Uncharted Territory

May 27, 2011

The UK’s RTFO – Electricity Should Count

Filed under: Biofuels, Electricity, Energy, Global warming, Rail, Road, RTFO, Transport — Tim Joslin @ 4:14 pm

The UK’s RTFO (Renewable Transport Fuel Obligation) is the policy dating back to 2007 that enacts an EU Directive requiring member states to ensure that an increasing proportion of transport fuel is renewable. This meant biofuels. I’ve written previously at length about this folly, most recently here. RTFO, folly, policy, maybe we should talk about the “follicy”, the “RTFOlly” or even the “RTFOllicy”!

Anyway, the EU seems to have listened to at least some of the many organisations objecting to their biofuel policy. They’ve come up with not one, but two new Directives which affect national policies on the issue:

  • The Renewable Energy Directive (“the RED”), 2009/28/EC (pdf), is broader in scope than transport. It details the requirements on EU member states to meet the 2020 goal of 20% renewable energy in the EU as a whole. Whilst this is broken down into different targets for different countries (for example the UK has to get to 15%), the Directive reaffirms a uniform 10% renewable target for transport fuels. It includes a lot more detail on how this can be done, though, including sustainability requirements of various kinds.
  • A new Fuel Quality Directive (“the FQD”), 2009/30/EC (pdf) which amends an earlier FQD by introducing an Article 7 (actually I now see there’s a bit more complexity than that – you can’t take anything on trust, can you?), which introduces two extra requirements:
    • to reduce greenhouse gas emissions in transport fuel by 6% by 2020;
    • for transport biofuels to meet certain sustainability criteria.  Apparently these are to all intents and purposes the same as those included in the RED, so perhaps the FQD is a Directive too far and the RED should have just covered everything.

Accordingly the UK’s Department for Transport (DfT) has initiated not one, but two reviews (hey, we can create a legislative mess just as well as they can in Brussels!), with consultations on both open until next Thursday (2nd June):

  • The RED Public Consultation, which considers amendments to the RTFO, to meet the new Directive including biofuel sustainability criteria.
  • The FQD Public Consultation, which only covers the requirement to reduce by 6% by 2020 the greenhouse gas (GHG) intensity of transport fuel or energy.

One of the problems with biofuel policy in the EU – apart the very existence of quotas and subsidies in the first place – is that it has become hideously complex.  There are no doubt many little devils in the detail.  But all I’m going to cover in this post is one aspect of the RED.

It seems that the EU has actually done something sensible.  They’ve introduced a clause to ensure that the 10% renewable energy in transport target is technologically neutral.  That is, they’ve back-tracked on trying to second-guess what kind of non fossil-fuel powered cars many of us will be driving by 2030 or so.  Yeap, they’ve only gone and allowed renewable electricity (and hydrogen for that matter) to count towards the 10% target.

Here’s what they say in paragraph 4 of article 3 of the RED:

“4. Each Member State shall ensure that the share of energy from renewable sources in all forms of transport in 2020 is at least 10% of the final consumption of energy in transport in that Member State. For the purposes of this paragraph, the following provisions shall apply:

(a) for the calculation of the denominator, that is the total amount of energy consumed in transport for the purposes of the first subparagraph, only petrol, diesel, biofuels consumed in road and rail transport, and electricity shall be taken into account;

(b) for the calculation of the numerator, that is the amount of energy from renewable sources consumed in transport for the purposes of the first subparagraph, all types of energy from renewable sources consumed in all forms of transport shall be taken into account;

(c) for the calculation of the contribution from electricity produced from renewable sources and consumed in all types of electric vehicles for the purpose of points (a) and (b), Member States may choose to use either the average share of electricity from renewable energy sources in the Community or the share of electricity from renewable energy sources in their own country as measured two years before the year in question. Furthermore, for the calculation of the electricity from renewable energy sources consumed by electric road vehicles, that consumption shall be considered to be 2,5 times the energy content of the input of electricity from renewable energy sources.

By 31 December 2011, the Commission shall present, if appropriate, a proposal permitting, subject to certain conditions, the whole amount of the electricity originating from renewable sources used to power all types of electric vehicles to be considered.

By 31 December 2011, the Commission shall also present, if appropriate, a proposal for a methodology for calculating the contribution of hydrogen originating from renewable sources in the total fuel mix.”

I’m afraid I can’t be held liable for any migraines induced by clauses a) and b). I suggest we come back to those when we’re feeling at our best.

It’s clause c) that’s interesting. But when we look at the DfT’s RED Consultation document (pdf) this is what they say (on p.39-40):

“11.6.1. Allowing all renewable fuels to receive RTFCs

We propose to remove the specific list of renewable fuels which may count towards a supplier’s obligation to supply renewable transport fuel in article 5(3) of the RTFO Order. Instead the Order will allow the renewable part of any transport fuel to be eligible for an appropriate number of RTFCs.

We believe our proposal will reduce the burden on industry by enabling any newly developed fuels to automatically count towards the RTFO.

The RED permits all forms of renewable energy to be used to count towards the 10% transport target. While the Directive does allow for the use of renewable hydrogen to meet this target, there is not currently a methodology in place for calculating the contribution of hydrogen from renewable sources. However, the Directive does require the European Commission to come forward with a proposal for such a method by 31st December 2011. We do not propose any amendment to the RTFO to allow renewable hydrogen to be eligible for RTFCs at this time but we will keep this issue under review.

Similarly, we do not propose to allow renewably generated electricity for transport to be eligible for RTFCs at this time. Again, we will keep this issue under review.” [my stress]

This is a bit odd, since the EU clearly said in article 3, paragraph 4, clause a) that in calculating the total energy used in transport:

“…only petrol, diesel, biofuels consumed in road and rail transport, and electricity shall be taken into account.”

which is a tad imprecise (presumably the “only” is present because they assume member states will want to minimise this figure), but I think can be taken to mean:

“…all petrol, diesel, biofuels and electricity consumed in road and rail transport, and no other fuel, shall be taken into account.”

and in clause b) more clearly that:

“…all types of energy from renewable sources consumed in all forms of transport shall be taken into account.”

The DfT’s RED Consultation document, then, provides no evidence that we know what the RTFO target should actually be, because electricity used to power transport has not been taken into account.

Furthermore, the argument for electricity is not “similar” to that for hydrogen, as the RED Consultation dismissively states in section 11.6.1 (above).  Unlike for hydrogen, the RED does supply a “methodology… for calculating the contribution [of electricity] from renewable sources”. In fact, it supplies two methodologies!  Pending a proposal for more accurate calculation (due by the end of 2011), the UK could elect to use either the proportion of renewable energy in the EU as a whole or in the UK (RED Article 3, paragraph 4, already quoted above).

Not including electricity makes the 2020 target more difficult to meet, because, both in the EU as a whole and in the UK, the proportion of renewable energy in electricity will be much greater than the 10% RED transport fuel target. Indeed the target under the UK’s Renewables Obligation scheme for the proportion of electricity from renewable sources by 2015 is 15% (keep on these numeric alliterations – must be a word for that – aren’t they?).

And it’s not as if the proportion of transport powered by electricity is trivial, since it already includes the majority of rail, including the London Underground a few trams and the odd remaining milk float!  That’s before we take account of the Climate Change Committee’s targets for electric vehicle uptake!

Why the omission? One possibility is that we don’t care, because we’re quite happy to promote biofuels to an even greater extent more than mandated by the EU.

But this hardly seems likely. Remember I said we’d have to come back to the EU’s clauses a) and b)? Well, I’ve steeled myself with a strong cup of coffee and am ready to tackle it. What these clauses say is that you can count renewable fuel used off-road (in farm vehicles and pleasure-boats etc – the DfT even have an abbreviation, NRMM, “non-road mobile machinery” for this set of vehicle categories) towards the target proportion of renewable road and rail fuel! Completely bonkers, of course. No doubt there’s a reason, some fix they got themselves into trying to implement the policy. Let’s not dwell on that.

The point is that the DfT proposes to scale back its RTFO targets to take account of the inconsistency between clauses a) and b). They lay out policy options (section 11.5, p.28ff) and note (on p.31) that:

Given our concerns regarding the sustainability of biofuel, at this stage we do not wish to see any additional increases in the volume of biofuel supplied in the UK above those already set out in the current RTFO [which did not take NRMM fuel into account]. We therefore propose to pursue Option B [to scale back the annual RTFO targets - which is actually done retrospectively (scaling back targets retrospectively? - we're definitely not in Kansas any more!) in Table 3 on p.32].” (my stress as usual, as well as comments in square brackets)

A second possibility is that maybe the DfT hasn’t realised the significance of the inclusion of electricity. But this doesn’t seem to be the case. Because there’s another curious passage in the RED Consultation document. On p.50 we find:

“11.7.2. Preventing the use under the RTFO of renewable fuel that has already been used under another obligation

As discussed earlier, the RED has two targets for the supply of renewable fuel. In order to ensure that renewable fuel is not counted twice towards the different targets, we propose to require that suppliers submit a declaration stating that the renewable transport fuel for which they are claiming an RTFC has not been used to discharge any other renewable energy obligation (for example the Renewables Obligation).” (my stress)

But the Renewables Obligation relates specifically to electricity generation!

The DfT’s FQD Consultation document (pdf) adds even more confusion:

  • On p.6, in section 6, “Who should read this consultation?” it includes “a provider of electricity for use in transport”, a category not included in the corresponding section of the RED Consultation document.
  • On p.10 in section 7, “Overview of the FQD” they note very clearly that:

“Furthermore, Article 7a(1) requires Member States to ensure that providers of electricity for use in road vehicles can choose to contribute to the GHG reduction obligation if they can demonstrate that the electricity they provided was used in electric vehicles.” (my stress)

  • On p.14, in section 10, they note that they will:

Establish rules for grouping and the participation of electricity providers for electric vehicles;

  • And they discuss the issue on p.34, in section 11.12, “Electricity for use in road vehicles”:
  • “The FQD requires Member States to ensure that providers of electricity for use in road vehicles can choose to contribute to the GHG emission reduction obligation if they can demonstrate that the electricity they provided was used in road vehicles.We propose to designate electricity providers as being those entities that sell electricity for public consumption. In order for an electricity provider to contribute to the GHG reduction obligation we would require them to supply adequate proof that the electricity they provided was used in road vehicles.

    The European Commission is in the process of considering how to account for the GHG emissions associated with electricity. Initial proposals from the Commission have suggested that Member States would be able to choose between assigning the GHG intensity of electricity used in electric vehicles as being equal to either the Member State average, or the EU-wide average for electricity generally.”

    A strange reading of the RED, which to me is not an “initial proposal”, but an “interim measure”, allowing progress towards the 2020 target to be tracked – more thorough accounting would make the target easier to achieve.

Why, then, has the DfT (or at least the RED Consultation team) ignored the opportunity to meet the RED transport fuel obligation by – at least in part – using renewable electricity? My guess is that there are two main reasons:

  • They’ve baulked at the sheer complexity.  For example, different numbers of Renewables Obligation Certificates (ROCs) are awarded for a unit of energy depending on the technology used to generate the electricity.  Converting them into Renewable Transport Fuel Certificates (RTFCs) would require either knowledge of the energy source or assuming that they are representative of the mix.
  • Vested interests now exist in the biofuel supply market.  Perhaps, although the DfT is now concerned about the sustainability of biofuels, they feel politically unable to reduce the total amount of biofuel in the UK’s quota below that previously assumed (even though, to meet the original quotas more biofuel would have had to be supplied because some would “leak” into the NRMM market and be unable to receive RTFCs).

It seems to me that these problems – assuming my guesses are correct – can be overcome.  A rule (such as an average weighting for all renewable sources on the network) for converting ROCs to RTFCs is perfectly feasible.  And even this is not absolutely necessary, since – to point out once again something the DfT seems to have misunderstood – the EU has allowed assumptions about the proportion of renewable electricity supplied to the transport sector to be made.

If renewable electricity suppliers are denied the opportunity to benefit from the RTFO they have a clear case for complaint. The whole point of the latest EU Directives is surely to ensure that the latest EU thinking – including technological neutrality and effectively a lower biofuel target for 2020, as well as measures to ensure biofuel sustainability – is included in the rules for schemes operated by the member states.

It does not appear that the UK’s RTFO scheme will be compliant with the EU’s RED following the current review.

May 20, 2011

A Better FIT

Filed under: Energy, Energy policy, Feed-in tariffs, Global warming, Solar PV — Tim Joslin @ 11:43 am

I’ve started, so I’ll finish. My previous post on the topic of the UK’s expensive feed-in tariffs (FITs) for solar PV suggested that it would have been easier to control the budget for the scheme if a quota system rather than a pricing system had been used.

I mentioned in the first of this series of posts on the FIT that I’d written to DECC to check they are not in fact operating a behind the scenes quota system. They aren’t. They referred me to section 6 of the government’s response to the 2009 consultation (pdf).

I have to say that I am rather surprised that the scheme is apparently specified in a consultation response document. I would have thought there would somewhere be a publicly available, formal, amendable document specifying how the scheme will operate and detailing the various responsibilities for its operation. How do I know, for example, that any given section of the 2009 response has not been superseded by some memo or ministerial statement? There I go thinking all private sector again!

Anyway, section 6 includes the following paragraphs, with some of my comments in italics in squared brackets:

“161. An objective of FITs is to provide long-term certainty for investors but we recognise that it will be important to review and adapt it as circumstances change including technology costs and supply chains and other policy developments. Therefore, we will be putting in place a programme of reviews after which it will be possible to make changes to FITs.

162. We will undertake periodic reviews of FITs with their timing to coincide with the Renewables Obligation reviews. Therefore, any changes to the scheme resulting from the first major review of FITs would be implemented in 2013 [already superseded],…

163. If necessary, early reviews will be set up to consider any significant changes to the fundamentals affecting the operation of the scheme outside of the periodic review timetable. … [So much for para 162 - we've already been told the "comprehensive review" will take effect from April 2012, or even earlier, not "in 2013"; so so much also for para 161 since there is clearly no "long-term certainty" at all, the whole thing is conditional on the vagaries of the political climate.]

164. All aspects of the FITs scheme will be subject to review including:
• tariff levels
• degression rates and methods
• eligible technologies
• arrangements for exports
• administrative and regulatory arrangements
• interaction with other policies
• accreditation and certification issues including the MCS.165. Reviews will focus on whether the tariffs offered deliver the target returns, and whether those returns are appropriate in continuing to ensure a real ["continuing"?, "real" - meaning what exactly? - small scale renewables will produce trivial amounts of electricity for many years] contribution from small scale generation to our renewables and other targets, and that the scheme continues to deliver value for money [clearly they must mean "political value" rather than monetary value].

166. In order to ensure that existing investors may proceed with certainty, any changes to future levels of support will apply only to investments following the review; generation tariffs the installations existing at the time of the review will be maintained. …”

Now, “investors” in paragraph 161 could have been taken to include the stakeholders in the companies supplying renewable energy generation equipment, such as solar panels, but by paragraph 166 “investors” clearly means just the lucky owners (in the case of solar PV) of large flat roofs (a.k.a. “generators”). See why it might have been better to have a had a formal description of the FIT scheme, with the various parties rigorously defined? The whole point of the FIT scheme is to build scale economies in the country’s renewables deployment capability. The likely outcome of a boom and bust (as discussed before) is unlikely to be to a healthily growing industry including competing reliable solar PV suppliers operating to a high standard.

I am unconvinced that a system of periodic reviews is sufficient to keep the scheme within 10% of its targets for expenditure (from our electricity bills), as the Chancellor has demanded.

Let’s consider why we’re in this situation. What if we had a quota system instead? What if we gave FITs to only a predetermined number of generators each year?

I’ll tell you what would happen. The quota would be used up very quickly and the papers would be full of stories about a “fiasco” as deserving home-owners missed out. Even if they bothered to try, it would be very difficult for the government to get across the message that the policy doesn’t exist to give a benefit to the lucky few who are able to take advantage of the FIT subsidy. The goal is to bring down costs so that there doesn’t have to be a subsidy.

So instead of an explicit quota, what we actually have is a soft quota. Everyone who gets in before the door is slammed will be allowed to sign up for FITs. This is not ideal as, first, we (the electricity consumer) are overpaying and, second, as I keep on saying, when the guillotine does fall most of the solar PV suppliers are going to go bust. Moreover, since the companies know this, we’re seeing the usual fly-by-nights trying to cash in while the going’s good. In this case the cowboys are, for example, knocking on old ladies’ doors to try to get them to sign over leases on their roofs for solar panels. If the subsidy were less attractive we might get what we want – efficient, quality suppliers.

So how could we inject some price-discovery into the scheme, control the budget and at the same time avoid what I might term “quota-envy”?

Well, why don’t we do what is being suggested for larger scale renewable energy purchases? That is, why don’t we simply auction the right to install solar panels (or other specified renewable energy microgeneration system)? Here’s how such a scheme would work (described for solar PV, but similar for any other technology):

  • Instead of just registering a deployment to qualify for FITs, the solar PV electricity generator would first need a permit, i.e. besides the current auditing at registration to confirm what’s installed is what the generator says has been installed, a valid permit would also be needed.
  • Permits would be auctioned for each FIT band (i.e. small-scale, <4kW capacity through to, say, 250kW-5MW), a specific number of permits being allocated to each band.
  • It needs to be taken into account that planning permission is needed for some solar PV installations (generally the larger ones, but there may also be issues with listed buildings, conservation areas and so on).  Most likely it would be best to specify that where planning permission is required, outline planning permission must be obtained prior to applying for a permit, since otherwise there may be a significant number of unused permits, making management of the overall scheme more difficult.
  • Permits would have a limited lifetime, say a year, so that the auction for permits for calendar year 2012, for example, took place in autumn 2011. Permits would be issued late in 2011 and would have to be used for registration dates during 2012. A calendar year is suggested because fewer installations are likely to take place in winter so a last minute rush might be avoided, but to smooth out demand for installation and registration, auctions could be held more than once a year.
  • There would be a charge for permits (say £100 for domestic solar PV) to cover the costs of the auctions and also to minimise the number of unused permits.
  • The administrators would set an upper limit price. Initially this would be the current FIT for the given band and technology (e.g. domestic solar PV), but subsequently it might be the price set in the previous auction to ensure continual price declines (it may be necessary to adjust for inflation).
  • The administrators would also set a limit for the number – or maybe better total cost – of generators they are prepared to accept in each auction.
  • Applications for permits would simply specify the generation price (in p/kWh) they were prepared to accept.
  • Applications would be accompanied by the fee (£100, say), refundable in the case of failed bids, perhaps less a small charge for administration (say £10), to deter time-wasters.
  • Once the deadline for bids had been reached, the administrators would simply calculate a strike price. Note that if the auction is conducted on a total subsidy cost basis, the number of generation proposals accepted will be more the lower the strike price.
  • Obviously, if there are insufficient bids to reach the predetermined quota for the auction, the strike price will be the predetermined upper limit price (in fact bids above this price would be invalid).

Such auctions would be very easy to implement, especially given the magic of the internet. The fees levied would make the process self-funding.

The advantages over the present system are obvious, but I’ll spell them out anyway:

  • Price-discovery: the cost to electricity consumers per kWh is the minimum necessary.
  • It becomes no longer necessary for government to try to guess how scale economies will drive down the price of small-scale renewable energy generation.
  • Cost control: the total cost to electricty consumers can be kept within tight constraints.
  • An end to boom and bust (to coin a phrase!): the overall FIT scheme will not run out of money prematurely, since funds can be spread out over time (probably more would be allocated each year as time goes on to avoid over-investment in high-cost generation – as is happening at present – but, even if the cost is spread evenly, this would lead to more supply in later years as per kWh unit prices come down).
  • Fairness: “quota envy” is eliminated. There need be no rush for permits (the same could be achieved with a simple ballot, of course, like the Olympic ticket sale, but that doesn’t have the advantages if this scheme – come to think of it, why aren’t at least the most expensive Olympic tickets being auctioned off?). Everyone bidding at the strike price or below will obtain the right to FITs.

As has been totally predictable from the outset, the current FIT arrangements are unfit for purpose. But we can fix FITs!

May 17, 2011

FIT Policy Revisited: On Quandaries and Rebound Effects

Filed under: Energy, Energy policy, Feed-in tariffs, Gas, Global warming, Solar PV — Tim Joslin @ 5:18 pm

I like a good paradox, but, being also somewhat pedantic, I reluctantly have to class aspects of the UK’s FIT (feed-in tariff) scheme as the result of trying to resolve a quandary, and not, strictly speaking, paradoxical.

Of course, there’s a quandary involved in all renewable energy incentive schemes. In fact, they are subject to a special case of quandary, which, due to the physics precedent (the boffins keep telling us that you can’t simultaneously measure a particle’s position and momentum), should perhaps be known as a quantum quandary.

The renewable energy policy quantum quandary is this: should the incentive for renewable energy generation be in terms of quota or price? If a quota system is chosen, such as the UK’s Renewables Obligation scheme, then the cost of acquiring the renewable energy is indeterminate; if the price is set, as for FITs, then it becomes very difficult to manage the quantity generated, as discussed yesterday.

By imposing a budget on the UK’s FIT scheme, a price-based system has in effect been turned into a quota system. This is perhaps the worst of all possible worlds, since, if a rational entity only wanted to buy a fixed value (or quantity) of renewable energy, she, he or it would probably devise some method of discovering the true market price, for example (in the absence of a mature, liquid market), auctions. This, I understand, is what the UK now intends to do in the proper, grown-up energy market, as opposed to the play market for small-scale and domestic renewable generation covered by the current FIT scheme.

More about the new rules for the UK’s electricity market another time. The quandary other than the quantum quandary which I want to explain relates to the detailed operation of the UK’s FITs for domestic electricity generation.

Now, you’d expect that the feed-in tariffs involve the operator (in this case the homeowner) being paid a set tariff for supplying electricity to the grid. If so, you’d be wrong, as least for the UK’s scheme [I'd be interested in the detail of how FITs operate in other jurisdictions, if anyone cares to add a comment].

If you stick a solar panel on your roof in the UK and jump through some bureaucratic hurdles, you qualify for two types of payments:

  • a generation tariff, of 41.3p at 2010-11 prices (adjusted by inflation so already around 44p) per kWh.
  • an export tariff of 3p/kWh.

The key point is that the price of electricity you use yourself (but don’t generate) is around 12p/kWh. So there is an incentive built into the scheme to use rather than export the electricity you generate. This is a deliberate feature.

But how might you use this elecrtricity?

Let’s consider a few possibilities:

1. You would have used the electricity anyway – great, the FIT is actually worth 53.3p/kWh to you (41.3p generation tariff + the 12p it would have cost you to buy the electricity). As far as the rest of us are concerned, we’ve paid 41.3p to avoid having to generate a kWh of electricity by other means. Everybody’s happy. Ish – this is already extortionately expensive electricity.

2. You can change your behaviour to use electricity you’ve generated rather than other electricity. For example, you may use storage (for heating) or immersion (for hot water) heaters to shift your electricity consumption from the evening or night to the day when, clouds permitting, you are generating electricity. It seems to me it would even be feasible to use batteries to store the electricity – remember, it’s only worth 3p/kWh if you export it, it’s worth 12p/kWh if you manage to displace electricity you would otherwise have had to buy. Everybody’s happy (ish), although the rest of us are probably not quite as happyish as in case 1, as inefficiencies are likely to be involved. That is, you’ll likely have used more electricity by shifting your consumption in time – the storage and immersion heaters will have lost some of their heat by the time you actually want it. So there’s a small rebound effect already – you’re using more electricity in total than before, so, for every 41.3p the rest of us are paying, we’re avoiding having to generate not 1kWh, but less than 1kWh, of electricity.

3. You could change your behaviour to use electricity you’ve generated rather than another form of energy. For example, you could charge an electric or hybrid car. Or you could switch from gas to electricity, for cooking or heating. Again, there are inefficiencies involved. Now, you’re using more energy (not just electricity) than before, and, for every 41.3p the rest of are paying, we avoiding having to find, not 1kWh, but less than 1kWh, of energy.

It’s this last point, case 3, that is crucial to the quandary. The export tariff was originally planned to be 5p/kWh, not 3p. This change is significant, because gas also costs around 3p/kWh. Reducing the opportunity cost (i.e. the income foregone by using rather than exporting your electricity) to a mere 3p makes it irrational for domestic generators to switch from gas to electricity. It would be sensibe to charge car batteries, rather than use petrol or diesel, but it wouldn’t be sensible to use electricity rather than gas for cooking or heating (unless you prefer to use electricity for one or other of these activities, as some people do).

But, in rewarding actual export of the electricity so poorly, policy-makers must – or should – have been wrestling with a quandary. Because there’s one other thing you might do with this 3p electricity:

4. You could afford to use the electricity for things you couldn’t afford before (or didn’t want to pay for). For example, you might install air-conditioning.

The quandary policy-makers must have been wrestling with was that the higher they make the incentive for using home-generated electricity to displace other forms of energy consumption, the higher they also make the incentive for simply increasing electricity consumption. If they’d made the export tariff much higher, of course, then they would have introduced an incentive for increasing the consumption of gas, for example, by ceasing to use electric immersion water heating and using a gas boiler instead (or even by installing a gas-based domestic CHP system, which itself qualifies for FITs! – I can’t get my head around the full implications of this).

But this leads to a problem with the UK’s scheme. It might simply result in a rebound effect, whereby FIT suppliers simply use much of the subsidised electricity themselves.

Unfortunately, it gets even worse, because householders benefiting from generous FITs will increase their income significantly (beyond what they could have otherwise earnt with the funds that paid the upfront installation cost), so:

5. Because of the FIT income, you could afford forms of energy consumption you couldn’t afford before. For example, you might fly away for an extra weekend break every year, happy in the knowledge that while you’re away your solar panels are steadily earning money for you! Or you might buy more goods, which required energy to produce. This is another rebound effect. The subsidy may result in less extra energy available for other consumers than is generated. In fact, it’s possible that the benefit could be negative, that is, domestic FIT suppliers’ energy consumption might increase by more than they actually generate!

In the worst case, then, the money spent on domestic FITs might make no contribution whatsoever to reducing the consumption of other forms of energy in the UK economy. The FIT subsidy might simply involve a transfer of wealth to FIT suppliers of around £400m a year by 2015 (increasing every year as the number of installations increases).

In less worse cases, we can work out the cost to electricity consumers per kWh of FIT electricity generated net of increased consumption. Remember, electricity consumption by households with solar panels may increase by a proportion – beyond displacing other forms of energy use – reducing the net increase in the nation’s electricity supply achieved the ludicrously high FIT cost. If the rebound effect is, say, 50%, that is, if FIT providers increase their overall electricity (or strictly speaking energy) consumption by half of what they generate, then the cost to electricity consumers of the extra electricity made available by domestic FITs would be not the already extortionate 41.3p, but 82.6p/kWh.

As I said, I’d be interested to learn how other jurisdictions have structured their FIT schemes. It seems to me that it’s very difficult to avoid incentive problems of one sort or another. Perhaps the whole business is misconceived.

May 16, 2011

FIT to Bust

Filed under: Energy, Energy policy, Feed-in tariffs, Global warming, Solar PV — Tim Joslin @ 1:57 pm

As I mentioned yesterday, I responded a week or so ago to DECC’s “fast-track” consultation on feed-in tariffs. In fact, here’s my response (paragraphication unfortunately deleted by DECC’s software).

The reason for the fast-track review is that DECC hadn’t anticipated the number of large-scale schemes that would apply for the subsidy, which first became evident late last year, although my warnings about the scheme in general date back over three years. They therefore propose to drastically lower the tariffs for the largest schemes from 1st August. I presume this means that none of the large schemes are viable, since there isn’t time for those that have recently received planning permission to be constructed and registered. Needless to say, those who’ve invested time and money in drawing up proposals and seeking planning permission are none too pleased.

The thrust of my response to the DECC consultation is that the FIT mechanism is bound to lead to boom and bust in the renewable industries concerned, especially PV. Or rather, exacerbate the boom and bust cycle that is endemic to industries (such as silicon chip manufacture) with high up-front capital costs and low marginal costs. In the end I can see no alternative to annual quotas for FIT schemes of different types.

Specifically, I can see two main problems with the scheme, a underlying problem of lack of clarity of objectives and a, perhaps consequential, budget-control problem:

1. Unclear Objectives
It’s unclear which part of the product supply chain FITs are intended to stimulate. Some (such as Jeremy Leggett) seem to imply the prize is the development of a UK solar PV manufacturing industry. This is surely unlikely. The horse has bolted to China, who also have a domestic market for PV, and are just one of the countries with a cost advantage in manufacturing. The question then becomes one of whether we are trying to bring down the cost of solar panels in the UK, by increasing market power and simple scale economies in importing the things, or to gain expertise in installing them on people’s roofs, or both.

For some reason the government acts as if small-scale PV is a virtuous end in itself. I find this simply bizarre. For a given budget, the FIT scheme would support at least twice as much solar PV production in large-scale schemes as on domestic roofs. Permitting a mix of schemes would bring down the cost of panels for everyone more than just allowing households to benefit (as pointed out in the fast-track review consultation document, paragraph 42). And larger schemes will achieve the holy grail of “grid parity” before smaller ones, allowing us to produce electricity at reasonable cost.

2. Control of Budget
With the scheme set up as it is, there seems to be no rigorous control of the budget. What appears to have happened is that the scheme was originally formulated with cost estimates. The proponents didn’t much care if there was an overshoot. They’d adjust the scheme in periodic reviews. George Osborne has now said (in the 2010 Spending Review, pdf) that he’s going to hold the scheme to £400m a year as of 2014-15 (the cost increases each year as more long-term commitments are made), and what’s more reduce it by 10%:

“The efficiency of Feed-In Tariffs will be improved at the next formal review, rebalancing them in favour of more cost effective carbon abatement technologies. This will save £40 million in 2014-15.”

But the only mechanism for limiting the cost is to adjust the tariffs at periodic reviews, the first of which has been brought forward from 2012 (changes effective April 2013), to this year (timetable unclear, but changes to take effect April 2012, “unless the review reveals a need for greater urgency” – fast-track review consultation document, paragraph 16).

I emailed DECC week before last asking if perhaps I’ve missed something and there is some mechanism I’m unaware of for managing the FIT scheme. So far I’ve received only a boilerplate reply, so will write back. I’ll provide an update on here.

The immediate problem is that the solar PV FITs are absurdly generous. The return on the one deployment I’ve been able to audit looks like it’ll be about 15%. You only need to look at Google or pick up a newspaper to see adverts for suppliers proposing to help you take advantage of the scheme. I predict a surge in installations over the remainder of this year. Ofgem provides a list of schemes (see the bottom of their web page) which can be analysed. So far there are around 30,000 of them (mostly small-scale), increasing at 2,500+ per month. If this rate increases dramatically (as I expect), the lead time for a policy response will likely lead to a budget overshoot. At present there is insufficient data to make any kind of projection. For instance, seasonal factors are likely to be important, but their magnitude is entirely uncertain.

What might also happen is that schemes just below the cut-off for the revised tariffs (50kW) remain highly profitable and we see a surge of these. Then another “fast-track” adjustment to the tariff levels will be needed. And, of course, the wholly predictable surge of solar PV schemes is likely to take the lion’s share of the available budget and squeeze out the other technologies the FITs are supposed to support. It’s farcical.

If the comprehensive review slams on the brakes by lowering PV FITs dramatically, then, as we’ve already seen for large-scale schemes, boom turns to bust, and numerous small solar PV installation companies around the country will go to the wall.

What’s most astonishing is that solar PV supported by FITs has seen a boom and bust in several other European countries, most notably Spain. You’d think the UK would have learnt. I suggested the use of a system of quotas (for different scales of deployment of each of the various technologies) in my response to the consultation, but remain fundamentally suspicious of the whole FIT concept. Renewables Obligations make more sense, since they force suppliers to deploy a gradually increasing quantity of renewables, and don’t try to second-guess market-prices.

May 15, 2011

Sorry, Nuclear Power is Not Expensive

Filed under: Energy, Energy policy, Feed-in tariffs, Global warming, Nuclear, Solar PV, Wind — Tim Joslin @ 7:44 pm

I’ve been looking at energy policy in somewhat more depth than usual over the last week or so.

I responded to the panic, sorry “fast-track” consultation on feed-in tariffs (FITs), which I mentioned earlier in the year (maybe more about this later); I attended a Climate Change Campaign (CCC) debate on nuclear power; and, today, masochist as I am, I downloaded the Climate Change Committee’s (also CCC, damn, can’t use that one!) 4th Carbon Budget (let’s call it “the 4CB”), for 2023-7, which apparently we’re all now committed to.

I have to say that participating in debates on energy policy is to enter a parallel universe where the veracity of statements seems to be entirely optional. Especially if numbers are involved. I find it physically painful. Blood vessels in my head threaten to burst.

Just as one example, here’s what the 4CB says on p.254 (Joslin’s 25th Law: the accuracy of the content of a report is inversely proportional to its length):

“Solar PV could play an important role in global power sector decarbonisation, with the IEA estimating that this could generate around 11% of global electricity by 2050. However, the importance of this technology in the UK is unclear given relatively high costs:
• Solar PV is expected to cost around 28 p/kWh in 2020 for large applications (around 5MW) and 45 p/kWh for small residential-scale deployment, compared to around 7 p/kWh for nuclear and between 11-13 p/kWh for offshore wind.”

It’s usual to quote such figures in today’s prices, ignoring the uncertainties of inflation, and this is what appears to have been done here for nuclear power. But the figures for solar PV are bizarre. They are of the order of the current UK FITs, which could probably be halved to something approaching the level in other European countries and still give the intended 5-8% return. And the whole point of the FITs is to build economies of scale to bring PV costs down in the future. 2020 was in the future last time I checked.

I believe the cost of PV is too high now. That’s why I object to subsidising home-owners installing solar panels with absurdly expensive FITs. Nevertheless, I appreciate the whole point of the FIT scheme is to build up economies of scale in order to rapidly bring unit costs down. Presumably whoever buried the above paragraph on p.254 of the report is also sceptical. But few observers of the industry would doubt that the cost will be much less by 2020. Jeremy Leggett is claiming (though somewhat implausibly) that “grid parity” will be reached by 2013.

The reason I’m sceptical about FITs is that, for a relatively small amount of electricity – maybe 1GW peak output – the FITs scheme will cost around £8bn (and that’s just up until 2030), according to the impact statement (PDF) on DECC’s page for the 2009 consultation on the proposal. That makes sense. There’s been talk of a “budget” of £400m, which Osborne wants to cut by 10% (it’s not really his budget as the costs of the FIT subsidy are added to electricity bills). If the £400m is the annual subsidy (it’s none too clear what it is), that would be the equivalent of about 400,000 PV schemes of around 2kW capacity (let’s be generous and call it 1GW in total), each subsidised by around £1000 a year (that is, at 40p/kWh for an average of (1,000/0.4 = 2,500/365 or around 7kWh/day). £400m over 20 years is around £8bn.

£8bn. Interesting figure that.

Coincidentally it’s the same figure I heard from Darren Johnson (Green Party, anti) at the nuclear power debate. He noted that £8bn is the cost of disposing of the waste from 8 nuclear reactors. I spoke briefly to Darren after the meeting, querying the figure. He said he’d heard it from Caroline Lucas and sure enough it’s all over the internet. I was surprised, because £8bn is peanuts. The output of a single commercial nuclear reactor is typically around 1GW (potentially quite a bit more in some of the latest models). And, unlike solar PV, nuclear power is 24×7. So, to decommission 8 nuclear reactors will cost a similar amount to the FIT scheme, which will provide peak power output equivalent only to that of 1 reactor! And the sun don’t shine all the time!

Let’s look at the £1bn waste disposal cost for each nuclear reactor in a slightly different way. How much electricity does it represent? Let’s say we sell it for 7p/kWh wholesale (10p/kWh for consumers would be easier, but I don’t want to be accused of being optimistic – hell, let’s be pessimistic and say 5p/kWh). Now, we’re producing 1 million kWh of electricity every hour (that’s what 1GW means). At 5p each, that’s £50,000 of kerr-chang each and every hour. Still, £1bn is a lot. In fact, it’ll take our reactor 20,000 hours to earn £1bn. Call it 1,000 days, or 3 years to allow for a bit of downtime. But nuclear reactors last 40-60 years. So the waste disposal cost is less than 10% of the value of the output of the reactor. Or to put it another way, less than 0.5p/kWh, according to Caroline Lucas’ figures.

Another number was thrown into the air at the CCC debate. Someone said the Fukushima accident would cost “hundreds of billions of pounds”. Sorry, it’s in the tens of billions (like the Deepwater Horizon oil-spill). It’s a disaster, sure, but – even if we call it £10bn per reactor (there are 6 in total, 4 badly damaged) and take account of the less than 1GW output of most of the reactors (they’re quite old) – call them 500MW units – the clean-up cost is still only of the same order as the value of the electricity produced over the lifetime of the reactors (0.5bn kW * 0.5p/kWh is £25,000 per hour, so earning £10bn takes 400,000 hours or around 20,000 days or about 60 years, allowing for some downtime). And there are 100s of nuclear reactors around the world. It turns out that the cost of a Fukushima or a Chernobyl every couple of decades is in fact insignificant compared to the value of the electricity produced. Sorry, that’s just how it is.

I’m not trying to make an argument for nuclear power here. There are clearly potential grounds for objection other than the cost.

All I’m saying is that the facts do not support the claims that nuclear power is expensive that you hear so often.

And unfortunately most forms of renewable energy are more expensive at the moment. Possibly excepting onshore wind, but no-one seems to want that.

May 11, 2011

You’ve Got to AV a Laugh

Filed under: 2010 General Election, Politics, UK — Tim Joslin @ 12:41 pm

Well, laugh or cry, because AV would have made a huge difference to UK politics. Perhaps not immediately, but over the long-term it would have made it possible for a broader political debate, with a larger number of parties.

Today is the first anniversary of the LibCon coalition. Here’s what I wrote precisely one year ago:

“…it seems to me that Clegg is a self-deluding fool. I therefore expect him to go into coalition with Cameron and destroy his party. The pretext will be ‘the national interest’, but the real reason will be the desire for power.

…Clegg’s probably already lost the Lib Dems any chance of AV, let alone PR, for a generation.

Here’s why. Think about it. The Tories have said they will campaign against AV in any referendum they grant the Lib Dems. What incentive will Labour have to support the proposal? None. Sure, they might pay lip-service, since AV was in the Labour manifesto, but, unlike if they were in coalition with the Lib Dems, they will not expend political capital whipping their significant dissenting elements into line. And they’re hardly likely to spend a lot of money on a referendum campaign when they could be saving their pennies for the next election. I simply can’t see the Lib Dems winning a referendum on anything against the Tories, their toadying media supporters AND elements of the Labour party.”

So the outcome of the referendum was totally predictable. I suppose that at least the £200m or whatever it cost provided a small economic stimulus.

I can’t claim to be totally prescient, though. I certainly didn’t expect the mind-blowing incompetence of the Yes campaign.

First, I can still scarcely believe that the Yes campaign failed to get across one simple point. It’s daft to have an electoral system where the outcome depends on whether or not a 3rd or 4th (or other additional) candidate happens to stand.

This is currently the case in every UK constituency. But you don’t have to look back too far for graphic historical examples. Dubya Bush in 2000 benefited from Ralph Nader’s candidature, representing the Green Party, which disproportionately drew votes from, ironically, Al Gore, environmentalist and potential competent President. And maybe the Yes campaign could even have allowed some maverick to point out that divided opposition let the Nazis in.

Second, the timing was absurd. Why the referendum was held so early is a complete mystery to me. The Tories had signalled their opposition and, newly in power for the first time in 13 years, were bound to be speaking with one voice. If time had been allowed for a few Tory splits on the issue to develop (and for Labour to get over the election and be a bit more united) that might have made all the difference. The damage done to the Yes campaign by John Reid wasn’t mirrored on the other side.

Third, the agreement with the Tories should have forced Cameron to declare neutrality. Allowing the office of the Prime Minister to be used could only help the Noes.

Strangely none of these reasons appear in the Guardian Top 10.

But the underlying problem is far more fundamental. There’s no point having a proportional voting system if Parliament doesn’t work in a proportional manner.

Our elections don’t have to be winner takes all. In the long run greater separation of the executive and legislative arms of government is needed, as I also wrote precisely one year ago. This would allow the House of Commons to debate issues without the outcome having been predetermined by the whips, as happened in the dim and distant past.

But Clegg could have made a start. He could have said he’d support Cameron as PM and vote on the merits of bills put before the House. This is pretty much the position he’s now been forced into, but sometimes it’s not about where you are, but how you got there! He could even have relaxed the Lib Dem whip, since, as is now clear, the Lib Dems – having tried to be all things to all men over the years, and respond to local issues around the country – represent a broader spectrum of opinion than either Labour or the Tories.

It is indeed laughable that the Lib Dems thought they could win a referendum on a more proportional voting system at the very same time as they are giving coalition government a bad name. Do they really think the British public is stupid?

Without a broader vision for the evolution of the Westminster political process, we’re not going to see PR in this country for a century, never mind a generation!

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