James Varley is the managing editor of Modern Power Systems
In the era of liberalised energy markets, do governments need to trouble themselves with formulating and implementing energy policies? Not so very long ago – around the time when one of the principal architects of electricity deregulation, then UK Prime Minister Margaret Thatcher, was questioning whether there was any such thing as “society” – the need for energy policymaking looked severely diminished and the old Department of Energy was dismantled. It was a matter of privatising the old state electricity monopolies, setting up some sort of regulator – and letting the free market work its magic. Recently, however, with issues like sustainability, global warming and, since September 11, supply security, rising up the agenda, the market increasingly looks like it needs more help in coming up with the right answers, and it is no longer considered heretical to talk of energy policy.
Indeed, the just published energy review commissioned by the UK government from its strangely named advisory body, the Performance and Innovation Unit (PIU), is peppered with the “p” word. It even calls for the creation of “a new cross-cutting Sustainable Energy Policy Unit to draw together all dimensions of energy policy in the UK.” The PIU study (available at www.piu.gov.uk), was launched by Prime Minister Tony Blair last June, precisely with the objective of looking at long-term energy policy for the UK, to 2050. Its recommendations will now be subjected to a process of “public consultation”, leading to a government energy White Paper in the autumn.
The PIU report acknowledges, and this must be difficult for unreconstructed “old labour” to stomach, that “introduction of liberalised and competitive energy energy markets in the UK has been a success.” But “new challenges require new policies”, warns the PIU.
One such challenge is the fact that for the last few years the UK – one of just two G7 countries self sufficient in energy – has got used to rather benign conditions in its energy markets, with North Sea energy resources eliminating the need to import energy and the price-led “dash for gas” leading to an entirely fortuitous reduction in greenhouse gas emissions.
The PIU sees much tougher conditions ahead, with an increasing dependence on oil and gas imports (as the North Sea resources become depleted – alarmingly soon on some projections) and the need to adopt ever more onerous targets for reducing greenhouse gas emissions, “as a result of international action, which will not be achieved through commercial decisions alone.” The PIU says that the “focus of UK policy should be to establish new sources of energy which are, or can be, low cost and low carbon” and suggests that “the immediate priorities of energy policy are likely to be most cost-effectively served by promoting energy efficiency and expanding the role of renewables.” Currently a meagre 2.8 per cent of UK electricity comes from renewables, but the target for 2010 is 10 per cent. Helping towards that end is a piece of legislation called the Renewables Obligation, currently before parliament and due to enter into force very shortly. This will require suppliers to provide 3 per cent of their electricity from renewable sources up to March 2003, the proportion rising to 10.4 per cent for the year ending March 2011, with suppliers receiving Renewables Obligation Certificates (ROCs). Generators not willing or able to meet these targets can fulfil some or all of their obligation by paying a buyout price of 3 p/kWh to the regulator Ofgem, who will recycle the proceeds to suppliers in proportion to the number of ROCs they have – creating a strong financial incentive to source from renewables rather than “buying out” – or so the theory goes.
The PIU report recommends that the renewables target should be increased beyond that envisaged in the current Renewables Obligation arrangements – already considered optimistic – to a very ambitious 20 per cent by 2020.
This implies of course further interference with the free market, and the imposing of additional costs on the electricity consumer. As the PIU report acknowledges, “at the moment, the use of renewables nearly always costs more than the use of fossil fuels.” But it argues that government support is justified for two reasons. One is that it helps the country meet international obligations. The second is that support now for renewables “will induce innovation and ‘learning’, bringing down the longer-term unit costs of the various technologies as volumes increase and experience is gained. In this way, today’s investment buys the option of a much cheaper technology tomorrow.” There are some who think that such meddling in energy markets to promote renewables (or any other particular energy source for that matter) is the preserve of the demonically possessed and must never be tolerated, eg the market libertarians of the Cato Institute (see the March 2002 issue of our sister magazine, Power Economics). But for most of us, erring on the side of caution in the matter of global warming, even if it means adding a little to electricity costs, seems sensible.
In the medium term the PIU does see a role for clean coal, provided it includes technology for carbon dioxide capture and sequestration.
And what about nuclear power, potentially the ultimate low carbon energy option? The PIU is not at all impressed by the 10 GW programme currently being proposed by the UK nuclear industry, but nevertheless believes that the option of new investment in nuclear power needs to be kept open, and “practical measures” need to be taken to do this. “If existing approaches both to low carbon electricity generation and energy security prove difficult to pursue cheaply, then the case for using nuclear would be strengthened.” But the decision as to whether to bring forward new nuclear build is a “matter for the private sector.” “Nowhere in the world have new nuclear stations yet been financed within a liberalised electricity market”, says the PIU.
So developments in Finland over the next few months will be particularly interesting. Power company TVO, which is 75 per cent privately-owned, is pursuing the project to build the fifth Finnish reactor because it believes it makes commercial sense.
The PIU argues that “nuclear is a mature technology within a well-established global industry”, so “there is no current case for further government support” and this is a view that would be widely supported in most countries.
There is however now one notable exception: the US government has recently announced nothing less than a public-private initiative to get a new nuclear plant on line by 2010. The US government seems to have decided that in the case of nuclear power development, policy considerations must take precedence over market forces.