UK Govt’s newest apology for an Energy Policy

Ed Davey MP, Secretary of State for Energy and Climate Change
Ed Davey MP, Secretary of State for Energy and Climate Change
Opinion by Energy Voice

I was once told that if Moses had been a Lib Dem he’d have come down from Mt Sinai with ten “really jolly good suggestions”.

It’s the same with Ed Davey’s attempt at an Energy Policy. It’s full of proposals for processes that, worryingly, sound as if they’ve been dreamt up by a bunch of City types.

What appears to be top of Ed’s priority list is Electricity Market Reform. This he says “puts in place measures to attract the £110billion of investment which is needed to replace current generating capacity and upgrade the grid by 2020, and to cope with a rising demand for electricity”.

Sounds simple enough, doesn’t it? We all know that we need to replace ageing conventional and nuclear stations, increase renewable energy, and all that obvious stuff, and so I was looking for a plan to do that.

Sadly though, having written the scene-setting bit of his policy Ed must have then sent it to the Treasury. That worries me because I read recently that a lot of new Treasury advisors are former investment bankers. Just saying; nothing inferred. Honest!

Anyway, the policy then starts talking about things like “Contracts for Difference” or CFDs which I always thought stood for Computational Fluid Dynamics which, come to think of it, is a considerably more interesting subject.

It turns out though that Ed’s CFDs are complex financial contracts designed to provide stable revenues for investors in low-carbon projects so guaranteeing they get their money back and make a few quid on top.

They effectively take the risk out of the investment which logic would suggest should mean that the rate of return will be quite low although I would bet it doesn’t turn out that!

CFDs are supposed to work by being set at a fixed level called a “strike price”, although I haven’t quite worked out yet who determines that it would be the subject of negotiation.

In addition, from what I understand the “strike price” won’t actually be set until sometime in 2013 so passing judgment on whether CFDs are a sustainable way of dealing with this won’t really be possible until then and of course – critically – it will also determine how attractive the UK market will be for renewables investment.

In addition, we have the setting up of a new company (Government owned, I think) to act as a single counter-party to the CFDs with eligible generators and if you want to learn more about this go and find the CFD Heads of Terms document on the DECC website yourself.

However, let me warn you it consists of 74 pages of gobbledygook that you will only understand if you are a lawyer, civil servant or a policy wonk. I gave up at about page 10 and I was still only on “definitions”. Ye gods.

Now inevitably, where there are mechanisms like this there are costs. Managing this pile of bureaucratic nonsense will cost a fortune.

It will employ lots of people that we – the poor darn consumers – will be paying for.

Doubtless, also, there will soon be a market in CFDs much as there is or was in carbon credits and so people will be making money trading these backwards and forwards and the cost of doing that will somehow find its way back into our bills. That’s the modern way.

Fancy financial instruments worry me. Remember the sub-prime mortgages scandal and instruments so complex that bankers didn’t understand them?

The German company RWE npower, which scrapped its plans to build a new nuclear plant in the UK last year, was reported as saying: “The proposals for the contract for difference have become increasingly complex and far removed from what we, the wider industry and the investor community, expected which was a commercial contract, backed by government.” I think that was an understatement.

Anyway, what I was really looking for in this “policy” was some form of energy-related industrial strategy. However, I knew that being the UK Government this was probably too much to ask for and I wasn’t disappointed. Well, I was disappointed but you know what I mean.

We should remember that the total cost of the Government’s proposals amounts to around £7.6billion. Well, that’s a current estimate which will doubtless go up. It will pay for new nuclear and presumably gas power plants, windfarms and so on and so forth.

Consumers are currently paying about £20 a head a year towards all that but by 2020 the Government say that will rise to about £110.

Others though think it will be considerably higher than that and I have to say I tend to agree.

But the point, of course, is that a large part of that £7.6billion will be added to the UK trade deficit because we don’t build reactors, wind turbines and much of the other hardware needed.

The only exception perhaps being gas turbine generators which is probably just as well because some estimate the UK could be as much as 80% dependent on gas by 2020.

So it’s disappointing but not surprising given Westminster’s track record that there is not even the sniff of a suggestion in the energy policy that the Government intends to put any real effort into growing an indigenous energy industry manufacturing base capable of taking on the challenge this Government policy presents.

Ah yes, gas. According to some reports Ed wants full-fat decarbonisation by 2030 whereas George Osborne is insistent that gas will have to be part of the energy mix past 2030. Now this leads me straight to the shale/unconventional gas issue which I shall be commenting on in part next month.

A Very Happy and Prosperous New Year to you all.