It doesn’t seem that long ago that we were publishing our analysis of each political party's manifestos and their relationship with the energy sector for the last election. Recently we were commenting on the impact of the pro-Brexit vote and how that could affect the UK's energy market.
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Phillip Hammond delivered a budget which will be analysed and debated by many but the energy industry is unlikely to amongst the many. He didn’t really say a lot and what he did say amounted to saying that he won’t be saying anything until later in the year.
There is still a seeming commitment to decarbonisation although the key instruments to assist that process are to be looked at in detail in the latter part of 2017. It’s interesting that, as we approach Article 50’s triggering, detailed energy policy has taken a back seat. Brexit negotiations will have to encompass UK-EU Energy Policy and how that plays out for the Levy Control Framework, the level of renewable subsidies and the level of the Carbon Floor Price remain to be seen. Everything is on hold; the best that could be inferred from today is that there is some form of decarbonisation commitment, long term .
The budget detail was as follows:
The Levy Control Framework, which manages / governs the various Renewable Energy Subsidies, RO, Fit and CfD, is to be replaced; no consultation as to how it is to be replaced is likely until 2018 and so a good spell of uncertainty will hang over the renewables market in the meantime. Generation projects may be held or shelved until the Treasury gives clarity. In likeminded procrastinating fashion the updates about the levies themselves, which were scheduled for this budget, have been delayed to later in the year.
The Carbon Floor Update was also held over until Autumn ’17 leaving generators with little certainty about the price of Carbon beyond 2019/20.
We await the autumn; meanwhile we have Article 50 and the commencement of the Brexit talks to look to and their impact on the energy market could be considerable as discussions move forward and speculation takes a grip.
To ensure your business is kept informed and understands how future announcements will affect your energy budgets please speak to Energy and Carbon Management:
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Week one of Donald J Trump’s presidency and the winds of change are blowing hard through many parts of American life and beyond. The environment and energy have been centre stage for some of the week with the Dakota Access and the Keystone XL (Phase IV) pipelines getting the Executive Order treatment. Looking back on the campaign trail of DJT you might recall his promises to reinvigorate the ailing US coal industry and get American miners back to work. Although nothing has happened yet (as far as the writer knows) it’s highly likely that there will be a push on coal, as it is part of the push to create American jobs.
So, what does it mean? Well, it is likely to mean that the world supply of oil (Keystone) and gas (Dakota) and US coal will be stronger; just at a time when we have worldwide oversupply of commodities across the piste. Prices aren’t likely to harden as these new supplies hit the market, unless there is a reduction in supply elsewhere in the world or an increase in demand. Will the Middle East and OPEC maintain its oil output reduction or will conflict, or the threat of conflict, in oil and gas sensitive areas of the world lead to a reduction in available supply? Only time will tell. Certainly, Mr Trump has made it clear that he is no friend of the environment and that driving down unit costs and employing American workers is his priority.
Meanwhile in London Mrs May has set out her stall as far as Brexit is concerned. She claims to want to maintain the environmental / energy programmes of Europe, post Brexit, but the winds of change and the new order in America have yet to assert their influence. The Prime Minister and President meet later this week and both sides are talking about a UK-US trade deal. American unit costs are lower and their economies of scale allow them to produce at significantly lower prices than the UK, so it may be difficult to see how we will accommodate American imports without sacrificing our own businesses. Maybe the strategy will be to allow the American’s to supply in place of European imports; Chryslers not Citroens may be the order of the day.
As UK moves away from the safety of its EU trading block and looks abroad for new partners it may encounter a number of countries with much lower unit costs where tariff free trade will not work for us. The upshot is likely to be a need for complex and industry specific trading arrangements to be negotiated which protect the UK as well as a switch in energy policy to help keep down unit costs and to enhance our competitiveness. As we move ahead with current environmental / energy strategies there is only one place for costs to go, up. As the subsidies needed to sustain higher cost renewable energy sources increase, in proportion to the amount of green energy in the system, then, de facto, the subsidy level must increase and the burden on the energy price will rise.
It will be hard to maintain the country on the renewable path at a time when we have to engage more directly with lower cost production economies like Trump’s America; the temptation to abandon the green path may increase as the need to drive down our unit costs takes hold and as the world over supply of commodities continues to suppress fossil generated energy costs thus making them more attractive.
Autumn is the time to make jam and Phil Hammond, under the watchful gaze of Mrs M, has been stirring the pot and today served up his first tempting conserve. The Autumn Statement (the last of its kind, as it is to be replaced by an Autumnal Budget and a Spring Statement) was crafted to offer up some sweetness to the newly identified voting constituency of ‘jam’. JAM, or those who are “Just About Managing” represent those people not served well by globalisation, without their share of the goodies and who, in the UK in June and in the US earlier this month, gave the political elite a severe kicking as Brexit won the day and Donald Trump ascended to power.
The real and immediate economic effect of Brexit has been to depreciate the pound against the US Dollar and the Euro. Good news for the exporter and bad news for imports. UK energy supplies are made up from a considerable quantity of internationally traded coal and natural gas and since Brexit we have seen UK 12 month electricity and gas contracts rise by 8% and 5%. So, UK energy along with other goods and services like petrol and food are now all beginning to see price inflation kick in. At a macro level, the knock on consequence in the UK will be a hike in inflation. The OBR (Office of Budgetary Responsibility) has forecast CPI (Consumer Prices Index) inflation rates as 2017, 2.3%, 2018, 2.5%, 2019, 2.1% and 2020, 2.0%. As inflation takes hold there will be increasing possibilities that the Monetary Policy Committee at the Bank of England may increase interest rates in order to calm inflationary pressures. There is no sign of that yet but the low interest environment depends on these inflation forecasts holding and as we have seen of late, forecasts and projections tend to be inaccurate.
So, Phil has spotted that the energy sector is a significant inflationary item in the budget and has taken some immediate steps to limit the impact of price increases. Those are:
• Continuing the cap on Carbon Price Support at Euro 18 / tonne
• Continuing the fuel duty rate freeze
• Increasing / enhancing competition in the market
At best these are marginal attempts to limit the inflationary impact of the Brexit-Currency-Fossil Fuel stimulus. The real driving force behind energy fuelled inflation is the price of the raw energy sources (Coal, Gas etc), the cost of subsidising the more expensive sustainable energies through CFD, FiT and RO and the true cost of moving to a smart grid. The Chancellor had this to say as far as these areas are concerned:
• Establishing a Shale Wealth Fund providing up to £1bn of extra resources to stimulate the shale industry and
• Restated the government’s commitment to decarbonising the economy and in the next Budget (Autumn 17) will publish its thoughts as to the future of the Levy Control Framework (the control mechanism for sustainable energy subsidies).
• Government expects £100bn of private investment to come into the UK energy sector in the next 15 years in order to provide new generating capacity, upgrade the Transmission and Distribution systems and develop shale.
The real inflationary effects of current energy policy have perhaps been understated. Decarbonisation and Smart Grid conversion are massively expensive transitions for the sector to undertake and if this Government’s commitment to those two processes is genuine, then we are likely to see a revision of the energy inflation forecast. The fact that the Levy Control framework review has been put off for a year seems to underpin this conclusion. Government needs to see how the currency stabilises and what real impacts there are to inflation and potentially interest rates before it makes an absolute commitment to sustaining the subsidy regimen, which supports the sustainable energy sector. If shale starts to show real promise and the out-turn prices are low, then we may see a wholesale shift in policy away from the more expensive green energy sources.
For now, this budget has done little to avoid the current bullish run on UK energy prices. The only thing that would do that would be a resurgence in the value of sterling or a collapse in the oil price and neither of those look like they’re on the cards in the near future. The next big piece of news will be from OPEC, in Vienna on November 30th when we will see if production quotas will be established and if so we could see an upward push in the price of crude with a consequential upward push on UK natural gas prices and electricity. This Government’s real intervention in the energy market has been clearly signalled for Autumn 2017.
Thames Water has announced that it will not be a retailer of water to non-domestic customers in its area after 01/04/17. It has transferred its book of clients to Castle Water along with Portsmouth Water.
Meanwhile Business Stream (the Scottish Supplier) is to take over Southern Water’s clients.
Those in Wessex and Bristol supply areas will see Water2Business as their new supplier. These are either new or different businesses taking over the supply role immediately on April 1st.
Our feeling is that with such massive changes occurring in the market our clients need to ensure that their needs are being served and a full market review / tender is essential to making a well-informed decision. Apart from better prices it is also possible to find new suppliers who will offer consolidated billing which to multi-site national clients could provide real administrative benefits.
We do urge all of our clients not to miss this opportunity and to take steps to ensure that they have a quality and reliable retailer in place for April 1st which can provide the billing platform that they need and that the market has been fully tested.
If you would like to discuss your water needs, please contact James Hickling on Tel: 01293-651218
The licence to frack on a green field site at Preston New Road, near Blackpool in Lancashire, has been granted. The fracking industry is overjoyed; the environmentalists are not.
So, despite a worldwide glut of fossil fuels what is driving the Government’s determination to frack, when it seems that we don’t need it? Our view is that this is preparation for the closure of the coal plants over the coming 8 to 10 years and the likely increase in gas demand for generation. Security of supply lies at the heart of the decision and rather than buy the additional gas from overseas suppliers, such as the US, Qatar and Russia the UK Government would rather we develop our own indigenous gas reserves. Scotland has already banned fracking, north of the border.
The forthcoming months are likely to see environmental protests intensify, as they did at the Balcombe fracking site a couple of years back. There is a long way to go before there is a fully fledged fracking industry in the UK, however today is one of those milestone days where the industry has taken another significant step forward. Green field sites are now fair-game.
In November The Department of Energy & Climate Change (DECC) published their 20 year forward view of the changing electricity landscape and neatly summed up a lot of thinking and speculating in a single graph, see below. One of the keys to the accuracy of this forecast is the success or otherwise of the expansion of the nuclear generation sector in the UK. Last week’s thumbs up by Mrs May for the Hinkley Point project must have been a relief to the forecasting department at the newly created Department for Business, Energy & Industrial Strategy.
The Chinese interest in our nuclear fleet is not just focused on the south west; the deal with China allows for their involvement in a new nuclear power station at Sizewell in Suffolk and also a fully Chinese-designed station at Bradwell in Essex. So the Chinese are in, Mrs May is happy with that, the Yuan will flow into the country and the nuclear industry will expand. The nuclear tranche on the graph tells the story of a stable and slightly contracting nuclear contribution up to and around 2027/28 and then its expansion as the new power stations come on line.
The DECC graphic tells a number of stories and all of them are premised on one key assumption; that demand will continue to fall; it has been falling since the financial crash of 2008 and according to the economists at the DECC it is expected to fall until 2025 or thereabouts, which is convenient as the expansion of the nuclear power plants won’t occur until then.
The fossil fuels are on the way out altogether or is it that they are cleaning up their act? The tale of the demise of coal by 2025 is clear to see and during the period leading up to that we can see the renewables (light green) expanding and the dark green coal on the retreat. Meanwhile gas will hold its market share until 2025/2030 at which point it will retreat slowly being replaced by both the increases in nuclear and the advent of Coal or Gas which is must in future run with fully functioning Carbon Capture and Storage.
The overall picture is one where in 20 years’ time fossil fuels will be significantly diminished and the vast bulk of generation will be carbon friendly. But the whole scenario relies on the UK demand levels falling for the next 8 to 10 years. One imagines that this is a result of the widespread use of new technology like LED lamps and businesses engaging with ISO50001, ESOS and the like. Along with the expectation that the rising price of energy will push demand down through the basic laws of supply and demand. Without a doubt the future price scenario is likely to be more expensive; the Strike Price for CfD’s (Contracts for Difference) for nuclear power stations is high (circa £90/MWH); most renewable projects like wind and solar and tidal have high strike prices too, as will Carbon Capture regimens.
Market price, today, is set by the price of fossil fuels, adjusted for Carbon credits and the inflationary or deflationary effects of currency movements. The economics of future energy prices are likely to have little to do with fossil fuel prices and significantly more to do with how well CfD contracts have been negotiated, how long term they are and a significant part of the cost will be the cost of borrowing, in order to fund major energy generation projects. It will be interesting to see what the key drivers of energy prices in the future will be and whether the move to non-fossil commodity fuel sources will lead to more expensive but more stable and predictable markets.
Source: The DECC Projected sources of UK Energy, November 2015
The economics of the proposed nuclear power station, Hinkley C, are one thing but the politics of it are another. Some argue that it is an absolute necessity, a no brainer. A low carbon energy source coming to the UK and replacing those old coal fired power stations. Others argue that at a strike price of £92.5/MHW it makes more sense to subsidize the mandatory installation of LED lights everywhere and save the electricity, instead. Others feel that building different kinds of renewables like solar and wind would be much cheaper (although less reliable), much quicker to achieve and less environmentally controversial. These are the simplistic arguments which have been bandied about but which avoid the real issue with which HM Gov and Co are wrestling.
At the heart of this issue there is that of allowing a foreign power to have such a degree of influence and control of such an economically strategic asset; namely China. Since Mrs May’s ascendancy to Number 10 the powers that be seem to be coming to the realization that having another country that close to our strategic infrastructure is perhaps not such a welcome development. The recent delay, reported widely two weeks ago, brought a pretty firm response from the Chinese Ambassador, Liu Xiaoming, in which the UK was warned of the seriousness with which Beijing is treating our delay. It seems that we are not the only ones to have come to the same conclusion and to disappoint the Chinese. In New South Wales Australia the Government has rejected the idea of the Chinese taking a controlling stake in Ausgrid, similar to our National Grid, bringing a similarly disappointed Chinese response.
So what next? Will Hinkley C ever be built? Should it be built? Increasingly it seems that the hurdles to this enterprise are higher and higher and options like mandatory LED lights in order to drop demand and more wind and solar farms in order to increase green energy supply, are more and more attractive. This story isn’t finished yet and such is its importance that how it ends, may well set the tenor for the direction of energy policy in the UK for some years to come.
Since Brexit nothing comes as a surprise in the world of politics, until yesterday that is. EDF said let's press on with Hinkley and build the mega power station and the Government said ...... no. The deal to build Hinkley B has been almost signed for the last three years, as the different parties have assessed the risks attached to the mammoth multi billion pound investment. This time it's the UK Government.
HM Gov says that it needs to acquaint itself with the detail before committing to the deal. Maybe there is some need for that but surely the civil service knows the deal inside out and could have briefed the new Business Secretary and indeed the Chancellor and PM with a one hour powerpoint presentation?
Perhaps at the centre of this new hurdle is the fact that we have a new Government, a new Prime Minister and we are exiting the EU. Hinkley represents a 35 year commitment to paying subsidies to EDF for operating the plant at a strike price of £92.50 per MWh whilst fossil fuels are producing market prices in the £40's per MWh. There is a strategic push to invest in fracked gas in the UK which may produce large quantities of low cost and 'cleaner than coal' energy. Disengagement from the EU could mean disengagement from EU climate change directives, targets and obligations and therefore the commitment to invest in renewables and zero carbon energy sources can be relaxed. The mandatory closure of coal fired power stations may well be over-turned or the closure date pushed into the future. This Government will want to keep costs low in the UK in order for us to compete effectively on the world stage as the Brexit-effect takes hold. We want in-bound investment and we want to export and low energy prices are one part in the equation for effecting that outcome.
The economics and politics of this government is monetarist and conservative. Thatcherite thinking is not dead, in fact it is very much alive at Tory HQ. Such a philosophy does not embrace subsidy well and it doesn't embrace long term subsidy to support uneconomic activity. Ask the shipbuilders, steelmakers and miners of the 70's and 80's. Perhaps this Governmental halt to the Hinkley process is more to do with an internal examination of the grass roots of the deal and where it sits in relation to the economic philosophy of Mrs May and her team and lot less to do with the new government wishing to acquaint itself with the detail.
Last year, April 22nd in fact, we wrote an article in which we said that only if we come out of Europe would we see a potential change in the over-riding energy policy. Last week our new PM, Mrs. May, announced the closure of DECC to the astonishment of many observers. Brexit has arrived and the Brexit ministers have their mandate which means the country must now wait to see what its future will be. As a part of that, the energy industry will have to wait too. And whilst we all wait, industry must tolerate the uncertainty as best it can. Investment decisions are likely to be postponed and the pound will suffer the immediate impact; our imports will become more expensive; imported fossil fuel energy sources will become more expensive. In some ways this is a good thing for the renewables as it shrinks the cost gap between them and their fossil alternatives. It also provides a stimulus to the fracking community, and as we know this government backed fracking (although the Scots don’t). Fracked gas will be more economic as the price of UK imported energy rises and so the regulatory and economic barriers to market entry will come down. All that remains is the technical / environmental considerations and of course, public opinion. It seems that fracking will happen; it’s just a question of when and where.
We are in the new world of Teresa May, Brexit, a cheaper pound, fracking and pricier energy. The long enjoyed downtrend in energy prices seems to have now come to an end. The outlook has changed; therefore business should be on watch for a creeping escalation in costs. The need to manage energy volumes and reduce where possible, combined with an effective procurement policy is essential, if the benefits of the last two years of falling prices are to be sustained into the future.
To find out how we can help guide you through the post-brexit energy world ring 01293-651218 and speak with James.
Could UK energy prices catch a cold, should the Leave Camp win the now very near Brexit debate?
Needless to say the answer is complex and full of caveats, however here is a view.
The pound is likely to fair badly for a while, if the country votes to leave and that is likely to put pressure on imported energy prices. Our imports come in the form of LNG from the Middle East, Natural Gas from EU interconnectors and from Norwegian fields plus imported coal. So, the currency and the relative strength of sterling, against a number of currencies, will have a direct bearing on raw material input costs and therefore impact energy prices. To what extent it is difficult to say, but we can probably say that for a period there will be volatility and perhaps a period of energy price inflation.
It has been argued by the Brexiteers, that the UK could unhitch itself from the Decarbonisation obligations which we have as members of the EU. There is a big ‘if’ attached to that possibility as the ethics of such a decision go well belong the EU membership debate. Nevertheless if we were to relax the pace of de-carbonisation and fossil fuels remained relatively cheap against renewables, then forward views of energy prices may well soften.
Possibly the biggest unknown and least unknowable is what will happen to investment in the UK energy sector in a Brexited future where we are out of the EU and possibly out of the European Energy Market. Would we remain an attractive option for energy investment, especially if we slow a decarbonisation policy? Investors will assess many things such as the economic climate and interest rates, potential growth in GDP and so on before making decisions; in a world where we leave the EU there is likely to be considerable uncertainty around those areas and we all know that uncertainty is not the friend of the investor.
So in just three areas, currency, decarbonisation and investment we have potential for volatility and uncertainty; how the combination of those things will play out post Brexit remains to be seen. In the run up to the vote, however, we have seen prices in electricity and gas contracts increase in just the last 2 months by between 20% and 30% and some of that has come about through volatility, uncertainty and speculation. As the Brexit date approaches we should prepare for more of the same.
Are you interested to see what you can do to protect yourselves from any increases in energy contracts? Contact James on: 01293 651218
The Scottish Parliament has spoken, or has it ? Well a little bit of it has spoken because the bigger bit, the SNP, decided to abstain from voting on the Labour motion to ban fracking, north of the border.
Why would Nicola do such a thing? Well there is a Scotland wide moratorium on fracking already in place at the moment, whilst an investigation into the safety and environmental impact of fracking is underway. That investigation is due to report in 2017. So, the SNP had to step aside and say nothing, otherwise it would be seen to be prejudging the outcome of the investigation. Meanwhile, Scottish Labour have seized the moment and inflicted a crushing defeat (32 to 29) on their rivals the Scottish Tories and banned fracking for at least as long as it suits the SNP to have it banned. So, the ban will run alongside the already in-situ, and SNP approved, moratorium and there will be no fracking. And then the investigation will report; Nicola will speak and the Parliament will either endorse the ban or overturn it depending on the whim of the SNP. It seems like a waste of parliamentary time to the uninitiated observer, other than Scottish Labour get to shout about beating the Tories. Let’s face it, after the last election result, especially in Scotland, they need something to shout about
The villagers of Kirby Misperton have been catapulted into the limelight by their local council, which yesterday approved the first exploratory fracking licence in the UK for five years. The Tory Government made it plain at the election, not quite a year ago, that security of supply and the development of fracked-gas was an energy policy priority. Amber Rudd and co have been pursuing that line ever since their re-election and Kirby Misperton is the first, we suspect of many, locations to be visited upon by the frackers. As with Balcombe in Sussex, a couple of years ago, we should anticipate protests and local disruptions and an increasingly annoyed local populace. Not half as annoyed as they will be, should the exploratory activity prove that shale gas can be extracted at economically viable levels and eventually the shale industry takes off with wholesale extraction.
Environmentally the argument against fracking bases itself around wanting to avoid the poisoning of the environment, avoid the risk of earth tremors and underlines that at a time when we should be going for renewable energy sources. It seems to be illogical to be investing in the extraction of yet more carbon based fossil fuel. The Government’s position is based much more on short to medium term economics, pushing the point that shale-gas conforms to the threefold mandate of the National Grid to ensure secure, affordable and sustainable energy supplies. Shale is likely to replace coal as a generation source; it is more secure than coal as it is ours and not an import; it is affordable when compared to purely sustainable sources like solar and wind and it is more sustainable than coal having around half the carbon impact of its solid cousin.
This licence is the first in a wave of exploratory fracking licences which are likely to be granted; the story of Kirby Misperton will be retold, again and again. The debate between the environmentalists and the Department of Energy will continue, both entrenched in their ideology and unlikely to give ground to the other. It is unlikely that this Government will change its view until the economics of sustainable energy generation are broadly in line with that of fossil energy and that the issues around intermittency have been resolved.
Brent oil reached its market low of $27.61 on 21/01/2016. Since then we have been watching Brent establish a very clear rebound in a fairly tight and well defined pricing channel. The October ’15 high of $53.13 sits just above the current price of $47.86 and represents the potential for considerable resistance to any further upside. A sustained breach of $53.13, with support, would indicate further upside to come however without that the probability of prices falling back is more likely.
The UK electricity and gas markets for October 16 and April 17 Annual contracts have, like Brent, shown some recovery. Prices in all markets are essentially trading sideways within fairly well defined price ranges and the opportunity to obtain good value longer term deals continue.
The budget (16th March 2016) has seen George Osborne move into overdrive with a number of high profile infrastructure and investment initiatives, aimed at stimulating the economy. HS3, Cross-Rail 2 and the Manchester-Sheffield tunnel are all given the green light, along with a number of less high profile projects, as the Government sets the economy’s sails against the increasingly turbulent headwinds of global economic deceleration, slowing UK growth and suppressed inflation. Those were the big flagship messages along with some welcome tax breaks, here and there, for personal taxation and small businesses and the usual concentrated dose of Osbornian fiscal rectitude, as the Treasury continues its battle with the National Debt, Borrowing and Public Spending. He also warned as to the consequences of leaving the EU and pointed out that Scotland would have struggled with such low oil and gas prices had it devolved last year.
The headline announcement of the death of CRC by 2019 is less significant than the other announcements concerning the energy sector and national infrastructure. Nevertheless it is significant for those businesses which are burdened with the cost of the CRC scheme and its administration as they will be able to wave goodbye to it in a few years’ time. On the other hand the revenue which Government will lose will be made up by increasing the Climate Change Levy as of 2019, which will affect every business small or large.
The oil and gas industry heard a number of positive news bites as the Chancellor spoke. The Supplementary Charge (an additional tax on Oil and Gas company profits) is to be halved from 22% to 10% and Petroleum Revenue Tax is to be abolished completely. Both these measures to be backdated to January 1st this year and are aimed at supporting UK Oil and Gas companies, as they weather the low crude oil price storm, which has been bad news for them but good news for the rest of us. Fuel Duty has also been frozen for another year, allowing the benefits of lower fuel prices to continue being felt at the pumps.
On renewable power the chancellor had this to say, ‘The Energy Secretary and I are announcing £730 million in further auctions to back renewable technologies. And we’re now inviting bids to help develop the next generation of small modular reactors.’ So, the Chancellor is putting some effort and some real cash behind the de-carbonization of the UK generation sector. More importantly Osborne has accepted the recommendations of Lord Adonis’ Report, ‘Smart Power’, on UK Infrastructure. That report was released on 04/03/2016 and has recommended that the UK engages in three key areas of change as we move to a decentralized and decarbonized generation network. The report identifies that decarbonization will lead to a need to build more ‘green’ generation plant, invest in and upgrade our continental interconnectors along with grid-sized and local storage facilities and invest in localized demand flexibility to manage supply and demand squeezes. Finally the report identifies the need for National Grid to be able to respond to the changing nature of generation and transmission and for it to move out of its post war centralized mode of thinking. These are extensive recommendations and the necessary investment will be significant and will further stimulate the economy.
Accepting the Adonis report opens the opportunity for the Government to wholly involve itself in more public investment in national infrastructure projects, which are at the heart of Government economic policy for fiscal stimulation. At the same time this will help keep the lights on as we start to close the old coal and nuclear power stations. This Keynesian approach of ‘spend to stimulate’ runs against Tory instincts but can be rationalized by the very cheap interest rates with which such projects can be funded and the dawning realization that monetary measures just aren’t enough.
The Competition and Markets Authority has delivered its provisional findings report today, following a two year long enquiry into the UK energy sector.
The report focuses on the domestic consumer and very small or micro-businesses. In general CMA is seeking ways in which competition can be stimulated and customers can be encouraged to switch supplier, whilst at the same time being protected from unfair trading. There are proposals to establish an industry wide open database of those who have not switched in the last three years so that energy company marketing activity can be directed to those disengaged users. Whether those customers want to be bombarded remains to be seen!
Customers with pre-payment meters are also identified as a sector where the limited competition needs to be enhanced so as to give better choice and value for money.
Interestingly the report calls on OFGEM to consider withdrawing the tariff simplifications which were forced on the industry recently. CMA believes that the effect of simplification has been to stifle competition and creativity on behalf of the suppliers. So we may well see the return of more tariff options in the domestic sector.
With regard to other areas within the report the CMA has a number of observations; Firstly within electricity it wants to see OFGEM engage with the industry to work toward mandatory half hourly meeting for all consumers in order to improve the settlements process which balances the inaccuracies between forecast demand and actual consumption. This is a huge logistical task and step one is to produce an impact assessment.
Within the wholesale markets the CMA looks at two particular areas where it foresees change will bring about price efficiencies and improvements for all customers. Transparency of the mechanism for allocating funds under the CfD mechanism – this is essentially the support mechanism to subsidise low and zero carbon energy generation, which is needed in order for the economy to decarbonize. The proposed changes demand that the auction and allocation procedures are more transparent and that competition for the funds is enhanced, thereby limiting the impact of the subsidies on end user invoices. It will be the DECC that will be impacted the most by the proposed change and it will be interesting to see the department’s response to the CMA proposal.
The second change to the wholesale markets relates to the proposed introduction of locational pricing for transmission losses which should make the transmission system charges more specifically reflective of the actual losses incurred given the relative locations of the generator and the off-take point. At present this element is obscured within the charging structure. The specific losses will be allocated to the generators. The report predicts annual savings within the energy sector of between £172m and £235m as a result of those changes.
On a final note the CMA believes that OFGEM should have more authority in the market to ensure that competition is stimulated and that customers (particularly domestic and the vulnerable) are properly protected.
The CFO of EDF Mr Piquemal has resigned in protest at EDF’s continued intention to go ahead with the new nuclear power station at Hinkley B in Somerset.
Whether the project goes ahead is now in real doubt. Leaving the internal politics of EDF to one side what does this mean for the UK energy sector? Hinckley is intended to generate 8% or so of future electricity demand. If it doesn’t proceed what will take its place? Bear in mind that coal power stations will be all but extinct by the time Hinckley is to be operational and so probably gas or renewables will have to take its place. Hinckley of course would be carbon neutral/low carbon and so the idea of replacing it with gas is unpalatable for both the environmentalist and political lobbies. Other nuclear possibilities may be available or more and better renewable generation could be proposed.
EDF has yet to make its final decision as to whether it will or can fund the Hinckley proposal and in the meantime the Department of Energy is probably working its way through Plan B; what to do if the deal collapses?
Brent Crude has moved up by 19% since January 21st this year. Sounds wonderful doesn’t it? Until you realise that it has fallen so low that a 19% bounce only amounts to a $5 a barrel increase.
Brent closed last week just shy of $33/bbl, having fallen from around $60/bbl in just under a year and we were north of $100/BBL just 18 months ago.
The bounce in oil has been reflected in the annual gas contracts for April and October 2016 and by extension the UK power contracts. All of these markets are showing similar movements.
Power, gas and oil markets remain bearish, trading below their 200 and 50 day moving averages and they all remain within downward price channels - but they are moving sideways.
It is too early to say that the downtrend has ended as we have seen many bounces before which have failed to develop into upward momentum. Nevertheless all UK energy users should be paying close attention, particularly after a period of such profound price falls, to the developing market signals and the associated fundamental news flow. On a positive note the recent opportunities for excellent prices remain, at least for the time being.
If you would like to discuss your energy needs please contact James Hickling on Tel: 01293-651218
ESOS is a mandatory assessment scheme for large organisations in the UK, which includes an audit of the energy used by buildings, industrial processes and transport to identify savings.
The Environment Agency announced in early January that the original 5th December 2015 deadline passed with two thirds of businesses still yet to comply with ESOS. Those businesses who fail to comply with ESOS could face a potential penalty of up to £90,000.
What if I did not comply or notify The Environment Agency before the 29 January?
Move quickly to inform The Environment Agency of your efforts made to date. Businesses making a late notification must provide evidence of efforts towards ESOS compliance, and evidence of the efforts made before the 5 December deadline. This may be taken into consideration by the regulator before considering enforcement action.
If you have not yet started the process or are still not sure if your business is affected we can help
Contact our team today on: 01293 651218
An intent to Comply shows that you are working towards compliance and not ignoring your legal obligations.
The basic information you will need to submit includes:
- Company information
- An explanation for why you were not compliant by 29 January 2016
- Who your ESOS Lead Assessor is
With our assistance, you will be able to update The Environment Agency and show that you are committed to compliance.
The last opportunity for businesses to avoid ESOS non-compliance penalties is tomorrow, Friday 29th January 2016.
The Environment Agency announced in early January that the original 5th December 2015 deadline passed with two thirds of businesses still yet to comply with ESOS. If you have not yet started the process or are still not sure if your business is affected we can help – Contact our team today on: 01293 651218
What if I cannot comply before the 29 January?
Move quickly to inform The Environment Agency of your efforts made to date. Businesses making a late notification must provide evidence of efforts towards ESOS compliance, and evidence of efforts made before the 5 December deadline. This may be taken into consideration by the regulator before considering enforcement action.
The Environment Agency are advising those businesses who fail to comply with ESOS could face a potential penalty of up to £50,000. A clear approach of firm but fair, to bring businesses into compliance and willing to take the necessary action to ensure it happens. Although penalties are expected to be a last resort to avoid enforcement action, make sure your business notifies The Environment Agency by 29th January.
So, the American’s have lifted their ‘nuclear’ sanctions on Iran which can now re-enter the International Oil Market. Initial estimates are that the Persian Gulf state will pump 500,000 barrels a day. The global oil glut will be worsened by this news and the price of crude is likely to slide further. At the time of writing (10am 18/01/16) Brent is trading just under $30 and the US market just above. Commentators and financial houses make no secret of the possibility of $20 barrel of crude. The continuing oil glut combined with reduced economic activity in China and a depreciating Yuan is causing worldwide jitters in financial markets. We probably have some way to go before there is a bottom to the slide and a firming of economic and monetary policies.
That downward pressure is translating into similar bearish pressure in the UK gas and power markets, where we continue to see the price of April and October 16 annual contracts slide further. The good news is that this is a buying opportunity for energy users as the market offers up some excellent short and especially long term value. Businesses are beginning to take advantage and so they should; economic cycles are just that, cycles. This opportunity won’t be here forever.
There are a maze of suppliers and available deals on offer and with over 40 years’ experience, we would be very pleased to guide you through. Please contact James Hickling on 01293- 651218.
Lord Smith’s Shale Gas Task Force has today reported its findings. The report backs the opening of exploratory wells in order for the fracking industry to gain an idea of how large an opportunity there is under ground. As the UK is part of the European gas supply industry whatever is produced here is unlikely to suppress prices across the continent; the volume will simply not be large enough. However, any home grown gas will tick the security of supply box whilst reducing our dependency on the less ‘reliable’ producers.
The tory government sees the use of natural gas as a transition fuel to a low carbon economy, by virtue of it having a lower carbon impact than coal, which is what it will replace in the generation mix as the coal power stations start to close. Opponents in the environmental lobby are quick to point out that rather than investing in gas now and something else in the future, surely the economy should move, now, directly to renewable energy sources.
This debate is likely to continue, but given the political will to see fracking emerge as a fuel source in the UK, we should expect to see exploratory wells open and then an assessment of the real economic and environmental costs will emerge. Once that is achieved we will see whether there is the investment appetite for the wholesale development of the industry.
The build-up to the Paris Climate Change Conference was huge and the outcome has been highly anticipated. At last, now we have it!
The conference ended at the weekend with a final communique, backed by over 200 countries. So, what were the key promises, agreements and intentions to come out of the negotiations.
- To keep global temperatures "well below" 2.0C (3.6F) and "endeavour to limit" them even more, to 1.5C
- To limit the amount of greenhouse gases emitted by human activity to the same levels that trees, soil and oceans can absorb naturally, beginning at some point between 2050 and 2100
- To review each country's contribution to cutting emissions every five years so they scale up to the challenge
- For rich countries to help poorer nations by providing "climate finance" to adapt to climate change and switch to renewable energy. (Source, BBC)
These four points can be viewed as follows: there is a temperature target; there is a timescale for bringing human carbon emissions into balance with the planet’s capacity to absorb carbon; all countries will continuously review their efforts to make this happen and the developed world will financially assist the developing world to cope with climate change including the use of renewable energy rather than fossil energy.
The big question, yet to be answered, is, ‘is it enough?’ Are these measures sufficient to avert global temperature rises in excess of 2 degrees C? Countries do not, as yet, have mandatory targets to achieve in terms of carbon output and that perhaps is the main weakness of the agreement but equally it is the most complex to achieve. The Paris agreement should perhaps be seen as the starting point of a more unified global approach toward limiting greenhouse gases, carbon emissions and temperature rises. There will be a first review of progress in 2018 and thereafter every five years. There now seems to be a positive understanding of the causes of climate change and the human contribution to it. Furthermore the global community is conscious of the likely effects on citizens of all countries if global temperature rises are allowed to proceed, unchecked. The detail of ‘the how’ to cut carbon emissions and ‘the who’ will do the cutting is likely to come from future conferences as more and more evidence comes to the fore and the experiences of different countries is shared.
The Climate Change Conference (COP21) in Paris is underway; Mr Cameron has been front of house setting the scene for the need for decarbonisation, in the face of potential global catastrophe should we fail. Meanwhile his mate in number 11, George Osborne and his acolyte Amber Rudd are undermining those words by withdrawing green subsidies and supporting the gas sector, whilst making the transition to low-carbon far more difficult that it was just 6 short months ago. The Government understanding of climate change and its policies to deal with it seem to be disjointed, if not at odds with one another.
The planet has just been confirmed as being 1 degree Celsius hotter than pre-industrial levels and earth-scientists advise that we must keep the increase below 2 degrees if we are to avoid the most extreme effects of climate change. Those nations on the sharp end of climate change, such as low-lying pacific island states, are arguing that the target should be 1.5 degrees. Their real concern is survival should sea levels rise as predicted. The economics and costs of climate change is potentially much higher than the price of an EUTS Carbon Credit. Nearer to home the good people of Carlisle will tell us that weather extremes are already here. They are real and devastating and becoming more frequent.
Despite all of the climate awareness in Paris, the OPEC meeting in Vienna confirmed that Climate Change is irrelevant to the fossil fuel markets. The OPEC policy, if indeed there is a policy, is to have no policy. No output limits. The strategy of pump, pump, pump is being sustained with the objective of putting Russian, American and other oil fields out of business. The oil war is real and has been for a year or more, which is driving down the fossil markets. The strategy will work eventually; logic says that it must. Oil fields, extraction companies and processors will go out of business as price falls. As they do global output will fall and the worldwide glut of oil will be consumed. As stockpiles erode the price will harden and equilibrium will return. Current fossil price levels do nothing to help climate change initiatives. As prices of fossil based power and heat fall then the cost of renewables becomes relatively more expensive. Governments, especially ours, are naturally sceptical of any industry that needs subsidy, however if the global price of fossil fuels remains low for a protracted period of time then it may be that decarbonisation can only happen at scale and with speed, within a financially supported environment.
It seems contradictory to be preaching decarbonisation in Paris whilst encouraging and supporting the very industry which is the cause of the problem. Our umbilical link to the fossil fuel market has to be cut if we are to be seen to be credible and to make a real contribution to climate change management. The policy dilemma is, as always, driven by factors outside the climate change argument; short-term the government wants low inflation; cheap energy is part of that equation; it wants to support the economy and see it grow and see more jobs being created and more than anything it wants re-election. Those aims are in direct conflict with what is needed in order to truly commit the country to decarbonisation.
For now the British business energy user is seeing the effects of the worldwide collapse in fossil driven energy prices in the form of low-cost long-term deals being available. The global circumstances which have conspired to create this price-dip we know will not last for long, and certainly not forever.
E&CM has been advising clients that taking advantage of the market makes eminent sense. There are a maze of suppliers and available deals on offer and with over 40 years’ experience, we would be very pleased to guide you through. Please contact James Hickling on 01293- 651218.
George Osborne continues to drive the nails into the coffin of the green energy sector. During his Autumn Spending Review announced today (25th November 2015) the Chancellor announced further measures to reduce subsidies and support for the renewable energy and environmental sector. £132m of support is to be withdrawn from energy efficiency schemes; this was spun to the public as a positive, emphasizing a £30 reduction in household bills as a result. And there was more, a 40% reduction in a scheme backing green heating systems which could jeopardise the UK hitting its climate change targets. Heavy industry saw a little relief with a £20m exemption being granted from green taxes.
The announcements today, coupled with Amber Rudd’s ‘reset’ of UK Energy Policy last week, have reconfirmed the Government’s wish to see subsidy levels for the renewable sector rolled back and for the twin needs of energy security and affordability to be seen clearly as a higher priority than sustainability. Amber’s reset did little more than re-confirm exactly what we already knew; coal power stations will be a thing of the past by 2025 PROVIDED we have alternative generation in place by then. That alternative is unlikely to be renewable energy as the Tories will not support any widespread multi-technology subsidy mechanisms, preferring to focus their support onto off-shore wind and nuclear. So the coal-vacuum will be filled by gas and preferably by home-grown fracked-gas, reducing our reliance on foreign imports but only half tackling our CO2 emission target.
And all of this is the message which our Government is sending out on the eve of the world conference on climate change, COP21, which opens within the next few days in Paris. Energy sustainability is not as important as security and affordability. One wonders how many other countries, attending the conference, will echo that policy and in so doing will make any international concerted action to combat climate change all the more difficult.
Read the full review via the Guardian
The possibility of a blackout this winter came nearer and realer as the National Grid had to ask the generators for more power earlier this week. The reason was simple; some of our power stations had broken down! The worry is that the balance between supply and demand is so fine that a breakdown or two on a balmy autumn day is enough to cause National Grid to issue a Notification of Insufficient Margin - Which is code for 'please, generate more!’. What will happen if we have a cold winter and what will happen if we have generation failure on a cold winter's day?
News like this is normally enough to send markets into a tizzy and for prices to surge, however the response has been sanguine. It is possible however that if there is a constant drip feed of this kind of news and even a limited blackout period anywhere on the grid that we will see prices harden quickly.
Energy users are enjoying some of the lowest energy prices for many years however the inexorable drift lower must come to an end sometime and negative news flow is the thing that is likely to pull prices back up, bringing to an end the very positive buying opportunities that have been available of late.
We believe this could be the first indicator of market exposure due to the current generation capacity gap before winter has started. Where possible it is advisable to quickly secure a long, fixed contract now to minimise any risk of increased energy costs.
It’s China, China, China, this week as the President of the world’s second largest economy moves into Buckingham Palace for a few nights. Red carpets everywhere and a great deal of wooing the great man from the east.
So what is Energyland’s interest in President Xi; well the Hinkley nuclear power station for one, and the possibility of an announcement to build another nuclear reactor, this time in Essex, Bradwell to be precise.
Without a doubt such an investment and such a significant infrastructure project would be bring many benefits to the UK such as jobs. However, in terms of EnergyLand priorities maybe there are some questions.
Is it affordable? The Hinckley Point nuclear power station Strike Price is £92.50/MWH and that is a long way north of the current market. It is unlikely that a station at Bradwell would be significantly different.
Is it sustainable? This is an old chestnut of a question where nuclear power is concerned; yes it is sustainable if we are talking about CO2 but if we talk about nuclear waste containment then maybe the answer is different.
Finally is it secure? Well, the big push in favour of renewables and frack-gas is that they are indigenous energy sources making them securer than say imported coal and gas, where concern revolves around who we are buying from and how much danger there is in allowing a foreign power control over our energy supplies. So, what ongoing involvement would Beijing have in the management and maintenance of one of our nuclear reactors?
We'd love to hear your thoughts, email us at: [email protected]
The UN’s Chief Environment Scientist, Jacquie McGlade, has waded into UK EnergyLand and criticized the new Tory Government’s accelerated move away from renewable energy. It’s been clear for a few months, as readers of our articles will know, that the Government is no friend of the renewable sector and is very much in favour of supporting and encouraging the oil and gas industries.
Professor McGlade describes a Government which has taken the UK away from being a leader in renewable technology to one which is doing just enough to meet its EU targets and no more. Britian’s credibility is coming under pressure, especially as we approach the Global Climate Change conference in Paris this winter. It will be interesting to see what line the UK takes at the conference as we begin the in-out EU referendum debate.
Tory HQ seems to be firmly wedded to low cost gas generated electricity as the medium term solution, in the belief that suppressed global commodity prices will keep costs low for some years to come and that will be, financially beneficial for British consumers.
The debate over international competitiveness has been further highlighted by TATA steel’s redundancy announcement for UK employees as the steel market is swamped by cheap Chinese steel. Energy costs are a key component of this energy intensive industry and UK PLC needs to have its energy prices as low as possible if it is to have any chance of competing with the likes of China in these markets.
Conservative thinking supports the fact that UK engineering needs energy prices to be low and to do that we need to buy into cheap fossil fuel generated power and to move away from the more principled position of the renewable sector. This brings UK PLC into direct conflict with the likes of Professor McGlade who sees the necessary future of the planet as one based on all governments acting on principle and not economic pragmatism.
David Cameron may be thinking that there is another little bit of Tory history repeating itself as he reads the reports of imminent power cuts this winter as the capacity margin between maximum supply and maximum demand gets squeezed to its limit. In 1974 Ted Heath led a Tory Government into battle with the miners’ union and ended up leading the country through a period of rolling blackouts and the electorate did not like it one bit; within a few months there was a Labour Government. Although the circumstances are entirely different the political lesson was well taught: when in Government don’t let the lights go out!
The Cabinet Office, DECC and the NGC must be in frantic discussion as to how to avoid any blackouts this winter and as we know the NGC has already invoked its emergency measures of Demand Reduction on the one side and paying old power plants to stay open on the other.
We have known that we would be shutting coal plant and old nuclear plant for years, and for years we postponed making any decisions as to how to respond. Now we are beginning to feel the cold teeth of a wintery blackout as we realize that chronic procrastination wasn’t the best policy choice for replacing condemned power plants and the great and the good are acting as if this has come as some surprise as they hustle down to the iron mongers to buy in some candles, just in case!
It seems that the strategic planning of our ‘secure’ energy supplies has been left to the ‘market’ and the ‘market’ has decided that without clear Government policy, robust subsidies and a buoyant energy price then the ‘market’ isn’t that keen on getting involved! At the moment we have limited policy direction, less and less subsidies of decreasing value and a market price that has collapsed. No wonder private investors aren’t piling in to build the gas power stations that we need.
We need around 20 Gas power stations to replace those closing or about to close in the coal and nuclear sectors but with electricity prices as cheap as they are there is no economic rationale to build unless there is some significant subsidy to guarantee return.
If we are to renew our generation sector with either renewable technology or natural gas then we need a sustainably higher market price than we have. If the collapse in fossil fuel prices continues, as is, then higher energy prices will only be achieved by a robust subsidy scheme, charged back to the end user, no matter which fuel source we are dealing with and that is the fly in the Government’s ointment.
The final option is to continue burning coal and ignore the EU directives. Continue to use low cost plant to burn a low cost fuel and make low cost electricity and argue that on grounds of national security that the lights must stay on. Depending on how the negotiations between David and Mr Juncker go might we see a shift in Tory thinking and a more pragmatic approach to the interpretation of EU policy, as the EU referendum debate gets underway.
We are absolutely delighted to announce that we have been listed as finalists for the Third party intermediary of the year award.
The message is clear; if you want to invest in any more renewable generation it has to be on a like for like basis with the fossil-sector, very limited subsidies and no special circumstances, considerations or assistance. Good luck! Ms Rudd’s latest announcement (22 July 15) to dramatically reduce solar subsidies from January 16 onward, is another nail in the coffin for the renewables industry and the Tories are banging those nails in, hard and fast.
DECC’s view is that we have enough subsidized solar in the energy mix with 730,000 installations up and running and the subsidy budget is maxed out. Amber Rudd and team DECC are taking a seriously aggressive stance against the renewables sector. So far we have seen three prongs of their strategy; the removal of CCL (Climate Change Levy) support for all green energy contracts from 01 August 15, which effectively takes away any price assistance for the Green-team. On-shore wind now has less financial support and planning regulations are being used to slow down any more on-shore farms; who wants a wind farm to look at every morning? And now the solar sector is under the cosh.
The flip side is that the Government is very much behind the gas sector and especially the frack-gas sector, granting exploration licences here there and everywhere and telling planning authorities that if they delay decisions then central government will make the decisions for them.
So how does the horizon of EnergyLand look; World oil and gas prices remain suppressed and the fall in China’s economic activity will probably keep those sector’s depressed for a good while. The more our energy sector stays wedded to the fossil energy and the less it has to do with expensive renewables the better. The government is making sure that it is as difficult as possible for the green sector to expand from where it is, unless it can do it on a like for like footing with its fossil-cousins. And that’s all good for inflation and keeping interest rates low and that’s all good news for any party which is in power and wants to stay there.
The Government has a green energy target, set by the EU and signed up to by UK PLC. We need to hit 34.5% carbon reduction in electricity generation by 2020, if we are to make the targets. With what renewable energy we have, together with the decommissioning and replacement of coal fired generation with gas generation, we should be on track to say that we have achieved our target.
The policy is to reach the target and that is all and you could argue that that is good enough. We’ve done our bit! But you could also argue that if we are taking Climate Change seriously then perhaps our policy should be to do more than our bit; to do our best, in fact.
Amber’s plan is not for us to do our best, it is simply a box ticking exercise, in which we hit our target, more or less, shout from the roof-tops as to how green and clever we are but actually what we are really doing is sponsoring the longevity of the gas and oil sectors, which provide energy stability and affordability at the expense of sustainability and also a healthy revenue to the treasury. Could the energy policy actually be set by George Osborne and not the department responsible for it?
In December we will go to Paris and talk about green energy and sustainability. No doubt discussing how we all want a cleaner greener planet for ourselves and our children and we will talk about how much we have achieved. However what we will probably not talk about how much we could have achieved nor what we are really trying to do. What the conference decides and whether we agree to do our bit remains to be seen but at the moment our national energy policy is presented through smoke and mirrors.
Two weeks ago we commented that the fracking industry had received the green light from Amber. We also speculated that the biggest obstacle that the would-be-frackers faces was local government planning regulations. True to form DECC, fronted up by Ms Rudd, shot a missile across the bows of the planning authorities, yesterday.
The 16 week time limit for the consideration of planning applications is to be strictly observed for the fracking companies and any heel-dragging will end up with direct government intervention and consent decisions will be taken out of the hands of local government. Government's clear intention is to minimize the obstacles in order to get fracking underway; the reason being to create a secure supply of gas to the gas generation sector, which is being set up to fill the vacuum left by the coal generators as they close up shop.
At the same time the green-support levies are being withdrawn, slowing down the expansion of renewable generation. It is clear that the Tories are determined to focus on keeping the price of energy as low as possible and place the related environmental issues as secondary concerns. The environmental lobby sees the direct intervention of DECC as anti-environment and anti-democratic. The Government sees this debate as one about energy security and national economic interest. The board is set and the pieces are in play.
How long will it be until fully viable commercial fracking sites come on line in the UK?
At long last the American’s have decided to join the carbon-free party, or at least so it seems.
President Obama has set out his objective to reduce carbon emissions by 32% from the electricity generation sector by 2030, compared to 2005 levels. Impressive. Ten years behind Europe but it’s good news that the Americans are joining the battle, at last. The immediate reaction in the US has been for 5 Republican state governors to announce their opposition. Obama has a fight on his hands, that’s for sure. The vested interest in American fossil fuels, coal, oil, gas (whether shale or not) and all the other carbon-nasties is vast. Mrs Clinton has swung in behind Obama, showing some democratic joined up thinking, and declared continuity for his nascent policy, should she be elected president. Undoubtedly the republican presidential candidates will be making their views known shortly. This debate will be huge and could well dominate the American Presidential election.
The US election outcome is critically important for the global climate change agenda. The Paris conference, this winter, needs the developed economies to back de-carbonisation. The global community needs full engagement by the main polluters and for them to develop the behaviours, policies and technologies that the rest of the world can emulate and afford. The developed world needs to establish a compelling argument for the rest of the world not to make use of abundant and cheap fossil fuels. Leading by example is key to success and having the Americans on board is essential to the credibility of the policy.
Winning the argument for a proactive transition to a low-carbon economy will be difficult in America, especially against the backdrop of a potentially hostile Congress and the Senate but at least they have now started the argument. The debate, along with the planet, is hotting-up; it’s a critical time ahead for politicians and policy makers and the economic fall-out for energy users everywhere could be significant, if the American’s fully engage.
Adam Smith is alive and kicking and free market economics are back on the agenda at Tory HQ. The lights have changed from green, through Amber, to red as a new signal is sent, today, to the renewables industry; the days of subsidy are coming to an end. RO, FiT and CfD mechanisms are all coming under fire at DECC as the tory agenda of removing market subsidies for renewable energy starts in earnest. The message is clear: subsidies will become a thing of the past and the winners and losers will be decided by market forces. Margaret Thatcher would be proud of Amber and Co; for those of us who remember the 80’s we will recall heavily subsidised British businesses being put to the sword as financial support was withdrawn; a little bit of Tory history repeating.
So, what does it mean? Well, it means that the rate of renewable expansion will probably slow, investors will be more cautious and only the very fittest green shoots will make it in the EnergyLand of tomorrow. The renewables sector will have to get its act together and find innovative lower-cost methods of getting renewable power onto the grid and that will keep down the overall cost to end consumers. A vote winner if ever there was one. It also means that as we close our coal fired power stations, in order to meet out European targets for carbon reduction, it is less likely that sustainable alternatives will be enough to fill the vacuum; music to the ears of the frackers who will see that gap as theirs to fill, provided they can get the planning permission to do their thing. As the gap between supply and demand narrows and it is, the National Grid announcement of last week is testimony to that, then there will be increased political, economic and public pressure to build replacement generation, quickly and cheaply so that the lights stay on. The stage is set.
We all know what Cameron’s boys in blue said in their manifesto; fracking is good. Is it just a question of time before fracking gets underway properly in this country? Planning is the big obstacle to fracking, but when your friends are in very high places, maybe even the biggest of obstacles can be overcome.
The National Grid today announced that it will be using the new capacity mechanism to manage this coming winter’s supply/demand squeeze. During the winter weekday afternoons, when its dark, cold and miserable, the country hits its peak demand for energy and the National Grid has to fire up everything its got in order to make sure we all get the power that we want.
Normally the Grid would have around 5% spare capacity, above the predicted demand level, however this winter coming that cushion is nearer to 1%. The capacity mechanism allows National Grid to fire up older mothballed plant to handle the peaks and to also ask large users to reduce demand. Of course that extra capacity and the willingness of large users to go ‘off-grid’ has to be paid for. No surprises for guessing who gets to pay at the end of the day.
How did it come to this? Well, UKPLC is closing a number of coal fired plants, under the orders of the EU, as we attempt to transition to a low carbon economy. The problem is that we haven’t built the replacement low-carbon generation units quite as quickly as we needed to. The dithering of the last two governments around whether to build nuclear power stations or not has caught up with us and the green revolution took a little longer than expected to get off the ground.
Anyway, we are where we are. The capacity charges which National Grid will pass through to energy suppliers may well end up being passed on to end users through their contracts. Then again the altruism of the suppliers may mean that they absorb these extra costs into their margins or that they had the foresight to build something into their prices for just such an eventuality. It will be interesting to hear what the suppliers say, now that the National Grid has made the first move.
There are a number of significant forces at work in EnergyLand at the moment, which seem to be completely separate but which are shaping the short and medium term energy price landscape in the UK.
In Beijing the Chinese government has tried to halt the massive collapse in Chinese share prices, which, in Shanghai are down a spectacular 30% in just a month. The financial press is beginning to warn that a continued and sustained collapse in the Chinese Stock Exchange could drag china and by extension the rest of the world back into recession. That is a very pessimistic view but we can certainly foresee a China where economic growth will continue to slow considerably. Global demand for energy could be compromised as the knock on effect of a Chinese slowdown ripples around the planet.
In Riyadh the Saudi’s happily announced to OPEC that their daily production of crude was at an all-time high of 10.564 million barrels/day for June and so the world over-supply of oil and gas continues, unabated. Prices remain subdued at $56/bbl. On top of that the news from Vienna, yesterday, that Iran will be welcomed back into the fold and sanctions will be lifted on oil exports will simply go to exacerbate the problem of over-supply. The energy-war with America and others continues as OPEC continues to force high priced production facilities into receivership or mothballs in order to, one day, bring the price back up.
Finally the IMF, based in Washington, launched an exocet missile into the Greek Bail-out plan. Whether the Greek’s leave the Euro or not is, to some extent, irrelevant; the point being made by Ms Legarde and co is that without a significant restructuring and a 30 year repayment holiday of the loan repayment schedule, or a serious haircut being taken by its creditors, then Greece cannot repay its debts and it is folly to think that it can. Each attempt to resolve this issue seems to merely kick the can further down the road, rather than get to grips with reality and thankfully the IMF is trying to do just that. The IMF’s position is likely to be most unwelcome throughout Europe, with one exception, Athens. Why? Well, no-one wants to take the financial nor political hit and the architects of the Greek bail out plans would rather live in financial-fantasyland than accept the economic reality of their decisions and the somewhat hostile reaction they will likely get from their domestic electorates, when it comes to election time. The Greek situation is akin to the sub-prime mortgage debacle of 8 years ago, just a national level; there are very significant assets on balance sheets that have no or significantly reduced value and no-one wants to admit it.
Today, July 15th, the Mr Tsipras will ask the Greek parliament in Athens to vote on the Brussels’ plan, meanwhile on Friday Angela is putting the plan up for debate in the Bundestag in Berlin. I am sure the news from Washington will make those debates all the more interesting and all the while this debate continues, unresolved, the Euro remains compromised and open to bearish speculation. For us in EnergyLand the Euro and its stability or weakness is important; gas is a Euro traded commodity and all the time the Euro is weak against sterling, then gas remains cheap.
So, here we are; a world where aggregate demand for energy could be compromised, at time when there is over-supply and at a time when one of the currencies that matter is under pressure! Instability, lots of unresolved negative issues and a global economy full of uncertainty. The net effect on price is bearish and none of the key indicators of supply and demand look like they are changing anytime soon. That said, conditions of supply and demand do change and they will and they can change quickly; this depression in price coupled with a supply-glut will not last forever, nothing ever does. Being informed and aware of the global shifts in economics and politics is essential to the timing of energy procurement in a globalized market and energy is one of the most globalized markets that there is. Make sure that you are informed and make sure that your advisors are very well informed.
And so to the third leg of the National Grid’s responsibility, security. Can we buy the energy we need whenever we need it and the second, is the energy reliable, guaranteed and usable?
Today we are still very much a fossil fuel using nation with more than 75% of our electricity coming from fossil fuel generation. So in order to keep the lights on, from where do we get our coal and gas? How reliable are those sources? What chance is there that we will, one day, run out? Those of us old enough to remember, will recall the miners' strikes of the 1970’s and 80’s. Those were the days when we self-supplied our coal from our own pits. Was it secure then? Well the rolling blackouts and the three day week indicate that maybe it wasn’t and that just because we have our own fossil fuel resources it doesn’t guarantee supply! In 2012 the electricity generating sector consumed 54.9Mt of coal, 16.8Mt of which came from our own coal mines and the remainder from overseas. Our largest importer was Russia at 18.3Mt, then Columbia 11.9Mt and the USA, 10.5Mt. The remaining 4.1Mt came from Australia, South Africa and the EU.
The UK currently has 3,196Mt of coal reserves, enough to satisfy current demand levels for 58 years! Currently 33% of electricity demand is satisfied by a fuel which relies upon an international market selling to us and a significant proportion of that is from Russia. (SOURCE, UK Coal.com) Without a doubt security is at risk. Not to mention that this is the fuel that we least wish to use, unless of course, it can be coupled up with a working Carbon Capture and Storage (CCS) facility, in which case, perhaps, it’s continued use is not so unrealistic.
Gas, our second biggest source of energy for electricity, has a similar story to coal. Our indigenous production of gas has been in decline for years as the North Sea gas supply slowly runs out. As the price of oil and gas remain low the incentive to explore and extract more is compromised as the cost is high and the return is uneconomic.
In 2011 we self-supplied a little over 100TWh of gas and we imported 160TWh and exported around 25TWh. So the majority of our gas is imported and it comes in through four fundamental routes: The Norwegian pipeline, Belgian pipeline, Dutch Pipeline, and as LNG (Liquefied Natural Gas) from Qatar. As our own reserves continue to deplete our reliance on imported gas must increase, unless we drive down gas demand or seriously engage with shale gas extraction in the UK. Bearing in mind that gas is the cover fuel for the renewable generating sector, there is likely to be a long term reliance on imported gas; which is fine so long as the exporters keep exporting to us. Gas, much like coal, is now an international commodity and is subject to movements in global supply and demand and commodity pricing, as well as political intervention, as we have seen in Ukraine and the Middle East.
We also have to remain conscious of just who is at the supply end of the European gas pipelines and whether they will be happy to continue the supply on basic open economic trading arrangements, free of political gamesmanship. Natural gas is a more carbon efficient fuel, than that of coal and it is the carbon rich fuel of choice, however, ensuring that supply is secure depends a great deal upon our relationships with the other parts of the world, who are selling what we want. Typically as tensions increase, security of supply decreases and process may become increasing volatile.
Gas is more than just a fuel in the power mix, it is also the fuel used in the majority of homes in Britain for heating and hot water. Gas has a permanent role in our economy even if the whole of the power network moved over to a sustainable fuel source. Unless there is to be a wholesale switch in how we heat our buildings then gas is likely to have a comfortable, secure role in the economy for a long time coming, albeit perhaps at a lower demand level. Ensuring a secure supply of gas can only be met through self-supply and our own reserves are depleting quickly in the North Sea, and as prices fall and remain low on the world markets the incentive to invest is reduced if not made impossible unless some state aid appears from somewhere. There is of course one further alternative, and that is shale gas. Estimates for the volume of natural gas locked under the ground in the UK are enormous. There are equally enormous environmental headwinds for the shale industry to overcome. However, if it succeeds and the volumes turn out to be true then the UK may well have a self-supply energy source, which it can use and possibly export if we are in surplus.
Renewable energy offers a degree of real security; no-one can stop the sun shining, the tides moving, nor the wind from blowing and as sources of energy they are free to use; no supply and demand problems nor currency movements to take into account. The problem with them is that they are unreliable and intermittent, so as a secure source of energy there is much that needs to be done in order to tame mother nature and harness that power in a way that works for us, consistently and reliably. For the time being gas is the cover fuel which lets us use green energy effectively, if not efficiently. We are blessed with a lot of wind, or cursed, depending on your outlook, in fact we are one of the windiest countries in Europe so it’s no surprise that the government is backing off-shore wind farms in a big way, although it is less well disposed to its terrestrial brothers.
UKPLC has moved on in 40 years from self-sufficiency in coal through the dash-for-gas supplied from our own gas fields to now harnessing the wind and the sun in its attempt to have control over the means of production of electricity and heat.
The drive for a sustainable, affordable and secure energy sector is a complex and difficult one and the three goals do not sit that comfortably with one another. Sustainability can be obtained at a price and a few technological breakthroughs, which are nascent but not yet grown-up, such as batteries. Either that or a continued reliance on gas as the cover fuel. Green power is relatively inefficient to produce and so we would expect to see the commodity element of energy increase in price as the switch to renewables moves on, apace. The consequential costs for re-wiring the grid and local distribution networks will also drive up prices in the medium term. The cost of the change is likely to be significant especially as fossil fuels are now plentiful and cheap, although that is a quirk of the market rather than necessarily a permanent state of affairs. Commodity markets move in cycles and we are in a lull at the moment. As to whether it is affordable, a simple conclusion might be to say that it is, provided all economies do the same and we are in a world of like-minded countries pursing the same objective.
Sadly, reality implies that those economies which want to industrialise and become the next workshop of the world, are likely to eye cheap and controllable fossil based power as a significant benefit in their fight for growth and export led expansion. For energy intensive industries; remaining in highly priced industrial economies may become an economic impossibility. The abundance of natural energy which we have in the UK could provide self-supply for us, and therefore security, provided that the technology that is needed can be delivered or we discover and resolve to use large quantities of shale gas, which is a battle yet to be fought, although it has the backing of Mr.Cameron. At the moment we are in the transitory phase and the road is likely to bumpy as we let go the past and embrace the future. We are, however, on course. We are on course to a more sustainable and a more stable future but at a significant price, which we must all bear. The positive is that as prices of delivered energy rise, the pay-back on energy conservation projects becomes more attractive and so demand reduction (destruction) should allow overall cost increases to be mitigated to some extent.
For any business engaging with energy there must be a balance between procuring effectively in order to mitigate price volatility and serious engagement with demand management and volume reduction, if overall costs are to be contained. Get in touch today; we can help your business achieve that balance.
Osborne's first post-election budget had some surprises, although if we remember what the Conservatives put in their manifesto, we shouldn't be surprised at all! He's living up to his promises.
Under the guise of wanting to stop providing CCL exemption support to foreign green energy generators Osborne's shotgun tactic of withdrawing CCL support across the board, has also hit the entire UK green generation sector. The removal of the exemption from 01/08/15 has sent the renewables industry into a spin. Drax (which is converting from coal to biomass) saw its share price fall by 25% on the news and the economic viability of green generation projects, generally, is now in question.
Rather than quenching investment uncertainty in the sector and bringing stability Osborne has managed to do the exact opposite and one suspects quite deliberately. Put this decision against the backdrop of the EU Referendum and all else that is going on in Energyland and you can see how investment in renewable energy is likely to become very much more selective, with a consequential slow-down in new projects. How that helps us to keep on track to hit our 20-20-20 renewable energy generation objectives and beyond is a mystery. No doubt George will tell us how, later.
The remaining Energyland related announcements show the real direction of Osborne's thinking. The creation of sovereign wealth funds for local communities which adopt and support fracking and the extraction of shale gas indicates where the strategic direction truly lies. That and the continued tax breaks for the exploration and extraction of gas and oil on the UKCS (North Sea), confirms that this Chancellor is well and truly wedded to the old industries, oil and gas.
Osborne is steering the country toward a lower cost but not quite so clean energy sector, underpinned by the supply of home grown natural gas to CCGT power stations, which will sit at the strategic heart of UKPLC’s energy generation. Coal will, still, probably be eliminated from the supply chain, which might allow the UK to hit its CO2 targets in the short to medium term but the strategic replacement of coal will be done by the gas sector, supplied with cheap UK shale gas, if Osborne has his way. Without a doubt security of supply also lies at the heart of the thinking here and the Government wants to see as much of our energy needs being self-supplied but from ‘cheap and reliable’ shale gas and not from intermittent, higher priced renewables. The game has changed.
So, the good ship George has raised its colours and started its voyage; the first change of tack has been to support the old fossil industries with one hand and simultaneously to pull the rug out from under the feet of the nascent renewables sector with the other. The environment is the casualty in the short to medium term but that isn’t necessarily this Government’s main priority.
To find out what this means for your business please get in touch today 01293 651218.
I’m not so sure anyone has actually defined what affordable energy is. Does it mean that we, as an economy, can afford to use energy within the context of our own economy, or does it mean that we, as an economy remain competitive against other European economies or is the question a global comparison? To avoid confusion this article discusses affordability at an international level.
At the moment, and for the last however long, the UK power market price has been intrinsically linked to the price of gas, coal, and to some extent, oil. The value of sterling is also important as these commodities are traded in Euros and US dollars. The fossil fuel world is in a bit of a fix at the moment as little over a year ago, the price of oil sat comfortably above $100 / bbl and supported the price of gas. Coal was in demand and commanded a price above $70/tonne. Those prices had been incentivising the exploration and extraction of new fossil fuel supplies and lead to the push to extract Shale Gas in the US. And then the bubble burst. The sudden realisation, by the global community that the combined effects of demand reduction due to the global recession and genuine demand reduction through engagement with the sustainability agenda coinciding with a massive surge in available commodities, saw the price of all three; oil, gas and coal take a tumble, and a big tumble at that. The normal market mechanism for oil price stability at OPEC failed (the Saudi’s kept on pumping) and prices have continued to be suppressed. The very fact that certain economies are switching away from fossil fuels means that fossil prices will fall as demand drops away. As a result the irony of the sustainable journey is that the fossil fuel solution to power generation looks increasingly attractive, the more demand for fossil fuels fall.
DECC has come up with an analysis of costs for different fuel generation technologies, which it published in its Electricity Generating Costs review (July 2013). The report looks at the expected costs in £/MWH for first or next of a kind projects which will go live in 2019. So we are really taking a glimpse into the future. At the time of writing electricity market rates sit around £47 to £50/MWH. The results are telling. Priced in £/MWh of power generated relative costs of the different fuels are as follows:
On Shore Wind £99/MWH
Off Shore Wind £107-114/MWH
Solar PV £123 /MWH
The message from these figures is clear. Sustainable energy is more expensive per unit generated and the load factors of sustainable generation are generally lower. The real cost difference is even greater. A gas power station can generate continuously – a solar farm cannot and so when the solar farm is dormant something else needs to take up the slack, a gas turbine for example. So now instead of one generation station working efficiently, we have two, which synchronise with one another and between them do the job of one. The cost of invested capital is higher under the sustainable option and operating costs are likely to be higher as well. An alternative arrangement might be to have two solar farms; one supplying during daylight hours and the other charging a Grid-Battery for use when the sun goes down. Again the invested capital is significantly greater as there is a need for so much more generating capacity. That capacity is dispersed and embedded locally which also requires more investment in the distribution and transmission infrastructure again requiring investment.
One of the benefits to moving to sustainable power sources is that it removes our exposure to movements in global supply and demand for fossil fuels (commodities) and our exposure to currency movements also marginalises. The price of energy in a world where the fuel source is free (solar and wind) becomes a function of the cost of capital together with the operating costs of the plant. Prices, in theory, should be more stable and subject to significantly less fluctuation. In that kind of future the price of energy might vary directly with movements in interest rates more than anything else and the investment returns required by the asset owners.
So, is sustainable energy affordable? On a unit for unit basis it is more expensive, that is a given, especially at a time when there is a world-wide glut of gas and coal. To be able to afford more expensive energy there needs to be a commitment to use less of it, so that at a budgetary level, the total cost of energy supply to factories, offices and households remains flat over time. Hence the drive to reduce demand through various initiatives like the Green Deal, ESOS and even CRC. If demand can drop as unit prices rise, then, provided they are scaled correctly, cost will remain neutral.
For the energy intensive users, the effects of the increasing prices are likely to be more dramatic; there may be limits as to how much demand destruction there can be and unit costs may, inevitably, increase. On an international basis, emerging economies that want to take their place as workshops of the world, as China has done, will want to aim for the lowest unit costs achievable and the availability of cheap gas and coal supplies is an attractive option. Although China has been the story of the last 20 years it is not the only economy that has industrialised quickly, or will want to in the near future. The remaining BRIC countries, Brazil, Russia and India have a long way to go, still, as they modernize and industrialise; and the next group, the MINTS (Mexico, Indonesia, Nigeria and Turkey) all have their particular agendas for rapid economic growth. Although we, along with our European cousins, have decided to decarbonize and reduce demand, we need to be aware that there are other countries, with plans to industrialise, who will see the availability of cheap coal and gas as an attractive part of their national expansion strategies. The Chinese have shown the world that wholesale manufacturing in a low-wage low-cost environment can transform a nation’s wealth and power, and who is to tell those other countries that they’re not allowed to have the same aspirations? It is likely that Europe and any of the other committed sustainable economies around the world will see themselves at a manufacturing disadvantage as a result of their energy and environmental policies. Is that affordable? I am sure we all have our own views.
Can we afford sustainable energy? If we use less, then at least total cost might not rise but average cost per unit will. The cost of fossil fuel is artificially low as it doesn't take account of the cost of decarbonisation. If we were to include the cost of carbon capture and storage in the equation, in order to convert a fossil fuel into a quasi-sustainable fuel, the price per unit would be far higher. Again, using the DECC figures a Coal station with CCS costs at £100 to £140/MWH and a CCGT station at around £90/MWH.
The Climate Change Conference in Paris this winter is important. The world is committing to sustainable energy in a big way: investment in 2014 was $270.2 bn, up 17% on 2013 (Frankfurt School FS-UNEP Collaborating Centre). The effect will be that we will see energy unit costs increase, and we, the UK, are leading by example. The challenge is to get every nation on board, including and most especially our American friends which will be tricky as their commitment to the green journey has been somewhat lacking thus far. Indeed their contribution to increasing global gas and oil supply lies at the heart of the currently over-supplied and price-suppressed oil and gas markets. If all nations commit to a sustainable future, then the international comparison fades into the background because we will all bear the higher cost. In the end the question is; will they all agree and, more importantly, will they act?
Please email us your comments and feedback via [email protected]
Visit our News page next Monday for the final instalment of this 3 part exploration.
Our friends at the National Grid (NG) have a huge job on their hands. Their over-riding obligation is to keep the lights on, all day, every day of the year. That, in itself, is a huge task but the NG is also charged with ensuring that the lights are kept on in a sustainable, affordable and secure way. So, they’re responsible for managing the decarbonisation of the electricity generation sector, ensuring that both power and gas remain affordable and on top of that, our energy supplies are secure. This article is the first of three which explores each of these aspects of national energy policy and examines how well UK Plc is travelling along the sustainable, affordable and secure paths.
Power generation in the UK is based on centralized wholesale generation by large power stations, which then transmit electricity, via the National Grid’s arterial system of pylons and wires, to the 14 Distribution Companies dotted around the country. These then take over from NG and arrange for the regional and local delivery to end consumers, us. In effect we have a two-tier system of transmission and distribution which is set to change significantly as the sustainability agenda begins to dominate.
Sustainable energy generation has picked up some major steam over recent years; according UK Government we produced 19.2% of our electricity from sustainable sources in 2014 up from 14.9% in 2013. Sustainable energy can broadly be defined as low or zero carbon, i.e. we do not release any CO2 into the atmosphere as a result of generating power (or at least much less). Our national targets are defined by the National Grid, and are taken from the appropriate EU Directives. The EU plan for the UK is to generate 34.5% of electricity generation from renewables by 2020. A tall order; however if we continue to decarbonize at the same rate as the last year or two then we should, as a nation, hit that target!
The electricity fuel mix (2013) comprised coal 38.4%, Gas 27.7%, Nuclear 20.6%, Wind 11.3% and other sources such as Solar PV, Hydro and Pumped Hydro make up the remaining 2.0%. Coal is the real nasty in the mix, and yet it has been our largest fuel source for some time. Due to the currently depressed gas market however, the proportionality between gas and coal is shifting in gas’ favour. Coal releases almost twice the carbon dioxide into the atmosphere than that released by natural gas, and given the dominance of coal in the fuel mix, it’s pretty easy to see that the big win for the Climate Change Lobby is the removal of coal from the generation sector. Fundamentally, the policy for decarbonisation is the elimination of coal and this is basically the key to the achieving our sustainability objectives. If all the coal fired power plants were replaced with zero carbon generation then the proportion of carbon in the whole mix would only be that which is contributed by gas, and that should, happily, bring us in line with our targets! Simple, you would have thought. But this is where we get into trouble. Coal generated electricity is cheap and has been cheap for a good long while. The world price of coal is suppressed as there is a so much of it about at the moment. The nature of the switch to green energy is that we must consciously decide not to use the cheapest sources of fuel, in favour of the more expensive. As demand for coal falls there will be more and more of it available and prices are likely to remain suppressed until such a time as loss making mines stop mining and go out of business, or find new markets in which to sell.
The replacement of coal-fired plants with sustainable plants also brings added operational problems. Coal is effective. It can be used to produce power whenever we want, come rain or sun, day or night, summer or winter. It is controllable. The replacement energies are not so easy to control; mainly as solar power only works when the sun is up and wind turbines only turn when it’s windy! So what do we do on a freezing cold, still, winter’s night? At the moment we use another form of generation, usually gas which fills in the gaps in supply left by its sustainable alternatives. So, as we eliminate coal plants and replace them with sustainable plants we need to also have enough gas plants around to act as the cover fuel which is counter-intuitive. The economics of our love-hate relationship with carbon rich fuels is dealt with in our second article, AFFORDABILITY. Back to our technical dilemma; sustainable energy sources are intermittent and unreliable. As a wise man once said, “Necessity is the mother of invention” and another technically viable solution is beginning to emerge; batteries. In the USA we have seen the triumphant announcement, by Tesla, that they are within striking distance of Grid-Sized batteries, which can be used to fill the sustainability gaps instead of a gas turbine. This is an elegant idea and in addition to Tesla there are a number of smaller battery manufacturers, working on similar solutions, using more advanced battery technologies than Tesla. So, the probability is that batteries on the grid, in your office or factory, or even at home will become commonplace, and the need for any fossil plant could, theoretically, be extinguished entirely.
The move to sustainable generation isn’t being implemented on a like-for-like basis; we don’t just shut down one plant and replace it with something using a different power source; that would be just too simple. Sustainable generation installations vary from very small roof top solar panels to large off-shore wind farms and even new nuclear power stations, if you count nuclear power as sustainable. The effect of these multiple installations, of differing sizes and technologies and intermittency problems, is that we will see an increasingly decentralized generation sector. Many users are investing in self-generation or in smaller plants, which can supply power directly into the local distribution networks. There are a number of significant benefits to this transformation; for one, there are lower power losses in the system as the cable distances are shorter, which means less power needs to be generated in the first place. Combine that saving with a reduction in demand as a result of higher energy prices and a desire by business and homeowners to reduce consumption for both economic and ethical reasons and we can see a future of lower total generation, alongside a sector which is more widely dispersed amongst its users. The effect of the shattering of the centralized supply model does have costs as well as benefits. First, there is the cabling needed to connect all of these diverse generating sets into the distribution networks and second, the cost of measuring their contributions to supply and the consequential balancing and settling of accounts between multiple generators and consumers is complex. Operationally, embedded generation has little or no controllability, so there is a random and relatively unpredictable contribution from these power sources to the grid, which needs to be managed in order to ensure that the lights do stay on.
Commercial clients respond to these market changes in different ways, as one might expect, however there is a growing acceptance that sustainable energy is here to stay and it is wanted, despite it being more expensive. The psychology of business decision making is changing from the basic need to see profit and investment return. Some are still driven purely by cost avoidance but increasingly businesses are driven by corporate responsibility objectives and a genuine desire to do their bit for the environment. More and more businesses now see the shift to sustainable energy as an opportunity to engage in investment projects which can show a positive return on capital; whilst at the same time allowing them to make a positive impact on the environment and to play their part in the sustainability campaign. Guiding clients through the bewildering and complex choices that challenge them today is pushing the energy consultancy sector to up its game, so that holistic programs covering the twin aspects of procurement and conservation can be run in tandem, with solutions designed to meet each client’s individual and unique objectives.
UK PLC is on track to meet its commitments to de-carbonize the power sector, assuming it can continue to convert 4 to 5% of fossil based to generation to green generation per annum for the next five years. Depending on technology and the utilization of grid-sized batteries, we can see a future where very little, if any, of our power comes from fossil fuels at all. Our longer term targets do, however, allow some fossil fuel use and therefore some wriggle room, so we will, more than likely, see gas remain in the power mix for some time. We can get there and we have options as to how; the next question is how much will it cost? We explore this in detail for you next Monday, if you have any feedback or comments please get in touch at [email protected]
Here at Energy & Carbon Management we'd like to share our new office journey with some of the great pictures we shot along the way.
Moving day, some of the Senior Management Team hard at work...
We're in! But we're a long way from finished!
All the boxes are unpacked, it must be time for bubbles and cakes.
An indoor picnic to break in the break out room.
We've had a fantastic first week in our new office, and we're looking forward to welcoming all of our visitors.
It's a hat trick! Energy and Carbon Management shortlisted for THREE TELCA awards.
We’re delighted to announce that we have been shortlisted for The Energy Live Consultancy Awards (TELCA) this year.
We are finalists for THREE TELCA categories:
Green Energy Champion
Small Consultancy of the Year (London & South East Regional winners!)
“We're delighted to have been shortlisted for these awards. The team work diligently to give each and every client professional advice, support and personalised customer service at all times. It’s fantastic to receive such recognition and we are proud to have been nominated for these awards by our clients and the experienced judges .” Gary Worby, Managing Director at Energy & Carbon Management.
The winners will be announced at the TELCA award’s ceremony on 25 June.
The election is over and there is a lot of dust still in the air, which is going to take a long, long time to settle. The Tories are triumphant but have only a tiny majority, which virtually no-one predicted. That tiny majority faces a number of huge issues, which came into sharp relief on May 8th and those issues could have a direct impact on the UK’s commitment to Climate Change and the decarbonisation of the energy sector.
First up, the EU referendum by the end of 2017. Cameron has promised the country a vote, after he has completed the UK’s renegotiation of our arrangements with the EU. Nigel Farage might not have won his seat but he got what he really wanted! A vote to leave could mean the UK detaching itself from the EU directives and an abandonment of the decarbonisation targets. I hesitate to use the word poll, after the pollsters got the general election result so wrong, however YouGov have been following this issue for the last 5 years. Currently the prediction would be 45% In and 35% Out; so we would stay in. There has been a constant increase in support for staying in the EU, since September 11, much to the annoyance of the aforementioned Mr. Farage. But, opinions change and depending on the treatment Cameron receives at the hands of the EU negotiators and the final deal, which he puts before the country, we could see those numbers swing around; a lot. This issue will dominate medium term thinking and the energy markets and its investors. Those developing green generation assets, will be watching closely.
The second issue is devolution and Scotland and what powers will David Cameron cede to Nicola Sturgeon? These negotiations are likely to start in earnest and soon. At the moment Energy is a reserved power, which means it’s reserved to the UK Parliament however Planning is a devolved power. Hence Nicola won’t let David build nuclear power stations north of the wall and nor will she allow any fracking. The Smith Commission, which was launched the day after the Devolution Referendum, published its proposals in January as to what additional powers should be devolved to Edinburgh and in relation to energy it had this to say:
Energy Market Regulation and Renewables
41. There will be a formal consultative role for the Scottish Government and the Scottish Parliament in designing renewables incentives and the strategic priorities set out in the Energy Strategy and Policy Statement to which OFGEM must have due regard. OFGEM will also lay its annual report and accounts before the Scottish Parliament and submit reports to, and appear before, committees of the Scottish Parliament
Energy Efficiency and Fuel Poverty
68. Powers to determine how supplier obligations in relation to energy efficiency and fuel poverty, such as the Energy Company Obligation and Warm Home Discount, are designed and implemented in Scotland will be devolved. Responsibility for setting the way the money is raised (the scale, costs and apportionment of the obligations as well as the obligated parties) will remain reserved. This provision will be implemented in a way that is not to the detriment of the rest of the UK or to the UK’s international obligations and commitments on energy efficiency and climate change.
Onshore Oil and Gas Extraction
69. The licensing of onshore oil and gas extraction underlying Scotland will be devolved to the Scottish Parliament. The licensing of offshore oil and gas extraction will remain reserved.
What does all this mean? The Scottish Parliament must be consulted regarding market regulation and renewables policy but Westminster still has the final decision. The Energy Company Obligation is likely to be funded by general taxation and not as an energy bill levy. Further extraction of oil and gas onshore will be for Edinburgh to decide upon with the offshore being for London. It’s a little bit of power but not a lot and Ms Sturgeon has picked up on that, already stating that she will be seeking greater powers than those proposed by the Smith Commission. It will be interesting to see what her detailed demands will be, particularly in relation to energy.
Energy generation, north and south of the border are two completely different stories and energy is also a decisive influencing factor in the SNP’s capacity to push for a further referendum. Scottish Government targets are to have 50% renewable generation by 2015 and 100% by 2020. Sounds great doesn’t it? As the UK power network is completely integrated it does mean that energy generation in Scotland is more expensive, as green energy is more costly than its fossilized cousins. The support payments are of course spread across all consumers via the FiT and CfD mechanisms. The flip side is this; renewable Generation by UK country is England 63%, Scotland 29%, Wales 5.4% and Northern Ireland 2.6% (DECC Energy Trends March 2015, p49). Scotland makes a disproportionately high contribution to the UK’s results in relation to decarbonisation and the rate of decarbonisation north of the border is significantly higher than elsewhere. So, England needs Scotland to help it stay on track with its green obligations and Scotland needs English consumers to pay their levies in order to keep the wind turbines turning.
In the devolution debate energy is a double sided sword. With oil prices suppressed, it makes the SNP’s job all the more difficult to argue for independence. The Institute of Fiscal Policy pointed out that oil at $50/bbl leaves Scotland with a £7.9bn black hole in its public finances, leaving the SNP in a bit of a quandary as to whether devolution is economically viable.
It would be very easy to speculate as to what the energy world might look like if we were to leave the EU or if Energy Policy becomes a devolved power but for now all we can truly say is that there is uncertainty. The next two years will be a political roller-coaster and any business involved in the energy sector needs to watch policy developments closely and keep an eye on the way the EU and devolution negotiations and debates are going. Significant policy changes are now becoming possible, although at the moment the hurdles that need be cleared in order to effect those changes seem very hard to jump.
We are very pleased to announce that on Friday the 22nd of May 2015 we will be moving to our new office location; Fourth Floor, Springfield House, Springfield Road, Horsham, West Sussex, RH12 2RG.
This new convenient location is perfect for our team and has plenty of space for our exciting expansion plans.
The Election starter's gun has fired and the horses have bolted! Like me you will have your political views about the election and it's not my place to bang on about being left, right or centre. What I would say is that energy and the energy sector is one of those areas of the economy that is 'too big to fail' and getting it right is actually important. It's important at that practical level; 'do my lights work' and it's important in terms of economic competitiveness for UK Plc.
So, what can we expect the ongoing UK Energy Policy to be, post May 7th? At the time of writing the BBC Poll Tracker gives: Con 34%, Lab 34%, LibDem 8%, UKIP 14%, Greens 6% and Others 1%. This election is a real cliff-hanger. The Lib-Con coalition is finished but if the polls stay as they are then there is likely to be another coalition. It's just a question of who might be in it. Whatever the manifestos say we can expect that there might be some dilution or amendment of a final new-coalition Energy Policy, depending on the horse-trading and bartering that will go on in some well-lit, smoke-free room sometime after the 7th of May.
The building blocks of our future energy policy are, however, likely to be based around either the Conservative or Labour manifesto statements.
The Conservatives are wedded to the Climate Change Act, which in turn is derived from EU policy and reflects our commitment, as a nation, to decarbonize our generation sector. The Tories are making commitments to hit those targets, investing in nuclear and off-shore wind and backing other forms of economically sensible low or zero carbon generation. They intend to back fracking and make us less reliant on imported gas and coal and thus meet the goal of energy security. Investment will continue in the North Sea and we will exploit oil and gas reserves and either use them ourselves or export. On-shore wind won't be backed by a Tory government. Essentially this tallies with current energy policy, which is what you would expect from an incumbent governing party. Although the policy meets the desire for reliability and security it doesn't do a whole lot for affordability. The EU Directive is going to cost UK Plc, as there will be a relentless drive upward in unit prices, as renewables and nuclear replace coal and as we have to double up on generating assets to cover the intermittency problems of the renewable generators. The Government's own figures put new nuclear and green generation prices at £80 to £110/MWH and at the moment wholesale prices are around £50/MWH.
In a desperate attempt to fend off UKIP's sand-bagging of the Tory right wing, the great and the good at Conservative HQ have promised us an in/out EU referendum in 2017. What if we vote to get out? At that point all bets are off as far as an energy policy is concerned. No more binding EU directive could mean no more Climate Change Act and no more green subsidies, and the energy market could generate using the lowest economic cost /highest environment cost fuels it could find. It's a possibility. Remote but possible.
Now, working on the basis that Mr Cameron doesn't have enough boys-in-blue to get him over the magic 325 line, on his own, then he will need a leg-up. The LibDems are the obvious port of call and neither party has ruled out a deal with the other. Nick Clegg and co are likely to come off somewhat badly at this election and may not have the same clout in the future. Indeed, even with the LibDems, Mr Cameron may still come up short. If the polls hold as they are, then UKIP are unlikely to have many MP's to lend him and so the only other feasible coalition partner for the Conservatives could be the Irish DUP. So, assuming that some or all of these parties get involved in a coalition how do the junior coalitionists differ on energy policy?
The LibDems are even more wedded to Europe than Mr Cameron and are fervent supporters of the Climate Change Act. They want us to reach our EU decarbonisation targets and maybe to do that a little quicker than the EU timescale and will bring in a Zero Carbon Britain Act which encapsulates that ambition. No real mention as to how we do this, nothing about nuclear nor fracking but the policy intention is there even if the specific policies aren't. No real difference to the Conservatives. UKIP, on the other hand, want us out of Europe, repeal the Climate Change Act, invest in Nuclear and some economically sensible renewable generation, burn coal and let the market find its price. Their policy is focused on affordability, keeping price low and UK Plc competitive. Although their stance is at odds with the Conservatives, what are the chances of them getting any MP's or enough MP's to have any leverage? The DUP are likely to focus on what they think is good for Northern Ireland, if they were involved in any coalition, and I suspect if they get what they want for their constituencies then the conservative energy policy would be left alone.
So, the centre-right offers us more of the same and a continued commitment to reach EU targets for decarbonisation. Prices rise as we decarbonise! Excepting UKIP, any other centre or right-wing partner is likely to be generally supportive of that policy. Only if we come out of Europe would we see the potential for radical policy change and that will take a massive groundswell of support for UKIP now and at a referendum. Likely? I am sure you have your views.
Jumping across the political divide we find the centre-left headed up by the Labour Party. Mr Miliband is in the same fix as Mr Cameron. The likelihood is that he cannot win on his own and will need a helping hand. In the broadest sense, Labour's commitment to the EU directive is much the same as his opposite number in the blue corner. The Labour manifesto does have two interesting twists of its own. The first is the well-publicised price freeze which, despite being initially derided, has stuck the test of time and gained reasonable traction with the electorate. The second is a commitment to reform the energy market and the way in which power is traded. Labour want an open and transparent power exchange in order to maximise liquidity in a fairly illiquid market. No more internal deals will be done within the larger energy companies, especially the Big 6. This will have ramifications for prices and volatility, which is no bad thing for us buyers. It won't affect the general direction of prices over the medium to long term as the underlying policy is the same. Decarbonise. There is no mention of decoupling from the EU and Climate Change Act and so we would see a similar strategy to that of the Tories but with an attack on prices immediately and longer term, through market reforms.
Labour's natural help mates, on the left-wing of British politics, are the SNP, Plaid Cymru, the Greens and the SDLP in Northern Ireland. THE DUP may also be available to Miliband however anything that sniffs of breaking up the United Kingdom is unlikely to get their support. Finally the Lib-Dems could also be potential Labour coalitionists. Ed does seem to have more friends than David. The Scots and the Welsh have nationalist agendas and both directly damage Labour electorally; the stronger they are the weaker is Ed. In reality it is only the SNP that is likely to carry the kind of voting power needed to get Miliband into number 10, or The Lib-Dems coupled with SDLP and DUP and maybe the Greens. One suspects that the less Miliband has to do with the Nationalists the better for Labour. Should Labour use the Nationalists or some kind of Lib-Dem based coalition to form or support a government then it is unlikely that the fundamental thrust of energy policy will change, as all parties are effectively signed up to the decarbonisation agenda. The only difference might be that separate energy policies emerge in Scotland and Wales, which are likely to be more radical and swifter moving than the current decarbonisation agenda in the UK.
Is there a real difference between the centre-left and centre-right energy policies? No, not really. Conservative, LibDem, Labour are all signed up to the EU and the principles of the Climate Change Act's objectives, it's just a question of how quickly they get there and by what variant of the route. Some will want more or less nuclear in the mix and some will frack and some won't but they will all move along the decarbonisation route. The higher price route. Labour, if they win, will freeze prices until 2017 and overhaul the markets as well, making price more transparent. Everyone has similar commitments to current energy efficiency initiatives such as ESOS and the insulation of domestic housing stock.
Any substantive change of UK energy policy isn't actually up for debate at this election. Whoever wins will inherit a policy which is underpinned by the EU and passed into UK law and that is to decarbonise. The likely coalition partners, whether left or right, seem to be generally comfortable with that policy direction with one exception, UKIP. It seems unlikely that UKIP will have the bargaining power to do anything in a coalition to change UK commitment to decarbonisation; for them the real battle will come if the conservatives win and deliver on their referendum promise and the country votes to leave the EU. That battle is two years away.
Looking into the future of UK Energy reveals that unless we leave the EU we are more than likely to stay on track with decarbonisation and ultimately higher prices. Faced with that future, business needs to engage in a two pronged attack on energy costs. First, procurement policy. How much should be contracted and from whom, using which product and at what price; the objective being to limit and mitigate the risks of constantly increasing prices in the near, medium and long term. The second is to minimise consumption, engage with the Government's ESOS initiative and drive out wastage, invest in energy efficient technologies and look to generate some energy locally.
Let us share with you our vision as to how your business can best navigate the ever shifting energy landscape, optimise its position and minimise its costs.
Contact James Hickling on 012345678899
There was the triumphal news of the Swansea Tidal Lagoon Project, with £1bn being made available to jump start this ground breaking sustainable energy technology. If successful it will be a global first and will save 236,000 tonnes of Carbon Emissions per year and create jobs in South Wales too! A big tick for the Government's green credentials and both British industry and technology are likely to play an important part in this project. Negotiations to get the project underway should now start, although nothing is yet known of the Strike Price, which the Tidal Lagoon is going to need, in order to be financially viable. We are not expecting it to be cheap but then again sustainable energy isn't cheap.
On the other hand, buried in the detail of the budget, are three measures for supporting the exploration and extraction of oil and gas on the UKCS (UK Continental Shelf), or the North Sea to you and me. These policies have been initiated due to the collapse in world oil prices and the recognition that in order to keep investment flowing, into the UKCS, there needs to be some support. The specific policies are i) a new investment allowance, ii) a 10% reduction in the Supplementary Charge Rate and iii) a 15% reduction in the Petroleum Revenue Tax Rate. Together these measures, according to Government, should create £4bn of investment.
Apart from these explicit 'energy' items the 2015 Budget was mute on any other specifics, except the rate of CCL (Climate Change Levy) that will increase by RPI, so that shouldn't be very much at all, given UK inflation rates, at the moment.
So, the policy is to invest £1bn in Sustainable Energy and £4bn in the not-so-green, at a time when we are committed to hitting both EU and Global emissions targets which, if achieved will need us to use a lot more sustainable energy and a lot less carbon based energy. Osborne's tightrope is a hard one to traverse; the UK wants to go green and knows it will push up energy prices in the long run. At the same time we need oil and gas today (and tomorrow) and so we must maintain investment in an industry which should ultimately decline and which is tainted with being environmentally harmful. Tricky. Sustainable Energy brings with it an inevitable rise in energy prices. Naturally business want to avoid those increases as much as they can and E&CM have developed procurement strategies to do just that. Contact us now and talk to one of our Client Portfolio Manager to find out how we can help you manage the changes that lay ahead. Contact US
The "technical" issues at the Rough Gas Storage Facility, which are likely to permanently reduce gas availablility in the UK, have started to feed through into gas and power prices, across the board, signaling a potential upswing in UK Energy Prices. Businesses need to act in order to avoid what could be a significant upward driver of energy prices. Contact us today in order to put a coherent energy strategy in place and avoid the pain! Contact US