Saying Yes But Meaning No

We do want biomass CHP generation don’t we?

And government really does mean it when it says that its 2010 CHP targets are for 10,000 MW CHP capacity and that 15% of energy used by it will come from CHP?

If the answer to both those questions is yes, it’s hard to see why up to 5GW of biomass development in course at the end of last year was frozen by government and why any development of new projects is to be seriously limited by it for the foreseeable future.

In December DECC announced that support for biomass plants would not be grandfathered – so the biomass plant you build now might not get the same/any support post-2013. That news pulled the rug from under projects which were to start to generate post-April 2013.

It appeared to be news to DECC that changing investment rules and removing investment props undermines the market. Extraordinary though it may seem, the DECC officials who have been in place for some time seem simply not to have known the basic rules of markets, investments and government support, despite that being their main job in life.

With a cock-up on that scale one expects immediate action. What did we get? Nearly two weeks later Lord Hunt announced that he would make an announcement at a future date, but not now. Then just over two months later we were told that an announcement would be made later, but not now. Why the delay?

There are two possible answers. The ‘good’ answer is the one that makes us think government is devious and investors can’t trust it but it nonetheless knows what it’s doing. The ‘bad’ answer is that they’re out of their depth. It isn’t simple deciding which it is.

DECC said that the 2010 Renewables Order (the Order that dealt with the biomass issue) had already gone to the Joint Committee on Statutory Instruments and they couldn’t now change things until the next Renewables Order in April 2011. That is a ‘good answer’: it is clearly nonsense, so must be designed to do no more than deflect us all. These people are irritating, yes, but not stupid.

But there is now a consultation paper out and in it one is really hard pressed to find any reason for the problem except the inability to sort out how to allocate costs and subsidies so the two match up. It appears that DECC decided not to grandfather biomass plant “precisely” because it couldn’t manage to fathom a scheme to ensure that the biomass plants with cheaper feedstock got less support than the biomass plants with more expensive feedstock or that as feedstock changed, prices changed.

Why should that matter? According to DECC, grandfathering could result in future market distortion if bands were changed for new entrants. On the basis of such future perhapses, possibilities and mights, DECC has thrown in the towel and decided that it can only deal with non-fuel costs as the basis for the RO allocation – and it is asking us how that will work.
Why not look at what other countries do so much more successfully than us? Why not copy the rules in Germany where they will meet their targets, even if we won’t? Why not do anything other than pull the plug on current projects?

It’s worse than that. For other kinds of biomass – waste from energy and anaerobic digestion – government is to defer a decision until the next review of the Renewables Obligation. There is no possible glimmer of light here for the future.

The message has to be that although government says it wants biomass, it doesn’t.

But if that’s wrong, they’re going about it in the wrong way and I will arrange that they be given free entry to the conference run by the Energy & Utility Forum on 1st June which tells them what funders and developers need: www.fundingrenewables.co.uk/ and I will go out of my way to ensure that the investment community engages with them.

Sally Barrett-Williams
Partner - The Carbon Catalysts Group
Chairman - Energy & Utility Forum

(© Sally Barrett-Williams)

The Shape of Things To Come

Without substantial intervention in the energy market, the UK will miss its emissions targets and will find itself with insufficient power.

That is agreed by Government, the Opposition and the regulator. But they have different views about the cause and extent of the problems. It’s no surprise, then, that they disagree about the way forward. Each has set out the options recent policy announcements.

The regulator kicked off with Project Discovery. This sets out four 2020 outturn possibilities, which presuppose two economic recovery scenarios, slow and fast with, in each case, high investment or low investment in ‘green’ infrastructure.

It then outlines five options to overcome the inadequacy outputs of these scenarios. The options range from a central energy buyer to a mix and match of a carbon floor, a centralised renewables market, new purchase and sale obligations, etc. In other words, all the options discussed over previous months make their appearance in the mix of policies for the way forward.

What did Ofgem intend by this? It doesn’t have a policy remit (and has intensely irritated its current and potential future political masters in publishing.) Was it aiming to narrow discussion about the range of possibilities?

If so, it didn’t work. The Treasury followed behind with its Energy Market Assessment. This dismisses reliance on a carbon floor and dismisses a central buyer for all energy outputs. It insists focus must be restricted to:

• paying low-carbon generators more;
• ‘penalising’ high carbon generation;
• paying low-carbon generators a fixed amount.

Having read this document, one’s response is why bother? It has no argument and defers anything substantive to an autumn consultation. The only effect is to show that Government doesn’t yet have a policy on market reform.

The Tories, by contrast, are hugely ambitious — over-ambitious, perhaps? They have published a twelve-point policy plan called Rebuilding Security. The plans fall into three parts: substantial market reform, administration and tidying up. The heart of change, the main market-reform proposals, are:

• requiring electricity suppliers to buy capacity;
• requiring gas suppliers to have storage, contracted demand-side response and (contrary to the trend in European competition decisions) long-term contracts;
• implementing a long-term carbon floor price via the CCL;
• building an offshore grid, with associated marine park facilities;
• mandating a national network of recharging points for electric cars;
• limiting Ofgem’s powers and taking policy matters back into government (contrary to the decisions taken by the European Energy Council).

These policy outlines are quite different, with the Tories being the most interventionist.

But discouragingly, there is a huge similarity between the proposals.

• Ofgem’s options and consultations are irrelevant: it has no powers to be dabbling in policy and no government will give its options any credence.
• The Government has, as yet, only nascent policies.
• The Tories have policies which involve a disregard for EU powers and EU decisions that one cannot contemplate any government following through.

A senior Labour parliamentarian said we don’t have policies, we just muddle through. So far there are no signs that is changing.

(© Sally Barrett-Williams)

How to get it really wrong

In January DECC announced that it was changing the Renewables Obligation rules for biomass plants and they would now no longer be grandfathered.

Putting that at its commercial bottom-line clearest, what government told us that day was that the biomass plant you build now might or might not get 1.5 ROCs per MWh after 2013.

The news pulled the rug from under projects nearing the end of their development period that were looking for finance and would start to generate after April 2013. And it pulled the rug utterly obviously, predictably and as certainly as day follows night. Governments do not make changes of this kind in this kind of way. Never. Ever. They know that doing so freezes investment and brings development to a halt.

So everyone asked, shocked and appalled, for an explanation in meetings they demanded with DECC. A number of things emerged from those meetings.

First, and most worrying for the investment community, was the discovery that it was news to DECC that changing investment rules and removing investment props undermines the market. Extraordinary though it may seem, the DECC officials who have been in place for some time and its panoply of energy politicians seem simply not to have known the basic rules of markets, investments and government support, despite that being their main job in life.

A second thing that emerged from the meetings was that DECC had changed the rules because it couldn’t manage to work out a simple a priori means of distinguishing between one kind of biomass and another. It couldn’t fathom a scheme to ensure that the cheaper sorts of biomass plants got less support than the more expensive kinds of biomass plants. Again, it is worrying that officials who have been in post for so long can so signally fail to understand how to do these things. They might at least have looked at Germany, which managed to do precisely that in its Renewable Energy Sources Act some considerable time ago.

With a cock-up on that scale one expects immediate action. What did we get? Nearly two weeks after developers and funders explained to DECC the momentous consequences of its ill-considered decision, Lord Hunt announced that he would make an announcement sometime later, (though no later than eight weeks later). Why the delay?

The answer is the third thing to emerge from the January meetings: any clearing up of the mess is not intended to happen soon. The 2010 Renewables Order – the Order by which this change is to be made – has already gone to the Joint Committee on Statutory Instruments. The DECC officials want to leave the matter to be dealt with until they get to dealing with the next Renewables Order in April 2011.

Just pause for a moment to consider the costs of such delay. Projects that might have come on stream after 2013 are stalled and will remain stalled until legislation (not Lord Hunt’s possible future warm words) deals with the issue in April 2011.

In that time projects will fold for different reasons–options that lapse, costs that mount beyond a fundable bar, contracts that don’t get taken up or which are renewed only at significantly higher cost. That delay will impact our reaching our renewables targets. It will also affect total overall costs since we know that new schemes are more expensive than older schemes.

The simple solution is to put before Parliament an order amending the erroneous order now. Anything less suggests that someone’s face-saving is more important than UK energy policy. So it may be to whoever is dragging their feet – but good order in government requires that corporate decisions rather than individual mistakes take precedence.
Isn’t it reasonable to assume good order will prevail?

(© Sally Barrett-Williams)

It's not a treaty Guv, honest!

It’s the start of a new year and, in Europe, the start of a new era. The Lisbon Treaty - the Treaty that isn’t a treaty but just ‘tidies up’ the administration - is now in effect.

One consequence of the new ‘administrative tidying’ non-treaty Treaty is that it has created the European Union (or the “Union” as it is called) in place of the “Community” it replaces. The new Union is independent of the countries that belong to it. So we can now talk about the EU and the Member States and they are all different entities.

We will see, over the next years, just how major and significant a change that little bit of ‘administrative tidying’ turns out to be.

Another consequence of the Lisbon Treaty is that the brand new Union and the Member States now have a curious kind of joint responsibility for a number of things. Energy is among them.

It’s hard to describe in brief what this joint responsibility amounts to since it’s expressed in Eurospeke as “a spirit of solidarity”. If anyone thinks there’s anything discretionary about that spirit of solidarity, just consider what its opposite would be: ‘acting alone’, ‘acting without regard to membership of the Union’, etc. It would, in effect, run counter to the Treaty (and the non-treaty Treaty) and the Union.

No; there is nothing discretionary about the spirit of solidarity. One might as well call it as it is and say there are now joint obligations imposed on indi-vidual (and joint) Member States and also on the new entity, the Union.

In the field of energy, our basic joint obligations are listed as:

• to create a Union energy market; 
• to ensure security of supply for Member States and the Union; 
• to promote energy saving and re-newable energy; 
• and to bring about interconnection of all energy networks.

These have always been our obligations. That is, they have been the obligations of France or the UK or Italy or Spain, and so on to ensure that France, or the UK or Italy or Spain, etc., do these things and aim to achieve these objectives. But that has changed. We now have joint obligations and the Union has the same obligations – which means that we must act jointly and the Union must act.

There is one significant additional change in the ‘administrative tidying’ of European energy obligations. Before the non-treaty Treaty came into effect the way in which each Member State carried out these obligations was left to each of them because they, and not other Member States (and not an administrative entity) had what is described as greater ‘competence’ in dealing with their own local circumstances.

That is no longer so: our competence to decide how we will implement the provisions of any directive is no longer a separate competence but is a competence only capable of being exercised in collaboration with the other Member States and the Union. We now share a competence in energy matters, which clearly means no Member State may act alone. But more: that competence cannot be exercised by a Member State if the Union exercises its competence first.

What this means is a quite extraordinary reversal of powers: the UK (a Member State) could not decide how to implement energy provisions emanating from the Union if the Union had decided how to implement the provisions first.

So much for an administrative-tidying no-treaty Treaty. And so much for a government that either decided not to discuss the Treaty with the electorate or which didn’t have a grip on what was happening. The amateurism of the energy brief over the last few years suggests that it’s less stitch up and more cock up.

(© Sally Barrett-Williams)

Price Cap, Price Control and Income Distribution: The New Energy Bill

The 2009-2010 Energy Bill contains some of the things we knew it would, such as a tax on suppliers to pay for CCS demonstration projects.

It also contains price control powers that are fundamentally anti-market, permit a high degree of government control and go far beyond what we might expect from any government, let alone one needing large-scale investment by energy companies:

• suppliers will be obliged to fund the government’s various fuel poverty schemes in ways, amounts and times government dictates; 
• government will be able to amend supply prices ; 
• and certain generator profits can be prevented.

The powers sought really are quite as extraordinary as this itemisation indicates they may be.

Fuel Poverty Schemes

Suppliers voluntarily participate in the current fuel poverty scheme and provide £150m to those who spend 10%+ of their income on energy.

New schemes will oblige suppliers to participate. These schemes will be flexible about the amount of any benefit (there isn’t a cap on scheme values), its form and how it is provided. The government is looking forward awarding pretty substantial price rebates to consumers.

A particular option foreseen is a scheme in which the fuel poor pay a lower price than others, so others are forced to subsidise them.

This amounts to the right to tax the energy consumer by whatever amount seems to government to be desirable. Further, the tax trigger is fuel poverty, whose level is raised or lowered by government actions.

Price Setting

The second provision involves a dif-ferent form of price setting, activated where prices to consumers are at different levels. Where a supplier charges non-discriminatory different prices to end-users - because some customers buy electricity, some gas and some both gas and electricity and the prices for each are different - the government may set aside the prices and impose its own.

This amounts to the power for government to impose its own view of the right price.

Preventing Excessive Profits

The third form of price control is aimed at preventing generators earning ‘excessive benefits’. When will this happen? When generators choose which plant to run to achieve profits from either bids or offers or make bids to benefit from being a sole provider in an export constraint situation.

In such a circumstance, new licence conditions will be introduced to prohibit this form of bid.

What is an excessive benefit here? We haven’t been told; it has been left for government to determine.

One obvious question to ask at this juncture is whether there is any prospect that this Bill, which has just had its second reading, will become law. There are fifteen pieces of legislation to be dealt with before the latest date Parliament can dissolve (22 May). Of these, three are carried over from the last session and must be dealt with; six others have more obvious electoral importance and there are at most 71 days to achieve this.

Although it cannot be probable the Bill will become law, it is possible.

There are signs the Tories will retain legislation providing them with fiscal tools (they indicate that law they would not introduce they will use because it’s there).

The contradictory nature of the Bill and its investment unintelligence should not lead us to be complacent and assume it could not become law. It could; and it could be hard to get rid of.

(© Sally Barrett-Williams)

Locking the stable door

The likely next government has, it appears, said it will cut Ofgem down to size and repatriate its strategic powers. A announcement of the details is expected some time before Copenhagen (7-18 December).
The new role appears to be an odd combination of ‘pure’ market regulator and consumer protection body. What makes the latter especially odd is that various consumer bodies have only recently been collapsed into one and taking the energy function out of that big brand new consumer body and plugging it back into Ofgem has no obvious rationale. (The Tories do know these bodies have merged, don’t they?)
So far as the ‘pure economic regulator’ bit of the new role is concerned, it seems clear where one might want the slimming regime to focus. Right now Ofgem has on its non-core agenda: Analysing the markets’ capacity to cope with the credit crisis and its reliance on imported gas; Changing the industry rule-making processes to unseat what it calls “vested interests”; Running a new, expensive, unwanted and widely derided offshore transmission regime; Pushing for smart meters; Contributing to “the European energy scene”; and Advising “government how to meet its 2020 target and, along the way, how to mitigate fuel poverty.
Since all this work essentially involves policy or its addendum, it should all be expected to go back to government if Ofgem were restricted to what was, once upon a time, its day job. Is there any chance that will happen?
A fly in the ointment of any retrenchment is the law. Late last August new European Directives came into effect, forcing Member States to arm their energy regulators with a range of powers.
These powers include, predictably, opaquely and vaguely, whatever may be needed to “promote a competitive, secure and environmentally sustainable internal market in electricity’”. If one took that phrase to court to argue that the regulator did or didn’t have the relevant powers, it’s hard to know what the outcome might be. To that extent it is broadly meaningless and is to be understood as just a handwave.
Much more meaningfully, however, the regulators are to have powers to monitor investment in generation capacity and they are to have powers to promote system adequacy. These are substantive powers that go way beyond ‘pure economic regulation’, no matter how broadly one construes the phrase - and several of the items on the regulator’s non-core agenda listed earlier clearly aim at these outcomes. So even though these were once ‘extra-curricular’ activities, they are extra-curricular no more.
Now is not the time to be complaining that with this massively political agenda the regulator is stretching the boundaries of its powers by straying into policy matters. It’s too late; the horse of pure economic loss bolted some time ago and the Tories will have a hard time getting it back in its stable.
That doesn’t mean everything on Ofgem’s agenda must stay. The new government should repeal, immediately, the bizarre, anti-competitive offshore transmission regime that began life this year. And Ofgem should be prohibited from having any kind of role in the market. It should also be pushed back from the more clearly political of its activities.
But trimming the regulator back still leaves it with wider powers than anyone expected. That is something, with whatever bad grace, we have to accept – while blaming our politicians that they have left us with regulation by a body that is substantially free of government direction but is subject to direction by the European Commission. It is a regulatory regime of a kind no-one could possibly have wanted. Although the Tories cannot do what they say they will do, what they can do – what they must do – is devise a regime to ensure that issues of this kind are brought before its own constituents to enable them a say in the matter before they become enshrined in law.


(© Sally Barrett-Williams)

Inappropriate Behaviour

WE ALL KNOW what the legislation says the regulator should be doing but, before saying Ofgem is not doing it, we ought to remind ourselves of its principles to avoid being accused of injustice, or worse. (By the way, when I say 'we' I do not mean only me.)
The regulator's duties are a collection of injunctions and permissions of various kinds scattered throughout the legislation. It must, in whichever of these it does, act in accordance with a pyramid of obligation:

• First it must carry out its duties or exercise its powers so as to achieve X.
• Second it must achieve X in a particular way.
• Third in achieving X it must take account of a number of factors.
• Fourth (sort of hanging on the end) it must also pay attention to guidance.

Thus the main focus for the regulator is doing what it has the power or obligation to do so as to achieve X - even if it has to do it in particular ways while taking account of and paying attention to various matters.
X is, put generally, protecting present and future customers by promoting competition. Given that, it's not surprising that the regulator from time to time seems to come up with yet another hare-brained scheme for introducing a brand new area of competition. Or is it?
Actually it is, and this is the nub of many objections to the regulator's activities: it is only meant to protect customers by promoting competitionwhere it is appropriate to do so.
The regulator cannot appeal to the unalloyed good of competition alone and it cannot claim to have discharged its obligations just because it has brought about yet more competition.
This 'appropriateness test' is a kind of sanity check – and it is one the regulator on occasion spectacularly fails–e.g., its abortive attempt to reform the exit capacity arrangements for gas, or its equally abortive attempts to change the transmission losses regime.
There is a new case of failure to pass the appropriateness test: the 'OFTO' regime, which came into operation this summer and which introduces something the regulator inaptly calls 'competition' into offshore transmission.
If we apply it to the timetable for the Pentland Firth we can see exactly how it works.

• Mid-May: Developers bid for Crown Estate leases for offshore sites.
• End September: Lease options signed. Immediately developers pay National Grid for a connection offer.
• End December: Connection offer made. End January: Developers must have reviewed and negotiated with NG and accepted the offer.
• End February: Apply to Ofgem to join the June tender.
• March-April: The developer pays Ofgem to draft its PIM, populates a data room specified by Ofgem, enters into agreements with Ofgem, pays Ofgem £50,000, provides a guarantee to Ofgem, agrees liability to Ofgem for all other Ofgem costs (including for heat and light).
• June Onward: The developer waits twelve months. It then pays Ofgem yet more and deals with a transmission operator chosen by Ofgem – a choice it has had no role in – before it has firm connection details and price.

Ofgem/DECC have lauded this bizarre arrangement as one to “promote innovation and deliver lower costs”. It is remarkably hard to see the basis for the claim.
They also assert that it will deliver offshore transmission “economically and efficiently”. The basis for this is mysterious.
Worse (if anything could be worse) they appear to have overlooked the funding that will enable offshore schemes to be built. They also appear not to have noticed that the regime affects marine as well as wind. The finance market tells us this is a disaster for any developer lacking a substantial balance sheet and particularly affects marine power.
This is a mockery of better regulation and runs counter to the regulator's primary objectives. What should the regulator be doing? Whatever it is, it is definitely not this.


(© Sally Barrett-Williams)

Black Holes and Illegal Acts

Emissions Trading in Disarray cried the headlines – followed by claims that the European Court’s decision that the Commission unlawfully rejected Poland and Estonia’s National Allocation Plans would undermine the carbon market.
Were they right - or did the instant press overplay its hand?
In 2006 all Member States produced their NAPs to the Commission – which promptly rejected almost every one, imposing its own cap on the number of carbon allowances (EUAs) that could be allocated by each country.
Those who objected the most - Poland, Estonia, Bulgaria, Romania, Hungary, Czech Republic, Lithuania and Latvia – appealed the rejection.
The Court, having heard the first two appeals, has found resoundingly against the Commission. Decisions on the other cases will go the same way.
The main elements of the decisions were:

• Only Member States can draw up a NAP or decide the total quantity of EUAs to be allocated and only they can decide how EUAs are to be distributed.
• The Commission has no power to substitute its own figures and its own cap. In doing so it unlawfully behaves as if it has power to “uniformise” and has a central role in the drafting of NAPs.
• The Commission must give ‘reasoned decisions’ for rejections. In these cases, it rejected the NAPs “on the basis of reasoning which consists only in the evocation of doubts as to the reliability of the data”.

Unsurprisingly, immediately the Court’s decision was published the Commission announced that it would appeal. Any appeal must be on the ground that the Court has erred in law. The chance of a plausible appeal seems slim.
Meantime, the Court decision is in effect. That is to say, the Commission’s rejection of the NAPs no longer stands.
What, then, is the outcome?
Some believe it is now open to Poland and Estonia to resubmit their NAPs with their original EUA figures and that when they do so the market will be “flooded” with EUAs and prices will fall, or even “collapse”.
But if the Commission’s rejection of the NAPs was illegal, they are still theoretically before the Commission for consideration. So no resubmission of NAPs is needed and, contrary to what some have suggested, no redrafting of NAPs is possible.
However, the emissions data have changed. If current emissions data are used, the NAPs will have to be changed (by Poland and Estonia – not by the Commission) and the outcome will be pretty much in line with what the Commission illegally decided.
There is a legal black hole here. If Member States’ NAPs were assessed using data available in 2006, it is arguable that it is not open to the Commission now to assess the NAPs it unlawfully rejected using newer, tougher, data.
And yet, the Directive which determines what the Commission can and cannot do, does not envisage an illegality of the kind found by the Court and it makes no provision for old figures to be used.
Thus the Commission cannot, without injustice, use newer data nor can it, without bending the rules, use old data (inviting legal action by other Member States).
What should it do? It has no options for decisions that are immune from legal challenge except a negotiated ‘fix’ or, if that fails to work, absolutely anything that spins out time and maintains the lower level of EAUs on the market. And that, probably in that order, is what it will do and I predict it will be successful – the Commission is a dab hand at dealing with legal black holes.


(© Sally Barrett-Williams)