Discussing Energy Economics on the Internet

Energy Market Reform: Again

Posted in Market Design,UK by Cheryl Morgan on the July 12th, 2011

Today the British government issued a new white paper on energy market reform. I have been on aircraft most of the day (and am now in Finland) so I have missed most of the excitement. Fortunately there are plenty of reports online. Reuters has a summary of what is proposed.

Basically it sounds like the government has come to the conclusion that electricity generators will not build new capacity unless they are given firm guarantees of long term prices (or spot prices are allowed to rise significantly, which is something the government is probably scared of). It all sounds very much like the dear old “dash for gas” of the 1990s. Let’s hope these new contracts don’t end up underwater.

Possibly the most interesting part of the report is this:

The government’s electricity market reform white paper, aimed at introducing reforms to take effect by mid-2013, failed to decide on a capacity mechanism which ensures enough back-up power capacity is available at peak demand times.

The government said it would make a decision on that by the end of the year with two alternatives possible.

Either it will opt for centrally procured capacity that is removed from the energy market or a market-wide mechanism in which providers offering peak capacity will be incentivized.

I foresee a big upsurge in the demand for market analysis.

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Centrica Takes The Plunge

Posted in UK by Cheryl Morgan on the July 8th, 2011

There are slow news days, and fast news days. If you want to make a big splash with a press release, send it out on a day that no one has anything to talk about except the latest UFO sightings. If, on the other hand, you want to bury bad news, announce it on a day when everyone is distracted with the biggest story of the decade.

That’s what Centrica has done in the UK today. The whole of the country is gripped with fascination over the unfolding story of the News of the World phone hacking story, which has already cost the venerable newspaper its life (and all of its staff their jobs), and threatens to do major damage to both Prime Minister David Cameron, and media tycoon Rupert Murdoch. What better time could there be to announce that you are raising retail energy prices by 16% for electricity and 18% for gas?

Of course not every journalist in the UK is asleep at the wheel. The BBC has a lengthy report on the issue. This is full of the usual back-and-fore in which Centrica blames world wholesale prices for its problems and consumer organizations quote their own statistics, either about historical prices or Centrica profits, in order to claim that the price rise is nothing but an exercise in gouging.

Sky News, however, takes a very different tack. It quotes Ann Robinson of the consumer website as saying, “the days of cheap energy are over and it’s time that we all started to understand what this means for our bills and how we use energy.”

Why might this be? Well, The Economist recently held an energy summit in London. The keynote opening address was made by Sam Laidlaw, CEO of Centrica. Here’s part of what he had to say:

We are rapidly approaching a tipping point in the energy story of this country and there is a risk that society is not being realistic about the path ahead. (…) Over this next decade three forces are coming together – our growing dependence on increasingly volatile world energy markets; our commitment to make serious cuts in carbon emissions; and our obligation as a society to ensure that energy remains affordable at a time of huge pressure on household incomes.

That issue, which is by no means unique to the UK, is explored in great detail in an article by Hugh Sharman at European Energy Review. Sharman lays into government energy industry forecasters, led by the International Energy Agency, which he describes as being “consistently optimistic — and serially wrong”.

Of course Sharman has his own axe to grind. He has made something of a career out of criticizing UK energy policy through his blog, DimWatt, but there is little doubt that the UK is desperately in need of new investment in generating capacity, and transmission infrastructure as well if it wants access to the promised green energy bonanza from Scotland. It is unlikely to get that if consumers are not willing to pay more for power.

So Centrica has taken the plunge. It wasn’t the first major retailer to do so. Scottish Power put prices up by around 10% last week. But it has a much higher profile and has implemented much bigger price rises. The company is doubtless hoping that the rest of the industry follows suit.

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NPower Up For Sale

Posted in Retail,UK by Cheryl Morgan on the July 4th, 2011

The Scotsman reports that the UK energy retailer, Npower, currently owned by Germany’s RWE, is likely to be put up for sale. The German company has hired Goldman Sachs to consider options, which may include an auction. RWE is thought to want to raise money in order to reduce debts, or possibly to finance investment in new nuclear plants. The paper cites Spain’s Iberdrola, which already owns another retail company, Scottish Power, as a likely bidder. This may trigger further consolidation in the rest of the UK energy retail sector, which has for some time been accused of being overly concentrated.

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Nuclear Europe, Round N

Posted in France,Nuclear,UK by Cheryl Morgan on the July 4th, 2011

At the end of last week the UK government found itself with considerable egg on its face when someone leaked a bunch of emails showing that the Energy Secretary, Chris Huhne, was apparently colluding with the nuclear industry to put a positive spin on the Fukushima disaster in order to forestall public unease about new nuclear build in the UK.

Huhne is a member of the minority Liberal Democrat party in the Uk government. His party colleagues are largely anti-nuclear, and permission for LibDem MPs to abstain on any votes on the issue was specifically negotiated as part of the coalition agreement. Understandably Mr. Huhne’s party colleagues are not best pleased with him.

Meanwhile the French have run into their own problems. The nuclear safety inspections I mentioned last week turned up 32 separate safety concerns at EDF’s Tricastin plant in Drôme in the Rhône valley. Two days later the plant obligingly suffered an explosion, sending a thick cloud of black smoke into the sky. The problem was not associated with the reactors, and French police have confirmed that no radioactivity has been released into the environment. Nevertheless, the British newspapers are making a meal of the story. Doubtless their colleagues around Europe are doing the same.

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Greens Weigh In On Severn

Posted in Renewables,UK by Cheryl Morgan on the May 8th, 2009

As I expected, environmental groups are not happy with the British government’s plans for an 8GW tidal barrage across the Severn Estuary. In theory the government has whittled a long list of 10 tidal power projects down to a short list of 5, and will eventually choose the best project. In practice no one expects them to opt for anything other than the massive 8GW scheme because that’s the one that will deliver the most generating capacity. Unfortunately it may also be the project that causes most environmental damage.

Britain’s environmentalists are not taking this lying down. A coalition formed by the National Trust, the Royal Society for the Protection of Birds, the WWF and the Anglers’ Trust has commissioned a report from the engineering consultancy, W.S. Atkins. That report has now been published, and it casts significant doubt on the process that produced the short list from the long list. In particular Atkins alleges that the government report:

  • Assumed that two-way generation would produce similar or less power to ebb-only generation; and
  • Used 30-year-old calculations that seriously underestimate the potential output of some schemes

The two-way generation issue is particularly important as such schemes are believed to be less environmentally damaging than ebb-only generation. The government short list eliminated the “tidal reef” project based on this technology that was the preferred candidate of the environmental groups.

You have to have a certain amount of sympathy for the government bureaucrats for wanting to avoid a scheme that bills itself as a, “Totally new concept in tidal power generation”. On the other hand, this debate isn’t going to go away, and trying to eliminate a major rival candidate early on was perhaps not a good idea.

More coverage in The Guardian.

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A Salesman Calls

Posted in Retail,UK by Cheryl Morgan on the May 7th, 2009

I had a visitor today. He claimed to be from Scottish Power and he needed to read the electricity meter. Although he very carefully didn’t say so, it was pretty clear that what he wanted was to get information about my usage levels so that he could give me a quote with a view to luring me away from my current supplier. I sent him packing, and thought no more about it until I saw a blog post by a friend who had experienced a similar visit.

The difference here is that the meter here is on the wall outside the house, whereas Juliet’s meter is inside the house. Consequently the Scottish Power salesman was keen to get entry to her home. Once again he wasn’t admitting to being a salesman, but instead spouted the nonsense about needing to do a “tariff check”. Because this involved someone trying to get into the house, Juliet not only sent the fellow away, she reported him to the police.

Is this reasonable? Actually I think it is. It is one thing for an electricity salesman to come to the door. It is quite another for him to try to trick his way into someone’s house. Juliet can look after herself (she’s a black belt at something dangerous), but older people could easily be quite frightened by this. That’s particularly so because the British media keep warning us against “distraction burglaries”, where one man distracts the householder with some fancy tale while the other sneaks into the house to rob it.

Given the scale of the operation (Juliet lives quite a long way from where I am), I have no doubt that this was a legitimate Scottish Power sales campaign, though I note that such things are often outsourced to specialist doorstep sales companies so the staff involved, and even the choice of tactics, may not have much connection with Scottish Power. It is, however, a rather stupid campaign, and one that is likely to backfire on the company. I’m writing this post in part in the hope that someone from Scottish Power will see it and ask some hard questions of their subcontractors.

More generally, however, I wonder about a retail market in which these things happen. The intention in opening up residential supply to competition was always to introduce healthy competition to the market. But experience has shown that customers are not interested in switching supplier for any reason other than price, and the savings available are often so small that no one can be bothered – hence the high pressure sales techniques. This new “tariff check” scam is quite mild compared to what used to go on before Ofgem got a grip on proceedings. We might have competition, but whether it is healthy or not appears to be open to debate.

The irony of the whole affair is that I’m currently staying with a friend, and when she got home she informed me that she’s already with Scottish Power, so clearly whoever is running the campaign isn’t bothering to check which households are already sold.

UK Announces Potential Nuclear Sites

Posted in Nuclear,UK by Cheryl Morgan on the April 15th, 2009

The UK Government has published a list of 11 sites at which it hopes new nuclear power stations will be built. According to The Guardian, the sites are:

Dungeness in Kent; Sizewell in Suffolk; Hartlepool in Cleveland; Heysham in Lancashire; Sellafield in Cumbria; Braystones in Cumbria; Kirksanton in Cumbria; Wylfa Peninsula in Anglesey; Oldbury in Gloucestershire; Hinkley Point in Somerset and Bradwell in Essex.

The majority of these locations (9) already house existing nuclear installations. The other two are close to the nuclear re-processing facility at Sellafield. The government hopes that the choice of brownfield sites will ease the process of planning inquiries, though anti-nuclear protesters are already lining up to challenge the process.

Meanwhile the companies involved are busy courting local public opinion. Here in Somerset homes have received leaflets from EdF that talk enthusiastically about the new jobs that will be created, and about the nuclear skills training center that will be established in conjunction with a local college. Hinkley Point is a particularly interesting site as it overlooks the Severn Estuary more or less exactly where the proposed tidal barrage would be built. This gives local people a genuine choice as to how they want their future electricity generated: by a nuclear power station, or by a renewable energy project that environmental campaigners say will be disastrous for local wildlife. The next year or so could be interesting.

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RSPB Changes Tack On Wind

Posted in UK,Wind by Cheryl Morgan on the March 26th, 2009

Despite having plenty of good prospects for wind energy, the UK has lagged behind both other European countries and America in deployment of wind farms. The problem is well known: planning permission. NIMBYism is a major issue – the British public has got it into its head that a wind farm is a terrible eyesore than is to be resisted at all costs. However, environmental groups, including the Royal Society for the Protection of Birds (RSPB), have also campaigned strongly against wind farms on the grounds that they are a danger to our feathered friends.

Not any more. Much to the delight of the British Wind Energy Association (BWEA), the RSPB has published a report titled Positive Planning for Onshore Wind. Produced by the Institute for European Environmental Policy (IEEP), the report states that risks to wildlife can be minimized by sensible planning and choice of location. Ruth Davis head of Climate Change Policy at the RSPB said:

“This report shows that if we get it right, the UK can produce huge amounts of clean energy without time-consuming conflicts and harm to our wildlife. Get it wrong and people may reject wind power. That would be disastrous.”

Actually, of course, the British people rejected wind power en masse a long time ago, and the RSPB should accept a large share of the blame for that. But it is good to see them change their stance. Possibly their minds were powerfully concentrated by the government’s enthusiasm for the Severn Barrage scheme which, if it goes ahead, is predicted to destroy large areas of wetlands that are vital to many bird species. The main advantage of the barrage, as far as the government is concerned, is the ability to get a huge amount of new generation from only one public inquiry, rather than have to fight environmental protesters in many small battles all over the country.

The full RSPB report is available here.

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On Retail Competition

Posted in Retail,Texas,UK by Cheryl Morgan on the March 3rd, 2009

Over at Knowledge Problem, Michael Giberson reports that a shake-out is occurring in the Texas retail market and asks whether vertical integration might have been a better option for Texas.

I don’t have Sally Hunt’s book to hand, and I know that there are complex issues involved in this case, but here are some quick thoughts.

1. The end result of vertical integration is a situation like we have in the UK where there is no serious wholesale market in electricity, and consequently much less transparency in the market. Transparency, in general, is a good thing, and I don’t like doing without it.

2. Texas is experiencing a shake-out of retailers because it, like California, made the foolish assumption that the retail market would see enthusiastic and successful new entry. All of the experience around the world suggests that this does not happen. Energy retailing is a business in which economies of scale are everything, and new entry is practically impossible. The Texas market will eventually settle down to a small number of very large companies all of which, I suspect, will also have retail businesses in other states.

No Aliens After All

Posted in UK,Wind by Cheryl Morgan on the February 11th, 2009

A while back I linked to a story about a catastrophic failure of a UK wind turbine that people were speculating might have been caused by a passing UFO. Sadly the real explanation is much more prosaic. As this Guardian report reveals, the actual explanation was metal fatigue in some of the bolts holding the turbine together. Enercon, who made the turbine, is embarrassed; Ecotricity, who own the site, are disappointed that their time in the limelight appears to be over; and the British newspapers are off looking for the next promising alien invasion story.

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