Table Of ContentThe Paralysis in energy Decision Making
T P
he aralysis in
e D M
nergy ecision aking
e
uroPean energy Policy in crisis
M g
alcolM riMsTon
Whittles Publishing
To my parents, Arnold and Ena Grimston
Published by
Whittles Publishing,
Dunbeath,
Caithness KW6 6EG,
Scotland, UK
www.whittlespublishing.com
© 2016 Malcolm Grimston
978-184995-167-8
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c
onTenTs
1 Introduction – the fatal sclerosis in energy decision-making ........... 1
2 Fossil fuels .............................................................................................. 12
3 Nuclear energy ...................................................................................... 47
4 Renewables ........................................................................................ 113
5 Energy efficiency ............................................................................... 163
6 Energiewende .................................................................................... 175
7 Japan – a worked example of medium-term power
capacity shortage .................................................................... 199
8 The liberalisation of power markets and its effect
on investment ............................................................................ 219
9 Climate Change ................................................................................ 266
10 Politics and energy: the tripartite relationship among the
technical, political and public realms in the age of inertia .. 307
11 Public perceptions and the strange case of radiation ................. 370
12 Conclusions – unblock the arteries or wait for thrombosis? ..... 429
Index .................................................................................................... 449
v
1 i –
nTroDucTion The faTal sclerosis
-
in energy Decision Making
1.1 a
n exTraorDinary coMbinaTion of PronounceMenTs
In July 2015, Ofgem, the UK energy regulator, published its annual assessment of future
electricity generating capacity. Traditionally it has been regarded as prudent to keep a
‘capacity margin’ – a gap between the amount of dispatchable (coal, gas, nuclear or hydro)
generating capacity available and the expected maximum electricity demand – of about
20% in case demand was higher than expected and a number of major plants should
break down or be otherwise unavailable. Ofgem’s projection of capacity margin for the
following winter was as low as -1% - in other words in the worst scenario it was possible
that the system could not meet projected demand even without major unexpected
events. Although major power outages remained unlikely, this figure represented the
biggest risk to secure supplies for 40 years.
The following week the Department of Energy and Climate Change stated that the
total amount of declared power capacity held by major power producers in the UK,
when intermittency was taken into account, fell by over 2GW to 76.5 GW, as older plant
closed but in effect no replacement capacity came on line: this figure had fallen by over
10
8
6
4
2
0
2015/16 2016/17 2017/18
-2
-4
Best case Worst case
Figure 1.1 Projected UK capacity margins (%), 2014/15–2018/19 (FES: Future Energy Scenarios)1
1
The Paralysis in energy Decision Making
7.5% in just five years. Progressive closure of coal-fuelled power stations owing to the
European Large Plant Directive and nuclear plants through age over the course of the
following decade would further diminish the amount of existing capacity.
In December 2014 the government announced the results of the first round of
auctions for electricity generating capacity. The measure was introduced in the Energy
Act of 2013 as a response to growing concerns that the liberalised power market was
not building sufficient new reliable (or ‘dispatchable’) capacity to ensure power supplies
in the medium to long term. Companies which guaranteed to make capacity available
in the winter of 2018/19 would be paid £19.40 per kW, in addition to any income they
might receive for selling electricity at the time. 49.3 GW of capacity was contracted
through this process, at a cost to the electricity consumer of over £950 million. Only 2.6
GW of capacity yet to be built won support (of which, the biggest project, a 1.9 GW CGT
at Trafford in Greater Manchester, failed to win financial backing and was effectively
abandoned before the end of 2015). Another 12.9 GW went to plants which required
refurbishment. The vast bulk of the total (33.6 GW) went to existing power plants,
something which could clearly only be justified if there was a realistic prospect of this
plant being closed before 2018/19.2 A similar outcome was to follow in December 2015.
Taken together these three announcements painted a clear picture. The UK was rapidly
reaching a point where a huge amount of new investment was required in power generation
capacity. Estimates suggested a total of more than £350 billion would need to be found by
2030 to keep the power system in a fit state, not just in terms of low-carbon generating
capacity required to meet environmental goals, but also with regard to the effectiveness
and reliability of transmission and distribution systems, gas storage and so on.
In normal commodity markets involving heavily capital-intensive industries, impend-
ing shortages result in increasing prices, which in turn encourage investment in new ca-
pacity that ultimately brings prices down again. In the UK electricity market, this was not
happening. Investors were clearly unconvinced that, despite the predicted shortage of ca-
pacity, prices would rise far enough and remain high for long enough to underpin the
levels of investment required. Far from investors putting up the capital to build sufficient
new plant to preserve a workable capacity margin, the power consumer was being required
to find nearly £1 billion just to prevent companies closing down their existing plant ‘early’.
This was obviously not a market which was working. There was a patent need for very
rapid decisions on investment, given the amount of time it takes to design and finance
a project, receive necessary permissions, construct it and connect it to the grid; yet no
major new power plants began operation in 2014. Nor was it a market where companies
were making an inflated return on capital. UK end user power prices remained below the
European Union average and well below those in western EU nations, such as Denmark,
Germany, Italy or Spain.3
Power stocks, not just in the UK but across Europe, had been among the worst-
performing of all the industrial sectors.4
2
Introduction – the fatal sclerosis in energy decision-making
Yet, the political rhetoric, as the 2015 election approached, seemed based on a
very different analysis. At the Labour Party Conference in September 2013, leader Ed
Miliband enthused delegates as follows:
Take the gas and electricity companies. We need successful energy companies in
Britain. We need them to invest for the future. But you need to get a fair deal and
frankly, there will never be public consent for that investment unless you do get a
fair deal. And the system is broken and we are going to fix it.
If we win the election 2015 the next Labour government will freeze gas and
electricity prices until the start of 2017 … Now the companies aren’t going to like
this because it will cost them more but they have been overcharging people for too
long because of a market that doesn’t work. It’s time to reset the market. So we will
pass legislation in our first year in office to do that … .5
In the event, Mr Miliband was unsuccessful in that election and the more business-
friendly Conservatives won an overall majority. But although the price freeze was dead
and buried, the chief whip in the previous Conservative-led coalition government,
Michael Gove, had said that Miliband was ‘absolutely right’ to warn about energy price
rises and said of the energy companies: ‘I do take what they say with a pinch of salt
actually. The way in which the major energy companies have behaved in the past does
not give me confidence in everything they say.’6
Of course, if companies are not making a reasonable rate of return on their existing
assets and are facing hostile comments from government and opposition alike, the
appetite among potential investors to make the decisions necessary to deliver a power
system needed by a modern economy is likely to be severely blunted. If the power market
had been ‘working’ in 2003, for example, then there is a real likelihood that not just 40
per cent of the generating capacity would have gone bust, as actually happened, but the
whole system would have followed it.
The aim of this book is to look at how the UK and other countries had found them-
selves in such an impasse, the potential consequences, and possible ways out of the scle-
rosis before it leads to an inevitable thrombosis in the arteries of a modern economy for
which electricity has become the lifeblood.
1.2 T -
he losT arT of Decision Making
Countries like the United States and those of western Europe were not always so inept
at taking decisions necessary to protect their long-term interests and create a better
tomorrow for generations yet to come.
The first electricity from a wind turbine was generated in 1887 – by 1900 there was
around 30 MW of wind generating capacity in Denmark, while by 1908 there were 72
wind-driven power stations operating in the US.
3
