Thursday, December 22, 2011

What industry thinks of the Electricity Market Reform's £200bn bill

Michael Lewis, managing director Europe, of EON Climate and Renewables, welcomed the government's white paper on Electricity Market Reform, in particular the contract for difference which will be set in 2013. But told delegates at the Countdown to 2020 conference in London that utilities could not front up the £200bn of investment required for new generation.  
He said: "Our balance sheet simply doesn't stretch far enough to deliver these targets. The collective balance sheets of the utility industry doesn't stretch far enough and with the planned or actual closure of the old nuclear plants and newer plants in Germany our balance sheets have been hit. We have to be very clear that the returns are at the right level. The contract for difference will provide that clarity long term. The sooner [it's introduced] the better."
He also welcomed the carbon floor price: "This is a very important piece of the overall Electricity Market Reform proposals. We've seen the carbon price sink to very low levels in the recent past - €7.40 a tonne - that isn't going to incentivise much at all in low carbon generation. The recession has reduced emissions.
"The EU cap has achieved the goal of reducing emission but not incentivised the new investment we need for the longer-term targets, which is why a floor on carbon is essential to provide those long term signals and long term incentives."
But Lewis pointed out concerns about the integration of renewables. Some of these concerns are part of the consultation launched in the technical update published by DECC last week which included plans for a market-based capacity mechanism and a decision that the system operator, the National Grid, should deliver the Feed-in Tariff with Contracts for Difference and the market - a model similar to that operated by California's Independent Systems Operator.
Lewis advocated two separate markets - one for capacity and one for energy: "If you have a very large proportion of intermittent capacity on the system - 30GW-40GW - there will be large periods where prices drop to very low levels. But if you don't have a capacity mechanism you will end up with a very volatile power price with long periods of low prices and short periods of very high prices when capacity has to earn its capital cost through the energy market for a very short period of time.
"By creating two separate markets, one for capacity, one for energy, you create more stable power price planning while ensuring that capacity runs fewer hours and gets the necessary returns."
"£200bn - that's what electricity market has to attract in terms of financing. That's a huge challenge. We're hoping that the figure won't be that high because we've made a commitment to reduce costs - including a 40% reduction in offshore wind by 2015."
Anders Søe-Jensen, president and founder of the offshore division at Vestas made no apologies for the high costs of offshore by saying that the industry was at the start of its innovation/technology cycle. But he warned that although the government target of £100/MWh by 2020 was ambitious, the industry had to bring down costs or it would kill itself.
He said: "Offshore wind is a higher cost energy because we are where we are in the learning curve. And we are all working to bring down the cost of energy. We are at risk but we all have to commit to bringing down costs otherwise we're going to kill our industry."
Vestas was working with Decc and the Crown Estate which issues the seabed permits to lower costs.
But he said the value to the UK economy would go beyond cheaper offshore electricity, pointing to a report from Oxford Economics which said that the industry could create 58,000 new jobs around the UK, many in deprived coastal areas.
Jensen said although Vestas had plans to build a plant at Sheerness that could only happen if the market was created through political and public support. "If the market is here, we will be here," he said. "With the wind resource in the UK, 169GW could be installed that would … make the UK a net exporter of electricity.
"In future, I can imagine a bond market for wind," he said in later comments.
Martin McAdam, chief executive officer of wave power start up, Aquamarine Power, said that creating the marine power industry would require a more fundamental shift back to more domestic manufacturing in the UK.
He said that although he attempted to keep as much of the investment in the Oyster local to the Orkney economy where a prototype was deployed - $4m of a total $20m - it was impossible to order the steel castings anywhere but China.
He said "We need to go way back in terms of where the UK has come from and where it's going. So we saw this huge change under Margaret Thatcher to move from a manufacturing economy to a service economy. There's nothing wrong with services. The financial services are an important part of the economy despite all the turmoil we've seen.
"But if you rely purely on services and you make nothing then you're wholly dependent on imports and that means you have quite an unstable economy. I firmly believe we have to get back to understanding that we can manufacture. A lot of this was driven by ideology at the time - we had a very high unit labour cost in the UK. We were over-unionised. So we talked ourselves out of having a manufacturing base. Siemens in Germany is expanding and they're not saying we're going to make this elsewhere in China. Germany has in the last 10 years increased production in the car industry."
He said there was no reason why the UK couldn't create and export market for marine power in the way it had for offshore oil and gas.
"A quarter of Europe's wave resource is in the UK. It makes a huge amount of sense for the UK to create an industry around these new technologies.
"But to move this industry to the next stage - we need the ecosystem. We need the supply chain to participate. I need other competitors, I need financing solutions. All of that benefit comes because we have an ecosystem that supports the new infrastructure.
So is the £200bn electricity bill worth it?
"£200bn might seem like a lot of money but in the context in the energy that this country requires today and will require in the future it's tiny. If we had to re-create the energy infrastructure in the UK its value is far greater than £200bn."
But, he admitted: "The early days are the hardest."
Hard days may become harder unless it becomes clearer where this £200bn is going to come from.

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