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Be Reasonable, Decarbonize Britain

Politics / Climate Change Jul 25, 2012 - 08:07 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleDuring the 1968 French student revolt a key slogan was: "Be reasonable, demand the impossible". In the UK of 2012 this concerns "decarbonization". Officially, clean energy is still very close to godliness, as could be expected in a country of Protestant religious origins, but just like the definitions of sin, the British have strange definitions of "clean" energy, in particular taking this to mean nuclear power and propping up the now ramshackle edifice of carbon trading. Among other things.

Key provisions of the UK government's draft energy bill, released in May 2012, are already under sharp criticism, mainly because the official No Alternatives - of building nuclear power and renewable energy plants - are totally dependent on government-guaranteed prices for their output. The price numbers game is a daily festival of information and disinformation (ie. propaganda) in the British media, but future electricity prices, by about 2015, will probably be as high as $250 per 1000 kWh for average consumers - if not more. Expressed on a barrel equivalent basis, we can note, this will price British electricity at around $1400 per barrel equivalent.

Pretty obviously this gives a "zero option" to the all-foreign candidates for so-called new build nuclear in the UK, including French, Russians and Chinese, now that the Germans have officially abandoned ship. They can build their nuclear plant but provisionally, of course, will simply use oil at $100 a barrel to generate electricity and sell it to mindless couched potato English consumers at $1400 a barrel. Nice business ! With the right kind of film props and stage sets, and generous bakchich to British inspectors, it might not even be necessary to install any nuclar equipment at all - saving an awful lot of expense.

In the space of much less than 4 years, since the end of 2008, British energy transition to achieve the goals of the European Union's climate-energy package (transposed into British law in June 2009) has come to only mean electricity and how to produce it - and who pays for it. All other aspects of this transition, famously called "Energiewende" in Germany, have been ditched - at least for the moment. The present thrust of the UK government's latest draft energy bill, released in May 2012, which will probably become law in the second half of 2012, concerns what is called Electricity Market Reform (EMR). A Google check with "UK EMR' is already a day-long waste of time trying to find out exactly what it means.

To some, even many EMR is Orwellian newspeak that Joe Stalin himself would have approved. Whatever aspect of EMR you look at, it hides something else. One keyword is the "contracts-for-difference", which underneath the newspeak means supporting investment in low carbon generation, with "low carbon" especially concerning (in the British case) building nuclear power plants and keeping "cap and trade" alive. In both cases the implications of how much the public will have to pay are atrocious and horrendous.

Due to a fantastic set of interrelated and constantly replicating themes, EMR produces mind blowing concepts such as the "capacity market" in which there would be power generators who will be paid for having capacity available and generating electricity, as well as not generating electricity, which can be defended. The newspeak then slides on to generators whose emissions performance standard (EPS) is above a certain carbon floor price, and who will cap the carbon emissions of any new electric generation plant they might decide to build in the UK. How about imported electricity ? Will older non-performing pant have to be scrapped? Who pays?

The high ground and main policy goal of EMR is said (in official documents) to be achieving an 80% decarbonisation target by 2050, and ensuring that 15% of UK electricity is generated from renewable sources by 2020. To reach the 80% target the government estimates that it will need to 100% and completely decarbonise electricity generation by about 2032, and the "only way to do this", for the UK, is to rely on a mix of renewable and nuclear generation.

Proving this is what is called an "elite technocrat theme", UK government publications on EMR repeatedly gloat that total "decarb" of electricity within 20 years, and doing this with renewables and nuclear power, has "broad political support". Within the political system in the UK, the newspeak has won to such an extent that no "street cred" politician will dare say a word out of place, on EMR, after all his parliamentary expenses easily cover his electric power bill!

The power play  moves on and further up by claiming that nobody has any doubt (in the UK) that the current market structure cannot bring forward sufficient low carbon generation, given the cost differential between low carbon generation and fossil fuels. To solve this problem, the response is EMR and its panoply of new pork barrels for corporate and finance industry insiders.

The Contract for Difference is by far the most controversial proposal in EMR. Already generating reactions of corporate horror in the power sector, companies such as SSE call it a "train wreck", and smaller companies say that they will be forced out of business. Even EDF, the main company expected to benefit from the reforms, pretexting the "lack of clarity" on Contract for Difference has put the development of its potential but unlikely new UK nuclear plant at Hinckley Point on hold.

For sure and certain and despite the newspeak, CFD is aimed primarily at supporting "new build" nuclear power in the UK, at almost any price, in a world where nuclear power is increasingly seen as not only dangerous, but also expensive. CFD is claimed by the UK government to eliminate price volatility risk for generators who have large upfront capital costs, and only concerns large energy companies. Totally wedded to trader jargon, CFD starts with a "strike price" being set for launching a plant's construction phase, with almost endless opportunities for price manipulation even before the plant is built and operatiing.  The plant owner will have this power price (set in GBP per 1000 kWh) "topped up" if the wholesale price on the day of operation is below the previously set strike price, and will have to pay back the government, or regulatory agency, or operator of the future CFD market if the wholesale price the operator gets rises above the strike price.

This Enronesque, opaque, easily manipulated and doomed to fail scheme is defended by UK government insiders as vitally needed because the government had to bail out British Energy, the then UK nuclear generating company, from bankruptcy 10 years ago because it "couldnt handle" volatile- and above all low wholesale electricity prices - even with the fantastic government-supplied gift of having a totally depreciated zero-provisions fleet, with all future decommissioning expenses handled by friendly Big Govenrment, to write into its company accounts. Nevertheless, British Energy failed.

Although the first criticism of CFD is simple - it's a not very well hidden subsidy for nuclear power - the creation of this "post-neoliberal monster", which is designed to openly rig markets while its defenders ritually bleat about "the rule of Free Markets", has been trashed by the power industry. Germany's E.On and RWE are long gone from Britain's shores (but not offshores - in the windpower sector), and France's GDF Suez and EDF, and their Russian partner Centrica-Rusatom have put any new construction plans on hold, until and unless the UK government simply guarantees them a modest $1400 per barrel equivalent for highly cleansed carbon correct electricity, to save the planet.

For the UK government supposedly convinced that "free market forces" and the "disappearance of government" are almost aphrodisiacal in their powers, as the 1980s Neoliberal clown ideologists wrote into the teleprompter scripts of Ron Reagan and Mrs Thatcher, it has one simple basic line when it concerns power production: it will set prices, or in UK government newspeak the price "will be set administratively", on what newspeak jargon calls a "cost-reflective basis". Little details like nuclear new build looking completely unrealistic at present power price levels, or even in ten years' time at average projected CPI rates, only get a one-line wiggle round answer from UK civil servants: they will apply "cost reflective pricing". They will also decide what that means, if you didnt guess.

What is sure and certain is future fraud, market rigging, administrative corruption and excess profit making. The UK government makes a point of not saying how long the CFD contracts would last, how they might be renegotiated, whether or not contract prices can be changed retrospectively, and what impact market volatility will be allowed to have on setting prices. Groping for ways to sell a terrible deal to the British couched potato consumer masses (who can in fact vote politicians out of power), UK government defenders of CFD and nucler new build, and the linked and worst possible tricks of the trader casino player "community", claim to find solace in long-term gas supply contracts, from Russia, Algeria, Qatar and Norway, of course.

These are not only fiendishly expensive but also fiendishly complex, and of course are very long-term. However, even taking the wildly exorbitant Russian pipeline, and Qatari LNG gas pricing tariffs as of July 2012, these "only" yield around $16 per million BTU or a little over $90 per barrel equivalent to their price gouging suppliers: this is peanuts for nuclear power producers!

To be sure, we can understand why UK civil servants groped around for the highest-possible priced supplies of energy (outside oil) to try justifying their obsessionsal need to have new nuclear reactors in the UK - that the British are either too lazy, poor or incompetent to build themselves. The sop provided to the couched potato masses is that gas supply contracts for the UK include price-reopener clauses to protect both parties from unforeseeable events, such as trifling falls in average gas supply prices, as in Germany following the liberalisation of the German gas market and a general fall in global gas prices.

For the moment, Big Govenrment UK has decreed that smaller renewable energy developers are "not suitable" for CFDs because the CFD system (if it is applied) will be too complex and risky for them and will favour larger companies. Totally unrelated in fact, but presented by the UK government as linked and related, Ofgem, the British energy regulator, is proposing that the "Big Six" energy suppliers in the UK should be forced to auction 20% of their power capacity. Some of this (in theory of course) could fall into the hands of renewable power producers and - in this case - the result would be that the ability of renewable generation projects to attract financing would increase.  Inch'allah!

While finance and business Web sites know all about the London Whale, the UK proposals for creating a "capacity market" directly links this with the biggest whale of all: a carbon market price floor.

Easily available UK government publications show its forecasts, newspeak for what it intends to apply, for "carbon prices" as the target of 80% decarbonized energy by about 2032 (and 100% low carbon electricity) is approached: UK government forecasts go as high as 500 GBP or $750 per ton of CO2.

In simple terms this would mean and need a $7 or $8 tax added to the price of every US gallon of car fuel or industrial guel used in the UK.

The usual criticism of the proposal, from inside the finance industry and therefore programmed to be talked aside by its friends in the UK government is that a carbon floor price undermines the terribly bouncy and wondrously free market "mechanism" of the EU's Emissions Trading Scheme (ETS). From its founding in 2005, this has rapidly become one of the most opaque and corrupt markets in the world - and in an age of Goldman Sachs that is saying things. The ETS has completely failed to keep carbon prices high (and traders have no interest in doing so).  Indeed the carbon price is currently so low, at around $8 per ton of CO2 that Germany has been producing a record volume of renewable electricity whilst its carbon emissions from electricity generation have also increased - - due to the low cost of coal-fired generation, because CO2 credits are so cheap at present. The EU's ability to ration carbon amongst the member states is about as high as its ability to prevent the national finances of entire countries going down the drain.

For the UK government, giving yet another insight into elite political mentalities, this creates a situation where the UK government has little option but to take matters into its own hands, and administratively decide everything with its corporate and finance industry friends, to reach its sacred goal of 80% decarbonisation by 2050. Helping this conveniently self-congratulating conclusion, the UK government adds that is believes it has the "most competitive energy market in Europe" - making it interesting to compare British energy prices, for any energy commodity or service, with prices for the same energy in other countries. With its new build nucelar "strategy", CFDs, and a bolstered carbon market the UK government is setting what are almost certainly thr highest energy prices in the world.

The UK government FON or "Friends of nuclear power" defend CFDs by saying they find it completely normal that CFDs are intensely criticised by smaller energy companies "without the desire or resources to develop new nuclear and offshore wind generation", in brief not friends of either the UK government or the nuclear-wind-carbon trading lobby. For the new "small player" losers in the neoliberal market rigging and price gouging experiment being applied in the UK, the outlook is sombre because all the UK's main political parties give lip service to Carbon Correct (even today in July 2012!). They will ramrod through the legislation needed to rig markets and gouge energy prices, of course for the nicest of juicy kickbacks and easiest of jobs for the boys, when they are deservedly thrown out of power by an enraged voting public. Likely the only real hope for real democrats is civil strife, to delodge the parasites through military action. 

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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