United Kingdom

United Kingdom

Astonishing arrogance

Wind is a marginal source of power and only recently have governments got serious about clean energy policy. But it's quite another thing for servants of the people to admit that renewables had barely crossed their minds when laying down market rules -- and then refuse to listen to good sense while pursuing a course that at best is only a partial solution to part of a major problem and at worse will muddle the market still further. That is what is happening in Britain with the New Electricity Trading Arrangements.

It's one thing to completely forget about renewables when shaping electricity market regulation. Wind is a marginal source of power and only recently have governments got serious about clean energy policy. But it's quite another thing for servants of the people to tacitly admit that renewables had barely crossed their minds when laying down market rules -- and then stubbornly refuse to listen to good sense while pursuing a course that at best is only a partial solution to part of a major problem and at worse will muddle the market still further. That is what is happening in Britain.

As introduced last year, the New Electricity Trading Arrangements (NETA) add an artificial levy to the cost of wind power which is likely to price it out of the market (pages 42-45). These trading arrangements, note, are supposed to level the market for all the generating technologies by fairly spreading the cost of balancing supply and demand. Since electricity cannot be stored in a warehouse, such rules are a necessary complication of competitive markets, which unbundle the businesses of supply and generation and remove centralised command and control. But in the brave new world of competition, some generators are being treated more fairly than others.

The problem is a global one faced by all competitive power markets. In the United States a more rational approach to dealing with it is being taken than in the UK (page 40). Regulators are considering simple and effective solutions aimed at tackling the root of the issue, rather than treating wind as an errant growth to be cut back and tied up in expensive bundles, as is happening in Britain. Wind power cannot fairly partake in a market which requires accurate forecasts of exact amounts of electricity delivery at given times throughout the day, with penalties for non compliance. Forecasting wind strengths is not an exact science.

Market rules that ignore this fact also ignore government policy directed at increasing the share of renewables in power supply. For that reason alone government representatives should be sharply reminding regulators of their statutory obligations, not sitting on the sidelines as aloof observers. Quite where the statutory obligation lies with Britain's energy regulator, Ofgem, on the environment is a decidedly grey area. But there can be no mistaking the pro-environment aims of Prime Minister Tony Blair. For Ofgem to ignore these and high handedly decide that wind shall remain the unfortunate victim of a flawed system, worth no more effort than a tweak to the rules which will have little effect, is an astonishing display of arrogance by people on public payrolls. Introducing measures to encourage "consolidation" of power fed into NETA by small generators, the route proposed by Ofgem, does not solve the problem. It does add further to the costs of a group of already hard hit market players -- the group Blair wants to see flourish.

Ofgem would no doubt retort that its remit is to protect consumers. Exempting small generators from shouldering their share of a power system's running costs would be tantamount to giving them a free ride. This argument, however, fails on two crucial points. First, the costs that Ofgem says wind power must pay for are, in fact, virtually non existent. Second, by structuring NETA as if the cost of having small generators on the system is 20-30 times greater than it actually is, Ofgem is pushing up not only the price of wind power, but the price of all electricity -- and the level of polluting emissions to boot. NETA wants all retailers to individually balance supply and demand. This has led to a steady build-up of spinning reserve to levels greater than needed to keep the national power system in balance. The cost of this spinning reserve is being passed onto consumers, along with a deal of unnecessary pollution and its associated cost.

A hypochondriac's symptoms

By pursuing the "consolidation" route so wholeheartedly, in the belief that it is the only way small generators should compete with large generators, Ofgem is demonstrating it has yet to really understand the central issues at stake. Consolidation is a partial cure for an overly fragmented market structure -- an ill caused by NETA's dogmatic pursuit of apportioning costs that are no more real than a hypochondriac's symptoms.

There are other routes. Germany has a centralised imbalance market, a concept which is among the solutions being looked at in the United States, along with that of a "single balancing price." It is this solution which might well fit best with the UK's trading arrangements. Last month the single balancing price was being championed in England by a series of critics of NETA, the wind lobby among them. Under NETA, the difference between the high price of buying in electricity to make up a shortfall in promised supply, and the low price of selling excess electricity, is the root cause of its ills. For wind power, which can't meet an exact delivery schedule, a single price makes far more sense. It also removes the stimulus to schedule excessive spinning reserve.

There is still room for manoeuvre. As Ofgem is so proud of saying, a key feature of NETA is the ability to change it -- unlike the former power pool system. Up to last month, NETA was into its 65th modification. To effect change, however, will require government intervention -- and a stop to the acceptance that wind power will cost the consumer an arm and a leg. The balancing ball now rests firmly in the court of officials at the trade and industry department. It's time to make Ofgem improve its act.

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