ROCking All Over The Land

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This is a bit of a departure for us here in the Republic. This post is the first in a series of (probably) four dealing with the daylight robbery that constitutes the UK’s renewables energy policy.The last part will accuse a Government minister of potentially committing a serious crime.

It wasn’t intended to be a series but the last instalment is going to be quite controversial and I realised that some in-depth background was required to justify the claims I will be making there. Please note that all figures relate to the UK as a whole unless otherwise stated.

 

 

Edward Davey turbine
A Useless, Expensive, Article Ed Davey MP FRSA

 

There has been a lot of discussion – and a fair bit of anger - over the past wee while about how the cost of electricity has been increasing faster than general inflation. This is not just a vague impression, it really has been. For example, my own supplier EDF has just put our bills up by 10.1%. This is much higher than the background level of inflation (2.2% RPI) and the differential is explained by EDF as being due to the cost of meeting government obligations.

So what are these government obligations, and why are they costing us all money? We’ve covered some of the detail of how much these are adding to our power bills before here and here. It’s a lot more now. Everyone now seems to agree that “green” electricity is costing us all dearly, but how much? How has this come about? And can it be at all justified?

 

You will know that our lords and masters have fallen prey to the hysterical fear of the Great Carbon Monster that has swept the globe over the past couple of decades. Forgive me, I mean that they are taking seriously the urgent threat to humankind of the scourge of Catastrophic Anthropogenic Global Warming. (I am truly sorry for that sarcasm but it springs too readily to the fingertips whenever the topics of politicians and CAGW collide.) Let’s leave the discussion over whether the fear is real or not for another day and just look at its immediate effect.

Our Department of Energy and Climate Change - currently guided by The Right Honourable Ed Davey MP FRSA - has decided that we need to decarbonise our economy. That doesn’t actually mean what they think it means but we’ll let that pass for now. To that end they wish to eliminate all methods of electricity generation by means of burning fossil fuels. Note, not all methods that involve carboniferous fuels, because burning biomass, the fermentation of carbon-based waste into hydrocarbon gases and even sucking petrol out of the air are being encouraged: only anything that involves extracting the fuel from the planet’s crust is verboten. The rationale seems to be that combustion of biomass is simply recycling recently sequestered carbon, which is considered acceptable, whereas fossils fuels embody prehistoric carbon and burning them releases stored evil. There are also some wonderfully spurious arguments about differences in the atmospheric radiative responses in the carbon isotopes embodied in “new” and “old” carbon.

Anyway, the means by which the government is attempting to change the energy mix in our economy is by its usual method of effecting any desired societal change: bullying. Large electricity generators are now compelled by statute to provide a specified annual percentage of their production from “renewables”. However, in a rare outbreak of sense, the government seems to have realised that it can take some considerable time to design, build and commission something as complicated as power generation plant so they have graciously allowed them some time to convert their generation from dirty carbon to nice clean unicorn farts.

And in an almost unprecedented second outbreak of sense they have allowed existing generators a little bit of leeway by providing a (temporary) get-out. In an almost exact analogue of medieval religious practice, our electricity generators can expiate their climate sins by purchasing indulgences in the form of “Renewables Obligations Certificates”, or ROCs. This scheme means that the generators must hand to the government every year sufficient ROCs to cover a set percentage of their overall generation or pay a forfeit. Therefore they need to get their hands on those ROCs.

And this is where it gets complicated for them and for us, and expensive for us but lucrative for them. To simplify things we will consider only wind generation. Unfortunately that won’t make it any less expensive.

There are two ways for generators to obtain electric absolution. The first, and the way that Mr Davey would prefer, is that the generators dump their nasty coal, oil and gas burners and replace them with lots of lovely natural wind turbines. If they do this Mr Davey will give them a shiny new ROC for every MWh of “green” electricity produced. They may be lucky enough to be given an actual piece of paper, but most likely it will just be an entry on a computer. Each of these ROCs has a notional value known as a “buy-out” price, currently £40.71 each.

However, if they can’t produce enough certificates by September each year then the secondary route to salvation is to pay a penalty equivalent to the value of the buy-out price times the number of ROCs by which they have fallen short. They can avoid the penalty by buying ROCs from other generators at a mutually agreeable price and this will make sense as long as the free market price is less than the buy-out price. The open price may vary considerably and market forces would tend to make it reduce as more renewable generation is brought on stream, creating more ROCs and increasing their availability. This potential drop in price is therefore compensated for (please read “the market is rigged”) by the government continually ramping up the obligated percentage of non-carbon-based electricity, thereby maintaining or raising the floor price of a ROC.

Money paid into the buy-out fund is distributed amongst the ROC contributors in proportion to their contributions of certificates. So if you are Windy Miller and you can’t sell all your ROCS, just hand the surplus ones into OFGEM and get money back from the penalty fund. Luvly jubbly!

The table below shows the percentages of renewably generated supply for 11 years from 2002. As you would expect, the obligation to use renewables increases year on year, that’s not a surprise.

Obligation period

1st April to 31st March

 Renewables as

% of Supply

2002 to 2003

3.0

2003 to 2004

4.3

2004 to 2005

4.9

2005 to 2006

5.5

2006 to 2007

6.7

2007 to 2008

7.9

2008 to 2009

9.1

2009 to 2010

9.7

2010 to 2011

11.1

2011 to 2012

12.4

2012 to 2013

15.8

No, the surprise comes when you look at the next table. This shows the value of each ROC, and therefore the guaranteed price for every MWh of electricity. That’s as in guaranteed by our Government but paid by you and me.

Obligation period

1st April to 31st March

% of Supply

ROC

Buy-out

Effective Price per Unit (£/kWh)

2002 to 2003

3.0

£30.00

0.030

2003 to 2004

4.3

£30.51

0.031

2004 to 2005

4.9

£31.39

0.031

2005 to 2006

5.5

£32.33

0.032

2006 to 2007

6.7

£33.24

0.033

2007 to 2008

7.9

£34.30

0.034

2008 to 2009

9.1

£35.76

0.036

2009 to 2010

9.7

£37.19

0.037

2010 to 2011

11.1

£36.99

0.037

2011 to 2012

12.4

£38.69

0.039

2012 to 2013

15.8

£40.71

0.041

Source: Wikipedia, although there seems to be a mistake in the calculations given there, corrected here.

I believe I may have mentioned in the past that I am an engineer. In every new technology I have ever encountered in my reasonably long professional life, the output from the initial installations is the most expensive, as the development and installation costs are recovered. As the technology matures, as more efficient methods are found and economies of scale are realised, costs drop quite quickly and then tend to level off. In the table above we can see that the support that you and I are giving to a reasonably mature but still developing technology has actually increased in ten out of the past eleven years. (At RPI rates, to be exact. But since the price of electricity is used as part of the RPI calculations, these increases feed directly into the inflation figures, which are then used to set the next level of increase, and so on.)

So in 2003 we subsidised electricity at 3p per kilowatt hour (enough to keep a single bar fire going for one hour) and in 2013 we will pay just over 4p. Remember that this is not the sale price of the electricity, but a subsidy paid by electricity customers to generators just to make the electricity. If the generators threw it away or used it to boil rivers dry it would make no difference, we would still have to hand over the dosh. At the end of the day the really profitable output from the wind farm is ROCs not watts – all ROCs are either sold to other generators or submitted to OFGEM for a share of the penalty pot.

And there’s another funny thing. You can see from the table above that the current buy-out price for a ROC is £40.71 so you may expect that to be the base price – if a generator can buy a get-out-of-trouble card for £40.71, why pay more? Well, if you look here, you will see that the average price of a ROC is claimed to be £47. Admittedly, that page is owned by a company that makes money from trading ROCs (all those double glazing salesmen from the 1980’s had to go somewhere) but one could be excused for supposing that the figure has some semblance to reality. Why would this price be above the buy-out figure? One explanation could be that the price reflects the share from the buy-out fund accruing to the ROC. I don’t really know, but that’s only one of the many things I don’t understand about the whole renewables scam.

That explains how the price of electricity has increased because of the necessity of buying ROCs and the value of the ROCs increasing with the RPI inflation figure. But as we saw at the top of this post, the real price of electricity to the consumer is increasing at four times or more the rate of RPI. Why is this?

The table below shows the increase in the required proportion of ROC-eligible generation is increasing every year. The cumulative effect is that for 2013 the generators will have to provide over four times as much “green” electricity as ten years ago. All renewable power generation is more expensive than all traditional thermal power generation so the overall effect is huge; hence the large increases in our power bills. Although if you do the arithmetic it doesn’t explain all of the increases: I think we could be justified in thinking that the power companies are doing a little bit of opportunistic “market repositioning”.

These increases are not due to any unavoidable market changes or the result of natural technological change – they are entirely politically instigated to satisfy a particular strategy to change the UK’s methods of electricity generation. To summarise: it’s all Ed Davey’s fault.

Obligation period

1st April to 31st March

 % of supply

% annual increase

in obligation

% cumulative increase

2002 to 2003

3.0

0

0

2003 to 2004

4.3

43

43

2004 to 2005

4.9

14

63

2005 to 2006

5.5

12

83

2006 to 2007

6.7

22

123

2007 to 2008

7.9

18

163

2008 to 2009

9.1

15

203

2009 to 2010

9.7

6

223

2010 to 2011

11.1

14

270

2011 to 2012

12.4

12

313

2012 to 2013

15.8

27

426

You can see that we are now insisting that over four times as much electricity is produced from “renewables” than was the case just ten years ago. For an industry based on large capital plant this is a huge change, and normal business rules would have prohibited it. But since we are in a supposed emergency then drastic measures would appear to be necessary, massively penalising conventional generation to encourage alternative means. But this is a government scheme so, almost by definition, it has not worked. By the most generous interpretation of “reneweables” we currently have slightly less than 9% of our total potential capacity from “green” sources and if the wind does not blow at between 2.5m/s and 25m/s simultaneously over every wind farm in Britain, about 4% actual capacity. Subtract pumped storage hydro-electric, which uses spare thermal capacity for its power source and we drop to less than 3%. For this we have paid at least £273M* pounds so far!

The Renewables Obligation scheme has one large and rather surprising but very deliberate omission – hydroelectric generation. Specifically, large hydro-electric schemes built before 2002 do not qualify. Although this is rationalised by the argument that the Renewables Obligation is intended to encourage new developments, it does have the effect of excluding slightly over 4GW of capacity (53% in Wales, 47% in Scotland, and a wee bit in England).

So, summing up: our “green” generator can sell paper for more than its artificial market price and get money back from those generators who just paid the green tax direct instead of involving any third-party parasites. The market is rigged in his favour and is becoming increasingly so. But from the generator’s point of view it gets even better - as the great Irish philosopher Jimmy Cricket once said “There’s more!”. But this post has gone on long enough so we’ll leave the joys of FITs until the next time.

*Based on the record of ROC sales here:  http://www.e-roc.co.uk/trackrecord.htm. Sales volumes multiplied by average price. All generation types are included.

The instalments of this series are:

Rocking All Over The Land (this post)

FITs And Stops

An ETSy-bitsy Problem

Crime In High Places

These links will become live as posts are made.

 

Links will become active as the later articles are published.

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