Utility Week

Utility Week 24th February 2017

Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government

Issue link: https://fhpublishing.uberflip.com/i/789966

Contents of this Issue


Page 7 of 31

8 | 24TH FEBRUARY - 2ND MARCH 2017 | UTILITY WEEK Interview is that all business must unfold on "a level playing field". Time and again as he talks Utility Week through his views on energy issues – from the capacity market to new gas storage and the role of interconnectors – the phrase rolls out. Rules, structure and clear, consistent regulation are the pillars of his world view. Take the capacity market to start with. Lerch is generally positive about the mechanism, which he sees as the primary framework for delivering the three conflicting strands of the energy trilemma. However, while the capacity mechanism has delivered security of supply at low auc- tion prices, Lerch is concerned that its mid and long-term potential to help with emissions reduction is undermined by the "double benefits" currently enjoyed by dirty diesel reciprocating engines and open cycle gas turbines. "Recips do not have the same cost structure in terms of what they have to pay," he says. "They have an addi- tional subsidy that other generators do not get and they do not provide benefits in terms of emission. It is not a level playing field." Ofgem has been working on reforms to the so-called "embedded benefits" seen as giving small distributed generators an unfair advantage. Its final decisions on what tweaks will be made are due to be published on 27 February – a date that will not pass without comment given there are many businesses with a lot to lose if those changes fundamentally challenge their existing business model. Lerch, though, has no sympathy: "There must be a level playing field and a fair allocation of costs." Uniper's leader is relatively happy that government and the regulator are getting to the right conclusions on embedded benefits. He adds that he is confident the price signals to justify investment in new combined cycle gas turbines (CCGTs) in the UK, which have been lacking to date, will soon come through. Another area where he sees unfair allocation of costs is interconnectors. According to a report from the National Infrastruc- ture Commission early last year, electricity intercon- nectors are set to play an increasingly significant role in the provision of flexible energy in the UK. The report recommended that government should look to enable an additional 8-9GW of interconnector capacity in the com- ing decade to deliver smart, secure and demand respon- sive energy to UK customers. Government, at the time, accepted the recommendation. Lerch is troubled by what this interconnector splurge could mean for the economics of Uniper's indigenous generation fleet. "Interconnectors are an important part of the energy mix," he admits. "Tick. But they are not competing on even terms with generators. That should be addressed." The way Lerch sees it, interconnectors have access to all the upsides of being power providers, but are not sub- ject to the same system payments. "They don't pay car- bon floor price, nor for transmission losses. They don't pay any transmission charges. That leaves interconnec- tors at an advantage when compared to indigenous gen- erators. It is not right that at one end you are a network operator, but you are competing with a generator, just not on the same terms. Simply because I label something different does not make it right to have an uneven play- ing field as far as I am concerned." Even if such unevenness can be ironed out and energy system participants old and new can find ways to play fairly, there are still other big fish to fry before security of supply concerns and market uncertainty become things of the past. Lerch sees two major risk areas for Uniper's "core business" of securing reliable and flexible energy. The first is a "disorderly and abrupt" end to the use of coal, combined with a failure to bring on new nuclear plant by 2025. The second is the "price risks, which are related to the internal energy market and the future of the UK relationship with its European neighbours". Lerch says it is "ironic" that the future of the internal energy market (IEM) has been cast into doubt by last summer's shock referendum result. This is because – "a bit like the capacity market", which was pioneered by the UK and is now a "great export" – the IEM "was pro- moted by the UK". As negotiations progress for the UK's exit from the EU, Lerch is clear that the strucutures and rules of the IEM should be protected. "As a European company we see strong networks in the commodities market and we want to trade freely between different countries in energy matters. This is our core business and we want to see this maintained aer the UK leaves the European Union. My hope and my expectation is that government will act rationally and find a means to maintain that." Certainly government knows the views of Lerch, and his peers at other big energy companies. In late 2016, Brexit secretary David Davis held a roundtable debate with industry leaders to discuss what the UK's energy priorities should be in an exit deal. Attendees were unanimous that the IEM must be top of the list. They also stood together on the need for free movement of labour. "We are relying on the movement of people between different countries to support the business" and meet demand for skills, says Lerch. Offering diverse and accredited career development to employees is something Lerch feels strongly about more generally. He is proud that, among the "best bits" of Eon which he says Uniper has taken with it, there is a "hid- den gem" in the form of a huge pan-European engineer- ing academy. This training school provides an enormous array of professional development courses for energy personnel. In 2016, 4,000 individuals took 600 differ- ent courses, with 40 per cent of trainees being Uniper employees and the rest from over 160 organisations. Other Eon legacies that have been passed down to Uniper are its safety and asset reliability record and a proactive approach to investment. Lerch says that this year alone, Uniper will invest £50-£60 million in mak- ing its fleet "more flexible and efficient – because that is what the market wants". What's different about the new company is its more focused portfolio of business activities and a smaller staff with a "much flatter hierarchy" which is "more ena- bling for the people and also more flexible". There are many old industry hands who are still unsure what to make of Uniper, which only made its debut on the stock market in September last year (shares began trading at €10.02 and have since strengthened to €13.08). For those wondering how this potentially uncomfortable merging of old and new, establishment and innovation, will define itself, Lerch has a clear mes- sage: "We are a new name, but we are a company with a long track record of ensuring security of supply. Provid- ing security of supply is our core business. And that will continue far into the future." "We want to trade freely between different countries after the UK leaves the EU. My hope and expectation is that government will act rationally and find a means to maintain that." Uniper UK by numbers 1,000+ Employees 6GW Generation 1 Coal plant 6 Gas plants 60MTH Gas storage (in millions of therms) 2 High-pressure gas pipelines

Articles in this issue

Archives of this issue

view archives of Utility Week - Utility Week 24th February 2017