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.
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