Brexit to add £350m to energy bills? Well, probably not!
By Paul Homewood
Although the Telegraph was pro-Brexit, the Business section seemed to have been fully paid up members of Project Fear. Since the referendum, nothing has changed, with every bit of bad news blamed on Brexit.
Before the vote, for instance, we were frequently told that Brexit would lead to higher interest rates, which would be a BAD THING. Last week, they told us that interest rates would fall because of Brexit, and that would also be a BAD THING.
This week, the Sunday Telegraph published the above article by dear little Emily, in which she unquestioningly covered an analysis by energy consultants, Cornwall Energy:
By Emily Gosden, Energy Editor
16 July 2016 • 7:32pm
Brexit uncertainty will increase by a sixth the costs of a Government scheme to keep the lights on, adding more than £350m to consumer energy bills, leading analysts have forecast.
Doubts over the future operation of the energy market and increased financing costs will lead energy companies to demand greater subsidies to build and operate power plants, consultancy Cornwall Energy claimed in a report.
Under the Government’s “capacity market” scheme, energy companies are offered subsidies to guarantee their power stations will generate electricity when needed in future winters.
The policy is intended to encourage the construction of new gas plants to replace Britain’s ageing coal and nuclear power stations.
Earlier this month, ministers set out detailed plans for the amount of power plant capacity they would recruit through the scheme for winter 2020‑21, via a reverse auction process to be held this December.
Brexit uncertainty will add more than £350m to consumer energy bills
Cornwall Energy said it estimated that securing sufficient power plants would previously have cost £2.1bn in subsidies – but that “increased uncertainty caused by Brexit” would add £364m to the bill.
This extra premium reflected growing doubts over the future profitability of gas plants, levels of electricity demand, and the future of interconnector cables that import power from the continent.
As yet there is no clarity over whether Britain will remain in the EU’s single energy market, which facilitates the trading of gas and electricity, making it easier to build interconnectors, and also involves paying carbon taxes through the Emissions Trading System.
If Brexit triggers an economic downturn, this could also reduce energy demand, so affecting the likely profitability of a power station.
“Increased uncertainty caused by Brexit” would add £364m to the bill.
So far, subsidies have been awarded through the capacity market scheme for winters 2018-19 and 2019-20, with each year’s auction costing close to £1bn. Subsidies awarded were worth less than £20 per kilowatt of capacity, or £20m a year for a typical 1GW gas power plant.
Proposed big new gas plant projects have generally failed to secure subsidies in the auctions, losing out to alternatives that require lower levels of support, including existing old-style coal and nuclear plants, and new, highly polluting small diesel generators.
Only one proposed big new gas plant secured a subsidy contract, and that has since struggled to find financing.
Ministers revised the design of this year’s auction to try to secure more new gas plants with changes that analysts said would effectively push up the subsidy price awarded, helping the viability of new gas plants.
Cornwall Energy said it had anticipated a price of £42 per kilowatt being awarded this year, but in light of Brexit had increased that to £49 per kilowatt.
“Throughout the period of the Brexit negotiations, we can reasonably anticipate a risk premium being priced into all forward capacity market auctions, the cost of which will ultimately flow through to consumers’ bills,” it warned.
Responding to the report, a Government spokesman said: “There will be no immediate changes following the result of the European Referendum and the Government will continue to deliver its agenda, including ensuring secure, affordable and clean energy.
“The Capacity Market acts as competition, so it’s not possible to predict exact costs. It aims to secure the lowest possible rate for consumers.”
It is ludicrous to claim that Brexit uncertainty will add more than £350m to consumer energy bills, as the Cornwall study is little more than guesswork, based on some highly subjective assumptions.
Indeed, you could just as easily plug the same assumptions in, and come out with the opposite result.
For instance, the UK adds a surcharge of £18/tonne to the EU’s ETS price for carbon, and this impacts the profitability of gas fired plants. If, as Cornwall speculate, we leave the EU arrangement, such costs would fall.
As for the future of interconnector cables, does anybody seriously think France will want to stop exporting their surplus power to us, or that the National Grid will not want to buy it when it is needed? In any event, if it was stopped, CCGT stations would be the prime beneficiaries.
In the meantime, the fall in the value of the pound makes such imports dearer, thus making gas more attractive.
By coincidence, I ran my own analysis of the likely cost of the Capacity Market after 2019/20, and concluded:
DECC have therefore realised that they need to pay much more if they are to incentivise new CCGT build. To do this, they have been forced to increase the capacity to be bid for, from 46.3 GW to 53.8 GW in 2017/18, and 52.0 GW in 2020/21.
If we look at the Demand and Supply Curve, provided by the National Grid for the 2019/20 auction, we can see that the bid price could rise alarmingly:
Eyeballing is difficult, but it appears that even the 2020/21 figure of 52.0 GW could force the price up to £50/KW/Yr. (As a guide, the auction attracted total bids of 57.7 GW in Round 1). All successful bidders receive that bid price, and not the one they have actually offered.
That would put the cost of the auction up to around £2.6bn, from £834 million in 2019/20. In contrast, the OBR currently budget £1.1 bn for 2020/21. All, of course, to be paid for by you, me and everybody else who uses electricity.
My analysis was based on last year’s auction result, and my estimate of £50/KW is close to the new figure of £49/KW suggested by Cornwall.
As with many other things like this, the extra cost will, in due course, be blamed on Brexit. After all, if Cornwall Energy end up having to admit that their earlier estimates were too low, what better than to blame Brexit, rather than admit their own errors. Dear little Emily will not question this, since she obviously has very little understanding of her energy brief.
No mention either is made by her of the very real cost of government climate policies, which the OBR project will be costing the country £13 billion a year by 2020.
I actually have no problem with her quoting from the Cornwall report, but is it too much to expect her to ask a few pertinent questions, and do a bit of analysis of her own?