Distorting the market
Climate Change. It is intended to reward owners of marginal power stations for keeping them serviceable as possible back-up for peak consumption times.
The first ever auctions under it took place on 16 December: lucky winners are basically getting paid for keeping spare capacity on tap for the next 15 years.
At least, that is the time-scale on offer to those who own conventional power stations. But as National Grid frequently acknowledge, the cheapest way to deal with peaks is to manage the levels of demand among users. Not only is the most ecologically friendly kilowatt-hour the one that isn’t needed, it can often be delivered at far lower cost.
But that only applies if there is a level playing field to permit companies that deliver demand management services the same deal as conventional electricity suppliers. Transparently, contracts for difference don’t do that. Its auction rules allow such companies just twelve-month deals with their customers. In sharp contrast to the 15 years permitted to conventional suppliers.
On the face of it, this is not only deeply discriminatory. It is a subsidy that seriously distorts the market. So hats off to a new demand management company called Tempus Energy. It has just applied to the European Courts of Justice, to stop the scheme. Tempus argues that by creating such discriminatory contract lengths, DECC is acting in total contravention to the Single Market fair play rules. I wish this brave minnow well.
Moving in mysterious ways
It turns out DECC’s new Contracts for Difference scheme is not really a conventional auction scheme at all. Even before the first official auction date in mid-December, smug government officials were boasting they had already ‘pre-qualified’ 95% of anticipated electricity need. I am not sure whether Christies or Sotheby’s would survive long if their art or wine auctions were all ‘pre-qualified.’ But our government clearly moves in mysterious ways.
As evidenced by its attitude to encouraging coal-fired power stations. Since 2012, the government has imposed a floor price for carbon on every kilowatt-hour sold. This is intended to increase the cost of coal-fired electricity – which emits a lot of carbon dioxide – relative to electricity generated by non-fossil fuels like biomass, wind or nuclear. Overall, discriminating against coal-fired generation in this way puts up the price of fuel. For the average household that adds around £16 to bills per year.
But the new ‘capacity payments” under Contracts for Difference make no such discrimination. Indeed the scheme seems specifically designed to keep more elderly power stations open, which might otherwise have closed. And certainly there is some ancient coal-fired generation plant still puffing along. Eight of these are set to be receiving subsidies for many years hence.. For the average household, this scheme is reckoned to add a further £14 to bills per year.
So, with one hand, the government is penalizing coal. With the other, it is subsidising it. And with both hands, it is clobbering consumers. Such market interference is adding rather more to household bills than any of the ‘Green Crap’ the Prime minister took such pride in removing from fuel bills, when killing off insulation programmes just last year.
Holding the fort
No. I hadn’t heard of her either, before she became an energy and climate change minister in the July reshuffle. But ever since the last election, Amber Rudd had been the backbench Conservative MP for Hastings and Rye, a seat she won by just 1,993 votes from Labour.
For the dying months of the Coalition government, she is effectively just holding the fort, with few if any opportunities to alter policy at all. Just as well. Up until July she had shown no obvious interest in energy policy, or climate change policy, or fuel poverty. And to be honest, her civil servants remain unconvinced she is at all interested in any of these topics that make up her official responsibilities.
She endlessly turns down opportunities to speak at conferences. When she does, she tends to put her head down and read in a monotone from the text her officials have provided. All this has led many to question why she accepted the prime minister’s invitation last July. I was one of the doubters. And then an old hand on the political scene explained her game plan to me.
She obviously reckons it extremely unlikely she will be re-elected on 10 May. But she understands clearly employment prospects in life after parliament are substantially improved if you can bill yourself as a former minister in Her Majesty’s government. As opposed to a one-term lobby fodder obscurity.
Grasping the facts
New energy minister Amber Rudd does not seem to have grasped some basic facts about her portfolio. At the Conservative annual conference, she was openly querying why anybody was bothered whether fuel poverty programmes were paid for via tax receipts, as the Labour government preferred. Or via surcharges on fuel bills, as the Coalition government has chosen.
“Surely taxpayers and electricity users are one and the same people?’ she trilled. Er, no. If a service is paid for out of taxes, then these tend to be raised more from the more prosperous members of society than the poorest; hence differential income tax rates.
But if the funds are raised on each kilowatt-hour, that alters the balance entirely. Whilst those with bigger homes may use a bit more fuel, the fact remains that, whether rich or poor, each household has certain basic demands for energy. It is the inability to fund basic needs that leads to fuel poverty. A blight affecting millions, which is exacerbated by opting to increase fuel bills. Rather than taxes.