04 October 2001
The New Electricity Trading Arrangements, trumpeted as a solution all electricity buyers would welcome, have angered renewable energy suppliers.Liam O'Brien explains why
When the government introduced the New Electricity Trading Arrangements in March, they were heralded as a win-win outcome for electricity buyers.
The "pool" distribution system, which was characterised by supply-side price manipulation and had allowed generators to produce almost as much or as little power as they wanted to, was being replaced by a regime that exactly matched electricity production with customer demand.
By forcing electricity suppliers to tie output to their customers' contracted demand, competition to sign up the finite number of business users was intense. Prices fell by 20-25 per cent, according to regulator Ofgem's review, and electricity buyers have since been left with the warm feeling that, contrary to what applies with most other utilities, they have won extremely favourable deals. "Good job done" seemed to be the buyers' consensus.
Six months on, however, alarm bells are ringing over the unforeseen problems Neta is causing to the UK's still painfully small, by international standards, band of renewable electricity generators.
The key issue is that Neta charges generators if they fail to produce the quantity of power they are contracted to. Such charges are unlikely to be levied if the power station is fuelled by predictable fuels such as gas, coal or nuclear energy, but highly likely if it is fuelled by the unpredictable rays of the sun or the strength of the wind.
Wind generators such as Beacon Energy and combined heat and power (CHP) producers such as British Sugar, Leicester City Council and Woking Borough Council, which used to sell much of their electricity to the grid, are now finding it too risky.
The viability of Leicester City Council's multi-million pound CHP unit relies on it being able to sell power on to the national grid, as does that of all the CHP, wind and solar generators. Local authorities admit privately that they will not be able to justify keeping such facilities running if they become a drain on councils' limited finances.
National Power has announced that it wants to sell off its CHP operation and Innergy's has already been shed.Green at the gills
The prospect of a meltdown in the UK's capacity to produce renewable energy is suddenly a real risk at a time when the government wants to ratchet up such generation to 10 per cent of the total by 2010. Buyers used to doing their bit for the environment by purchasing green tariff electricity fear that doing so will become increasingly problematic.
The green energy business is bitter about the present state of affairs. It argues that its warnings to Ofgem about Neta's disastrous impact on green energy were ignored in the rush to put the system in place. It is a system that is favouring the mega-generators of smoke-stack power at the expense of smaller, more efficient and cleaner producers.
Granted, there have been price reductions for business users, but will they be around after the smaller producers have been pushed out of the market?
Furthermore, the more outspoken say, an unelected quango - Ofgem - has put in place a regime that is jeopardising the Kyoto commitments of a democratically elected government.
Two possible remedies would be to take renewables out of Neta and give them their own distribution mechanism, or to allow the old pool regime to apply to renewables.
However, neither are likely to be acceptable to the government or Ofgem given that they would amount to a tacit admission that Neta was not sufficiently well thought through before implementation.
The Department of Trade and Industry's soon-to-be-launched consultation exercise on ways to address the problem is seen by critics as unlikely to result in the sort of action that is needed. And renewable generators don't see why the taxpayer should be required to bail out green producers, as Callum McCarthy, Ofgem's chief executive, has suggested.
But without swift action, buyers fear that Neta, supposedly a boon to the power purchaser, could turn into a burden.