by Nick Fedorkiw, Regulatory Affairs Manager.
Creative Destruction: that was economist Joseph Schumpeter’s phrase to describe how capitalism allows for innovative, more efficient technologies to take over their predecessors, sometimes in a violent fashion. Examples would be online films replacing DVDs (good for Netflix, bad for blockbuster), cars replacing the horse and buggy, etc. It is normally quite a messy process with the incumbents doing all they can to hold out before becoming obsolete. However, this only works where a natural market exits that values the qualities that new players bring independent of any government regulation of guidance.
Electricity is one of the most highly regulated industries and unique to electricity, the national markets themselves are artificial creations of governments. So when a disruptive technology comes along, like wind in the electricity market, there is no natural market platform for the invisible hand to get to work. And therefore the difficult but necessary creative destruction that needs to occur doesn’t.
I think this is the problem we have with the nuclear vs. wind situation at the moment. First, the UK electricity market is designed to work for nuclear, both in terms of the trading arrangements and the proposed CfD. But also the much lower risks that wind imposes on society are not valued in the market because governments generally take on the big risks associated with nuclear; construction cost risk, and catastrophic incident risk. If a proper market existed which internalised not only the environmental and security of supply benefits of wind, but also the additional uncosted risks of nuclear, I think the conditions would be set for renewables to “creatively destruct” the incumbent technologies including nuclear.
The Purpose of Price? In natural competitive markets for any particular good, price serves the function of sending signals to market players to produce the efficient quantity. No market participant needs to estimate what the efficient quantity of their output is. All they need to do is act in their own self interest, they vary their behaviour according to changes in prices, and the invisible hand does the rest. The purpose of price is to set quantity.
The price of energy and particularly electricity is seriously flawed due to all the externalities associated with it. The cost of carbon being the main one, (the greatest externality ever according to Nicholas Stern), but there are others such as the cost of security of supply and some other tertiary ones. This is how we find ourselves in a world where quantities are out of balance; there is too much traditional carbon based energy and too little renewables. One solution would be to fix the pricing mechanism by internalising the cost of the externality. This is the principle behind carbon taxes and if we were starting from scratch that might be a good idea.
However, the amount of renewable generation we have in the economy is so incredibly low, that we do not need a price to tell us that we need more of it. Only once we approach an equilibrium where we need to fine tune the relative quantities of renewables/nuclear/thermal generation, would a market price be necessary. Currently, a price on renewables serves no purpose.
This is why a pure FIT , where the level is set at the cost of production (not price), is the only reasonable financial mechanism for supporting the most rapid build out of renewables that industry can stably provide.
The UK’s offshore wind advantage. To end on a positive note! Everyone knows the UK should be a world leader in offshore wind. This is primarily due to its large offshore resource. But I think it has some other big advantages:
· The scale and complexity of offshore wind requires a global supply chain, especially the financial supply chain. The UK is probably the most open country in the world to foreigners and this will help in attracting that needed supply chain. A good example of this is probably the OFTO regime. Although it’s a nightmare for us as developers, it has definitely attracted a lot of interest in the financial community because it is a very rare example of transmission assets being made available to foreign owners.
· I think people underestimate how difficult it is to do anything offshore. Britain has a strong maritime history through its Navy and more recently oil and gas industry. There aren’t many countries that have been able to do anything comparable, Germany definitely not being one of them.
· The City of London, although currently not doing so well, has for centuries been the centre of innovation in the financial sector. Offshore wind is going to need the most creative financing to get anywhere near the UKs ambitions and the city is well placed to do that.