The expensive levies that were not...

As energy prices in the UK keep rising we have come to realise that between 2010 and 2013 the rise reached 37%. Not surprisingly the energy industry (see the big six) were quite fast to blame the "Green Levies" for the soaring energy prices. Right... you may think; that nearly makes sense. After all you must have heard of the subsidies that support the operation of wind and solar farms and the UK; they must have something to do with your rising bills or not really...


I am copying the above graph from the excellent carbon brief blog which you can find here. These are cost estimates of the energy companies for the social and environmental levies. That's at least about £110 on the average household. Now even for British Gas (see graph) that does not exceed 10% of the average UK bill. How come its the sole most mentioned reason for our expensive energy bills?

At some point the figures were even backed by the Coalition Government which went as far as saying that they may soon reach £194 by 2020. This time the estimations are not just about the Green levies but also about social levies; the latter mostly referring to the Government's ECO scheme which was obliging energy companies to offer energy efficiency improvements to low income households.

As you can imagine the energy industry was pretty happy to eventually have their nemesis aka green and social levies removed. So happy, Ed received a thank you letter! In the meanwhile ONS (Office for National Statistics) reported a record 31000 excess winter deaths, at a 29% annual rise. Was anybody happy about this I wonder? Probably not the energy poor people that would have their houses insulated if it wasn't for scaling back the ECO scheme.

But, that's OK... it cannot be that poor people expect everything from the nanny state (just being ironic!). At least the rest of us got a good deal with the £110 savings that the energy companies passed on our bills. Ha! Whose savings??

After being promised that energy bills would be reduced within weeks. By how much? We were told by £50 on average. Why not £110? Nobody knows... or maybe we know that instead of finding a way to force the energy industry to lower bills, the Government let them enjoy windfall profits which may reach £2bn in 3 years.Were your bills reduced btw? By £110? maybe by £50? or just increased again?

A quick recap therefore would read like: the Government has just offered energy companies a few billions which took away from energy poor people (and support from renewable energy projects) justifying its actions by falsely promising lower bills to the rest of us.

Well done guys...

Capacity market and strike prices

Earlier this summer the UK Government issued a press release about the new energy infrastructure investment and reforms vital to “keeping the lights on and emissions and bills down”. In more detail, the Government expects to unlock £110 bn of investment and secure 250,000 jobs until 2020; it expects to achieve this with two main policies. The first is the Strike Prices for renewable technologies, which aims to reduce exposure of renewable generators to volatile energy prices. The second is the introduction of a capacity market, which the Government hopes will incentivise a new generation of gas plants that will be needed to support the increased role of intermittent sources.

These policies supplement the Electricity Market Reform which introduced the Contracts for Difference (CfDs) and is part of the more comprehensive Energy Bill. The strike prices for renewable energy recommended by the Government will shield investors from volatile wholesale electricity prices and in this way encourage investment. The strike price for offshore wind is £155/MWh for 2014/15 declining gradually to £135/MWh in 2018/19 while the respective figures for onshore wind are £100/MWh and £95/MWh. Solar PV projects are set to receive £125/MWh declining to £110/MWh for the same period. There are strike prices for most types of renewable sources apart from tidal range, which, according to the Government, will be further considered by DECC.

A certain degree of number-crunching is required to compare the CfDs with the existing RO and FiTs, but the Government claims that the support given by CfDs is in line with that offered by the existing schemes. The main advantage now is protection against wholesale price volatility. Price volatility and uncertainty over climate change and renewable energy targets have been blamed for deterring investment worth billions of pounds in the UK. This is not a UK specific issue, but is reported across the EU, where slow economic recovery has made governments hesitant to commit to new targets. It can therefore be assumed that if the financial support offered by the UK Government removes uncertainty in addition to being similar to existing schemes, the results will be positive.

The predicted increase in renewable energy in the UK's electricity fuel mix has forced the Government to introduce a capacity market, whereby certain generators are paid for the essential service of stand-by operation. The increased role of intermittent generation makes this auxiliary service particularly valuable for the system operator, and the introduction of the capacity market acknowledges that. Quite disappointingly, Davey was fast to name gas-fired power plants as the main benefactors of the capacity market. Plants that could use renewable energy to offer capacity services have not been mentioned and they will be examined on a case by case basis by DECC. Unfortunately, that means that there is no news for medium/large-scale hydro and tidal range plants. Their dual role of renewable energy generation and storage has been overlooked in favour of gas (and the Government's ambitions for a shale gas sector boom in the UK).

Shale gas for the UK?

It's already been a few years since shale gas started making headlines in mainstream media. Despite some first doubts now it is clear to everyone that shale gas is a "game changer" for the US energy supply. Increased gas supply meant that prices plummeted and for the first time the link between oil and gas price was broken. Gas is a very flexible resource as it can be used for power generation with very efficient combined cycle gas turbines, for industrial processes, for domestic heating and cooking or even for transport. When burnt it is cleaner than any other mainstream fossil fuel; therefore the benefits of lower gas prices can be felt across every sector of the economy. Low energy prices make the US an attractive place for energy intensive industries, some of which have already started relocating. 

It all sounds rosy about shale gas but leaving open space for the industry to operate freely (see lack of regulation) meant that shale gas operations caused numerous light tremors and in some cases were accused for water contamination. Drilling for shale gas makes use of hydraulic fracturing which is the source of all the aforementioned problems.

What about shale gas in the UK then? Do we have enough resources here? Can we drill for them in ways that will control and limit the environmental impact? Should we just let shale gas where it is because more gas will only keep us hooked to fossil fuels for longer? Recent reports show that although the UK is not among the top shale gas countries outside of the US, the indigenous reserves are not negligible. Even more recently the British Geological Survey estimated the total reserves to be at 40 trillon cubic metres (tcm).

I'll straight-forward say that if we can control and limit the industry's environmental impact then there is no good reason for not drilling. Why?

With UK's conventional gas extraction being pretty low while US LNG is ready for shipments there is no doubt that the UK gas intensive industry will sooner or later start importing. Centrica already signed a 20+10 years contract for gas deliveries starting in 2018. That's shale gas converted to LNG. Although I have no proper estimations it is fair to assume that the embedded emissions of imported LNG from shale gas is higher than indigenous LNG. I wonder how the embedded emissions comparison looks like for imported LNG from conventional Qatar's sources and indigenous shale.

Will a success story for shale gas lock-in the UK in a high carbon (gas) future? There is no need to go very far to realise that this is not necessarily the case. The US, with huge coal reserves and production made a fast shift as soon as a new and better resource (shale gas) became available. In the same way, the UK will shift away from shale gas as soon as other, better resources (wind? wave? nuclear?) become available.    

The government should be wise enough to regulate the environmental impact of the industry, arrange for community compensations and do not favour the gas industry against the low carbon energy industries.