UK nuclear madness

Always remember what we said here a very long time ago: the whole point of France's nuclear policy is to get other nations to underwrite their astronomical nuclear liabilities.

This is precisely à propos of Mr W's prompting BTL here (he'll kindly correct any details that need correcting) ...

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The Hinkley Point C / Sizewell C story so far:

When EDF (together with Centrica & later still the Chinese) acquired the old British Energy in 2008, they were immediately set on building more of their EPR design of nukes in the UK: HPC was nominated to be the first.  Recall that until after the 2005 GE, Blair was set against a nuke revival which he'd believed to be electoral anathema: but various voices** persuaded him it was a Good Idea.   EnSec at the time was of course ... Ed Miliband.  EDF had the effrontery to announce an HPC start-up date of 2017, and that it wouldn't require a penny-piece of subsidy - the latter line being official government policy up to and including the awful Chris Huhne (remember him?)  

Next milestone event was Fukushima 2011 which, to be fair, was outright force majeure and caused significant mods to be made to the design of the structure in which the EPR reactor would be housed.  OK, so the costs went up as a consequence.  But that was the last externality that EDF can truly be excused of: covid might just also creep in to the reckoning, but not inflation, their other bleat.

During the regime of Ed Davey - to be fair, egged on by that git George Osborne - suddenly EDF was going to get subsidised.  We have written about the awful HPC CfD contract many times here.  It has only one saving grace, on paper at least: project cost overruns are solely for the account of EDF / the Chinese (who've now buggered off) / Centrica.  But given the outrageous one-way changes subsequently made to the CfD in EDF's favour, at EDF's demand, even this is of little comfort.  The project overruns are horrendous; and we know EDF will hold a gun to HMG's head for outright cash subventions at some point.  (Personally I suspect this has already happened, disguised as SZC payments, see below.)

To repeat: once the Fukushima design changes were made, everything subsequently is down to EDF's monstrous incompetence.  EDF hints that UK regulators have kept tinkering unreasonably with new design demands, but remember: the CfD states that unless a new regulation could have reasonably been foreseen by EDF, the latter is indemnified against extra costs arising.  So we can put 'costly regulatory tinkering' out of our minds.

Fast-forward to SZC

EDF, of course, realised even before the ink was on the CfD (which they only signed because they thought Brexit would scupper the project altogether) that they couldn't carry out SZC on the terms explicitly for SZC itself that are actually contained in the HPC contract (i.e. for SZC as a put-option for EDF).  So they carefully played a lobbying game resulting in Boris agreeing to finance SZC on a US-style 'rate base' footing (i.e. underwritten directly by taxpayers) - and then, got HMG to stump up hard cash: a billion here, a couple more there ...  now the cash commitment has hit £11 bn of taxpayer money, rather than the usual 'stick it all on the electricity bill'.  AND - amazingly - although EDF has yet to take FID on SZC, the new reactor is already under construction in France, paid for by us.  FFS !  Talk about "too big to fail" ...

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So now we loop back to the very first line of this post.  Also, we should stew in the details of how badly in trouble HPC is, and how cash-strapped and liability-riddled EDF is in general; how much HMG needs French cooperation on the Boats issue; and the perennial suspicion the whole civil nuclear programme is there to underpin the military nukes ... and you have a recipe for an ongoing haemorrhage of taxpayers' cash that starts to look seriously injurious.  And in the middle of this, Miliband thinks he can get electricity bills down!

An appalling tale - egregious even by the standards of HMG cockups and nuclear age skullduggery.  I have nothing against nukes in principle: but in practice they just never add up.  If we wanted an SZC, let it be remembered that by far our best-performing nuke has been SZB.  We should have 'simply' (hah!) built an updated SZB. 

ND  

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** including one G.Brown, brother of whom worked for, errrr, EDF

General - if you follow the tags, you'll find loads more C@W posts on these topics.

The eternal attraction of cushy deals + the easy life

"Nicolas de Warren, president of the French Union of industrial companies with high consumers of electricity, calls on the government to appoint a mediator between the Union - which wants a deal for for cheap electricity - and stated-owned EDF.  "EDF appears to be in a form of denial of the current situation and the very serious loss of competitiveness suffered by French industry [...]. If we do not reach a conclusion quickly, [there are] risks of plant closures and the relocation of production," he warns. According to him, the main point of divergence between EDF and industrial companies is the methodology for defining the cost of nuclear production."

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I've recounted the following story before.  My commercial career was spent in companies that expected to make their own ways in the world, & never looked for subsidies[1].  One day I found myself dealing with ICI (deceased), that blue-chip paragon of British Industry, where I discovered their attitude was "why do a hard day's work when you can lobby government instead?"  Soon, I encountered more firms like that and, aside from initial revulsion, I realised there was an entire slice of the 'commercial' world with a 'business philosophy' I didn't know existed, and needed to understand.    

This entitled sense of "always look for the easy life, we deserve it" soon hit me again in a slightly different variation.  In the firm I was working for we had cannily acquired a long-ish term contract for purchasing gas at a deeply discounted price, from a seller for whom the gas was more-or-less an unwanted by-product.   It wasn't an outright distress sale - they were a perfectly viable going concern - but if they'd wanted to get top dollar for it, they'd have needed to set up, in a hurry, an entire new, specialised commercial department, which doesn't even sound easy and in practice would have been extremely difficult.  Getting shot of the whole lot in one go, for a price they found acceptable, was just fine by them.  The deep discount was the price they were willing to pay (- or rather, to receive).  To give a rough indication: if market price at the time was 100, we settled for 85.  A bloody good deal for us, and they were a willing seller.

Somehow, word of this deal got out (it always does).  So then I get a delegation of senior managers from big industrial companies based in the area where we'd be taking delivery of the gas (some for our own use, some for onward sale).  Their pitch was as follows (and I'm not making this up):

"Now look[2].  We all know you've bought a big slug of gas at a price of 40.  You've got to share this windfall with us.  We'll offer you 50.  You've a moral obligation to sell it to us."

Where they came up with '40' is anyone's guess.  I politely replied that their numbers were way off-beam: that we'd be delighted to sell them gas; and that they'd pay something based around market price[3], like anyone else.

"But whether it's 40 or 45, it costs you much less!  You must sell it to us at cost-plus.  What's 'market price' got to do with it?"  

Tempting as it was to give them a little lecture about how house prices have nothing to do with the cost of bricks, I decided it was best to draw the meeting to a close with as little emotion as possible.

Nothing changes.  I suppose you can argue that EDF, as a state-owned monopoly, is in a slightly different position.  But the attitude remains the same:  what's mine is mine, & what's yours is up for negotiation.  Now hand it over. 

ND

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[1] Sometimes they had subsidies almost thrust upon them, but that's a bit different. 

[2] They didn't quite add "you devious London ba-astards", but that was the tone.

[3] After several months when they'd calmed down, we did indeed do a deal for them.  It was at market price, minus half the transportation charges they'd been paying to get gas delivered through the grid.  Given that we could deliver direct, locally, this was the logical win-win arbitrage.  A perfectly good deal for them, as they ultimately recognised.  We got there in the end!  - shame we had to go a fraught round of SillyBuggers first.

Hinkley project: completely out of control

I think we all know the basic history of the Hinkley Point C nuclear power project here: initially talked of by EDF as being absolutely necessary for the UK power system by no later than 2017, they are now so far behind schedule they've even sought (and been granted, by the Tories) a waiver on the back-stop start-up date of 2035.  Taking the piss, or what?

They always plead changes in regulations** / covid / inflation / phase of the moon or whatever, but it's hard to obscure the facts of their basic incompetence, as manifest in, well, every one of their wretched EPR projects.  I could elaborate.  Now, it seems, they're passing round the hat for another £4bn.  Under the terms of the CfD, they pick up the tab for project over-runs - the only good thing about that contract.  Personally, I suspect the extra £5bn just granted them "for Sizewell C" - even before it reaches FID, FFS! - is also really a cash-bung to keep going with Hinkley.  Sizewell, you see, isn't going to be developed on the CfD model, it'll be 'rate-based' (to use the American term), i.e. nothing effectively reining back the costs: Taxpayer Will Pay.

I know nukes have their advocates, but surely that's only theoretical, wishing for hypothetical nukes that don't exist?  Or, someone will tell me we could have a S.Korean one that actually works.  Or indeed three, for the same price.

You just know it's also bound up with French 'cooperation' over the boat people.  Ah, diplomacy.  Thank Heaven the FCO is so good at what it does, eh?

ND

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**The CfD for Hinkley electricity indemnifies EDF against "unforeseeable" changes in regulation. 

The Sizewell C 'RAB' Abomination

A couple of weeks ago at Mr Wendland's prompting, I undertook to post on the putative Sizewell C contract, currently "under negotiation" with EDF and various financial parties.  I'd said it was worse than the Hinkley Point contract - hard to believe, but true.  We know it will be on a "Regulated Asset Base" footing, which has been used in the USA and elsewhere since time immemorial but in this SZC manifestation has some nasty new twists.  Other aspects are broadly known, but as with Hinkley, the final document will be secret, so there's always a limit as to what we'll get.  (There are aspects of Hinkley we only know because the EC published them.) 

Anyhow, I was duly working up a post; but this morning have been handsomely beaten to the punch by the redoubtable Citizens Advice in their response to a consultation.  Well, a very big hat-tip to them, and here's the link.  Adjusting for the fact that their language is naturally diplomatic, you can't do better than read this to get the full horror of what's being proposed.  It's only 16 pp - but if you're pushed for time, just the first 3 pages gives you the basics.

ND

Government introduces its stellar defence procurement skills to energy sector!

+ + UPDATED + +   - see below

Defence projects are the bane of the taxpayer's existence.  (Along with NHS IT projects, PPS procurement etc etc etc).  Astonishing delays, budget over-runs, faulty products - all followed by rinse-and-repeat with exactly the same contractors.  Learn nothing; repeat; and get the same results.  Never fails.

And now we have HMG's pathetic attempts to get a new generation of nukes up and running.  I say 'new', but the EPR is by now a pile of discredited and distinctly old crap.  And yet, conned by EDF, stitched up by George Osborne, bullied by Francois Hollande and betrayed by her own personal weakness of character, in 2016 Theresa May signed up for the Hinkley Point 'C' contract, the exact terms of which we may never learn: but we know enough to say they are awful.  All the optionality - and it's very great indeed - lies with EDF.  What's more, EDF knows that if it huffs and puffs and lies a bit more, it can get unilateral, favourable changes to this one-sided contract that are even further in its favour.  For example, not long ago it obtained a three-year relaxation to the back-stop date for start-up, from 2033 to 2036.  That's for a project it initially said would start up by year-end 2017! (sic)

So after this week's update from EDF, where are we now?  Start-up-date maybe 2031 or 2032 ... cost, well anyone's guess really, but wildly higher than any number floated before.  And this just days after HMG put around £2.5 bn cash (that's c.a.s.h., upfront, not just a high HPC-type electricity price) into Sizewell 'C', the next monstrous would-be product of EDF's nuclear fantasy.  The big difference with SZC being that, unlike HPC where EDF has to swallow the over-runs, with SZC the taxpayer will do that because EDF has no intention of taking on any construction risk at all.  And Boris signed up for that (not just May, then, who's an airbrained git).  

Did I say EDF has to swallow the over-runs on HPC?  Well, thus far, that's what the contract says and that's how it looks.  But, lo!  The contract doesn't commit them to finish the project at all !  They just don't get to sell that pre-priced electricity if they don't.

However, we can all picture the scene.  It is 2034.  HPC looks sort-of finished, but beneath those big domes and concrete silos, vital bits are not yet ready - and EDF knows full-well they ain't gonna be finished by 2036.  So there will be no juicy, HMG-underwritten, 35-year electricity contract.  They've been cap-in-hand to President Le Pen for more money, but she's sent them away empty-handed.

They know what to do.  "Get Starmer in here" they shout, and he's duly brought in to hear their story.  

"Look here, Starmer, we've run out of money.  But you need the electricity really badly, right?  This HPC delay, and the parallel delay at SZC, have already scuppered your energy strategy, which assumed that BOTH plants would be up and running by 2030! (aside: hah!  that Ed Miliband, eh?  Sucker!!)  You've had three years of patchy blackouts already.  So: we need another, errr, let's say £4bn - well, make it £5bn, what's that between friends, hmm?  Now.  Cash.  And then - we PROMISE - we'll be up and running by Xmas 2037, just, errr, 20 years late.   And we'll have another little meeting - about SZC - next month.  Whadya say?  You don't really want to leave this thing standing here like a radioactive white elephant, do you??"

Watch and wait...

ND

UPDATE     ... but you won't be waiting for long!  See this story - published after I wrote the above post.  You (maybe) read it here first

Winter draws on ...

 ... and we are in better shape than might have been the case, all things being considered.  Don Cox noted BTL that the Rough gas storage facility has started up again** - a very curious, nay, fishy 'miracle', as we've noted before - albeit at 20% of its former capacity: but every little helps.  Several UK coal plants have been revived, to be on standby in case the gas runs out and the wind doesn't blow.  And the Germans have moved mountains to get floating LNG receiving import facilities online, again with the caveat that the volumes won't be as great as all that.  They nearly made their ambitious gas storage inventory targets before going into winter, too.  They, also, have been busily reviving coal, and indeed lignite plants for reserve duty.  And they've done what I and others thought was probably not possible, in squeezing a few extra months out of the nukes that were set for closure.  This wasn't possible with Hinkley Point B in this country, despite government pleading and financial blandishments: HPB was closing (and has indeed closed, as of August) due to age and infirmity, whereas the German nukes were closing by political fiat.  That doesn't mean Scholtz will get any more months out of them next year, because the supporting infrastructure has been shutting down, too.

Several other EU nations, notably the Spanish, have been preparing very well, too.

On the supply-side downside, the French are again falling hugely short.  Their nuke fleet was staggering back to its feet for winter in a partial way, after extensive safety-related closures, only to be hit by a wave of strikes.  Well, there you go, Macron: it's a continuation of massive imports and the highest (wholesale) electricity prices in Europe for you, then. 

This is also proving very costly for Germany, too - but I always said nobody should bet against their ability to put their shoulders to the wheel.  You have to laugh when Macron throws a strop when it's announced by Germany that they are budgeting EUR 200 bn for their energy measures.  Merde! That will distort the European energy market!  Well what did he think:  the richest nation in Europe would volunteer to freeze, out of fellow-feeling for the Frogs?

Talking of distorting the market, France is also desperately trying to get the EC to introduce a "cap on wholesale gas prices" - whatever that might conceivably mean in a truly global gas market.  I won't bore everyone with my endless refrain that most European politicians don't understand how markets work.  I used to finger the Germans most specifically for this, but it now looks as though most of the top players in Scholz's government have taken some rapid lessons on this topic since February, and know the score a little better.  Tough titty, Macron - but you had it coming.

I only hope the new government here looks him squarely in the eye and tells him he can forget any hopes for Sizewell C he might have nurtured on behalf of the French équipe nucléaire; not on the terms he had in mind, anyhow.  We've had enough of PMs bowing the knee to EDF in these matters.

Hold tight for the coming winter.

ND

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** Anon asked:  anything to do with the cost of gas futures at the mo? And the implications for Russia / Middle East LPG. 

The forward market is in very strong contango at the moment (having been for months in backwardation, which some theorists say is impossible for a commodity like gas).  This betokens market sentiment that for right now (i.e. until really cold weather strikes) Europe is looking OK for gas supply - a function of all those efforts noted above - and that winter 2023-24 now looks to be the big problem, despite some some idiot political pundits saying the coming winter will be the last we need to worry about.  Fully-laden LNG tankers are stacked up off the Atlantic coasts of UK / France / Spain, effectively acting as floating storage.  So yes, Anon, Rough (and UK plc) is in a position to benefit from this current situation.  Rough, as you prob know, is 'seasonal' storage, i.e. designed only really for a single annual cycle of injection and withdrawal; and although there's plenty of volatility across the whole forward curve (which benefits such facilities) it pales into insignificance compared to the vol in the spot and short-dated markets, which benefits facilities with much shorter cycles (e.g. 1 or 2 months).  I hope (but rather doubt) that HMG allowed Centrica to get on with their 'Rough miracle' without public money; because Centrica has played a pretty shifty game on this. 

Whilst on the subject of storage economics: as you'd expect, owners of grid-scale batteries, limited though they are in capability, have been making a fortune for more than a year now: ditto owners of gas-fired peaking plants.  Vol is the main play in town, now that simply going long isn't a one-way bet any more.  For example, the current gas market contango will reverse in a matter of days if a Beast from the East hits (energy beast, that is - not Putin again).

Incidentally, the personal burnout in energy traders has to be seen to be believed.  Initially they were just making fortunes; but now liquidity and credit issues are bearing down on them, and they can drop $10m on a cargo of LNG as easily as make it, in the touch of a button.  Hairy times. 

UK Nukes, part 3: FFS, why?

OK, so HMG is hell-bent on Sizewell C, to the extent that they are kissing the Frenchman's arse to get it done.  Since last week's announcement there has only been bad news from France, on Flamanville and the operations of the existing French fleet.  This follows upon well over a decade of nothing but bad news on the EPRs; so why SZC will be any better, no man can tell.  If ministers had half a wit, but were still that determined to go ahead, they'd be striking a much harder bargain than appears to be the case - and experience tells us the actual bargain will be even worse than anything that's ever made public prior to the inevitable public inquiry that will follow when everything goes pear-shaped.   (For a modest fee, I offer to act as commercial consultant in the matter.) 

Even if were to be concluded on intelligent commercial terms, literally nobody would dare hazard a guess as to when this chunky bit of capacity would come on line.  That's pretty dreadful for long-term planning in a perilously-balanced sector of crucial national importance; and gives the lie to the "only nukes deliver predictable baseload electricity at scale" line, which is about all EDF has to offer.

The question therefore arises: why in the name of Hell is HMG so bent on SZC?

Here are three answers:

1. Keynesian job creation.   That's the explanation I have always favoured.  You can see the attraction of HPC, for example: a project creating thousands of fairly decent civil engineering jobs (albeit the workforce holed up in portakabin hotels in the middle of Zummerset is not a particularly happy body of men) that drags on for year after year, being paid for by the French & Chinese, at their ultimate risk.  RAB-financed SZC, though, looks to be under-written by HMG and paid for concurrently on electricity bills - a rather different equation.
2. Support for the UK nuclear deterrent.  They bang on about this at great length at SPRU (Sussex University), essentially suggesting that the civil nuke programme is tacitly subsidising the military.  Maybe: it's not something I've ever studied: and I'm instinctively suspicious of deep-state conspiracy theories.  But the logic is obvious enough: you can take a look for yourself.  
3. A new one:  getting HMG off the legal hook.  So I now add this 3rd explanation: HMG can use SZC as something rather concrete** they can adduce in front of the judge as evidence they are actually doing something - however crass.  I've written here before about the stupidity of legislating for targets like Net Zero 2050 by making them "legally binding".  It simply invites court actions by the Green Blob, and indeed the courts gratify it by entertaining them, and sometimes finding in their favour.  Just last week, the High Court agreed that HMG's NZ2050 strategy was too woolly and has given it a few months to sort it out (plus costs for the Blob).  This is of course bloody ridiculous, but what does anyone expect?

What do readers think?  What other explanations might there be?  Is anyone convinced by SPRU's military hypothesis?  

Over to you.

ND  

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** and I do mean concrete - unbelievable amounts of the stuff, even more than at HPC: 40% of the new plot they'll be building on at the northern end of the site is bog, with very poor and deep underlying bedrock.   EDF screwed up the geology at Hinkley, so the scope for real and very costly nonsense at SZC is huge. 

New nukes in the UK - part 2

So EDF won't (and, by itself, can't: it's bankrupt) take construction risk on nukes any more (Part 1).  But it needs to parlay its supposed expertise into anything that can defray its appalling future liabilities and monetise its sunk costs - at other nations' expense.  Hence, its relentless pressure on HMG, (a) to proceed with Sizewell C, and (b) do so on a completely different financial footing to that of Hinkley Point C.  Oh, and (c) HMG must put its hand in its pocket right away to fund the ongoing engineering, because "EDF has almost run out of money".  And HMG has agreed.

The new finance basis will be "Ratable Asset Base", whereby approved developments call on guaranteed periodic payments from, well, taxpayers ultimately**, during the construction phase.  The logic is, this reduces risk to the point where cheap institutional finance will swing in, attracted by the state-backed cash-flow stream.  By "reducing the cost of capital significantly" vs the "commercial" margin EDF claims it needs to charge in return for taking construction and cash-flow risk on (e.g.) HPC, the overall cost - which was always to be borne by UK bill-payers anyway, if over many more decades - is brought down by a noticeable amount.  In capital intensive sectors, attracting the least-cost capital has always been vital (true).  As a throwaway line it is added that RAB is how loads of big infrastructure projects are financed in the UK and elsewhere (true): and of course almost the whole of the US utility sector has been built on this basis (also true).  How heartening!

Heartening for the French, maybe, but open to many heavyweight challenges.

• EDF, having just been re-nationalised, is now essentially the French state, which can raise money (almost) as cheaply as any western nation.  If they are so strategically keen on SZC, let 'em get on with it.  They already have a put option for the project, complete with UK-guaranteed electricity price.
• Yes, RAB is used in big infra projects.  The difference is, those are traditionally based on conventional technology, proven construction methods, and low strategic risk.  SZC?  Pull the other one: it comes from a stable with truly appalling previous in these matters.  To trust them to get their act together on this one, in the face of all history, is some kind of madness.  RAB as 'conventionally' practised is not at all suitable for nukes: ask the Americans, who've tried it.
• In particular, tax-payers are open to the following scenario (as HMG freely admits).  SZC construction gets underway, and taxpayers make regular payments, year by year.  For the first N years, the work is all civil engineering anyway (HPC is still in the civils phase, five years after commencement), and the construction risks are moderate (though by no means nil) - so the chances are, the payments will properly fall due, more or less.   After several billions of this and a monstrous scar inflicted on the East Anglian countryside + precarious heritage coastline, EDF says that's it, we're stuck - we need a lot more £££, in order to finish the project.++  HMG says 'no'.  EDF declares its project affiliate bust, and says, maintenant mes braves, whatchagonnado?  There is no answer to this question, short of having the French government guarantee construction which, naturellement, it refuses to do: that's the whole point!  So the UK taxpayer bears the ultimate risks of construction, delay and budget overrun, as part of its exposure to (it bears repeating) an organisation that is legendary for its grotesque, world-scale failures in all these regards.  
• It's not at all clear big institutional money is looking for the kind of home represented by SZC.  Nuclear risk lies at the heart of this, despite attempts to dress up the financial proposition as just another annuity stream.  In particular, everyone knows the Big Contract between HMG and EDF will be secret.  So the institutions will also ask for secret protections - and they won't take their sharpest pencils to the rates they charge, either - if indeed they are interested at all. 

This is just the headlines of the RAB stuff:  I'm not even talking about the massive strategic issues of (e.g.) China having a 20% stake that needs squaring away; and whether a large chunk of deeply uncertain nuclear capacity commencing probably 10 / 11 / 12 years from now (who'll ever have a firm handle on that?) can contribute meaningfully to a national electricity requirement which places an ever greater premium on reliability, flexibility, and certainty in both these vital dimensions.   Still less am I addressing the plethora of SZC- and East Anglia-specific environmental issues involved, which themselves are multi-dimensional and acute.

And yet, HMG ploughs on regardless.  As we said at the end of Part 1:  FFS, why?   Some suggestions towards an answer in Part 3 ...

ND

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** I say 'ultimately taxpayers' but in the first instance it will probably be electricity bill-payers.  Not a huge amount of difference, in practice. 

++ Ample proof of EDF's approach to contractual obligations comes very recently from this FT revelation: 

EDF is in negotiations with the British government over penalty clauses in [the] agreement struck in 2013 to finance the building of [HPC]. The subsidy deal guarantees EDF a price [for] electricity it produces for the first 35 years of its life ... Penalty clauses ... reduce the 35-year term if Hinkey is not generating electricity by May 2029 [by] one year of guaranteed payments for every year of delay up to 2033. If the delays extended beyond that date the government has the option to terminate the subsidy contract. EDF ... has repeatedly pushed back its completion date while costs have spiralled. In the latest setback, EDF warned ... that the first of Hinkley’s two reactors would not be completed until June 2027 .... [and] the company cautioned that there was the possibility of a further 15-month delay to September 2028, adding that date could slip again ...

New nukes in the UK: Sizewell, RAB etc (part 1)

For well over fifteen years here we've periodically asserted that France has a critical strategic objective of getting other nations, not least the UK, to pay for its monstrous nuclear liabilities.   As soon as EDF came away with Osborne/May's outrageously generous gold-plated deal for Hinkley Point C, they started lobbying for the next one, Sizewell C (CGI above); and - significantly - that this should be on a different contractual basis.  To remind ourselves of the salient details of HPC, bad and good:

• there is no HPC completion date!  In fact, EDF isn't obliged, contractually, to build it at all!  
• ... but if they don't, all the ever-increasing sunk costs are for the account of the project (80% EDF, 20% the Chinese)
• any problems encountered along the way that are down to HMG, and most specifically any more-than-trivial changes in nuke-related regulations, are for the account of HMG (even if, for example, another nuke accident happens somewhere in the world that inevitably means every government everywhere will insist on a new type of widget being fitted on all nukes everywhere).  In other words, EDF - arguably the world's leading nuke institution - refuses to accept fundamental nuke-risk
• the electricity sales contract strike-price (technically a CfD) of £92.50/MWh, was base-year 2012, indexed to inflation (it is now well over £100).  At the time that was some three times higher than prevailing wholesale baseload electricity, although obviously it looks a lot better right now, as our good friend Mr Wendland noted BTL the other day
• the HPC deal gave EDF a put option on SZC at £89.50 (indexed) (which would then apply to them both); said (by EDF) to be a good deal at the time, since "of course" SZC would be cheaper to build than HPC, being able to call on all the HPC experience and the established construction labour force etc.
• any problems encountered along the way that are NOT down to HMG are for the project's account
• certain very mild contractual disadvantages (I won't call them penalties because they are trivial) kick in if EDF isn't finished by 2029; and the whole contract is cancelled in they aren't finished by 2035.   This for a plant that EDF told us in 2008 would be operational by Xmas 2017! 

But, pleased though they were to get this deal inked in 2016, this wasn't good enough for EDF - a company that is technically bankrupt, although as a recently fully-re-nationalised French state entity, this might not be as fatal as it would be for most companies being relied upon to undertake huge and critical enterprises.  Why not good enough?  Because EDF retains HPC construction risk, and is only remunerated (if at all ..! - see 2035 above) via electricity sales in due course, albeit at a price underwritten by HMG.

Construction risk?  Well, needless to say, at HPC there have been many problems along the way.  Obviously Covid wasn't expected - although hey, any firm undertaking projects with a construction period of more than a decade, and a lifespan of maybe a century, had better reckon on Shit Happening, no?  But Brexit happened before the contract was signed, so no sympathy there.  And likewise no sympathy for the many purely technical and design cock-ups perpetrated by EDF and its (mainly French) major contractors, e.g. getting the geology wrong on the bedrock at Hinkley, FFS.  So costs have been steady rising, and timetables steadily slipping.  Oh yes, there's construction risk aplenty.

So what about SZC?  Surely, as we've been assured by EDF ad nauseam, just as HPC was going to be a breeze, because of the prior experience obtained with EPRs at Flamanville (France) and Olkiluoto (Finland), so SZC in its turn would be an absolute shoe-in.  Hah!  All three European pre-SZC EPR projects have been fiascos; and the two EPRs built in China, apparently much more efficiently and on time / on budget, are in trouble already: one is shut down and the other on limited running, due to unresolved problems that the French nuke authorities are very troubled by.

And aside from the entire history of EPRs, there are SZC-specific reasons to believe it'll be more costly than HPC.  I won't bore you with the details, but every site is always different and SZC will bring all manner of new challenges, some of them pretty fundamental.  Nothing that engineers can't solve, mind - at a cost ...

SO.  We can easily see why EDF refuses to bear construction risk at SZC.  They are "even more bankrupt" today than they were in 2016.  In the next post we'll look at how HMG proposes to steam ahead with SZC anyway - and we'll ask the obvious question:  FFS, why?

ND 

Energy Supply Carnage: Last Man Standing?

A very traditional business strategy, in sectors where for some reason corporate survival is by no means assured, is "last man standing". Just hang on while competitors go under or vacate the field, in the hope of cleaning up when there's nobody else left and the benefits of monopoly can be reaped.  Well, for a few years at least - until the competition authorities eventually forget how worried they once were.

The UK energy residential supply sector has offered the prospect of this for many years.  The comfortable days of the 'Big 6' - when the barriers to entry were so high that new entrants rarely stayed the course - were always likely to be under threat at some point, with chaotic fallout.  So what were those barriers?  

• Competence: gas may be a relatively easy business to participate in, but electricity is fiendishly difficult, in several dimensions, as many an apparently competent energy player has found to their cost (Shell, BP, Total, Statoil, Conoco, ...)
• Branding & trust (a.k.a. inertia): people were fairly well accustomed to, and comfortable with, buying from "the electricity board" (not realising the concept was otiose from the mid 90's, with the restructuring of the industry and the separation of the supply side from "the wires") 
• Low margins:  the business might have been comfortable for long-term incumbents, but fortunes were not readily made - indeed, once the market settled down after the initial upheavals of sector restructuring, there was always at least one of the Big 6 thinking seriously about jacking it in
• Capital adequacy:  at very least, in order to be able to hedge the commodity price risk (a very necessary requirement in circumstances of volatile wholesale prices), a basic minimum credit standing is required

This all speaks to energy supply being the preserve of relatively large, competent, well-financed companies.  Was a market of "only" six suppliers necessarily non-competitive?  There are many other sectors where six, competing properly, would be considered pretty good.  To be fair, it can be argued that the Big 6 'competed' in a rather nominal fashion, and did little actively to shake up the significant degree of customer inertia: but the acid test - the trajectory of prices for end-consumers - was broadly favourable, and had been ever since the market opened up.

The picture began to change about a decade ago when a number of aspects came together to facilitate participation by players with quite different business models.

• government and regulators were very keen indeed on seeing new entrants, and proved willing to ignore the kind of arrant dross that was applying for supply licences (interspersed with a handful of genuine and properly-financed innovators).
• for the same "reason" (presumably), Ofgem simply hasn't enforced its own rules on smaller players, e.g. the requirement to provide a telephone call-centre service to customers. 
• one of the major barriers to entry - the need for complex systems (again, particularly for the electricity side) ceased to be an issue with the advent of decent-quality off-the-peg supplier software packages at reasonable prices. 
• wholesale prices: they started on a multi-year trend of slowly falling.  This facilitates the "Northern Rock" trick: sell long (e.g. one-year contracts at fixed price), buy short (on the spot market, where because of the falling price-trend, it'll be cheaper than when you made the sale).  Buying spot requires minimal credit; which is, errrr, handy for companies that have almost none...
• the "flipping" model: price comparison firms that offered to switch customers "automatically" (i.e. passively, on the customer's part) onto the cheapest available tariff.  A supplier with next-to-zero marketing capabilty could thereby "buy" as much market share as it wanted, simply by pitching its prices accordingly.
• some of the social-policy costs levied on suppliers only apply to the larger players.

This helps explain how an inadequate company might be able to get into the energy supply game.  But why would they want to?  There is no single motive, but alongside some perfectly creditable intentions, others of them are very bad.

• genuine, albeit speculative profitability of the "Northern Rock" model - for just as long as wholesale prices continue to fall AND the supplier isn't going to the trouble and expense of hedging against the possibility of rising prices (not least, because it doesn't have the credit standing to do so! - see above).
• positive cashflow: notwithstanding various unavoidable start-up costs and system overheads, with a customer base once established the supplier is able to get ahead of supply-cost outgoings via (a) direct debit charges and "estimate"-based payments, i.e. borrowing its customers money; and (b) collecting, as it is required to do, ever-increasing "green" levies, which do not need forwarding to the relevant authorities until several months later (if indeed they are ever paid out at all) - another cheap source of "finance". 
• ease of syphoning off this cash: small players with no public profile nor recognisable corporate governance can readily and quietly play tricks like borrowing from Related Parties at outrageously high interest rates, "investing" in Related Party ventures, and paying Related Parties for extremely costly "software services" and "consultancy".  How do I know about this stuff?  Because sometimes it's as plain as day in their annual reports!  (That's for the supply firms that aren't so small, they don't have to file full accounts ...)  Where were the authorities in all this?  Evidently, neither Ofgem nor government could give a stuff.    

Until now, of course, when they are dropping like flies.  In the meantime, the Big 6 has ceased to exist!  SSE and National Power have exited: we are left with E.on (German), Scottish Power (Iberdola of Spain), good old Centrica, and of course EDF, probably only still in the game to give it political cover for its UK nuclear machinations.  True, Ovo and Octopus have stepped up to the plate: but then, so had Bulb - until last month ...

At least some of the current survivors will be hedged through to April-ish, when the prevailing energy price cap is scheduled to end (see earlier posts).  Of course, nobody will be making any positive plans whatever until the government has shown its hand on replacing the cap.  If it gets this wrong, chaos ensues, probably followed by de facto nationalisation in some shape or other (like the banks in 2009). 

But there must at least be the chance that Centrica's unwavering 25-year strategy of positioning itself to be the Last Man Standing finally pays off.  And a Happy New Year to all concerned!

ND

To Whom the (Energy) Spoils? A Genuine Puzzle

There's an interesting dynamic rumbling in the energy sector and associated financial elements, the dialectic of which is as follows:

1. We can't use fossil fuels in future, oh dear me no.  Perish the thought.  Put my pension into something else.  Let me believe that the ambulance runs on pixie-dust and electricity comes entirely from wind.  Don't allow any more production of North Sea oil & gas.  Make Shell's life hell if it even thinks about such a thing.  I might even start to feel very strongly about all this.
2. Actual disinvestment starts apace: actual pension funds switch out of fossil fuels by the billion.  For the BPs and Shells, the Centricas and even the EDFs (see below), the cost of capital starts to rise.  They actually sell some of, maybe all of, their hydrocarbon-related assets.  
3. But in the world outside of all those tightly-shut eyes & heads-in-sand, the ambulance still runs on diesel and electricity is still generated using fossil fuels.  
4. In fact, the market for fossil fuels right now is pretty tight (see previous post) AND, what with all this wind in the power fleet & other kinds of uncertainty, prices are exceptionally volatile.  They are likely to stay that way, even if in absolute terms they subside from today's level.
5. Some people are making a Great Deal of Money from this - right now.  And the scope for a great deal more to be made in the coming years is huge: particularly via assets (and managements) that are responsive enough to make hay from all that volatility - e.g. efficient & flexible gas-fired power units.  Even just the continued supply of simple gas to western consumers (whether the green-woke like it or not) has a lot of mileage still in it (at least two decades, I'm guessing).
6. But the 'traditional players' seem to feel themselves unable to make the usual response to an economic reductio ad absurdum, in terms of investment (long term) and arbitrage (short term) to take advantage of the mispriced assets etc.  

For present purposes, let's put aside the amusing cognitive dissonance that ought to be (though probably isn't) increasingly wreaking havoc with all those who like to mouth "we don't need fossil fuels" but still like to be warm etc etc.  It's the economic & commercial dissonance I'm interested in.

We can easily spot little Volodya Putin and other traditional upstream players making pots of money out of the situation.  They probably hope to make yet more.  China, though essentially an energy importer right now, will probably benefit in relative terms (that is, relative to the West) by being untroubled by 'green' scruples.  All this is easy stuff.  

But what of other business models?  Can 'western' firms somehow thrive in this crazy market?

Exxon:  it's been clear to me for a long time that Exxon, that ailing, blinkered and sluggish beast, is basically hoping it can quietly get on with not changing much at all, and not go down the costly, guilt-stricken route of Shell et al.  But is there anywhere to hide for a US stock-exchange listed firm of Exxon's prominence?  Can any others of its kind, smaller and perhaps less exposed to the limelight, pull off that trick?  

The big commodities players:  there are plenty of these big players - you all know who I mean, but slander is slander - who, if they have any scruples whatsoever, well I've never noticed.  (Ditto their shareholders: well they couldn't, could they?)   Some of these cos are indeed buying up fossil fuel assets: the energy version of money launderers and sanctions-busters.  Are the unscrupulous to be the big western beneficiaries?

A.N.Other Corp: this is where it gets really interesting.  Case study:  EIG Partners - ("Over the past decade, EIG has thoughtfully developed a quiet yet purposeful commitment to integration of ESG factors throughout our business")  - whose website homepage would encourage you to believe they are essentially investors in wind farms and solar.  But lo!  Earlier this year they quietly bought West Burton B, one of the UK's biggest, most modern and efficient gas-fired power plants, from EDF which is busily trying to reposition itself as 100% green.  And what magnificent timing: EIG has already made an absolute ton of money at WBB from the extreme market conditions of the second half of 2021.  

Here's another example: Vitol, who've also bought UK gas assets recently - this time from none other than Drax (who have problems of their own) -  and are likewise minting it this winter.  Here's how they brand this venture ('VPI'):  "We are part of the UK’s pathway to Net Zero, complementing the increase in renewable energy to power homes and businesses. Our portfolio includes hydrogen and carbon capture projects to help lower emissions and develop a future for decarbonised, dispatchable and flexible generation in the UK."  Oh and, errrr, gas-fired power plants.

So: is it all simply about greenwashing?   Maybe you just need the right "communications" firm in tow.  Good old capitalism at work:  assets change hands from those who don't know what to do with them, to those who do.  At distressed prices, if the former are panicky enough ...

Well, maybe.  I think Shell was hoping they could pull this one off, too.  Do we think it's all about shuffling the western-owned assets into less prominent, more media-savvy hands?  Or is it destined to be yet another massive transfer of wealth from the naive & decadent West to the hard-nosed East?   

ND

With dumb energy ministers like this ...

Minister says price cap not to blame for supplier failures:   Suppliers which have gone out of business as a result of the recent escalation in gas costs cannot blame the price cap because they should have been adequately hedged, the energy minister has argued. Appearing at the House of Lords Industry and Regulators Committee, Greg Hands said suppliers who were properly prepared have “clearly been in a much better position to ride out the big increases in global gas prices.”

OK, we haven't yet seen the full transcript and maybe Hands said something more nuanced later on.  Maybe ...

Here's the thing, Greg.  

(a) Just hedging volatile wholesale prices alone is hard enough for very small suppliers that have been stupid enough to sell forward at fixed price - which is of course what a very large % of residential gas and electricity customers (the ones that are active in the buying market) expect from their supplier.  

Why?  Because in order for the supplier to fix its own prices in the wholesale markets, effectively entering a forward contract (i.e. a financial derivative), it is getting into two-way credit risk.  Will it still be around to pay up if prices subsequently collapse?  That's the consideration from the point of the other party to the hedging agreement.  Of course, the small supplier should equally be worried about whether that other party itself will still be around to perform, should prices subsequently soar.  But that 'other party' will probably be at least three orders of magnitude bigger than the dodgy little twat-company that is the "small supplier" in Ofgem-regulated Britain: so not an issue the tiddler need worry about in practice.  And on the other side, well, who's going to extend the latter any credit?  So they can't actually afford to hedge much at all.  When they sell at fixed prices, in other words, they are taking a purely speculative punt on what the spot price will be at the time they must make delivery ('Northern Rock syndrome').

(b)  But it gets worse.  Suppliers don't just need to think about fluctuating commodity prices; the government has forced them to provide a price cap.  As eny fule kno, a price cap is essentially a Call Option, in the jargon of financial derivatives; and while (for the provider) hedging a price cap that's out of the money is relatively simple, albeit an advanced technical exercise, the cap that the government forced on suppliers was always fairly close to being at-the-money - a vastly more difficult and sophisticated, costly, dynamic hedging challenge.  (It's deeply in-the-money now! - which of course means wipe-out for the unhedged...)

But we are not talking players who are remotely capable of mastering sophisticated derivatives challenges - we are talking a bunch of opportunistic, under-resourced minnows, some of whom have extremely dodgy business models and that should never have been licensed in the firstplace!

So, Mr Hands, while you may fairly expect the Centricas and EDFs and Eons of this world (and maybe the Ovos and Octopuses ... maybe?) to have their shit together, you should be looking squarely at Ofgem for the rest.   Licensing players with no capital, but then imposing a tight-fitting cap, is a sure recipe for what's happening right now.

ND 

The Hinkley Point TV Drama

Did anyone see the extravagent airtime awarded by the Beeb to EDF's PR department in its Hinkley Point "documentary"?   Obviously we've been here before with the Beeb's "Powering Britain" (Energy is Big and Sexy) series: but that was fairly spread among a group of different assets that have "truly-massive-engineering / nice-photography-on-a-sunny-day" TV appeal.  But this one is all for EDF.

How much did EDF have to pay them?

Only three more episodes to marvel at.   Given that there's nothing yet to see at Hinkley except vast civil engineering, it's just "Watching Concrete Dry".  A prime comedy slot.

ND

"Affordable" as a theological concept: the Energy White Paper

As part of the usual service to t'readership I tend to offer a pre-digestion of big government reports like the Energy White Paper, published last week as part of a raft of important documents**.  This one, however, defies easy summary, except to say that the clue is in the name: Powering our Net Zero Future.  A big turn-off for some, no doubt: but that's where we're headed anyway, and I find it interesting to see how they go about discussing some of the challenges.

Actually, of course, they don't anywhere quite say this is going to be bloody difficult, if not actually impossible.  But for those able to read between the lines, there are hints enough in the veritable smogasbord (cliché ! - Ed) of interesting issues set out.  There's some intelligent work going on across a very broad front, most of which seems (on this evidence) to be fairly clear-sighted as to the difficulties involved.  

So dive in if you are interested; but I want to pick up on one overarching aspect.  The government claims to be most concerned that the costs of Net Zero to be borne by Red Wall voters the ordinary energy consumer are "affordable", a word that appears 19 times.  Sounds like an appropriate concern, right?  Well we may be glad they have it in mind, but I'm sorry to say, it's almost meaningless.

1. Electricity and gas (particularly the former; and also petrol / diesel etc) have such enormous utility value to consumers, we can - and are ultimately willing to - "afford" almost anything.  One of the clearest demonstrations is that literally no consumers - not households, not even industry - were militating against the old monopoly regimes for gas and electricity on the grounds of the prices they charged being too high.  Those monopolies were ended on wholly ideological grounds - albeit that the ideologues confidently and correctly predicted huge consequential price reductions.  Another is the amount of Duty heaped upon motor fuels.  Governments know they can stick almost anything on the price of such mass-consumed essentials, and we'll pay.  (Relatively easy to collect, too.)
   
2. Greens (and outriders such as the CCC) advance a quite different argument: "we can't afford not to" - meaning, the cost of not lowering our CO2 emissions would exceed the bill for doing so.  Some of them seem to mean this literally, i.e. to be understood in cash terms.  Others of them know that can't possibly be proved (even if it has the structure of a logical case) and mean it in some metaphysical sense, as if cost-incurring UK actions in 2021 will certainly cause the rest of the world to act so as to ... (etc).  Or perhaps in a weaker sense: if the UK doesn't take the lead in incurring such costs in 2021, it will let the rest of the world off the hook, and then ... (etc).  Who knows - it's theological stuff.
3. Lots of people of all stripes really like to believe another line of reasoning: it's "affordable" because it's an investment in another industrial revolution that will generate a surplus of wealth.  Again, this has the structure of a logical thesis.  But it's an absolute act of faith in the "WW2 US Economy" model.
4. Keynsianism, the weaker version of #3: we can "afford" to have men dig holes and fill them up again ... (as suggested here, in the context of energy, many times since at least 2014 and probably before)
   

Anyhow, the government has *affordability* on its agenda: and in practical terms we may hope this means they will - as the White Paper avers - ensure that contracts are awarded as competitvely as possible, a continuity / extension of the extremely successful CfD auctions of recent years; and hold Ofgem to their mission of beating up on the natural monopolies and suppliers.  Sadly, one can easily find some cases where the WP indicates they'll just be doling out largesse to chosen "(pick-the-)winners" - rarely a good idea.  Then again, these are mostly R&D-type efforts, one of the few areas where government intervention can sometimes genuinely pay dividends (for someone).

The really egregious stuff comes in the vexed area of nuclear power, which must demonstrate "clear value for money" (= "affordable", obviously), and that the industry can prove it is able to "reduce costs & deliver on time and budget".  Given all of recent history in the matter, will EDF be put off by these strictures?  Don't make me laugh - we already know the evidence-free, jesuitical arguments they will deploy on this one, when the time comes. 

ND

 ____________

** one of them details their modelling methodology which, they claim, generates 700,000 separate scenarios for 2050.  Call me lazy but I ain't reviewing that one ...

Centrica: as predicted, more assets on the block

Back to the day job, eh?   In September we wrote this:

And so it comes to pass, according to the WSJ, which reports that Centrica has put its fair-sized global LNG portfolio on the block.  It further reckons that the company "may actually need to pay any potential buyer to take the LNG business off its hands, underscoring the uncertain outlook for gas prices internationally".

Oo-er.  That won't be what Centrica has in mind.  Can we form an independent view on the sales value?

Not readily.  Firstly, in its published reports Centrica wraps up LNG in the results of its trading division, a traditional smokescreen behind which all manner of things can easily be hidden.  Next, it only publishes sketchy info on the individual deals that comprise the portfolio (commercial confidentiality: fair enough).  

Most importantly, however, Centrica very explicitly declines to offer a mark-to-market valuation for its big long-term LNG contracts (page 108 of the 2019 AR), of which it has several.  Its *reasoning* for this omission is that there are as yet no transparent long-term forward curves for global LNG.  That can be argued either way**, so their case can indeed be made.  BUT - the trouble is this excuse has frequently been used disingenuously, nay, culpably, by energy companies in a similar stew to skate lightly over eye-wateringly large negatives (in the billions, in some cases) that, although nobody could calibrate them accurately, are known by everyone in the industry to be very much on the red side of the ledger.  And here?  Who knows: I don't.  But it means that literally nowhere in the accounts does a full valuation lurk - even an estimate, even bundled with other stuff.  Institutional shareholders could easily take fright at that, when they consider what lay behind the scenes in other such cases in the past.

If prospective bidders all put a negative value on the LNG portfolio, I can't imagine a deal being struck.  But what other stand-alone assets does Centrica have to sell next?  And - are they due for a nasty downside surprise in the forthcoming Energy White Paper, which is set to pronounce on the fate of future UK large nukes, probably impacting on the value of Centrica's fateful 20% holding in EDF's UK nuke portfolio.  All rather uncomfortable.

 ND 

___________ 

** I'd argue that a pretty good forward value could be put on the LNG deals out three years.  Further, though I'm not an accountant, doesn't the conservatism principle require that forseeable losses should promptly be disclosed? 

"Energy is Big and Sexy" - BBC. Well, Yes

As you will imagine I have been idly watching the Beeb's Powering Britain, not in the hope of learning much, but rather to see how prime time TV covers - or dodges - some meaty issues.  Needless to say, for the most part the four episodes have been lavishly-photographed tourist guides, our breathless reporter always being gushingly overwhelmed by the scale and sheer sexiness of the whole thing.  Big Engineering always has that effect - if you steer people away from dirty, leaky old kit and fix their gaze firmly on the shiny new stuff.  Helicopter rides are generally quite fun, too (on a day when the weather's ok ...)

All in all, a massive PR opportunity for the firms involved (SSE, Drax, Spirit and EDF) which naturally they've seized with both hands and immense gratitude.  Can't have done the whole industry any harm, either - give folks an idea of the scale of what it all means; romance of engineering & commerce, etc.  Indeed, if a similar series had been run on commercial TV or a newspaper, you'd assume it was paid-for advertorial stuff.   

And not a Green in sight!   Dear me no - we're all quite green enough without letting Swampy or Greta come on with their whingeing and wimpering.

Controversy has barely been acknowledged: just the once, really, over Drax.  The SSE episode was about the world's biggest offshore windfarm and its onshore receiving station - including the merest hint (which probably passed unnoticed to most) about what's fast becoming a cause célèbre, the culpably chaotic business of digging big cable corridors, generally through highly sensitive coastal geography & habitats etc, with no obvious sign of planning / coordination on the part of National Grid.  Otherwise, it was just 100% jaw-dropping Big Kit on display in breathtaking marine vistas.  And no mention of what happens when there's no wind? ...

The Spirit episode featured their huge Morecambe Bay gasfield and its onshore gas processing plant.  (If you haven't heard of Spirit, it is a Centrica spin-off, one of the many new 'end-of-field-life' specialist O&G producers who manage upstream assets when development risk is long since past and the original developers - in this case British Gas - have better uses for their capital.)   Big offshore installations are pretty mind-blowing, so no shortage of gawping to be done here.  What controversy might have been expected?  Well, there are some people for whom even mention of fossil fuels in any other sentence than "we are closing this thing down as fast as humanly possible, ideally tomorrow morning".  But the Spirit PR team had put clever words into the mouth of the plant manager, who simply said that we'll need gas for a few more years on the path to Net Zero Carbon (tacitly answering part of the question left by the SSE programme), and that they were there to do their bit.  The Beeb felt no need to qualify that with any sort of counterpoint voice-over.  

The last episode was on EDF's nukes at Heysham, and the nuclear fuel plant at Springfields down the road.  They didn't explicitly use it to answer another part of the unasked SSE / wind question.  Obviously, they could have filled the entire slot with nothing but controversy (see, for example, the Public Accounts Committee report published today); so they ran with more-or-less none whatsoever.  Fair play, it had to be that way, really: though arguably they might have mentioned the cracks in one of the boilers and some of the fuel bricks ...  So it ended up quite pedestrian to my view.  I was, however, entranced to hear engineers talking in "thousandths of an inch" (it was the same in the Drax episode) which jars a little.  Then again, I imagine they run the plant on Windows 98 or some such.

So what about Drax, then?  Yet again, they didn't use it to answer the SSE / wind question (- it actually contributes to both parts, in fact); but, yes, they really couldn't - and they didn't - fail to mention that burning trees to generate electricity is controversial.  Which it bloody is - an outright scandal, in fact, compounded by the risible official "green" carbon-accounting convention which allows Drax to ignore CO2 emitted at the point of combustion, and hence to qualify for 9-figure sums in annual "renewables" subsidies despite emitting more CO2 than in the days when it was burning coal (and vastly more than if the same electricity was generated instead by gas) with the distant prospect of maybe that CO2 being maybe absorbed by replacement trees (maybe) 50-100 years hence (maybe).

They've got me started now.

Anyhow, all four episodes are labelled "Series 1" so perhaps they'll follow up with more later.  There's no shortage of energy companies with big PR budgets, interesting stories to tell, and photogenic kit to display.  One thing we may predict: there will be a lot of Greens who are furious at the easy, glossy ride the Beeb has given the industry in these programmes, and will be pressing to get more *balance* into any subsequent series.

ND

Centrica: Decline of an Old Friend

 Picture ... thousand words ... etc

I've always had a soft spot for Centrica, ever since they got off on exactly the right foot back in the 1990s when British Gas was triumphantly de-merged.  Maybe it's to do with the mighty relief of the break-up of that ghastly, brutal monopoly.   Newly-liberated Centrica did an awful lot right; and as the years progressed, they were clear-sighted, objective and flexible enough to recalibrate their strategies in the face of changing market circumstances (including cutting their losses decisively when called for).  Not least, they've staved off being gobbled up.

You'll find we've written about them, on and off, for years - and not always in complimentary tones because they haven't been beyond reproach at all.  Worst of all has been their nuclear gamble, when they got hopelessly carried away by their stonking coup of buying a heap of electricity from the old British Energy at the absolute bottom of the market, when Gordon Brown (remember him ...) was engineering a bail-out.  That was very good business (one of several such opportunistic bottom-of-the-market coups - almost as good as John Browne / BP in 1998), but it wasn't to last.  Participating as a more-or-less passive partner (OK, patsy) in EDF's outright purchase of BE in 2009 was crass, and they've regretted it from the day they agreed it, probably even before the ink was dry.  And they've never found a way of severing the ties, despite committing to do so by the end of this year.

Still, it's sad to see them the way they are now, cancellation of dividend and all - even if they are by no means alone among broadly competent energy companies out of favour right now.  Earlier in the year we said there needed to be some meaningful asset sales and that remains the case, IMHO.  But it seems we have to wait for developments on the nuclear front ... 

Centrica still plans to exit both E&P and Nuclear, but divestment programmes have been paused until the financial and commodity markets have settled.  

Yeah, right - doesn't sound much like any time soon.  Which must mean selling something more conventional than a part-share in EDF's mouldering, cracking-up UK nukes (with the associated energy-sapping politics that EDF wages all the time against HMG).  

Still, they remain a competent lot.  How much of that former clear-sightedness and objectivity do they retain?  The sale of Direct Energy (their big North American supply company) is a start, and must be a wrench: they bought it in 2000 as part of their Enron wannabe strategy, and grew it to #2 position in North America.  So maybe they really are up for it.

ND

Nuclear Power in the UK: Scary Scenario Looms

At the end of last month, EDF called time on the Hunterston nuke in Scotland.  It's been plagued with cracks in the graphite core, and not generating properly for quite a while now.  They'd been hoping to nurse a few more years output from it.

Now obviously, if the UK power system has been managing without it for all that time, it isn't needed per se.  BUT - it's the same design as all the other currently-operation UK nukes, except for Sizewell B.  A grim example of "concentration risk" ...  Could we get by OK without any of them?  They are all being nursed along, with successive extensions having been announced to their lifespans over the years.  

EDF, of course, has every incentive to squeeze the last drop from them, and not just for the electricity sales-revenues.  Decommissioning is very expensive, and as I wrote in an earlier story, relating to the North Sea oil & gas sector: 

... abandoning North Sea platforms comes at a huge capital cost: so every day’s delay in recognising the inevitable is money in the bank. And every small thing that can be done to eke out its life is an effort well spent.

The range of options for a nuclear operator is not as great as for an oil company (safety considerations):  EDF doesn't have available to it any real parallels to the strategy adopted in the North Sea case I related there.   

Furthermore, EDF is not exactly flush with money ..!  -  if it's bad for them in the UK, their French decommissioning liabilities are astronomical, as we've been noting periodically since this blog first began.  There's a rather obvious scenario where this could get extremely awkward.

ND

Lurid Energy Nightmares

The first version of this post appeared on our good friend Sackerson's excellent blog ...

An important line of thought in energy matters is how coal transformed the entire world by being a very dense (and fairly convenient) form of energy.  Oil is even better.  (Google ERoEI for quantified approaches to these thoughts.)  Cheap coal and oil were the basis of industrial civilisation, and cheap electricity the basis of the modern way of life.  Oooh-errr, missus: isn't "green energy" going to be of much poorer ERoEI, and much more expensive? ... and hence, the end of civilisation as we know it? 

When allied to the obvious observation that activist "greens" are generally ignorant to the point of causing despair; and those that aren't daft romantics are often outright malcontents (sometimes anarchists and sometimes malevolent & motivated anti-capitalists) - oh, and add China to the mix, because they ain't falling for this crap but we are! - there's scope for some fairly apocalytic visions.  Oooh-errr, missus ... 

For a well-written example of this thesis my attention was drawn by the good Sackers to a piece by one John Constable, a name that will be familiar to those who get their kicks from the often rather peculiar output of the Global Warming Policy Foundation. His article is here.  Now I understand this "intellectual" line of thinking, and it's always nice to have something theoretical to worry about: but he's been eating too much cheese and I'm deeply skeptical of his argument, on three immediate grounds:

• ad hominem: Constable is a deep fellow but always leaves the indelible impression he's pursuing an unacknowledged agenda 
• "Attempting to reverse this process by returning much or all of the energy system to low density flows means handing over to those who control the renewable energy sector the majority of the potential for change available to our society.  The political implications of this are terrifying, and not even public ownership of those resources could avoid the concentration of power and constriction of human freedom that would result." 
• he's dramatically (and, given his considerable knowledge, wilfully) wrong when he talks about "low density flows" as if that's anything remotely new ** 

Well, it's true Rebecca Long-Bailey (when shadow energy minister before GE2019) planned to hand the whole thing over to local authorities (the irony! when you see what a cock-up they make of their energy endeavours), right down to the level of parish councils and even "local communities ... of around 200 homes"; and of course all workers in the sector to be unionised.  To which preposterous package I'd be very hostile indeed.  But that ain't going to happen - anywhere. 

So whom does Constable imagine has been controlling the energy system** up until now (in the open-market era, i.e. post 1990)?  The nearest UK candidates are, in broad coalition, (a) National Grid (b) Ofgem (c) HMG.  The CCC helps a bit and snipes a bit, from the sidelines: other related quangos are either more helpful (being more closely directed by government and industry) or more snipey (being "greener").  Similar in most countries.  With most aspects of detailed development / delivery / execution outsourced to private companies (and/or municipal utilities in some countries), small and large (EDF is an egregious counter-example, but doomed in its present form).   Any serious signs it's about to be handed over to Greta?  What does she know about constructing anything more weighty than a tweet? 

No: as I keep saying here: net zero carbon has gone completely mainstream now (since 2019, specifically, in my assessment).  So - it's in the hands of the engineering companies, the traditional energy companies (who ain't volunteering to go the way of the dinosaurs any time soon) as well as a rash of really creative newer engineering / technology companies, and the banks.++  Right now I'm working on a project for a gigantic "traditional polluter" whose products are vital for our way of life, whose efforts to go green up until last year were next to nil, and who now are throwing their best people into really bold schemes to go zero carbon!   And when you see real, competent people working these Big (very big) Problems, constructively and productively, it makes the idea of "handing things over to parish councils" look utterly, utterly absurd.  And despite RL-B's talk of the unions taking a controlling stake in all this, whose side do you think a practical GMB man is on?  (Or Kier Starmer?)   For reasons both of jobs, and keeping the lights on, nobody in the real world will do anything other than let the big corporates do what they're doing. 

Now: will our 2050 energy end up being more expensive?  Not sure: there are some very simplistic a priori arguments in the air on this one.  Yes, there are huge upfront capital costs - but right now, that's surely going to be spent on Something Big, on Keynsian grounds at least, so it might as well be building clean & useful stuff.  (Plus adaptation / mitigation, of course - a key part of the 2019 breakthrough-to-mainstream.)  And the beauty of wind and solar is that once the (substantial, but fast declining) capital expenditure has been taken care of, the operating costs are wholly unburdened by the fuel costs that dominate "conventional" energy.  (Don't fret about the details like grid balancing, over which Mr Constable frequently hyper-ventilates - and I used once to worry myself a few years ago.  It's just an engineering problem: the Grid is very good at it; lots of clever people are beavering away at it - and the costs of all that will fall, too.) 

But let's suppose, as seems possible, that Chinese coal+wind+solar beats western hydrogen+wind+solar+batteries on cost.   So what?  Globalism is over!  We ain't gonna be buying our stuff from them on the same scale anymore, anyway.   Are we ..? 

ND
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** the whole point about the gas industry is that methane is INCREDIBLY low in energy density, (even when you freeze it to put it in ships, it's still quite poor) - but an exceptionally useful form of energy.  And so, highly specialised infrastructures (physical, financial and commercial) have long since been established to cater for this.  In many respects (although the technical analogies aren't easily mapped for non-scientists), the electricity situation is even more extreme.   Neither of these massive industries are in the hands of the Green Blob.  Anywhere.  Whatever daftness sometimes surfaces in the legislation under which they conduct their resolutely practical business.

++ OK, yes, and a bunch of chancers, con artists and would-be 'war profiteers' at the margin