Utility Week

10 | 17TH - 23RD NOVEMBER 2017 | UTILITY WEEK Policy & Regulation Analysis A er years of ad hoc interventions, the energy market has sunk into a tangled mess. The government has replaced consumers and suppliers as the real buyers of energy, and in their place has picked win- ners and losers through a multitude of over- lapping policies – its hand oen guided by lobbyists. As a result, the decarbonisation of the energy system has been more expensive than was necessary. That was the diagnosis of Oxford eco- nomics professor Dieter Helm in his cost of energy review published late last month. "Complexity is itself a major cause of rising costs, and tinkering with policies and regu- lations is unlikely to reduce costs. Indeed, each successive intervention layers on new costs and unintended consequences." His remedy? Radically simplify the policy framework and leave markets to do the rest. Replace the smorgasbord of different fos- sil fuel levies with a single economy-wide carbon tax. Make the carbon price strong enough to enable the phase out of subsidies through the Renewables Obligation, feed- in tariff and contracts for difference (CfD) mechanisms, and apply the tax to imports to prevent emissions being exported. Trans- form the capacity market into an equivalent firm power auction that would be open to renewables but would pay them according to their intermittency. Once implemented, the government's involvement in the market would be lim- ited to setting the pace of decarbonisation through the carbon price and the level of security of supply through the target capac- ity margin. The market would discover the way to meet those objectives in the most cost-efficient way. In theory, at least, there seems to be broad support for an economy-wide carbon tax. Many agree that it would help to opti- mise the process of decarbonisation, ensur- ing that the cheapest and easiest solutions were implemented first. In practice, however, many are also sceptical about the feasibility of implementing such a policy, especially at a political level. "While Helm is right in saying that a more uniform and systematic carbon tax would be a good idea, introducing one has proven politically difficult in a number of countries," says Energy and Climate Intelligence Unit (ECIU) energy analyst Jonathan Marshall. "And the proposal for border adjustments is simply not credible, especially now that the government is engaged on a quest to tie up free trade deals around the world." Cornwall Insights associate Peter Ather- ton similarly tells Utility Week: "At the moment, you have pockets of tax which are in some cases very high. If you move to an economy-wide carbon tax presumably the rate would be relatively low, but it would be much broader based." It would likely be a regressive tax, with implications for equity. "Transitioning from where we are today to that would require a fair amount of political will," he adds. There are questions as well over whether a carbon price alone can incentivise the development of immature low-carbon technologies. In the absence of subsidies, Helm does accept the need to provide some early-stage support for research and development, but writing in a blog, ECIU director Richard Black argued that this would leave a "yawn- ing gap in the middle for technologies that need deployment support for a period of time – the sort of thing that has brought onshore wind and solar power prices down so quickly". Labour shadow energy minister Alan Whitehead agrees that while Helm is "essentially right" on the need for a robust economy-wide carbon price, he is wrong in thinking it could replace subsidies at this stage. "He's addressed the problem of complex- ity, and there is a problem with complexity, but I think he's tried to deal with that by oversimplifying the process," Whitehead says. "One of the issues about renewable deployment is that renewables are coming on stream at different rates of development." He tells Utility Week that although low- carbon subsidies were never intended to be a permanent feature of the energy market, for the time being they are still a necessity. Despite the recent headlines about the low costs achieved by technologies such as off- shore wind, "we're still not there as far as a lot of renewables are concerned". Firm power So, what about the equivalent firm power auction? Under Helm's proposals the auction would be open to all generators, but they would be paid on the basis of their de- rating factor. This measure would reflect their expected availability during periods when the system is tight and would be influenced by the make-up of the system at the time. Generators could improve their de-rating factors by contracting backup capacity or deploying co-located storage. "This directly confronts those that cause intermittency costs with the costs they cause, just as a carbon price confronts those that emit carbon with the costs they cause," Helm explained. Atherton is supportive, saying there should be a way of pricing intermittency into investment decisions and that "clearly it makes sense to do it via auctions". "If you wrapped it up for all generators to do the same thing, then the differential in cost would be apparent, and the costs Generation in Helm's review In the third of a three-part series, Utility Week looks at what Dieter Helm's cost of energy review has to say about generation, where again some radical ideas come up against hard realities. Key points Numerous political interventions have destroyed the "market". The system needs to be simplified. There should be an economy-wide carbon tax. Generators should be paid according to their intermittency. Critics say a universal carbon tax is politi- cally fraught. Emerging renewables technologies need subsidies as they develop.

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