The 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 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, recording or otherwise without prior permission of the publishers. The publisher and author have used their best efforts in preparing this book, but assume no responsibility for any injury and/or damage to persons or property from the use or implementation of any methods, instructions, ideas or materials contained within this book. All operations should be undertaken in accordance with existing legislation, recognized codes and standards and trade practice. Whilst the information and advice in this book is believed to be true and accurate at the time of going to press, the author and publisher accept no legal responsibility or liability for errors or omissions that may have been made. 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