The government has said for many years that it has three aims for energy policy: security of supply, affordability, and decarbonisation. It has been neatly summed up in recent years as the energy “trilemma”, which makes clear the inherent tensions in managing those three aims, which can often be incompatible.

But the reality is made clear by the Department of Energy and Cimate Change’s (Decc’s) struggle to set appropriate strike prices for the first phase of its Contracts for Difference regime, which will replace the Renewables Obligation. For Decc, the move to a CfD regime is an attempt to keep down the cost of investing in new low-carbon generation rather than allowing generators to be over-rewarded by the Renewables Obligation. But as it states in its Delivery Plan for Electricity Market Reform (EMR), in order to convince investors to take up the CfD option they must be offered a similar return to that they would have received from the RO. Price is less important than security.

Decc argues that investors will be tempted by the certain return from CfDs, but that may not be the case. ESB is just one example of a company that wants to extricate itself from that type of “tolling” contract so it can take on more risk and trade its way to higher profits. Not all companies will see a fixed return as more attractive than risk.

Meanwhile, in the immediate future the possibility of having to manage a relatively low supply margin has National Grid and Ofgem rushing to put a generous incentive regime for more balancing plant in place – although it is far from clear the margin will fall far enough to require it, or whether the margin will be lower than those managed by neighbouring countries on a regular basis. That is one area where intervention has been the order of the day.

In others it is assumed that the market will provide: our place in the global market for gas (and increasingly as a customer for electricity interconnectors), for example, is assumed to provide security not because we have supplies guaranteed, but because when there is a shortage the price will rise to a level at which we are the most attractive buyer in the market. In times of shortage, security is more important than low-carbon.

In public policy terms there may be three aims for energy policy that have to be kept in balance. But energy ministers’ frequent quip about not wanting
the lights to go out on their watch is not really a joke at all. For an energy minister – and in practice for many customers, industrial and domestic – there is one energy “must-have” and two energy aims that are “nice-to-have”. When it comes to the point of dispatch, security of supply is the number one aim of energy policy. When that is threatened, the other aims quickly become optional.

 

Janet Wood

 

From New Power, May 2013