing that the government is willing to break its pre-election promise of no subsidy for new nuclear. The claim of no subsidy is still present on the Number 10 website, [Number10.Gov.UK, 2012] which states in its “transparency” section that its goal is to: “Facilitate the world’s first new nuclear development without public subsidy by 2019”. However, the Contracts for Difference proposed within the Energy Bill represent a public subsidy to new nuclear, thus breaching the government’s own explicit promise on the subject.
23. It is also disappointing that nuclear fission, a mature 50-year-old technology, still needs public subsidy, both explicit in the form of the proposed Contracts for Difference, which take money from all bill-payers, ie the British public; and implicit in the form of requiring the public to underwrite its unlimited liability, because the nuclear industry is neither financially stable enough, nor safe enough, to be able to procure insurance to cover its risks. The public underwriting of its unlimited liability amounts to a public subsidy somewhere in the range £11–£5,400 per MWh (€14–€6,700) [Versicherungsforen Leipzig GmbH, 2011]. Even at the very bottom end of that range, this makes nuclear completely uncompetitive with the low-carbon alternatives.
24. This is one of many nuclear subsidies. The government channels funding to new nuclear via the Technology Strategy Board, the Research Councils and DECC: for example, via the “Developing the Civil Nuclear Power Supply Chain: Targeted Call for Knowledge Transfer Partnerships” [TSB 2012].
June 2012
References
Number10.Gov.UK, 2012: http://transparency.number10.gov.uk/business-plan/6/26
Cockerill TT, Odeh NA. Life cycle GHG assessment of fossil fuel power plants with carbon capture and storage. Energy Policy. 2008;36(1):367–380. Available at: http://dx.doi.org/10.1016/j.enpol.2007.09.026
Doherty 2011: Doherty & O’Malley “The efficiency of Ireland’s Renewable Energy Feed-In Tariff (REFIT) for wind generation”, http://dx.doi.org/10.1016/j.enpol.2011.06.024
Hope 2011: “The Social Cost of CO2 from the PAGE09 Model”, No. 2011–39, September 15, 2011. Available at: http://www.economics-ejournal.org/economics/discussionpapers/2011–39
SACTRA, 1994 : “Trunk Roads and the Generation of Traffic”, DfT, ISBN 0115546131
TSB 2012: “Developing the civil nuclear power supply chain: The Technology Strategy Board and the Nuclear Decommissioning Authority (NDA) are to invest up to £1 million to establish new Knowledge Transfer Partnerships (KTPs) in the field of nuclear technologies for civil power generation, decommissioning and waste management. This targeted call for KTPs is focused specifically on the exchange of knowledge and skills into the nuclear supply chain. This targeted call is part of a £15 million programme and is running in parallel with a £14m investment in nuclear technologies by the Technology Strategy Board, NDA, the Engineering and Physical Sciences Research Council and the Department of Energy and Climate Change through which up to £2 million will be invested in feasibility studies to develop new and innovative early-stage technologies and up to £12 million in collaborative research and development.” http://www.innovateuk.org/content/competition/developing-the-civil-nuclear-power-supply-chain.ashx
Versicherungsforen Leipzig GmbH, 2011: “Calculation of a risk-adjusted insurance premium to cover the liability risks resulting from the operation of nuclear plants”, Grubler A. The costs of the French nuclear scale-up: A case of negative learning by doing. Energy Policy. 2010;38(9):5174–5188. Available at: http://dx.doi.org/10.1016/j.enpol.2010.05.003