Tony Lodge: We rig the market in favour of wind and then want more gas. Our contradictions in energy policy could cost us dear.

Tony Lodge is a Research Fellow at the Centre for Policy Studies.  His latest pamphlet, ‘The Atomic Clock – How the Coalition is gambling with Britain’s energy policy’ was published by the CPS earlier this year.

By deciding to rig the electricity market against some of the cheapest and most abundant fuels available the Government looks set to deliver the ironic scenario where the most expensive energy sources will become Britain’s de facto choices going forward. In turn this will lead to higher prices for industry and consumers.  Ironically, this policy will also lead to future high carbon ‘lock in’ as Government encourages much more electricity produced from gas (which it will tax heavily from next April) as new atomic plants are delayed and coal is forced out.  How have we got here and why do we have such mixed messages?

The case remains that on comparison the cheapest method to generate abundant electricity is through the steam turbine.  The varying cost of this process depends on the fuel feedstock chosen to heat the water to create the steam to turn the turbine, but the principle remains the same.  Coal, gas, atomic and oil plants all supply electricity through this process.  Readers may be very surprised to learn that even in June 2012 coal was still the fuel of choice for UK electricity generation.  Last winter coal provided over 40% of electricity demand and regularly shouldered over 50%.  The fuel is cheap, abundant, easily stored and UK pits still produce a third of demand at just under 20 million tonnes.

But coal is set to be priced out of the market by the Coalition’s carbon price floor which will start next April and tax C0₂ emissions at £16 per tonne, rising to £30 per tonne by 2020.  Britain’s remaining coal plants will start to close quickly and those which have been recently modernised will have to run at lower loads due to costs.  By rigging the market against coal it is also likely that over 1 billion tonnes of accessible high grade British coal will become stranded as mines close on the back of lack of future market certainty.  Importantly, EU carbon prices remain around just €7 a tonne so the UK is set to become one of the highest carbon taxed states in the world.

The Coalition wants to replace carbon intensive coal with less intensive gas.  It will publish a gas generation strategy in the autumn and start the firing pistol for yet another dash for gas which could lead to over 70% of UK electricity being generated from gas by 2020.  Up to 80% of this feedstock fuel could then be imported making the UK one of the most gas hungry states in the world.  A new Emissions Performance Standard (EPS) will ban new coal plants but be set high enough to allow new gas plants to be built.  But what is the benefit of rigging a market against coal and less so gas whilst promoting more gas?

The Government needs gas turbines to spin to shadow the growing proportion of intermittent, unpredictable wind generation.  Interestingly, coal plants are far better suited to meet both the present pattern of peak demand and the more complex pattern of demand peaks that will develop with more erratic weather dependent supply on the system.  With the carbon price floor the cost of burning gas will not be as high as for coal but it will still lead to higher bills for consumers; and it knocks out a supply diversity which has served Britain well for generations.  By 2020 the UK could have very low coal and nuclear generation and very high gas and marginal renewable generation; the price of gas will be the biggest issue facing the then Government, as echoed by the recent warning report from the Committee on Climate Change.

Britain had to try wind energy.  If it didn’t then those who believed religiously in the ability of the weather to provide cheap and plentiful electricity would have never forgiven our political masters (of any party) who had decided against policy support. 

Twenty years since the UK opened its first commercial wind farm, at Carland Cross near Newquay, it can now be said with certainty that not only has Britain undisputedly tried to make wind energy work but in the process it has squandered billions of pounds of taxpayers’ money on a unpredictable and erratic energy source which nearly 3500 wind turbines later still regularly provides under 3% of UK electricity supply at any one time.

The Chancellor’s desire to cut subsidies for wind energy is timely and can help the sector strip fitter and earn a better return for the consumer. Implementing the Government’s green ambitions, originally signed up to by Tony Blair in 2007 (against the advice of his Ministers) have already increased the price of electricity by 13%; achieving its target for 2020 would increase prices by 25%.  The number of ‘fuel poor’ households in the UK has increased from two million in 2004 to nearly five million today and will increase further.  This is not affordable alongside our desire to reduce our national debts.

Wind generation and other weather dependent generation such as solar have a low load capacity value because the likelihood of them meeting peak demand is impossible to manage due to their unpredictability.   Although Britain has a relatively good wind resource it is not uniform across the country. Official statistics show that less than one third of onshore wind energy developments in Scotland achieved a load capacity of 30% or more, in Northern Ireland only 25% did so; in Wales the figure was less than 20%; while in England the figure was just 15%.   Not being able to supply electricity at peak times also means being unable to enjoy peak prices.

The low load performance means that there are more wind farms than necessary to produce a given output.  Consequently, building more rather than fewer better located schemes clearly increases the resource costs of equipment and land required to produce a given output and raises the point that wind farms are being too generously subsidised if the present policies clearly support low efficiency wind farms, as is the case at Carland Cross which averages just 22% capacity.

The Chancellor should now consider a policy where existing wind farms which receive subsidies but achieve load capacities well below 30% could be scaled down or withdrawn. One approach could be to offer a proportion of the full subsidy for developments achieving load factors between 30% and 35%; a lower proportion for those achieving a load factor between 30% and 25% and nothing below that.  Government should also cease payments to wind companies for ‘constraining off’ which is when the grid cannot take surges of electricity from wind farms due to insufficient national energy demand.  It must then compensate the companies.  New electricity storage technologies can help resolve this in time.

It is with this approach that the Chancellor can save money, reduce the subsidy for wind and consequently guarantee that developers are proposing wind developments at the best sights so to secure the best subsidy.  That developers presently want to build on sites which have such a low performance shows the subsidy at present is far too high.

But if the Government is to slash the subsidies it gives to wind farms it must tread carefully in light of the debacle with its attempts to reduce the feed in tariff (FIT) for solar schemes in 2011, without allowing for adequate consultation.   Energy Minister Lord Marland said in January this year on the solar FIT, “This is one of the most ridiculous schemes that have ever been dreamt up. It is already going to cost the consumer £7 billion for £400 million of net present value.  That is on a product where you need electricity when the sun does not shine. It will produce 0.1 per cent of our electricity supply and it does not target the needy or consumers. This is one of the most ridiculous policies ever dreamt up.”

So DECC (or perhaps the Treasury) must set out the policy alternatives for a leaner and more efficient wind sector which is forced to take its snout out of the renewable money trough and deliver electricity to the grid from high performance sites in appropriate locations.  If the wind energy sector wants a future then it should work ambitiously with the Government to deliver a lower cost and more efficient solution before it has no choice.

By rigging the market against fuels which are cheap and abundant the Government has created a headache for future political generations.  The priority should now be to deliver the new build of atomic plants and to re-examine a carbon price floor which will prematurely force coal out and encourage a greater reliance on gas than relative prices warrant. The price floor will do nothing to help guarantee the construction of new nuclear as these plants will get a guaranteed price for their electricity through a contract for difference, anyway.  The same applies for carbon capture and storage which offers an important window for new coal.  Otherwise, Britain risks becoming a world leader in energy taxation coupled with high prices.

The bridge to new atomic power is a long one and Britain needs as diverse a generating portfolio as possible to get through to 2025 and remain high performance and low cost.   If we are going to rig markets to ‘decarbonise’ then let’s at least reward performance and slash subsidies for energy sources which are not delivering.  If they can deliver then their subsidies should decrease as the technologies mature anyway, to the relief of the consumer.  This could be a rare win for the Chancellor, but his carbon tax risks real political trouble.  He should watch Australia where a struggling Government has just introduced its own carbon price floor – to derision and scorn.