Archive for utilities

Renewables – what incentive is there to build back-up capacity?

Posted in Energy markets with tags , , , , on June 13, 2008 by Dan

E.ON is arguing that Britain will need lots of fossil fuels for a long time in the future, even if we hit our 15 per cent renewable energy generation by 2020 target (which will mean 30 – 40 per cent renewable electricity generation). Gas is a particularly good partner for renewables because it can be switched on and off quickly and balance out the volatility of renewable generation.

E.ON has a fair question about this: what incentive is there to build back-up capacity?

“If we are to meet the European target, we need to back that up with fossil fuel generation that can be turned on quickly when the wind does not blow,” explained a spokesman for the company. “But the issue is who pays for that. If we spend half a billion pounds on a gas-fired power station that is not turned on very often, we need to look seriously at how that investment is rewarded.”

Renewables generally have low marginal generation costs, so fossil fuels will lose when there is lots of electricity being generated by the new wind farms (assuming they ever get built).

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Green tariffs under fire … again

Posted in Energy markets with tags , , , on March 7, 2008 by Dan

A clamber of quangoey energy/green groups – Energy Watch, the National Consumer Council, the Renewable Energy Association and the Energy Saving Trust – have written to Defra to suggest that electricity suppliers be required to provide information on the fuel mix used in each of their customers’ tariff. Their issue is that green tariffs are not transparent.

The real issue with green tariffs is that most suppliers allocate, or ‘match’, their renewable generators with green tariff customers. Because the suppliers purchase or generate a proportion of their electricity from renewables regardless of the tariffs their customers are on, they are able undertake this ‘matching’ exercise without building any new renewable capacity.

Mandatory disclosure of individual fuel mixes would not address this issue (and in fact wouldn’t really make much sense, given that electricity is delivered through a shared grid). Disclosure for the supplier as a whole would, and it would also make green tariffs unworkable. This might not be a bad option. A better option still would be to regulate green tariffs (or clearly accredit them, if regulation is not feasible) so that they must deliver extra investment in new generators.

Energy suppliers provide energy, not social security. Let’s keep it that way.

Posted in Energy markets with tags , , , , , on March 6, 2008 by Dan

The government has been acting threateningly toward the energy suppliers over the past few days. Unless they donate more to consumers in fuel poverty (a household is in ‘fuel poverty’ when it spends more than 10% of its income on energy), the suppliers may face a windfall tax.

There is a feeling that the suppliers have been swindling customers by holding retail prices high while wholesale prices are low. It is possible that some of the recent bumper profits were generated at certain points in 2007 where the wholesale price dropped ahead of the retail price. This is normal – retail energy prices lag wholesale prices, so when the wholesale price drops suppliers profit; when it rises they lose out. As a trend, wholesale prices over the past 12 months have been rising and are almost certain to continue doing so during 2008.

Equity markets understand these ups and downs and the capitalisation of listed suppliers was indifferent to the high profits. The only real windfall the suppliers made over the past year was passing the market price of freely allocated EUAs on to their customers.

The government is using a temporary profitable situation to hold energy suppliers responsible for increasing fuel poverty – which is of course driven by rising wholesale prices. Demanding that suppliers address a social security issue will lead to a poorly designed cross-subsidy from wealthier customers, who would fund the fuel poverty contributions through their bills.

What is strange is that the suppliers’ response is that they need their windfall to invest in clean generation technology – tacitly accepting that they have made an unreasonable profit. Perhaps they feel this message play well with the public. Or perhaps they are trying to keep the debate focused on the relative directions of retail and wholesale prices, rather than that tricky EUA question.

Feed-in tariffs: a regressive tax?

Posted in Energy markets with tags , , , , , on February 26, 2008 by Dan

Following the targets for renewable energy included in the recent Climate Change and Energy package, there has been debate about the role feed-in tariffs might play in the UK. Most environmentalists support a feed-in tariff, citing evidence from Europe that such schemes have increased renewable capacity. The government is going to investigate this summer.

Under a feed-in tariff, energy suppliers are obliged to buy surplus electricity from owners of small-scale generators at a premium fixed by the government, and share the marginal cost among their customers. This makes installing microgenerators on homes more attractive.

There are two issues with feed-in tariffs:

  1. It tends to be wealthier people that install microgenerators on their homes – partly because they have the available capital (a feed-in tariff would not reduce the capital investment required to install a solar panel or wind turbine – it would reduce the time over it pays back) and partly because they are more likely to be the kind of people who worry about the environment. A feed-in tariff as outlined above is a regressive tool because the overall effect is that poor consumers subsidise wealthy ones.
  2. Feed-in tariffs encourage microgeneration – not lower greenhouse gas emissions per se. Any intervention that is directed at a type of solution rather an outcome leads to inefficient and sometime counterproductive behaviour. It may be that the money could be better spent on large scale renewables or energy efficiency.

If private homes are a good site for small scale renewable generators, perhaps there is scope for the energy suppliers to make deals with homeowners. Suppliers could install, own and maintain generators on homes, and in return the homeowner would get cheaper energy. As owners of the generators, suppliers would be incentivised under the existing Renewables Obligation.