Tuesday, August 2, 2016

GWPF Newsletter - UK Energy Rethink: Theresa May's China Calculus








British Government To Delay, Reassess The World's Most Expensive Subsidy Plant

In this newsletter:

1) UK Energy Rethink: Theresa May's China Calculus -- BBC News, 31 July 2016

2) British Government To Delay, Reassess The World's Most Expensive Subsidy Plant -- The Daily Telegraph, 28 July 2016


3) Matt Ridley: Britain Should Go For The Cheapest Energy -- The Times, 1 August 2016

4) John Constable: Hinkley C And The Power Market -- Global Warming Policy Forum, 29 July 2016

5) Christopher Booker: Saved In The 'Nick' Of Time From The World's Most Expensive Power Station? --The Sunday Telegraph, 31 July 2016

6) Is Theresa May’s Chief Of Staff Behind The Hinkley Point Jitters? -- The Spectator, 30 July 2016

7) Nick Butler: Britain Can Find Opportunities Beyond Hinkley -- Financial Times, 1 August 2016

Full details:

1) UK Energy Rethink: Theresa May's China Calculus
Carrie Gracie, China editor

In explaining its shock decision to delay the deal on Hinkley Point, the government said it needed time to consider all components of the deal, but speculation is growing that China questions may be at the heart of the reassessment.
Under the existing terms of the £18bn project, a Chinese company is to finance a third of the new Hinkley Point C reactors and may later build a Chinese-designed nuclear power station in Essex.
So what's the difference between a French company and a Chinese one when it comes to the UK's critical infrastructure?
How you answer that question depends on your assessment of China and its intentions.
This is a fiendishly difficult calculation.
China is a moving target, and a huge, contradictory and complex one at that.
In 2016 it is already not the country that David Cameron faced when he became prime minister six years ago. and not the China that former George Osborne set out to woo for investment in the UK's infrastructure upgrade.
Beijing is more powerful and its global agenda more assertive. At home, its political crackdown puts it increasingly at odds with British values.
Should any of this matter? The UK already has a Chinese company, Huawei, running key parts of its telecommunications network.
Arguably nuclear energy is likewise a business relationship subject to similar national security safeguards.
But led by the United States, several other western countries have barred Huawei's involvement in key telecommunications networks on national security grounds.
And no other major developed economy has invited Chinese involvement in a key nuclear energy project.
'Fear and greed'
Two years ago the German Chancellor Angela Merkel asked her Australian counterpart what drove his country's policy on China, and he answered "fear and greed".
In the absence of political change in China, this blunt assessment sums up the calculus for many countries, though the exact proportions of each differ depending on circumstance.
Some in the British political and security establishment felt that under the previous government's declared "golden era" with China, there was not enough fear in London and too much greed.
One such was the prime minister's joint chief of staff Nick Timothy.
In comments which have received enormous scrutiny since Thursday night's surprise announcement that the Hinkley Point deal would be delayed, Mr Timothy wrote last October on the eve of the Chinese president's state visit to the UK:
"Security experts - reportedly inside as well as outside government - are worried that the Chinese could use their role to build weaknesses into computer systems which will allow them to shut down Britain's energy production at will…
"MI5 believes that 'the intelligence services of… China… continue to work against UK interests at home and abroad'."

2) British Government To Delay, Reassess The World's Most Expensive Subsidy Plant
Emily Gosden

Plans for Britain’s first new nuclear power plant for a generation suffered a last-minute delay on Thursday night after Theresa May’s Government announced a new review.
Executives at French energy giant EDF were left surprised after ministers cast doubt on the plans by saying a decision on the Hinkley Point nuclear power station will not be made until September.
Both EDF and Government sources had thought that ministers would sign off the subsidy deal for the £18 billion plant today, after the board of EDF approved the project by 10 votes to seven.
However, within hours of EDF giving the project the go-ahead, Greg Clark, the new Business and Energy Secretary, announced that a final decision will now be delayed.
He said: “The UK needs a reliable and secure energy supply and the government believes that nuclear energy is an important part of the mix. The government will now consider carefully all the component parts of this project and make its decision in the early autumn.”
While EDF was left cancelling interviews planned for Friday morning, Government sources played down suggestions of a U-turn, insisting it was natural that the new Prime Minister would want to take time to review the project before approving it.
One source said: “It’s a massive deal and we just want to make sure we have thought it all through.”


3) Matt Ridley: Britain Should Go For The Cheapest Energy

With Hinkley’s costs astronomical and renewables unreliable, how else can we offer a fair deal to the less well off?
If Hinkley Point C nuclear power station goes ahead, the cost for consumers of subsidising it could be £30 billion, according to the National Audit Office — five times what was originally estimated. The increase comes largely from the fact that fossil fuels are cheaper than even the lowest possibility envisaged by the late and unlamented Department of Energy and Climate Change.
The purpose of this subsidy is to ensure that we have very-low-carbon electricity to replace ageing coal and nuclear plants, the better to mitigate global warming. Since Hinkley would emit half a billion fewer tonnes of CO2 during its 35-year life than comparable gas-fired projects, that implies a cost per tonne of carbon dioxide avoided of £60.
How does this compare with the cost of the damage that global warming will do in the entire future, per tonne of CO2, a number known as the “social cost of carbon”? The US government uses a figure of $37 per tonne (£28), so we are being asked to pay more than twice as much.
Even that probably overstates the cost of carbon. Taking into account more than ten recent studies of climate sensitivity using real-world data, assuming a normal 3 per cent discount rate, and employing two widely used models of climate change, Professor Ross McKitrick of the University of Guelph in Ontario and two colleagues at the Heritage Foundation in Washington DC found that a realistic social cost of carbon was somewhere between $3 (£2) and $30 (£22) per tonne of CO2.
Indeed, there is a 40 per cent chance in one model that the social cost of carbon is actually negative — which is to say that CO2 emissions will prove in the end to have done more good than harm. Since that study was published, satellite evidence has confirmed that there has been a 14 per cent increase in green vegetation over 30 years, 70 per cent of which is directly attributable to increased CO2.
This “global greening” has affected all habitats, from the tropics to the tundra, but especially arid areas such as the Sahel region of Africa, where the poorest countries are. More carbon dioxide makes plants less susceptible to drought. In terms of its cumulative impact on harvests and human welfare, global greening is worth trillions of dollars.
By contrast, the damage done by climate change has so far proved smaller than predicted — there does not seem to have been a consistent increase in storms or droughts — and even this year’s El Niño temperature spike, now fading, has failed to push the rate of change of temperature above the middle of the range predicted by the models. Disaster could still be round the corner, but so far it is looking increasingly possible, indeed probable, that the social cost of carbon is far lower than the premium we are being asked to pay for low-carbon energy.
Having an indirect commercial interest in coal — although I champion gas and cheaper versions of nuclear power for our electricity needs in the future — perhaps I am biased in favour of low estimates of the social cost of carbon. But then the proponents of renewable energy also have a vested interest in the social cost of carbon being high.
Renewable subsidies are even worse value for money when compared with the social cost of carbon. According to a new study by John Constable and Lee Moroney, small solar costs the UK consumer at least £253 per tonne of CO2 mitigated, offshore wind £183 and onshore wind £91.
At least if we build Hinkley, the power will be available whenever we need it; not true for wind and solar. California is already experiencing problems with solar power dumped on the grid during the day when demand is low, but not being there in the evening when demand spikes. The result is that nuclear power faces being phased out for more flexible gas, which means an increase in emissions.
South Australia, meanwhile, has experienced what an excess of wind does to a grid. Coal plants, made unprofitable, have shut down, so electricity prices now shoot up on days when the wind is not blowing, causing economic havoc and leaving the grid to rely on expensive diesel and open-cycle gas generators (not helped by higher gas prices), which can respond quickly and which have relatively high emissions.
Elsewhere in the world, even coal is the unintended beneficiary of renewable subsidies. Fatih Birol, head of the International Energy Agency, said in June that political support for renewable energy technologies has made it difficult for gas to compete, which has helped coal to maintain market share.
In a prescient paper for the Centre for Policy Studies, Rupert Darwall predicted these problems. He argued that heavily subsidised wind and solar capacity flooding the market with “near random amounts of zero marginal cost electricity” was wrecking the economics of conventional power stations. He concluded: “Without renewables, the UK market would require 22GW of new capacity to replace old coal and nuclear. With renewables, 50GW is required, ie, 28GW more to deal with the intermittency problem.” On top of this is the huge cost of connecting remote wind farms to the grid.
Incidentally, storing renewable power is not an answer. According to the physicist Clive Best, to store just a day’s worth of electricity for Germany, let alone a week’s worth, would require almost twice as many car batteries as there are in the entire world.
It is clear that our cheapest option for keeping the lights on is gas.

4) John Constable: Hinkley C And The Power Market

No one wants Hinkley C power station, not because nuclear is in itself a flawed technology, but because the electricity market is so distorted by climate policy that it is dangerous for an investor unless offered subsidies that are wildly expensive for the consumer. Discussion should now shift from the folly of this particular deal to the underlying problems that are making it all but impossible for any despatchable, conventional power station to be built in the UK.  
“When the bridegroom jumps out of the window, the wedding is off”, says Gogol, very wisely, and the outlook is little better when neither party to a proposed commercial contract has any deep enthusiasm for the deal. However, when those parties are two governments it is probable that timidity will prevent cancellation and so result in a grim mésalliance, recriminations and costly divorce. How much better it would be if someone would jump out of the window.
EdF’s board very nearly did so yesterday, voting only narrowly, 10 votes to 7, to commit to a Final Investment Decision in Hinkley Point nuclear power station, and it seems probable that the UK government was expecting the decision to go the other way, sparing them the necessary cold-hearted execution. Greg Clark, Secretary of State for the new department of Business, Energy and Industrial Strategy (BEIS) is to be commended on refusing to be hustled into accepting this deal, though outright cancellation would surely have been much better for all concerned than the deferral that he has announced.
As noted in a previous post, the main obstacle to the construction of nuclear power, and indeed any conventional power station in the UK is the distortion of the UK electricity market by climate policies, including the Emissions Trading Scheme and the Carbon Price Floor, but principally the EU Renewables Directive that requires about 35% of UK electrical energy to come from renewable sources in 2020. The residual market is deeply unattractive, being both small and physically variable over all timescales, making it very hard for investors to improve their chances of recovering capital and fixed costs except by charging high and controversial prices per unit of energy sold. The strike price offered to Hinkley, double the market rate, was supposed to overcome this difficulty. The Capacity Mechanism was expected to do the same for gas. Both are outrageously expensive, but neither has been sufficient to motivate the require investment.
Those in EdF’s board who voted in favour of Hinkley C may have hoped that the UK government would now be so short of options that it would grasp the project in desperation, and that this desperation would increase so that after a decent interval had passed the UK would succumb to pressure to increase the subsidies still further. Mr Clark’s decision makes that look very unlikely. Even if the UK government’s decision taken in October is to proceed, this will amount to calling EdF’s bluff. The delay is fair warning, no further subsidies are on offer, and EdF should get out now, while it still can. The window is open…

5) Christopher Booker: Saved In The 'Nick' Of Time From The World's Most Expensive Power Station?

In the nick of time, it seems, a glimmer of sanity is at last breaking in on what I have long been describing as the most insane single project a British government has ever put its hand to.
We can credit the decision to put on hold our agreement for EDF to build the most expensive power station in the world at Hinkley Point to Theresa May’s joint chief of staff, Nick Timothy: the man who, having back in April described the Climate Change Act as “a monstrous act of self-harm”, was also behind the abolition of the Department for Energy and Climate Change (Decc).
Until now, the absurd story of Hinkley has been as vivid an example of the self-deluding power of groupthink as could be imagined. All those ministers swept along by it, such as Ed Miliband, Chris Huhne and Ed Davey, should hang their heads in shame. This culminated in that humiliating spectacle last year (as also noted by Mr Timothy) when David Cameron and George Osborne invited the President of China to London in October and begged him to lend us billions of pounds to buy a reactor design so flawed that it could almost certainly never be built.
Nothing should have brought this home more forcefully, as I noted last year, than the contrast between the Hinkley project and the way South Korea is building four nuclear reactors for the United Arab Emirates, to an already proven design and at only a fraction of the cost.
Although the UAE only began talks with Korea in 2009, the year we began negotiating with EDF for its two 1600 megawatt (MW) reactors at Hinkley, the four 1400 MW reactors for the UAE (hence their name APR1400s) are already under construction, with the first due onstream next year and the rest to follow by 2020. For £15 billion, they will thus supply 5600 MW of electricity, much more than Hinkley’s 3200 MW, so grotesquely subsidised that even Decc admits its cost could eventually be £37 billion.
This is the dreadful fiasco from which, literally in “the Nick” of time, it seems we may now be saved., Of course we desperately need reliable nuclear power to make up for the inadequacy of all those intermittent windmills. But we should forget about the French and Chinese and get on the phone to Korea as fast as possible.

6) Is Theresa May’s Chief Of Staff Behind The Hinkley Point Jitters?
Steerpike

This week relations between Britain and China were placed under strain after the government delayed approval for the Hinkley Point nuclear plant. Under David Cameron and George Osborne, Britain’s first new nuclear power station — of which China General Nuclear has a one-third stake — had been expected to get the green light this month. However now Theresa May is in charge, the government appear to have got cold feet.
Announcing that no decision will be made until autumn, Greg Clark — the business, energy and industrial strategy secretary — said the government will now ‘consider carefully all the component parts of this project’. So, while May has never been the biggest fan of Osborne’s pet project, could it be her co-chief of staff Nick Timothy who is leading the voices of discontent?
Last year Timothy — who has been described as May’s ‘political’ brain — penned a blog for Conservative Home titled: ‘The Government is selling our national security to China’. In this, he claimed that — under Cameron — the government ‘seems intent on ignoring the evidence and presumably the advice of the security and intelligence agencies’.
As well as raising concerns about human rights abuses in China, Timothy suggested that the Chinese could have ulterior motives and ‘build weaknesses into computer systems which will allow them to shut down Britain’s energy production at will’:
‘For those who believe that such an eventuality is unlikely, the Chinese National Nuclear Corporation – one of the state-owned companies involved in the plans for the British nuclear plants – says on its website that it is responsible not just for “increasing the value of state assets and developing the society” but the “building of national defence.” MI5 believes that “the intelligence services of…China…continue to work against UK interests at home and abroad.’
He goes on to say that it is ‘baffling’ that — in the light of security concerns — the British government have been so welcome to Chinese state-owned companies. Given that Timothy concludes ‘no amount of trade and investment should justify allowing a hostile state easy access to the country’s critical national infrastructure’, Mr S suspects the project looks less likely with every day that May is in power.

7) Nick Butler: Britain Can Find Opportunities Beyond Hinkley
Nick Butler

The wedding has been called off. The marquee had been put up, the champagne was laid out, some of the guests had flown in — but then, at the very last minute, the unhappy couple decided that they could not live together after all.
That summarises all too accurately what happened last week as the board of the French power utility EDF approved, albeit by a very thin majority, an £18bn investment in the long-delayed nuclear plant at Hinkley Point, only to find it had been abandoned at the altar. Two hours after the EDF announcement, the UK government decided to hold another review of the plan, knowing full well that a celebration had been planned for the following day.
What happens now? It is hard to see how the wedding can be rearranged. There can be only two reasons for the review. First, the government is unhappy with the price that had been provisionally agreed. Second, that a new administration in Downing Street dislikes the idea that the Chinese as investors in the Hinkley project should be given the right to operate their own nuclear station at Bradwell in Essex.
The government has good reason to be unhappy on both counts. The problem is that changing the terms on either could pose a mortal threat to the project. If the EDF board was nervous at the viability of a deal based on a price of £92.50 for each megawatt hour of electricity produced, it is hardly likely to warm to anything less. The majority vote of 10 to 7 in favour could easily be reversed.
It is hard to find many people within EDF who really believe in the project. The company has huge problems and does not need another. Unsurprisingly, EDF’s share price rose by 10 per cent within minutes once the prospect that Hinkley might not proceed became ­evident. [...]
For the UK government, it is essential to ensure the electricity that Hinkley was supposed to provide can be replaced from other sources. This is not impossible, but will require a degree of planning not evident in UK energy policy in recent years.
There are potentially lower-cost nuclear providers whose projects can now be accelerated. Money, rather than technology, is the biggest challenge. If the government wants new nuclear as part of the energy mix, there is a strong case for using its own credit rather than relying on costly private financial options. Thirty-year money is readily available at very attractive rates to the right borrower.
An alternative source of power is natural gas, which is plentiful and cheap. Secure long-term supplies could be signed up quickly and could also be used to close down coal-fired power stations more quickly than planned. New gas-fired power stations will be needed and the key step is the establishment of a viable set of “capacity payments” to ensure the investment is made.

The London-based Global Warming Policy Forum is a world leading think tank on global warming policy issues. The GWPF newsletter is prepared by Director Dr Benny Peiser - for more information, please visit the website at www.thegwpf.com.

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