Energy in a post-Brexit Britain: it's a generation thing

Power generation challenges highlight need for a total policy re-think as the UK enters the post-Brexit era. Tom Crisp, writer at Cornwall Energy, examines the options open for the Government.

From whichever angle you view the UK generation sector and its recent history, the vista is one of increasing complexity and growing uncertainty. After all the activity of the EMR era, there is an array of new policies and institutions, but not one of the new mechanisms seems to have been fully deployed and the objectives realised. Three years in, with the Renewables Obligation now rolling off, both FID Enabling and the initial contracts for difference (CfD) rounds have been criticised, and no significant conventional generation at scale is being pulled through the Capacity Market. Progress towards a smart, low-carbon system remains uncertain.

But the political shift ushered in by Brexit and the accompanying change of government personnel heralds an opportunity to think more radically about how to address the issues at the heart of the system and the emerging policy challenges.

In the nuclear power sector, the drama surrounding Hinkley Point C continues, following the government’s decision to review the project. There are plenty of reasons to support a rational reassessment of the viability of the CfD commitment under its current terms, and the proposed delivery structure. But making an issue of foreign ownership would have significant implications for the UK’s nuclear power pipeline.

Should BEIS now validate its policy support but seek to change or renegotiate the material terms of the contract, the possible impacts on other major projects seeking third party investment are likely to be profound. The tendency of the last government to withdraw key schemes at short notice and with little-to-no consultation has already been well documented. And given that investor sentiment is already very hawkish towards GB, revisiting the CfD would substantiate concerns that committed agreements can be broken by the mood of whoever happens to sit in Number 10.

That is not of course to say that the new government should be bounced into signing the CfD. If a change to the government’s position on Hinkley came as part of a wellconceived energy strategy under the new BEIS umbrella, then it could be considered part of a comprehensive whole, rather than as a singular kneejerk reaction.

Onshore wind and solar PV in GB continue to face real barriers, including ideological opposition. Without the prospect of a CfD auction for essentially political reasons, with a controlled budget and at low strike price bidding caps, they are in effect being given no chance to demonstrate the value achievable from clear reductions in deployment and operating costs that have revolutionised the two sectors. The paradox between rejection of the cheaper low carbon options and the government’s continuing emphasis of reducing energy costs for hardworking families and businesses is hard to square.

New large-scale gas is being offered an indirect road to realisation. The government decided not to reengage the European Commission on diluting technology-neutrality in the capacity market so as to positively discriminate for large gas. But officials continue to intervene to remove what they claim are market distortions that disadvantage larger-scale transmission connected generation.

Two capacity market auctions are now on the horizon, with an early auction for 2017-18 supplementing the third T-4 auction for 2020-21 set for the turn of the year. We continue to express doubts around whether new CCGTs will come forward as, while we expect prices to firm on the upper-teen levels per kilowatt seen in the first two T-4 auctions, they look to be well-short of the prices flagged by DECC in its most recent impact assessment.

All of this suggests that the multiparty, complex suite of governance, policy and regulatory processes are failing to respond adequately and consistently to the whole system challenges that are now presenting themselves. So, what could remedy this malaise? Unfortunately, many processes are already in train, and will be hard to stop. But the lesson of the delay to Hinkley Point C might be that there are no sacred cows- so perhaps we should give the new government the benefit of the doubt and trust that it will act where it disagrees with the current prospectus.

If so, then we would repeat what we have argued before: in our view the moment is ripe to profoundly reconsider how to deliver the trilemma in the light of muchchanged environments in domestic and international energy and climate policy. A comprehensive wholesystem strategy should be developed that sets a realistic ambition around the role of new build gas, views low-carbon and flexible generation objectively on its merits, plans for the most efficient integration of disruptive demand-side and storage technologies, determines the limit of our ambition in interconnection, and realistically reassesses the requirement for new nuclear power.

The diagnosis and prescription for the market all speaks to the creation of an independent system architect to develop such a strategy and then drive the design of code and regulation that implements it.

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