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Energy Policy Consultation

Energy Policy Consultation - Rupert Dorey

Chamber is well informed about the strategic energy issues facing Guernsey, and has had regular meetings with participants interested in policy development such as the Energy Policy Group and with industry participants.

In the past, Chamber has commented that in order to undertake effective policy development it is vital to understand a number of key parameters:

  • Have a clear view/understanding of forecast energy (incl. electricity) demand over say the next 30-50 years
  • Have an understanding of the likely changes in energy mix (eg: Fossil derived fuels, domestic and imported renewables etc.)
  • Define clearly the role of publicly owned assets in facilitating energy supply and distribution, such as GEL, and the States role in fostering energy competition and innovation.
  • Define clearly the role of demand management and energy efficiency, rather than just supply.
  • Have a clear idea as to what energy security means in terms of cost vs availability.
  • Consider carefully Guernsey’s compliance with global environmental targets.

Chamber is very aware of the complexities and indeed inherent conflicts of interest in developing an Energy Policy that will stand the test of time, and importantly will deliver on the principal aims of:

  • Ensuring safety, security, sustainability and affordability of Guernsey’s energy supplies
  • Ensuring energy is used efficiently
  • Ensuring environmental impacts are minimised, and Guernsey’s adherence to international environmental standards.

Energy Policy Questionnaire Responses:

Today’s energy market

Currently the Energy market is Guernsey is hampered by not having a detailed overarching long term plan. The island is heavily reliant on fossil fuels for transport, heating and to a lesser extent electricity production (in emergencies), with associated costs and risks for effecting their importation and production.

The comparatively small size of the Guernsey energy market is arguably sub-optimal for engendering significant competition. However, Chamber is supportive of competition where it can coexist with incumbent operators, such as GEL, especially in areas such as micro generation and electrical storage. We believe that competition benefits innovation and choice.

Chamber understands that the costs of energy on Guernsey is likely to be higher than in non island jurisdictions due to the more complex supply infrastructure, however comparisons with other jurisdictions with whom we can compare energy costs should be adjusted for local levies and taxes in order to effect a meaningful comparison.

Tomorrow’s energy market

The greatest opportunities in the energy sector currently are in electricity management including energy storage, smart grids, voltage optimisation, and distributed generation. The key challenge is to “levelise” demand to achieve a constant supply curve, thereby minimising capital expenditure on partially used generating assets. Demand for electric energy on Guernsey will, we believe, rise from around 35% to over 60 % of the energy mix within 30 years. In absolute terms this could mean that total annual demand will rise from around 400GWh to 600GWh.

Policy direction has been very light on demand management to date, which arguably is just as important as supply. The notion about being smarter and more efficient about using energy resources has been lacking in policy to date and needs to assume a higher level of importance.

Future energy policy direction is going to have to become increasingly responsive to compliance with international environmental directives, meaning that renewably sourced energy as well as more efficient use of energy will inevitably have to become more important.

Government’s role in the energy market

The Governments role is to set energy policy. The role of the States of Guernsey, via its ownership of GEL is likely to become greater in future (via the increasing importance of electricity in the energy mix). We believe that it is highly unlikely that the States will wish to relinquish control of GEL, but that it should specify key long term operating parameters through which GEL operates (and which we are told by management of GEL that they wish to be instructed, in order to permit effective long term planning).

  • Return on Capital Employed (ROCE) target
  • The weighted cost of capital
  • The anticipated energy demand mix

Chamber believes that GEL should not crowd out competition in the electricity sector and that competition will benefit choice and innovation. Chamber believes that there may be some merit in considering the separation of the supply of electricity and its distribution in order to foster competition, where all suppliers would “pay for access” to the distribution company. Against this, is the feeling that increased complexity in what is a small market may be undesirable, and possibly inefficient.

Chamber acknowledges that certain elements of policy implementation, such as construction of offshore wind farms (should it ever happen) are from a political perspective probably more easily undertaken by a government (community) owned entity than by private organisations.

Reliability and security of supply

It goes without saying that a reliable and secure supply is paramount. We would be surprised if anyone thought otherwise, especially as an unreliable and insecure supply would be catastrophic. The question that needs to be asked is what are the parameters of security and reliability that we require, and at what cost do they come? Alternatively, would we be prepared to tolerate a modicum of power outages for a large reduction in energy costs? For example, would a business be prepared to accept a 98% availability rate for being charged say £0.10ppu or paying £0.18ppu for the current 99.9% availability rate, or indeed £0.25ppu for 100% guaranteed supply? Our belief is that while demand is relatively inelastic, security and reliability do not come at any price.

Energy Policy should be considered in the context of a diverse mix of energy sources, including, when financially expedient to do so, local macro renewables. We are very supportive of the proposed GF-1 cable which will add significant resilience to Guernsey’s energy policy options, including export of electricity, if significant macro renewables are developed in future.

Energy Independence

Energy independence is clearly a good thing, and by definition reduces “dependency”. But energy independence means different things to different people. By way of example, does independence come from government ownership and development of assets, or does it come from privately financed operators owning and developing assets which just happen to be located here, but which reduce our dependence on existing external providers of energy (such as EDF)

Energy Demand

Energy demand is one area which has attracted the least policy attention to date, and little has been achieved despite the States resolving to consider the creation of an “Energy Efficiency Centre”. Energy demand can be managed both through education and through the price mechanism, as well as via better technologies enabling greater energy efficiencies. Demand management is probably one of the “cheapest” and most effective means to manage usage, but it does require change in behaviours and a keen awareness of the availability and knowledge of alternatives. Chamber believes that there is considerable scope to manage demand more effectively.

Demand management will likely have to be led by government as most commercial suppliers business models are built on the premise of selling more of what they can offer, and are not incentivised to sell less. Chamber suggests that GEL will have a role to play here by offering more dynamically flexible tariff structures to more effectively manage peak and off peak demand (electricity storage has a significant part to play here)

Affordability

Guernsey should aim to be competitive with other jurisdictions in terms of energy costs, and we should benchmark ourselves against our competitors, using island comparators and other jurisdictions with whom we compete. Clearly Guernsey has a relative disadvantage compared to some as we have relatively complex infrastructure and supply lines with fewer economies of scale. However we also have the benefit of lower levies and taxes, which is often omitted when making comparisons. Given the challenges and expense we face in investing in new technologies and Infrastructure facilities (such as GF-1), we believe that the opportunity to reduce costs is likely to be low, other than by improved efficiencies. Affordability is just one of the policy aims which has to be balanced against other claims such as resilience, reliability and security.

Chamber does not propose to comment on energy poverty or hardship tariffs as this is outside of our scope, and is rightly part of the States social policy mandate.

Environmental

Chamber believes that Guernsey, as a comparatively wealthy jurisdiction has at least the same responsibilities as anyone else to comply with internationally agreed protocols on environmental responsibilities. In many ways, Guernsey should, relatively, find it far easier to comply than many jurisdictions as the proposed GF-1 cable will reduce dramatically our carbon emission footprint at a stroke as HFO electricity generation will largely cease, other than in emergencies. Additionally, we do not need to travel long distances to work and for leisure. Finally, we have future opportunities for macro renewables when technology/ cost constraints permit.

Hard targets

Current States resolutions have committed Guernsey to complying with environmental targets, albeit its success to date has been modest. It would be difficult to envisage hitting any targets without direct intervention from the States including those suggested by Environment & Infrastructure such as fuel levies (on equalising levies on marine leisure fuel for example), and energy efficiency regulations for new build housing.

Soft drivers

Chamber believes that the “Soft Drivers” for change, while superficially attractive, should not be part of a government funded enterprise. Our preference is to allow the natural course of product replacement to run its course, as and when older units useful economic life have expired.

Competition and regulation

Chamber believes that there should be support for competition in electricity supply, indeed, we would find it hard to argue otherwise, not least as competition has the benefit of promoting innovation as well as promoting keener pricing. We have speculated how this may be achieved earlier in this note, by separating the distribution facilities from the supply functions to allow a level playing field for distribution.

We are concerned that preserving a monopoly where genuine and non-wasteful competition exists, sends a poor message to business. GEL, as a wholly owned government entity and effectively a monopoly supplier has no requirement to be regulated (indeed, that may be wasteful). However, if competition were permitted, GELs likely response could be seen to be predatory, and regulation would be justified and indeed rightfully demanded.

Investment

Chamber believes strongly that additional investment in cable infrastructure is an imperative, and without which the key aims of an effective energy policy would not be achieved. The GF-1 will be instrumental in Guernsey being able to deliver on its desired long term energy policy outcomes, offering a variety of flexible policy choices and an efficient means with which to deliver them. This investment will also enable the States to reconsider its N-2 policy in so far as maintaining on island generation is concerned.

Longer term, investment in the development of Macro renewables, when economically viable, will be greatly facilitated by GF-1, which may facilitate electricity export to France but supress PV electricity generation on island (as marginal cost of importation is very low).

Chamber is of the opinion that funding of GF-1 may be best achieved using the residual “Guernsey Bond” funds, which will be well matched to fund conservatively a long term asset with a long term liability, and which will be self funding.

Other Important Matters

  • Chamber notes that nowhere in the Consultation is any view, or are any questions asked about the long term future of fossil fuel importation facilities. Chamber believes that given the potential costs that we are aware of in the public domain of a deep water berthing facility in the region of upwards of £150m, that any investment in such a facility vs GF-1 is mutually exclusive. Not only is GF-1 significantly less expensive and is fully self-funding, it also offers far more long-term flexibility over energy policy. An investment into a deep-water berth, as proposed, would offer neither policy flexibility, nor would it offer a sufficiently large revenue stream to fund the investment.
  • Importation facilities for the expected diminishing fossil derived fuel usage, we believe, would be best considered using alternatives such as a floating single point mooring system or via fuel capsules, presently used by some importers.
  • The Policy consultation needs to consider the role of Electric Vehicles (EV’s) and smart meters to help balance electricity demand.
  • The Policy consultation needs to consider more fully the role of energy efficiency in new build construction. Items such building codes for thermal efficiency, solar roofs etc
  • The Policy consultation does not mention the use of coal and its use on island. There is a strong case for phasing out coal usage due to its highly polluting nature, as well as its contribution to respiratory illnesses.

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