Winds of Change
On 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.