Politicians have been telling conventional energy business for years that they intend for their business models to become obsolete in the transition to net zero. Now they seem completely taken aback by the fact that these private businesses, which exist primarily to deliver returns to their investors, are behaving in short-term, profit-maximising ways. It makes perfect sense for these businesses to sweat their assets and seek to leverage any beneficial market trends when they expect a shortening of their expected economic lives.
This is entirely rational…businesses exist primarily to deliver returns to their investors – this is the purpose of capitalism: governments expect private enterprise to invest in, say, electricity generation, and in return the investors in those businesses expect to earn a level of profits that is at least commensurate, on a risk-adjusted basis, with what they could earn from alternative investments. This serves a wider purpose than the enrichment of individuals since these investors are often things like pension funds…if they do not perform well then pensioners receive less income. Obviously, there are arguments for and against capitalism, but in a capitalist society, governments should not expect private businesses to prioritise “social good” however that may be defined…if you move the goalposts, as governments have done with de-carbonisation policies, then you must expect businesses to respond to make the best of it that they can.
The reason I’m writing about this is that we’re seeing this play out in various different ways in energy markets around the world, and policymakers seem not only caught off-guard but also offended by these developments.
Biden tells the oil industry he wants to put it out of business, and is shocked when they cut investment
First of all we have US President Joe Biden, who has not only signalled very clearly his desire to do away with fossil fuels, he has imposed significant new regulatory burdens on the industry since taking office. Now he is threatening to use emergency powers if these same companies don’t increase supply in response to high prices. He is particularly exercised about the current high price of petrol, telling oil companies:
“You need to work with my Administration to bring forward concrete, near-term solutions that address the crisis and respect the critical equities of energy workers and fence-line communities….in advance of that, I request that you provide the Secretary with an explanation of any reduction in your refining capacity since 2020…”
– Joe Biden, President of the United States of America
I confess to not knowing what the “critical equities of energy workers and fence-line communities” actually are, but my question is, why should oil companies do this? Why should they justify reductions in capacity…reductions that are entirely consistent with Biden’s stated desire to see a reduction in fossil fuel use?
According to Bob McNally, head of consultancy Rapidan Energy, Biden had expected shale drilling to increase rapidly in response to higher prices…this isn’t realistic at the best of times but not only has the industry and its investors reacted to de-carbonisation policies by raising the bar for new projects, the industry is also facing supply chain challenges and rising labour costs.
Biden has singled out Exxon-Mobil and is accusing oil companies of failing to increase production in order to benefit from higher prices. He is complaining that the are not drilling, not making new investments, and making share buy-backs. But what exactly did he expect when he made it abundantly clear that he wants to make these businesses obsolete?
Large parts of the US at risk of blackouts
This comes after warnings of power shortages across large parts of the United States. Last month I wrote about possible power shortages in California, and now regulators in Michigan and Texas have issued similar warnings. The Midcontinent Independent System Operator (“MISO”) is expecting a summer peak forecast of 124 GW while there is typically only around 119 GW of generating capacity available, while The Electric Reliability Council of Texas (“ERCOT”) has asked customers to conserve energy after several power plants closed unexpectedly. California expects peak demand could exceed available supply by as much as 3.5 GW.
“Regulators in several regions of the United States are predicting record heat and drought this summer that could cause rotating blackouts. MISO, ERCOT, and the California Independent operator are a few that are already warning their residents that problems may occur where they would need to conserve energy. States are pushing solar and wind generation to become carbon free, but those technologies are intermittent, operating only when the wind blows and the sun shines so they cannot be relied on 24/7 to supply power.
Some states, particularly California, are adding expensive battery storage capacity to hold excess power to be released when needed. The cost of battery storage capacity is not factored in when states and manufacturers tell the public that wind and solar are cost competitive with natural gas and coal generated power. These renewable technologies have helped increase electricity costs to consumers because of their intermittency, and electricity prices continue to rise. In fact, the Energy Information Administration estimates that electricity prices will rise by a national average of 3.9 percent from last summer,”
– Institute for Energy Research
Some of the problems are linked to summer droughts which affect hydro-power output and the availability of cooling water for nuclear and coal plant, but lack of regulatory coherence over de-carbonisation polices is also playing a part, where the necessary storage and transmission investments to ensure a stable energy transition have been lacking. The speed with which conventional generation is being replaced with intermittent renewables, without these balancing technologies being in place, is creating issues with stability and contributing to the prospect of shortages in the summer, when cooling demand peaks. Conventional generation is leaving the market faster than the expected – 2% of the generation capacity in MISO has closed in the past year.
The National Electricity Market of Australia suspended indefinitely
Then we have the situation in Australia where the National Electricity Market (the “NEM”) has been suspended for the first time in history, and households have been urged to reduce energy use to avoid blackouts. The reasons are as follows: gas and coal prices have been rising, pushing up the cost of fossil fuel generation to a point where market rules required a price cap to be applied. The generators responded by withdrawing capacity from the market, not wanting to sell at a loss or use up scarce coal stocks (this post on the Watt-Clarity blog describes some of the generator bidding activity during this period).
The situation has been exacerbated by a combination of planned and unplanned maintenance outages in the thermal fleet and periods of low wind and solar output, as well as unseasonably low temperatures which have unexpectedly boosted demand. The suspension means that instead of running 5-minute actions, AEMO, the market operator will make central dispatch decisions based on generator availability with prices being set at the average of the previous 28 days for the relevant hour of the day. If generation costs are higher, generators will be able to apply for additional compensation which will be recovered from consumers later on.
The price cap mechanism was designed at the inception of the NEM in 1998 to manage short term disruptions such as summer heat waves – longer-term global energy shortages were not anticipated in the market design. In addition, the cap level has not been updated in over 20 years, and was set in relation to gas prices.
While coal is still cheaper than gas, it is becoming difficult for power stations to procure coal – as global prices have risen, domestic buyers are competing with export markets, so coal operators adjust their bidding strategies to price themselves out of the market when demand is lower.
However, once the cap is triggered, this coal rationing approach cannot be used because under the market rules, a generator that has bid in to the market must be fully utilised before the market operator can direct other generators to run. This discourages generators with low coal reserves from bidding in at all. A similar dynamic applies to other time-limited generation such as hydro, where water stocks need to be managed.
“It’s never been done before so the details have never been tested…If directed to lose money the obvious question is at what level,”
– Tony Wood, energy program director at the Grattan Institute
The idea now appears to be that AEMO will work with the generators to manage the situation and agree which plant should be directed to run, although it’s unclear how generators will be paid, if they will be directed to run at a loss, and whether consumers will be hit with higher charges as AEMO seeks to recover costs. This is prompting calls for market reform, with suggestions that the Western Australian model of a ringfenced, government-owned electricity sector backed by a domestic gas reserve should be under consideration.
Britain staggers into an electricity supply crisis this winter, placing its hopes on coal..
As I have written before, the GB market is going to be short this winter, with 2 GW of nuclear and 4 GW of coal capacity scheduled to close this year, and outages in the French nuclear fleet raising the prospect we will be exporting to rather than importing from France. EDF has already declined to keep Hinkley Point B open – the plant was closing for safety reasons and had had extended outages while its condition was evaluated. Given the problems in EDF’s domestic fleet, further life extensions for aging British reactors must be a low priority for the company.
However, the Government has just entered into a bespoke bilateral agreement with EDF to allow West Burton A coal fired power station to remain open this winter. The plant had been set to close in September, and the Government will now have to pay enough to make it economic for the plant to remain open and also to purchase the necessary coal. This is not straightforward…EDF had understandably run down its coal stocks ahead of closure, but since it used to buy from Russia it now needs to create a whole new supply chain for this winter. This won’t be cheap, and the price of the contract will reflect that. Similar deals are in the works to keep coal units at Drax and Radcliffe open.
However, the specifics of the EDF deal are interesting. West Burton A consists of four, 500 MW units, but this deal only covers 400 MW of capacity, with EDF agreeing to keep two of these units open, one to provide this capacity and one as a backup. These units will now close in March next year. The question is why is this deal only for 400 MW? We need all of the remaining coal capacity to remain online, so why not the full 2 GW? I reached out to EDF’s press office – I don’t normally look for comments since I’m not a journalist – and they were kind enough to take the time to respond.
The answer is that two of the units already began de-commissioning last October and cannot now be returned to service. The other two can but due to their age and reliability concerns, EDF was only comfortable offering 400 MW in the expectation that at any time one of the units would be needing maintenance. West Burton A is 57 years old, so it’s hardly surprising that EDF is cautious about the amount of capacity it is willing to commit to, and this is a much larger concern than access to coal. Safety assessments have been run, and while the plant will not operate on a normal commercial basis, it will be available to act as the station of last resort providing emergency back-up power to National Grid ESO.
The other coal plant that is due to close this year are one of four 500 MW units at Ratcliffe (opened 1963) and two units at the relatively youthful Drax which first opened in 1974. Even if all of these stay open, the impact of the nuclear closures and the prospect of exporting to France instead of importing will certainly wipe out the spare capacity margin which last winter was just 3.9 GW on a de-rated basis. This will make lower the resilience of the grid and lead to real risks of shortages during periods of low wind output, with rationing likely for industrial users.
While technical problems with the French reactors are not things the Government could reasonably be expected to predict, the closure of aging conventional capacity should not have come as a surprise. That the Government is now scrambling to keep the oldest coal plant in the market, despite all its net zero ambitions, is a sign of the seriousness of the current problem. But this is entirely self-inflicted – ever since I started my blog I have been warning about falling capacity margins, and if I could see it coming, why couldn’t they?
…while Germany is also firing up old coal plant
Germany has announced that it will be re-starting coal power stations in a bid to reduce gas demand this winter over fears of gas shortages – the German government has said it will pass emergency legislation to re-open mothballed coal plant for electricity generation. Germans are also being urged to reduce electricity use to conserve supplies. Yet the Government seems determined to press ahead with the closure of its three remaining nuclear power stations with a combined capacity of 4 GW, but the end of this year, claiming that the technical and safety hurdles for remaining open are too high (apparently their fuel rods need replacing and the lead time for this is 12-18 months).
Germany has spent billions of euros on its failed Energiewende and its energy prices are the highest in the world, but like many of its peers, the country has failed to make the necessary investments in storage and transmission to deliver on the policy’s objectives, and the country relies heavily on imports, including nuclear power from France and gas from Russia. Now the availability of both is under threat the country has no choice other than to turn back to coal.
Cakism in energy is beginning to bite
The Cambridge English Dictionary defines “cakism” as “the wish to have or do two good things at the same time when this is impossible”. Energy policy is full of it – the desire to replace dispatchable generation with intermittent generation while maintaining security of supply; the desire to end the use of fossil fuels while expecting energy companies to continue to invest and increase production at the drop of a hat; the desire to maintain a nuclear capability without making the necessary investments; the desire to transform the energy system without it costing anything (or at least without consumers noticing that it will cost anything).
But the effects of covid and the war in Ukraine have exposed the many flaws in the policies of the energy transition across the developed world, and policy-makers appear to have no answers. This is why we are seeing governments committed to net zero turning back to coal in order to keep the lights on, the prospects of blackouts, and the complete breakdown of market mechanisms.
It’s time for policy-makers to take an honest look at their net-zero ambitions and strip out the wishful thinking. The energy transition is possible, but it won’t be cheap, and can’t necessarily be achieved by 2050. And based on currently-available technologies, countries without access to sufficient hydro-power or geothermal energy will not be able to reach net zero without nuclear. Accepting these realities is the first step to correcting past mistakes and planning for a transition that actually works.
Good read. Our elected officials need to show courage and integrity when it comes to nuclear energy.
As ever with Net Zero policy, the question should be why not how.
I suggest that Phil Lenoir settles down to study the publications produced by the. Intergovernmental Panel on Climate Change. He will then realise that the word”why” is otiose .regarding the need for net zero by 2050 at the very latest.
I think this is kind of the problem though. To paraphrase; if you have a ‘why’, you can bear almost any ‘how’. The challenge being made here is that we do not have a very good plan to get where we need to be and, I would suggest, are being driven by ideology much more than we should be. I’m not disputing the IPCC work, or it’s outcome, but the very importance of it demands a better approach than is being delivered. It reminds me of the usual corporate business planning process when you are set an annual target and need to work out how to get there, often with the target having very little connection to the situation on the ground.
Many of the solutions are being put forward because ‘something must be done’ and very real flaws are being overlooked. You can only ignore basic economics for a while (until it comes back to bite you) and the laws of physics are ironclad. It is reasonable to have some flex in a plan, but when large chunks of the plan are basically wishful thinking, you need to look again at your plan.
My wife’s cousin Pat living near Sydney has been having to switch off power for 4 hours a day. She is terminally ill and, happily, her nurse has managed to get a permit to keep the electricity on (it is cold there right now). I really dislike these Greens. It is their screeching and our weak politicians that has led us into this morass: getting out will not be easy.
Unless there’s a rational answer to ‘How?’, the ‘Why?’ Is irrelevant. One needs something to work before it can be counted upon to achieve the intended result, regardless of the importance of the ‘Why?’
In fact, the more important the ‘Why?’, perhaps the more important we develop well-thought-out ‘Hows’ before going off half-baked, eating raw cake, getting salmonella from inadequately cooked eggs in the batter, and ending up no closer to a solution, sick as a dog, out the cost of a batch of cake batter, and now having to cook the next cake over a wood- (or dung-) fueled fire. This then leads to respiratory issues that compound the digestive issues; plus, now we can’t see very well after dark because we’ve run out of fire-fuel trying to bake the second cake.
Feeling desperate, we try a third batch, but find we can’t catch the chicken in the dark, we’ve just taken a drink of water from the wrong ‘puddle’ (nope, not lemonade!) and are now really feeling absolutely nightmarish.
All of a sudden we wake-up, realize it WAS a nightmare, and go find and hug the nearest engineer we know – because they GET THE RIGHT THINGS DONE RIGHT. Once they develop more than one technical solution, then we can start overlaying decision criteria – best ROI, least risk, max long term community benefits, least system lifecycle carbon emissions, etc.
However, until you start comparing alternate technically feasible solutions to an outcome-based problem statement, you’re eating half-baked cake – Enjoy!
Some minor corrections: West Burton opened 1967 not 1957. Similarly construction at Ratcliffe started in 1963 and first unit commissioned 1967 (station fully commissioned 1970?).
The decision of EDF to only make one unit available does not surprise me. The following two factors have probably come into play:
a) Coal Stocks. The coal stock at West Burton would have been run down close to zero in anticipation of closure. One of the issues is that there is only a limited amount of rolling stock in the UK to move coal around (much have been scrapped due to lack of need). EDF may well have calculated that they could only get enough coal on site to support one unit.
b) Staffing. EDF may also be struggling to get enough operations and maintenance staff to keep the units going. Younger staff will have moved on in anticipation of closure (erosion of employment benefits meaning that little reason for them to stay) and older staff looking forward to retirement. You can’t get new staff (who wants to join a site closing in 6 months) and even if you could, you don’t have time to train them.
It should also be noted that the two points equally apply to the Drax and Ratcliffe units!
Sorry , yes, I mis-read the email, it said 57 years old (so close the a diamond rather than platinum jubilee!)
EDF told me they weren’t really worried about access to coal, although I had made the same assumption. Apparently the limiting factor is reliability rather than access to fuel or staff. My read on that is that maintenance had been scaled down ahead of closure and now it’s harder to ensure availability, hence the rather large haricut on the capacity being offered.
I would say that the fuel point is less relevant for Ratcliff – the other 3 units are expected to run out to 2024, so they wouldn’t really be running stocks down in the same way. You’re probably right about Drax though.
I’ve corrected the error now
The reliability issue is closely connected to the period for which the plant can expect an economic life. Guarantee it for 5 years, which is a statutory boiler inspection interval, and it can become interesting to do more maintenance work to increase reliability. Offer a baseload contract on top, and the economics of doing that improve markedly – and you save on gas imports. After all, we are unlikely to see Hinkley Point in that time frame, and nuclear and other older plant is likely to close.
There’s plenty of big coal hoppers dumped in sidings all round the country as to whether they are serviceable maybe an issue but the private Rail Freight hauliers are pretty adept at making things happen. I would suggest bigger issue is whether we can actually find ships to transport sufficient coal.
From what I can see global coal supplies are going to be extremely tight this winter – although some supply shuffling will happen e.g. more Russia->India whilst more S.Africa to Europe, supply is going to struggle especially as more countries shift to coal generation to replace gas shortfalls. I can’t see how Europe can replace Russian thermal coal imports from other sources so it probably won’t matter if mothballed coal plants can be restarted, there won’t be enough coal.
On a separate note – how will German renewables be balanced with less availability of gas peakers and without being able to dump excess on neighbours increasingly strained grids. Does this not mean more curtailment is likely and less renewable generation on the grid.
The more I look, the more serious the situation looks this winter assuming Russia turns off all gas supplies. Its going to be a truly harsh test of EU unity, perhaps the UK can avoid the worst of it
Net Zero via nuclear is hypothetically possible (so is enough wind/solar + batteries to destroy the world) but realistically it isn’t going to happen – remove Russia & probably China & probably the French too (given their own problems) from the equation and the global bandwidth to build new reactors will be completely inadequate when the world wakes up to its fossil fuel supply crisis. There is also the question of Uranium supplies (believe Russia is key player here) – but then we descend into the rabbit hole of other hypothetical but equally unlikely solutions – its the rabbit hole of renewables that got us into this mess. I just don’t understand why the engineering profession hasn’t spoken out, everybody seems silenced by the new orthodoxy. Anyway time will tell…
As for this winter, the capacity shortfall is very worrying indeed but pales by comparison to the situation in much of Europe, especially Germany. In a worst case situation would we not limit exports on interconnectors ? Whats to lose post Brexit and better than imposing blackouts on the electorate ? Maybe another fire on the interconnector will do the job, the Texas LNG terminal fire certainly helped Biden ! Also I think you’ve been asked this before, but is there a risk the Norwegians might choose Germany over the UK re. gas exports (contracts aside) or are they primarily restricted by pipeline capacity as to where they can send the gas ?
It’s interesting that last time there was a major outage on IFA it coincided with outages in the French nuclear fleet (I’m NOT suggesting a conspiracy) and I wrote at the time that the interconnector outages were probably positive for the GB market despite consensus being the opposite.
GB and Norway have a very long-standing co-operation in the North Sea, and a new supply agreement has just been signed between Centrica and Equinor. I can’t see Norway backing out on firm supply commitments. What I can see happening though is Norway cutting capacity on the electricity interconnectors, but the mechanics are different: Norway hasn’t contracted to sell electricity to GB or Germany (or the Netherlands) it has simply opened up interconnectors and allowed electricity to flow based on price differetials. There is definitely a risk it will cut capacity since it is harming the Norwegain market so much. The gas deals don’t (as far as I can see) create any harm for the Norwegian domestic market.
David,
regarding your comment about the lack of disquiet from the engineering profession; there is unease, but it tends to be at an individual level rather than at a company level.
I don’t the structure of the UK electricity industry helps either. Nobody has ultimate responsibility for security of supply. National Grid are probably best placed but:
a) don’t have the means as they cannot own/operate generation plant.
b) politically are fully committed to a transition to net zero. You only have to look at their website to understand this is their chief priority. This politically driven approach has the effect that they are not going to raise unwelcome truths about the effects of increasing renewables on security of supply. It also results in a level of wishful thinking-example taking the view that closure of German nuclear stations will have no effect on GB electricity market.
c) in my dealings with National Grid at an engineering level, it feels like they don’t have the depth of knowledge and experience there once was, particularly regarding the reality of power station operation.
I see you have top billing for the forthcoming webinar (congratulations):
https://twitter.com/NetZeroWatch/status/1539309513014411264
My 1 Mbit internet connection won’t allow me to join in live reliably. Will you be posting it here afterwards here? It should be an excellent discussion, with all involved having a formidable grasp of the issues.
At least the Germans sensibly mothballed their coal plants we just took great delight in creating opportunities for politicians to get photo ops whilst they pressed the button to demolish them. Absolutely criminal and why the opposition doesn’t call them out is beyond me not that they ever take responsibility for anything.