The former CEO of National Grid, Steve Holliday, this week called for an end to headlines which scream “Blackout Britain”. He is right to do so because 1970s style power cuts are unlikely.
However, there is an alarming story to be told about energy policy. While many policy analysts have repeatedly and naively claimed power station closures will lead directly to electricity shortages, it’s the wider failings of a policy which has abandoned any semblance of a market, led to unacceptably tight generating margins, and delivered a subsidy-drunk and high-cost renewables sector that is the real concern. And these failings are acute.
Thirty years ago, the then Energy Secretary, Cecil Parkinson, unveiled the White Paper to privatise the electricity supply industry and end the old CEGB monopoly on power generation and supply. This policy initially delivered competition in the sector from the power stations right through to the suppliers and resulted in some of the lowest prices across Europe. Vitally, it allowed those new companies generating the electricity to source their fuel from the cheapest sources and end Britain’s long over-reliance on coal from Arthur Scargill’s miners.
It worked well until the Blair Government legislated to commit the UK to some of the most ambitious weather-dependent renewable energy growth targets in the world. These targets were similarly applied to reducing carbon emissions and dovetailed with acquiescence on a raft of corrosive EU energy directives. This was done without any clear appreciation of the consequences it would have on the central tenets of electricity privatisation. Today the consequences are clear and represent some of the worst excesses of Government intervention and subsidy for a generation.
The overriding issue remains the urgent need to replace old coal-fired power stations which have served the UK since the 1960s with new plants which burn natural gas to generate electricity – called CCGTs. (We can forget Hinkley C because it won’t be nearly ready on time.) These new plants are years behind schedule due to a failure by Government to deliver the right investment landscape. Indeed, the effective abandonment of an electricity market means that landscape must be created by Whitehall.
The Coalition government told Parliament, in 2012, that it wanted to see the construction of up to 28 new CCGTs and would provide further market incentives for those already generating. These would be delivered through a new policy tool called the capacity market which was designed to guarantee that sufficient and reliable electricity supplies would always be available in the future. It provides payments to power stations such as those powered by gas and coal.
Electricity generators bid into a capacity auction to supply power. If they win a contract, they then pledge their availability to provide electricity when needed in the future. The auction price is designed to encourage investment in new power stations and strengthen the economic case for existing ones. The key in this auction is the price it delivers; the lower the price then the poorer the case for new investment and plant retention.
The last three auctions – the most recent was in December – have failed to deliver any new CCGTs. The price has been too low. Many investors who hoped to build these new plants have now walked away.
Contradictions have been a constantly damaging theme of recent policy. In 2015, the then Energy Secretary called for all of Britain’s coal fired power stations to be gone within 10 years, but naively failed to realise this would mean many would choose to close far sooner. Since then, many have announced early closure in the hope of securing a panic subsidy from Government. This has worked and thus increased the need to get replacement CCGT plants commissioned and built.
Alongside propping up old coal stands the policy ambition to import more foreign electricity. National Grid – a publicly listed company – is keen to increase flows through new undersea cables, known as interconnectors, further undermining the investment case for existing and new CCGT power stations in Britain.
A new interconnector with France or Holland will not guarantee the constant flow of cheap electricity to the UK when it is always needed, but will boost National Grid coffers as they will run and own the kit. Ofgem’s recent attempt to break up National Grid because of this clear conflict of interest was near hopeless and they failed to deliver the independent system operator we now need. Watch National Grid push for more interconnectors in the future; last year the Grid made £123 million from its interconnector with France.
Last week’s Industrial Strategy Green Paper offers a glimmer of hope. It aspires to see a real market in this policy area again but offers no route to deliver a situation whereby all technologies compete on a level playing field. How, for example, is the Government going to wean companies off green subsidies? For offshore wind, payments have soared from £253 million in 2010 to £1.4 billion last year.
As a result, Britain won’t have power cuts but she will have something which is almost as bad. The intervention which replaced a real market will now only grow until the Government legislates to replace failed policies. Unless it moves soon then the country which led the world on energy liberalisation will be paying 50 year old coal plants to keep the lights on. This is what bad policy looks like.