Low investment in renewables technology is damaging our education system!

(this article was first published in "Energy" in May 2007 but it seems even more relevant now)

OK so the headline makes you think I’ve finally flipped.  But bear with me and I’ll try to explain.  Firstly a statement of the obvious which is that the availability of both young and perhaps not so young well educated personnel is essential for the energy industry regardless of which sector of it you are in and at which level you’re recruiting.   

But many complaints are made about our education system and its ability to deliver literate, numerate and well rounded youngsters. However, for a long time now though it has seemed to me that the problems may not actually lay with the system itself, the quality of teaching or necessarily the aptitude of pupils but with something else entirely.  It’s one of those bees in my bonnet I had difficulty in getting rid of because it seemed to me that whatever Government tried it didn’t really make a lot of difference.

I was therefore interested to spot a recent report in the Financial Times where in a letter to Boris Johnson - the Conservative shadow minister for higher education offering comment on an article Mr Johnson had written which despaired of the fact that Britain was no longer producing physicists, Sir John Rose the CEO of Rolls Royce pointed out that "if you don’t have a nuclear industry, then anyone who is smart enough to be a nuclear physicist is not going to choose that career”.

In other words, it's a question of demand.  If the demand is not there for physicists, chemists, electronics engineers and so on and so forth then students will quite rightly tend not to go down that route.

The real question we have to answer then is why demand has fallen?   A recent comment from Richard Lambert - the Director General of the CBI - provided a very good clue. He said "In today's rapidly changing economic world order, we must create more global enterprises if we want the UK to remain in the top tier of world economies. Yet in the past 20 years the number we have built from scratch has been low."    

Well we are already aware that in Scotland the birth rate of high growth companies is well below what it should be and indeed Mr Nicol Stephen – the now former Enterprise Minister - gave us a partial  explanation for that during last years Global Scot Conference when he quite correctly stated "private sector funders were hampering the drive to improve the number of successful start-ups by starving companies of the kind of risk capital that could make a vital difference to early-stage ventures."   He went on to say "That is very dangerous and short-sighted and ultimately damaging for the economy."  

You can hopefully see a pattern emerging here. 

Certainly, as the energy industry evolves and changes as it is expected to over the next decade or more and becomes increasingly technically wider and more sophisticated - for example fuel cells, energy storage technologies, bio-fuels and hydrogen systems - then the broader and deeper the educational needs and skillsets become.  But if Richard Lambert is right then it’s not a matter of whether the education system can provide what the industry will need but whether the industry is going to have sufficient critical mass to be able to attract people to it in the first place and inspire them to get the education and qualifications they need to take part in it.

At the moment there isn’t a lot of sign that this is happening.  What action there is in developing and bringing new products to the market isn’t moving here on anything like a large enough scale or at a fast enough pace to give me any confidence that demand is really going take off. 

This is concerning because the “New Energy Era” is surely something that today’s young are already taking a huge interest in. Are we seriously going to fail to capture, focus and direct that youthful enthusiasm so that it can benefit this country both economically and environmentally?

The answer is almost certainly that we will.  To my mind there is just not the same appetite here as there is in other countries to really grab this new opportunity.

Well let me clarify that.  For sure the appetite exists amongst engineers, academics and “green” entrepreneurs. It’s just that there is very little real appetite amongst funders to get behind them. 

Contrast this with the USA. Vinod Khosla a top venture capitalists in Silicon Valley said "The best brains in the country are no longer working on the next pharmaceutical drug or the next Silicon Revolution. They want to work on energy"   He also said that although commercial success could take years, venture capitalists are pouring cash into solar power, fuel cells, wind energy, biofuels, new lighting microchips, "smart" power grids, and other innovative energies. 

But that’s the American way isn’t it.  In fact here’s an interesting tale of two banks that also demonstrates the difference in thinking between us and our transatlantic cousins.

Bank number one has just announced a £10 billion, 10-year initiative that encourages the development of environmentally sustainable business practices through lending, investing, philanthropy, and the creation of new products and services.

It will commit £9 billion in lending, advice and market creation to help commercial clients finance the use and production of new products, services and technologies. In addition, the bank will commit £0.7 billion to achieve Leadership in Energy and Environmental Design certification in all new construction of office facilities and banking centres; donate £25 million to support non-profit organizations focused on forest preservation, innovative energy conservation, developing green affordable housing and other environmentally progressive activities; and invest £50 million in energy conservation measures for use in all its company facilities.

This initiative is without doubt an extremely visionary one and commercially highly astute. It is also exactly what the big banks should be doing.

Bank number two on the other hand has announced a $70bn takeover attempt to buy another bank in Europe.

Now you may be getting all excited about Bank number one but don’t be because the bank in question is the Bank of America.

Kenneth D. Lewis, Bank of America's chairman and chief executive officer said when announcing this initiative "Today, we have a tremendous opportunity to support our customers' efforts to build an environmentally sustainable economy - through innovative home and office construction, new manufacturing technology, changes in transportation and new ways to supply our energy,"

What can one say?  The man is right and in the context of my argument about creating demand for well educated graduates and others he’s helping that happen.  It’s the American way but it’s certainly not the British let alone Scottish way. 

Which bank is bank number two?  Well it doesn’t really matter because it is irrelevant in terms of what we in this industry are trying to achieve but it’s based in Edinburgh.  

Just remember though that every time one of our financial institutions comes up with excuses for doing as little as possible in terms of investing in this sector then they’re not only harming us economically but the evidence suggests they’re almost certainly harming our education system as well.  Makes you think eh!

© Dick Winchester May2007

UK Govt’s latest apology for an Energy Policy

Energy – Jan 2013

I was once told that if Moses had been a LibDem he’d have come down from Mt Sinai with ten “really jolly good suggestions”. 

It’s the same with Ed Davey’s attempt at an Energy Policy. It’s full of proposals for processes that , worryingly, sound as if they’ve been dreamt up by a bunch of City types.

What appears to be top of Ed’s priority list is Electricity Market Reform.   This he says “puts in place measures to attract the £110billion of investment which is needed to replace current generating capacity and upgrade the grid by 2020, and to cope with a rising demand for electricity”.

Sounds simple enough doesn’t it. We all know that we need to replace ageing conventional and nuclear stations, increase renewable energy and all that obvious stuff and so I was looking for a plan to do that.

Sadly though, having written the scene setting bit of his policy Ed must have then sent it to the Treasury. That worries me because I read recently that a lot of new Treasury advisors are former investment bankers. Just saying; nothing inferred. Honest! 

Anyway, the policy then starts talking about things like “Contracts for Difference” or CFDs which I always thought stood for Computational Fluid Dynamics which, come to think of it, is a considerably more interesting subject.

It turns out though that Ed’s CFD’s are complex financial contracts designed to provide stable revenues for investors in low-carbon projects so guaranteeing they get their money back and make a few quid on top.

They effectively take the risk out of the investment which logic would suggest should mean that the rate of return will be quite low although I would bet it doesn’t turn out that!

CFDs are supposed to work by being set at a fixed level called a “strike price”, although I haven’t quite worked out yet who determines that it would be the subject of negotiation.

In addition, from what I understand the “strike price” won’t actually be set until sometime in 2013 so passing judgement on whether CFDs are a sustainable way of dealing with this won’t really be possible until then and of course – critically – it will also determine how attractive the UK market will be for renewables investment.

In addition we have the setting up of a new company (Government owned I think) to act as a single counterparty to the CFDs with eligible generators and if you want to learn more about this go and find the CFD Heads of Terms document on the DECC website yourself.

However, let me warn you it consists of 74 pages of gobbledy-gook that you will only understand if you’re a lawyer, civil servant or a policy wonk.  I gave up at about page ten and I was still only on “definitions”.    

Now inevitably, where there are mechanisms like this there are costs.  Managing this pile of bureaucratic nonsense will cost a fortune.

It will employ lots of people that we – the poor darn consumers – will be paying for.

Doubtless also there will soon be a market in CFDs much as there is or was in carbon credits and so people will be making money trading these backwards and forwards and the cost of doing that will somehow find its way back into our bills.  That’s the modern way.

Fancy financial instruments worry me. Remember the sub-prime mortgages scandal and instruments so complex that bankers didn’t understand them?

The German company RWE npower, which scrapped its plans to build a new nuclear plant in the UK last year, was reported as saying:  “The proposals for the contract for difference have become increasingly complex and far removed from what we, the wider industry and the investor community, expected which was a commercial contract, backed by government. “  I think that was an understatement.

Anyway, what I was really looking for in this “policy” was some form of energy related industrial strategy. However, I knew that being the UK Government this was probably too much to ask for and I wasn’t disappointed. Well I was disappointed but you know what I mean.

We should remember that the total cost of the Government’s proposals amounts to around £7.6billion. Well, that’s a current estimate which will doubtless go up.  It will pay for new nuclear and presumably gas power plants, wind farms and so on and so forth.

Consumers are currently paying about £20 a head a year towards all that but by 2020 the Government say that will rise to about £110.

Others though think it will be considerably higher than that and I have to say I tend to agree. 

But the point of course is that a large part of that £7.6billion will be added to the UK trade deficit because we don’t build reactors, wind turbines and much of the other hardware needed.

The only exception perhaps being gas turbine generators which is probably just as well because some estimate the UK could be as much as 80% dependent on gas by 2020.

So it’s disappointing but not surprising given Westminster’s track record that there is not even the sniff of a suggestion in the energy policy that the Government intends to put any real effort into growing an indigenous energy industry manufacturing base capable of taking on the challenge this Government policy presents. 

Ah yes, gas.  According to some reports Ed wants full fat decarbonisation by 2030 whereas George Osborne is insistent that gas will have to be part of the energy mix past 2030.  Now this leads me straight to the shale/unconventional gas issue which I shall be commenting on in part next month.

A Very Happy and Prosperous New Year to you all.

Scottish Independence – Implications for the energy sector – Part 1.

(first published in June 2012 in the Press & Journal "Energy" supplement)

I take it pretty much for granted that if you’re an “Energy” reader then you’re someone that’s curious about what goes on in the world.

That means you’re probably keen on learning about new ideas and new “stuff” and you’ll have more than a passing interest in both local and global politics and economics because the industry you’re in is one of the most global you can get.

So I think I can also be fairly sure you will have noticed that the “Yes” campaign in support of Scottish independence has now officially kicked off and therefore I’ve taken some time out and had a think about what might be the consequences for the oil and gas industry, renewables and the energy sector generally and had a crack at coming up with some ideas for possible high level policies if indeed Scotland does become independent.

Top of the list for most people will be taxation and regulation.

The stability of the petroleum tax regime remains an issue given the changes made by both the existing Tory / LibDem Coalition government and the New Labour government before that.

I’ve often wondered why the UK government has generally treated the oil and gas industry so carelessly over tax. But of course, given that in a UK context oil/gas only represents something in the order of 2-3% of GDP (gross domestic product), then its importance may not be as large as it would be in an independent Scotland where it would make up over 15% of GDP.

This of course would put it on a par with the industry in Norway where it’s treated as an immensely valuable business with huge global potential.

However, it seems reasonable to assume that, given the huge importance of the oil and gas sector to an independent Scotland that no Scottish government regardless of its political makeup would be likely to jeopardise its future by creating an unstable tax regime or indeed one that doesn’t encourage appropriate levels of exploration and production and a healthy supply sector.

It would seem sensible then to assume it would receive Norwegian style treatment.

In terms of regulation the same approach would apply and I think it unlikely much would or should change although perhaps greater emphasis might be put on maximising recovery rates, developing better mechanisms to encourage companies to give up so called fallow fields and encourage the development of new technologies.

The overall policy aim though should also be to encourage exploration and development and ensure there are no major obstacles – regulatory or otherwise – to prevent that.

Of course, safety regulation is currently the subject of a potential takeover grab by the European Union.

Whilst the UK and Norwegian governments plus trade unions in both camps are opposed to the idea, as indeed is the current Scottish government, there is no guarantee as yet that it will be dumped.

One policy that the proponents of independence might like to consider then is the repatriation of offshore safety controls if the EU succeeds in its power grab before 2014 or 2015.

This would help put operators and contractor’s minds at rest that there won’t be any further increase in bureaucracy that could stifle industry progress in an independent Scotland.  

The other fiscal element that will need to be considered carefully is the taxation of personnel.

Many offshore workers in particular live outside Scotland travelling offshore as and when required. In effect, in an independent Scotland they then become “foreign” workers.

Because of their importance to the industry there should be a cross border agreement with the remaining members of the UK that they will be taxed once only and only in their country of residence.   

I’ve always said that one of the things that helped Norway considerably was the Not only was it right that the Norwegian state benefit properly from its natural resources but setting up Statoil was a strategically smart move from the point of view of having a champion for Norwegian industry.

I would pretty much guarantee that, had Statoil not existed, then many of the major Norwegian high tech companies wouldn’t either. 

The question then is whether an independent Scotland should establish a state owned or state majority owned company and if so what should it do?

Although it couldn’t retrospectively takes shares in existing fields unless it bought into them should – let’s call it ScotEnergy for fun - take a majority share in all future fields on behalf of the Scottish nation with private sector companies coming in as partners?

Difficult to answer isn’t it? 

Certainly though ScotEnergy could act as a national champion and help support our indigenous industry in terms of R&D support, help in setting up trials for new equipment and so on and so forth.  

There is also the thorny issue of decommissioning and who pays. 

I’d like to take a different approach which involves dramatically reducing the costs of decommissioning by changing the policy. 

For example and notwithstanding the Ospar anti-dumping protocol covering European waters, I’ve never understood why jackets should be removed when we’re trying to rebuild fish stocks and old jackets make great reefs. They would add to the more than 6,000 known, charted wrecks in UK waters. Are there other simpler solutions as well?

This is just Part I of my thoughts on the independence issue. I’d like to cover this subject in more detail and to include all the other elements of the energy sector in Scotland.

So more to come on this over the next couple of years and I’d encourage readers to let me know what they think and what policy ideas they may have.