All entries for Saturday 21 January 2012

January 21, 2012

Legal challenge to UK energy legislation

Writing about web page http://www.bbc.co.uk/news/science-environment-16646405

This week, green campaigners have launched a legal challenge to some aspects of legislation in an attempt to block new nuclear stations. There are two main areas of attack – governments limiting liability of the generators, and the introduction of a carbon floor price (the latter currently specific to the UK). Their challenge of course completely mis-represents the reasons why this legislation is in place. For example, on the subject of a carbon floor price Caroline Lucas, Green MP for Brighton and Hove, claims:

“The introduction of a carbon price floor is likely to result in huge windfall handouts of around £50m a year to existing nuclear generators”

I haven’t gone into the details of her claim, but I do know the history behind why the introduction of a floor price is critical to new nuclear investment, and it has nothing to do with handouts of £50m a year to generators (which, incidentally, is not a great sum in the first place. It would represent the change in revenues of existing nuclear generators if the wholesale price of electricity were to change by 0.1p per kWh, about a 2% change in the current base-load price of around 4.5p per kWh).

A little bit of history for those who aren’t familiar with the highlights of events affecting the UK energy market during the last 30 years. Electricty generation was largely a state-owned system, with the Central Electricity Generating Board (CEGB) owning and operating the power stations. In 1991, Margaret Thatcher concluded the sale of the CEGB to private investors, creating two companies – National Power and Powergen. However, during the sale process it was discovered that the existing nuclear fleet, containing a lot of old generation Magnox stations which were expensive to run and didn’t have a lot of life left in them, made the deal commercially untenable, and so all the nuclear stations were kept in public ownership under a new organisation, Nuclear Electric. This commercial PR disaster along with Chernobyl is what killed off the UK’s new nuclear build programme at the time, and why we only have one PWR today, Sizewell B.

Nuclear Electic was part-privatised in 1996, the newer design AGR and PWR stations sold off as a private company, British Energy, and the old Magnox stations retained under Magnox Electric and the Nuclear Decommissioning Authority. However, the government reformed the electricity market in 2001 with a piece of legislation called the new electricity trading arrangements. This, combined with a big dip in wholesale gas prices due to oversupply, led to a crash in the electricity price, and in 2002 British Energy essentially went bankrupt and had to be bailed out by the UK government (there were other factors, such as stations being offline, renegotiation of fuel costs and problematic business deals, but the wholesale price crash is the main trigger). The wholesale cost went down to 2p/kWh and lower, below the cost of generation. It should be pointed out that other generators also suffered from the price crash – Drax (the UK’s largest, newest and most efficient coal plant) came close to closure in 2003 because it wasn’t profitable at the time, and only a long-sighted view by investors kept it open (the plant is now very profitable).

British Energy survived with government help and was sold to EDF Energy in 2009. Now, a new build programme is looking to replace the existing nuclear fleet which is due to be largely decommissioned in the coming decade or so. However, building power plants is very expensive, in particular modern nuclear plants with advanced safety features. Therefore, investors are unwilling to commit to such a long-term project as a power station (which is expected to provide returns over a period of 60 years or more) with such high up-front costs unless they can see that their investments are secure, because it becomes too risky for the rates of return. As such, the prospect of a price crash such as that of 2001 repeating and wiping out their investment is untenable, and so long as that remains it’s unlikely that a new nuclear build programme will happen. This is the real purpose of the carbon floor price – not to give generators a £50m/year bonus (which as I’ve already stated, is small beer in the grand scheme of the industry), but to give investors the confidence to give long term commitments to new generating capacity in the UK. Without this, the industry will continue to suffer from under-investment in new capacity and we will be left with a short-term approach to new power stations, most likely further increases in the numbers of combined cycle gas turbine (CCGT) plant. There are two problems with this approach – firstly, it makes the market much more volatile to carbon fuel prices, which are unstable both in price and increasingly supply as declines in world production and increased dependence are used more and more as a political tool. Secondly, it doesn’t sort out our carbon emissions without the additional retro-fitting of carbon capture and storage technologies, which add further to the cost and fuel use and are as yet unproven on a large scale.

Faced with these realities, politicians have sensibly opted to provide the market with an instrument that guarantees a minimum carbon price, thereby making investment in nuclear and other low carbon technologies a commercial reality without otherwise subsidising them. Whether this amounts to a subsidy in name I’m not sure; it seems a bit of a grey area and I don’t have the technical knowledge to answer that question. What I do know is it seems like a credible way of delivering long term investment in low-carbon generating capacity, which can only be a good thing for the UK’s future and the environment. Few people complain about the direct subsidy of other renewable technologies including on-shore wind (except when they are taken away) which are in any case far larger in pence per kWh than any subsidisation of the nuclear industry. The fair alternative would be to remove all forms of subsidy for all forms of power generation, and apply a great deal of upward pressure politically on the carbon price. However, without the long term security of a floor price I still question the risk of such a strategy in securing the investment required.


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