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Government’s Energy Security Agenda winning out

Issues affecting electricity generators and the energy market as a whole.

If you want to find out why the Department of Energy & Climate Change (DECC) are busily pulling the plug on renewables subsidies early you might want to look no further than Germany. It has subsidised wind and solar power generation to a massive extent over recent years as it drives towards an ambitious national target of deriving 60% of its power from wind and solar by 2035.

What’s happened there is a 12-year slump in wholesale energy prices to €31/MWh - which is hitting the bottom-lines of Germany’s power generation majors RWE and Eon (the parent company of two of the UK’s big six) hard.

But worse than this, it is forcing a de-coupling of wholesale energy prices from consumer bills which have actually been increasing while renewables subsidy costs are being passed back to them. These subsidy costs now make up 25% of an average German’s electricity bill. So far so worrying for the traditional coal and gas-dominated generators?

Reports have been coming out over the summer suggesting there is a good chance the UK will miss EU-agreed targets for renewables, which demand that we derive at least 15% of our energy needs from renewables by 2020.   There is clearly some way to go in the next 4.5 years.
 
The fact that renewables are expected to stand on their own two feet with a view to achieving ‘grid parity’ by 2020; and new renewables projects are likely to be excluded from the next capacity auction which should be timetabled in the autumn; seems to throw salt on renewable generators’ wounds. It’s also a major gamble as it may stop a good deal of planned investment in new renewables generation.

However, is there a genuine fear now that coal-fired power stations will be forced to close prematurely as they may be rendered uneconomic if wholesale energy prices slide in the way they have done in Germany? Amber Rudd’s first priority must be energy security which of course means having enough generation capacity on stream or ready to deliver on request – without fail.

But the quest for energy security may be clouding the Government’s judgement in some other areas. Its 35-year £90+/MWh FiT subsidy for the generator (likely to be EDF) which it takes on new nuclear plant Hinkley C, looks a little desperate in view of renewables subsidies being pulled altogether. However again this is about securing the nation’s energy ‘base-load’ which renewables, with their variables of supply, cannot offer. Put simply, renewables don’t tick the DECC’s energy security box.

Does it also explain why Amber Rudd backed the safe development of Shale Gas earlier this month? Giving the green light to controversial shale gas development plans reduces the UK’s reliance on gas imports. Britain is currently on course to import approximately 75% of its oil and gas resources by 2030 as North Sea oil and gas reserves dwindle. That percentage is too high as Rudd says: “The choice is how much we rely on gas from abroad or whether we extract more in the UK. Having a choice of where we get our energy, including producing our own at home wherever we can, is the best way to make sure we’re secure.”

The other advantage of shale gas extraction is it assists the Government towards meeting its carbon emission targets and also offsets the base-load reduction that is already underway as some of our larger coal-fired power stations including Ferrybridge C begin closing. The only snag about shale gas development is that it causes other, little understood, environmental damage. It also further tarnishes Amber Rudd’s green credentials.

But the new DECC Mantra: “Energy Security is Sanity, Decarbonisation Targeting is vanity”, appears to be gathering followers in the corridors of 3 Whitehall Place just now. It remains to be seen if the mood will change as we get closer to the UN Climate Change Conference in Paris in three months’ time.

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