New Thinking: Having your cake and eating it

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New Thinking: Having your cake and eating it

CM cropped medHaving your cake and eating it: energy companies want profit without risk

Catherine Mitchell, IGov Team, 22nd October, 2014

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Having your cake and eating it – energy companies want profits without risk

The fire at Didcot electricity gas plant on Sunday night has, as to be expected, led to numerous articles (e.g. here, here, here and here) which argue, when boiled down, to two simple points: (1) that not enough has been done by Government to stimulate investment in the electricity system and as a result we are now dangerously close to having brown or black outs this winter; and (2) that getting the necessary investment requires a more certain, investment framework.

However, these arguments are either specious or ingenuous, or both.

Those of us who have been working in energy for longer than a few years recognise the perennial calls by incumbents for more certainty of the investment framework. Paul Golby, then CEO of E.on UK, seemed to spend most of the 2000’s saying that E.on needed more investment certainty if E.on was to invest in nuclear power. The Government, first under Labour and then the Coalition, from 2006 onwards, gradually gave him more and more investment certainty until there is now more or less complete policy certainty of investment for nuclear, and yet no British generators, including E.on, have come forward.

Any company in Europe which genuinely keeps an eye on the way that the economics of energy systems around the world are changing knows where it should invest – renewables. This is because, in Europe and in GB, there is a very clear energy policy pathway – one towards low carbon and greater efficiency – and also a clear technological trajectory towards ‘smarter’ system operation based on new IT, which favours relatively smaller over relatively larger scale generation.  After, a brief career in energy journalism, one of my first jobs as an energy consultant in 1989 was to describe the implications of the Large Combustion Plant Directive (LCPD), which primarily affects coal plants. Twenty-five years later that Directive is beginning to kick-in. It has taken 25 years because it was accepted in 1989 that industry needed time to transfer from one business model to another.

Even so, industry still wants more investment certainty! And, I imagine, they will continue to call for more and more investment certainty until they are monopoly companies with captured customers and getting comfortable profits, and even then they may complain.

The problem is that these companies exist in a privatised, competitive industry. Those that work in the industry are compensated for the higher risk of competition than monopoly arrangements by high salaries and large profits, some of which are returned to investors. Clearly, it would be more comfortable for those executives to have a combination of high salaries, a nice guaranteed profit and no risk but that is not how competitive industries work.

Every time a company or an industry body asks for more certainty of investment, what they are really asking for is certainty of support for their preferred fossil technology going into the future despite policy,  usually,  being very clearly to reduce its use. These companies and lobbies know that their calls are disingenuous. Those commentators – whether Coalition MPs or lobbies –  which argue against renewables or in support of greater investment certainty – are calling for more support of the status quo and this is support of private rather than social/public interests. They clearly accept it is OK that customers pay for the companies own inability to change, or their preference not to do so, so that they can carry on doing (and making money) in the same way they have done for the previous X years.

These companies have to change. As a recent blog and paper showed, the jury is still out on whether they are capable of this. There are four aspects of this that really irritate me: firstly, that these GB companies disingenuously continue to argue for investment clarity, when it is clear to absolutely everyone what the energy policy path is; secondly, that other commentators criticise Government policy in a fact-free way to their suit their private interests rather than be based on knowledge; thirdly, that Government panders to incumbents or commentators  (i.e. giving them a market-wide capacity payment rather than a targeted capacity payment to cover the ‘missing money’) thereby clouding policy unnecessarily and unhelpfully and forcing customers to pay more than they should;  fourthly, that by pandering to incumbent demands, Government is de facto not supporting all the investors and market participants which are doing what Government policy says they want new investors to do.

What was heartening about the Didcot power station fire was that were a few media reports (e.g. here, here, here and here) which explained factually correctly what was happening at the time of the fire, and what the impacts of it would be immediately and for the winter. Firstly, fossil fuel power plants were surplus to capacity requirements and were being closed down anyway because it was a windy day/night. As more zero cost variable power is deployed, fossil generation can become surplus to requirements, thereby reducing payments for generation, and high peak prices can also fall, hence the falling share prices of the conventional utility companies. This shows that policy is working: once subsidies are paid, these renewable technologies provide extremely cheap power; and emissions come down. Bit by bit the system is changing, as expected by policy, so that the system remains secure as unwanted fossil and nuclear plants close down.  Secondly, these big power plants – even relatively new ones as the Didcot gas plant was – are insecure.

All politicians and the regulator can do is keep their policy clear and consistent, and stand up to these self serving demands or criticisms. Policy has been in place now for 25 years. The fruits of it are just now coming through, and therefore all the more reason to keep going with it. However, that is also why companies, lobbies and pro-status quo commentators have become so ubiquitous in calling for new investment frameworks. What actually has to happen is that the private companies have to learn to live with competitive risk. Maybe if I worked for them, I would be making the same arguments but that does not mean they are correct or in the public good.


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