Energy Market Reform Discussion - Complaints about Nuclear & Contracts for Difference (CfD)

Parliamentary Renewable and Sustainable Energy Group seminar on Energy Market Reform 

How can it deliver decarbonisation? 

Energy Market Reform is so complex to hide nuclear subsidies?? - “It's like my cat hiding behind the curtain but you can clearly see it's tail sticking out”

I hope that's hooked you! This is a brief overview of what we took away from the commons discussion. Not necessarily correct, there was a lot of info thrown out; if it's incorrect, apologies. Here is a summary of the key points that came out and most of the nuclear related bits (this is a nuclear blog after all).

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Attendees: Alan Whitehead (Chair), Caroline Lucas MP, Laura Sandys MP, Craig Bennett, Director Policy and Campaigns, Friends of the Earth; Catherine Mitchell, Professor of Energy Policy; and more..

Electricity market reform (EMR) is very complex; there could be many winners or losers. It was suggested that it's all so complex to hide nuclear subsidies - “It's like my cat hiding behind the curtain but you can clearly see it's tail sticking out”.... Let's brush that aside.

A strong opening remark by Laura Sandys MP hit the nail on the head with what we need in the long term: Security, Affordability and Low carbon. She then went on to say, “Security + Affordability = Low carbon”.

Key areas we took notes on:

   1. Whats missing and what's needed in Energy Market Reform (EMR)

   2. What's wrong with Contracts for Difference (CfD) and how to change it
A contract for difference in this case is setting a price for electricity. In rough terms, if the price a company can sell electricity at is above the strike price, all is good. If it is less then the govenrment will make up the diference. The aim being to provide a stable and predictable incentive for companies to invest in low-carbon generation.
   3. Nuclear?!

What's missing and what is needed in EMR

Missing:

DEMAND SIDE MANAGEMENT AND DEMAND SIDE REDUCTION. 

This was a major point made by everyone. The demand side of EMR is missing, and only 50% of capacity is actually used. Methods mainly discussed were the use of a smart grid and smart technology (things that load follow so your fridge is a bit warmer at peak electricity use times). And the UK needs to subsidise demand side reduction technologies to ensure it happens.

Needed: 
The capability of CCS was brought up. Caroline Lucas MP said that we need to stop a dash for gas but to use gas as a bridging technology. Which is important because a large increase in gas would make us very dependant on gas prices and, in the past, price hikes have been due to this. (Aside - see figure below. Also worth pointing out that gas is still cheaper than renewable energy without a carbon tax).

Committee on Climate Change - "Household Energy Bills" Worth noting that the biggest increase from 2010 (as stated in report) is in Renewables and CCC.

Friends of the Earth mentioned 6 main points in the Friends of the Earth and Greenpeace open letter (see here). They also brought up how renewable energy costs have fallen very sharply and eventually they should be competitive with fossil fuels.

One thing the FOE representative said that made us chuckle:
People forget that “energy from renewable systems is free"; there's maintenance but that is a very small cost. (Aside - the figure below doesn't echo this. The cost over the lifetime of a renewable system is still very high as they have a limited lifespan and high upfront cost for the electricity they are capable of generating)

So, what we need are long term contracts for low carbon technologies to ensure their development. The extension of Renewables Obligation (RO, obligation on licensed electricity suppliers in the United Kingdom to source an increasing proportion of electricity from renewable sources) could do this as it's useful in incentivise technology. People did admit that “Contracts for Difference” (CFD) in certain respects is the way forward, but up to 2020/5 the RO should be extended and after that CfD should implemented.

Summary: 
1.  Improve demand side
2.  Extend RO and push back CfD

What's wrong with CfD and how to change it

CfD is designed for nuclear. Others said that CfD is a good idea, but it should not include nuclear; there should be a separate version (of sorts) for nuclear, but that would come out as a direct subsidy for nuclear, so can't be done. Currently renewables are doing well under the RO. CfD has no obligation in it to purchase renewables, it needs purchase agreements involved (sort of similar to the RO). So it was mentioned a way round this to 2030 target would be to extend RO and push back CfD.

A bit from Caroline Lucas:
Nuclear is low carbon but expensive. Under CfD the strike price would be £135-160, where as for “so called” expensive offshore wind it would be £96. Implying that therefore offshore wind is more economically feasible.
(Aside - Not sure which study those figures are from, but below is a figure from the Committee on Climate Change showing expected prices; nuclear and offshore wind appear the other way round. Although, recently it's been reported (The Times) that EDF want a strike price of £165 for Hinkley C) 

Committee  on Climate Change - "Renewable Energy Review" With a 10% discount rate, and Unabated gas including a carbon price... Nuclear appears cheaper than offshore wind up to 2040. And up to 2030 Offshore wind has a very rigid price. Some of the renewables show the price drop friends of the earth mentioned. But only wind appears to be comparable of fossil fuels (so long as there is a reasonable carbon price).

Nuclear

Not much to say here as it's been mainly covered in the previous sections, but one other thing stood out (we missed who said this) "even people in DECC" don't think the UK will build more than one new reactor. (Aside - Interesting how people thing CfD is almost entirely for nuclear, yet also say the people making the policies don't expect there to be more than one new reactor, seems a lot of faff and bad press for very little.)

Their closing remarks

Strategy and legal targets are not a silver bullet, there is no certainty that they will be met. But they are needed.

We need to get out of the idea of there being a huge amount of nuclear built in the run to 2025 (the UK is aiming for 16 GWe of new nuclear in this time, 10+ reactors). In reality there will be 1 or 2, but these could be replaced by 2 gas power stations or a couple of inter connectors. “The nuclear illusion is still flickering in the background” EMR is not based entirely on new nuclear, but there are a lot of aspects that distort it in favour of nuclear “We need to get out of that mind set”