Winds of Change

Sea windmillsOn 2nd November, 2016 BBC Radio Scotland ‘Good Morning, Scotland’ broadcast an interview on renewable energy wind-turbine subsidies with Alexander Burnet MSP, who is apparently the Scottish Conservative Party nergy Spokesman. This followed a brief interview with Keith Anderson of Scottish Power, representing the renewables sector.

The onshore-wind sector has received subsidies to encourage investment in a new industry that has invested around £13Bn in Britain in recent years (and with the majority of the investment probably made in Scotland). The Westminster Government intends to end the subsidy, and the onshore-wind renewables sector is concerned that this will not merely adversely affect onshore-wind programmes (not least in Scotland), but place the whole sector at an unfair disadvantage in the marketplace.

Anderson called for a “level playing field” specifically for the onshore-wind sector, by providing it with a contract to underpin the risk of investment in onshore wind turbines. While Anderson did not define his use of the term ‘contract’, implicitly this ‘contract’ appears to be what is termed a CFD; not a subsidy payment, but a form of price-fix. I shall return to this below, while you ruminate on the nature of Anderson’s distinction between ‘subsidy’ and ‘contract’; which may perhaps best be approached somewhat laterally, through the idea of a “level playing field”, rather than focusing abstractly on the ‘market’ aspects of  industry pricing,

Alexander Burnet’s interview, representing the Conservative Party on the other hand, principally represented an unpolished statement of the British Government’s current position on the onshore-wind sector. There was, in Burnett’s words, a Conservative “manifesto promise to end subsidies for on-shore wind” which it was intended to implement assiduously. We were however, treated to one of the conventions of Conservative rhetorical flourishes by Mr Burnett: the onshore-wind sector had been supported well in its early developmental years, and now it was time to stand on its “own two feet”; and look at the “market”.

Ah, the magical use of the word ‘market’, at which (in Conservative hands) all problems dissolve: at least if there is a putative ‘market’, however limp, wherever we are invited to inspect. Nevertheless, and suddenly arising somewhat from ‘left field’ (and as far as I could discern, without much help to the understanding of the average listener), Mr Burnett laconically offered the opinion that a CFD was “not a priority” for the Government, which, in effect seemed a rather stark, off-the-cuff and peremptory rejection of Anderson’s request for a ‘contract’.

A CFD, for the rest of us (mere taxpayers, whose need to know is, for Conservatives clearly partial at least) is a Contract For Difference: a tradable commercial instrument that reflects price changes of the underlying asset (presumably the form of contract to which Scottish Power aspires). Meanwhile, in BBC News Online (2nd November), the helpful information was being provided to the public that: “Contracts for Difference [CFDs] are used to stimulate emerging green energy developers by guaranteeing a minimum price for what they generate”. Clearly, now that the Conservatives are classifying onshore-wind as a mature (enough) industry, what really matters is that single Conservative answer to every problem: the Market. Only in the very next sentence of BBC Online’s explanation, this proves to be not quite correct, for it actually extends beyond “emerging” energy providers to mature industries (if you are the right ones): “Such a contract for Hinkley Point C nuclear power station was signed in September”. Hinkley Point (construction cost £18BN) therefore depends for its financial viablity on a CFD awarded by the Conservative Government. This is, then what the Conservatives mean by a ‘market’: one in which the price is fixed. So much for standing on your own feet (unless, of course you are the Scottish public and do not understand what is actually going on).

Alexander Burnett, for the Scottish Conservatives, was eager to explain that “nuclear needs to be part of (the) mix”, and informs us that the costs for Hinkley Point were “agreed” (a matter wholly between the Conservative Government, the Chinese and the French investors. It is worth remembering that Theresa May appears to have signed the deal because it was effectively too late even for her to dig the Government out of the hole into which the previous Conservative Government had badly negotiated both itself and the British public – you can be rid of the EU, but it seems you cannot rid yourself of a Conservative Government, no matter what it does, on just about anything). Burnett seemed less keen to discuss, or be clear about the actual terms of the Hinkley Point CFD. He didn’t discuss the precise terms of the CFD with respect to Hinkley C, or deem a comparison between nuclear at Hinkley Point and onshore-wind in Scotland worth pursuing. I beg to differ.

So let us look at some (merely) illustrative figures. I do not claim these illustrations are the whole picture, or explain everything; but I think they advance us a just little further along the no doubt long and tortuous route (set by politicians), that we ordinary mortals must traverse to reach some basic understanding of the real issues, rather than the kind of generalised, banal superficialities Mr Burnett is inclined to indulge: but Mr Burnett is a politician, and he deals in ‘sound-bites’.

Let us, briefly, look elsewhere.

The Department of Energy and Climate Change published the outcome of the first allocation round of CFDs for renewables, including wind renewables, on 26 February 2015. From these results we may select the following from a table of allocations:

Onshore wind circa £79.23-£82.50/MWh CFD ‘strike-price’
Offshore wind circa £114.39/MWh CFD ‘strike-price’.

Offshore wind receives the highest strike-price, and presumably may continue to do so. It is onshore-wind alone that is now being left to its own devices. Ironically the ‘offshore’ Scottish islands, which do not appear to have been able to benefit to the same extent as mainland-onshore projects from the growth of the onshore-wind sector (through grid connectivity issues for example) will now be at a much greater disadvantage to offshore wind developments than hitherto (in spite of what seems, ‘prima facie’, fairly obvious capital cost advantages). Such is the economics of this ’market’

Turning to nuclear power we may look at the comparative ‘strike-price’. At Hinkley Point, “The Initial Strike Price is £89.50/MWh (expressed in Money of the Year for the Base Year)”. This is well above the strike-price for onshore-wind (up to 13% greater MWh). The Hinkley Point initial strike-price may be adjusted only “in accordance with the express provisions of this Agreement”; according to complex formulae set out in the ‘Baseload Market Reference Price’ (Section 12.2),  the ‘Calculation of Indexation Adjustment’ (Section 13.3), and the ‘Sizewell C Pricing Adjustment’ (Section 14), which triggers yet more adjustments dependent on the circumstances of the Sizewell C Project. So we have a guaranteed minimum price, to which a series of arcane, complex equations apply certain adjustments to produce ….? You tell me what the Strike Price may turn out to be.

Whatever you may believe this Byzantine network of arcane formulae represents, I do not believe it is best described as a ‘market-price’. This is the context that provides signficance to Keith Anderson’s legitmate request for a “level playing field”.

In the BBC Radio Scotland interview Mr Burnett was, in effect, asked to explain why an old, mature industry sector like nuclear is being awarded CFDs (Britain is already closing old nuclear power stations at the end of their useful lives), when onshore wind – still a new and developing indistry – is considered already too mature to require CFD support. In spite of carefully reviewing Mr Burnett’s words, I at least, could find no coherent explanation for the basis of his special case for nuclear, in spite of the fact that the “maturity” case clearly applies ‘a fortiori’ to the nuclear industry.

Whatever plausible arguments may be assembled for nuclear power, ‘market pricing’ is not one of them. Given the history of the nuclear industry world-wide, and especially the problem of managing the legacy, including a decommissioning commitment with no clear end ever in sight (given that the half-life of the spent fuel is beyond forecasting imagination, and far beyond the planning capacity of mere humanity), how many nuclear power plants would be built if they depended entirely on their own devices in a ‘market price’ environment? The question is rhetorical: on a ‘level playing field’, and without massive State intervention over a very long term (as at Hinkley Point), it would be fair at least to hypothesise that for a genuinely independent, market-focused, rational investor contemplating the nuclear power industry, none whatever would be built anywhere in the world on genuine ‘market’ criteria alone. That at least is the fairest starting point when addressing the nature of the energy issue under review. Whatever the argument for nuclear, it is difficult to believe it is a genuine matter of the ‘market must prevail’.

Clearly the public has much to learn about the nature of the deals being done by the Governemt on energy – which, after all are in the public’s name (but whether in the public’s interest is a matter yet to be decided). Sweeping generalisations about ‘markets’ and sector ‘maturity’ by Mr Burnett or whomsoever from the somewhat shrill, over-assertive and under-powered Scottish Conservatives will not do; but we do perhaps have some insight into Scottish Conservatism’s relationship to reality, in an observation that Mr Burnett offered, perhaps carelessly, or unconsciously in his interview, and under pressure on the Hinkley Point decision: “most things are political decisions in politics”; they are indeed, but not necessarily decisions that we will find are in the best interests of Scotland.

Such, however is the nature of decision making, and of political discourse in modern Britain under the Conservatives.

Comments (16)

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  1. Caroline Innes says:

    A very good article – absolutely right this is not a free market, there needs to be some guarantees for long term investment since electricity prices vary enormously. We need storage to accompany more renewable investment. The key point though, as Lesley Riddoch said today in the National, is that if we continue to depend on Westminster to set the framework for renewable and grid support we will never get what we want. Time for the Scottish Government to take responsibility for these matters and deliver on the great potential of our islands and other renewable sources.

    1. c rober says:

      One only needs to look at where Germany and Norway are gearing for post carbon economies , but they at least have some form of storage not based on chemical , and of course are looking at the wider EU grid as a way of selling off unused power – ie night time. We need an aternative to chemical , Tesla 1 or 2 is not that option , perhaps for new builds going dc – but not for retrofitting in a nation like Scotland , which is full of old houses.

      Where this would be further beneficial is through connecting to the likes of Africa , well the politically stable parts , and of course to Eastern Europe to reduce the gas stranglehold of Russia for electical based heating. The Eastern Europe option would be short lived though as a move from GAS as heating will be the norm in Western Europe anyway.

      The overall thing that we need to get over though is Nimbyism – Protecting todays distant view for householders front windows on the horizon , well its costing them and all of us over the longer term. However I read just this week that they are beginning to state there is less and less places for implanting wind turbines , not just because of residents , but that the good areas onshore are all but taken….. But this imo is an outright lie , one only needs to look around Loch Thom on a google map , and where it is forestry/scottish water owned but only a minor area is forested.

  2. bringiton says:

    Scottish tax payers are going to have to cough up a share of the subsidies for nuclear and no doubt pay for higher electricity charges as well.
    I assume that in our “free” market,Scottish energy companies will have to buy in supplies from the grid south of the border.
    You can see why Westminster would not want Scotland to have an independent energy supply which undercuts their expensive nuclear option.
    It also seems that Cumbria will have to continue taking waste from these new stations which,given the current problems at Sellafield,must be a great source of concern to local people.
    As with many other things,England’s Tories seem hell bent on returning to the past,having learned little or nothing from history.

    1. c rober says:

      Scottish energy sellers perhaps , but not Scottish companies. Scottish Power is Iberdrola , Scottish Gas , a supplier of leccy is Uk but essentially England based with a global footprint for gas buying.

      Both of them are however still a monopoly , and wish to keep it that way. IMO any subsidies for eco generation as a result should be outwith their control and towards true independent suppliers.

  3. John S Warren says:

    For those who may wish to scrutinise the Hinkley Point C: CFD in detail, the link is below. The The DECC renewables CFD tables are also below. My apologies that they were missing from the article; entirely my oversight.

    1. Hinkley Point C:
    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/556763/1_-_Contract_for_Difference__redacted_.pdf

    2. DECC Renewables, CFD Table:
    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/407059/Contracts_for_Difference_-_Auction_Results_-_Official_Statistics.pdf

    1. c rober says:

      My argument against NUKE power is the long term cleanup costed to the tax payer , which is not in any way value for money , never mind the inflated price of supply.

  4. Craig Miller says:

    Free Market is one of the most misleading terms that Economic Rapists use about themselves ….Trickle Down is a euphemism for a reality I will not translate …..Social Market… that’s obviously what we need …..they could probably sell us one…

    1. c rober says:

      As I mentioned above , if we must apply subs to energy creation , to monopolies , then imply remove them and give them stick instead of carrot , then foist subs on community energy creation or smaller companies . Monopolies get there by holding the industry , govts , customers over a barrel – so time to remove the barrel.

      So we must legislate , before its too late. Say by letting them suffer , and then tax payer owned share ownership in part , with an overweighted seat on the board – ala French industry style. The EU cant say a thing , unless they want to tackle Germany and France for the same.

      The market will adapt to survive through removing subs , interference in capitalism by socializing investment into the biggest suppliers never brings socialized profits – or reduced prices as a result.

      1. Establish price pkwh on the customer by Government.

      As we have seen the gas and oil price remain low for a protracted period we still see price increases faster than decreases.

      2.Set minimum low carbon generation and time frame for 100 percent target.

      This is where legislation to evolve removes the carrot and replaces it with a stick , adapt to survive.

      3.Retain the supply grid , both gas and electric as state owned.

      The companies can only supply through the state owned grid , preventing a further barrel to be held over , both nationally or from external states.

      4.Removal of the standing charge.

      Profit making , only in Gas and Electricity supply can we pay them to connect to their customer. Now if there is to be a standing charge it should be returning to the State in order to improve and repair the grid it owns – not for company profit making.

      5.Taxing downtime of eco generation.

      Other than peak time eco generation is wasted , hardly the panacea it is portrayed as. So the companies would find a way of using it if it is being taxed on , perhaps through their investment and creating hydrogen for vehicles or home storage and generation for fuel cells during peak load – removing the need for further Hinkleys. Norway and Germany are heading in this direction already.

  5. Donnie MacLachlan says:

    At the end of the day, the uk government wants the Scottish Parliament, Scottish Industry and Scottish People beholden to to them.

    It’s not in their script for Scotland to become a world leader in renewables or any thing else.

    Or to put it another way, if whisky was invented in Scotland tomorrow, the uk government would out prohibitive taxes on copper stills, barley and water,

    1. c rober says:

      again?

      Similar thing happened in America – https://en.wikipedia.org/wiki/Whiskey_Rebellion

      Taxes on the little man , sent down from their founding father masters – not long after independence.

      Whiskey was used in barter trade , so untaxable , which meant the creation of a tax on the black economy in order to pay off the war debts , for a war started to remove taxation from England that primarily affected the wealthy land owner. But as we now know the founding fathers wealth in todays money is staggering , and as a result of creating taxes on others it remained so.

      This is a perfect example of todays political environment in the UK , where the wealthy create the legislation , protecting their own assets and increasing them.

      Since the Financial crash the 1 per-centers have doubled their wealth , politicians have had near 20 percent wage increases , yet the countries are still treading water and savings rates have hit the floor as companies share prices have increased 50 percent and banks have not been forced to sell off mortgage assets for their socialised debts for whatever they can get… unlike in Ireland.

      Then dont get me started on how politicians are allowed to employ family members , giving them 7 weeks overtime – without offering the job on the market like all other employers legally have to…. but of course our politicians are above the law on many levels. Keith Vaz anyone?

      Guy Fawkes knew what he was doing , unfortunately he was unsuccessful and before his time. But still our country celebrates this tomorrow , ironically on the wrong side , ie happy that he failed.

  6. Lawrence Anderson Burley says:

    The great hidden subsidy to the nuclear power industry is that they escape paying insurance premia to cover the risks they – and we! – bear when things go wrong as they depressingly often do, from “minor” emissions of radioactive matter to full-blown catastrophes, à la Chernobyl or Fukushima. Government = taxpayer picks up the insurance tab. If the nuclear industry had to pay commercial insurers for cover of risks they keep telling us are insignificant, but which the Market so beloved of Tory Govts assesses with a very unsentimental eye, not one nuclear power station would ever be built!

    1. c rober says:

      Japan and Germany have stated no more nuclear powerstations ar to be built , even France whom have had many minor problems wont build new and where EDF is state owned – but will build Hinkley alongside China.

      HMMM I wonder why then the UK is considering such a new powerstation at all , when the concensus is that they simply arent worth the cost?

      Someone somewhere is getting a bung , from a situation deliberately created by privitisation of public owned electricity supply by Westminster , citing that open markets equal lower prices and that EU legislation meant the sell off rather than the Tories … today of course no one in the UK is clever enough to consider googling state owned industry in the EU of course.

  7. c rober says:

    Heres and interesting read on where energy is going – home storage. While I am not a fan of dc-ac , it can serve as a stepping stone onward to other things like hydrogen – which is better for longer range driving as well as reducing our major polluters like buses , taxis and lorries in our city centres.

    http://www.businessinsider.com/home-battery-rival-tesla-powerwall-2-2016-10/#1-teslas-powerwall-20-is-a-269-pound-lithium-ion-battery-that-you-can-mount-on-your-wall-panasonic-makes-the-cells-for-the-battery-while-tesla-builds-the-battery-module-and-pack-the-whole-thing-costs-5500-including-the-inverter-and-stores-135-kwh-of-energy-1

    Combine these batteries with stick legislation I have already mentioned , and then the power companies are installing them to store cheap off peak electric in the customers own homes.

    Holyrood I call you out , amend electricity legislation and housing planning for DC homes.

  8. MBC says:

    The market has never been free. There have always been government interventions which regulate or stimulate. Look at housing. In 1989 Thatcher deregulated the private rented sector by the Short Assured Tenancies bill. This liberated in some senses, in that ‘fair rents’ were abolished in favour of ‘market rents’ where landlords could charge what they could get out of people. But it offered a direct stimulus in other respects by removing security of tenure by the explicit mechanism of a six month lease as the legal minimum. A different field from energy but the same principle, no market is ever free or unrestricted, it is regulated or stimulated by law to various extents.

    1. Broadbield says:

      “it is regulated or stimulated by law” created by politicians for political ends, which leads us back to Burnett as quoted in the penultimate para of the article. The ending of subsidies for renewables is unambiguously a political attack on Scotland’s renewables industry and therefore on Scotland.

      UK pours billions into vanity projects – Hinkley, HS2 etc – where is the investment in other fledgling renewable technologies being developed in Scotland? Thatcher destroyed UK industry (to build up the financial sector) and now the Tories are going to destroy the renewables industry. Plus ca change.

    2. c rober says:

      Just read today that an old gas field is to be opened up in the North Sea – I just wonder if this was due to either incentives or agreeing to remove the subs on eco generation?

      As I said , be that housing or energy , remove the subs or protection , legislate the changes , remove the barrel we are held over for the carrot – the stick works , or the company simply dies and a competitor moves in.

      So far opening up markets , or privatizing energy hasnt delivered what it promised , in that competition lowers prices , it has created a shared monopoly between the big 5 , colluding on prices.

      Its time to throw them in the ring , rather than the towel.

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