Morning:
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The excitement which greeted Centrica's decision yesterday to build a big new offshore wind farm, financed in part by recycling its capital out of earlier investments, might have persuaded an optimistic casual observer to think the UK is well on course to meet its wind generation and green energy targets. But the realistic interpretation is that people got excited because it is so unusual. Britain's embrace of renewables is nowhere near enough to meet the challenge.
The country has signed up to an EU commitment that 15% of our energy comes from renewables by 2020. That does not sound too stretching but it is deceptive.
Electricity meets roughly half our energy demands and renewables are obviously about electricity generation, so the reality is that 30% of our energy will have to come from renewables in 11 years' time. Currently we do about 5%, so there has to be a massive shift.
But the need for extra capacity is much bigger than it seems. One reason of course is that 20% of current generation comes from nuclear plant and apart from Sizewell it will have to be replaced before 2020 because it is at the end of its operating life. But because of a lack of political will, waiting for the new nuclear building programme is like waiting for Godot. It is talked about endlessly, but is so long coming you are left wondering whether it even exists. Will the Conservatives be any better? Don't hold your breath.
We need to replace ageing coal plant too but this is stymied by a requirement that new coal stations must meet targets for carbon capture and storage. Trouble is that this technology works in theory but has not yet been made to work on a commercial scale. So understandably there is not exactly a rush to be the first to spend £1 billion or more to see if it does.
The other problem of course is that the wind does not blow all the time, so if a third of our electricity is to come from wind when it is blowing we are in theory going to need an additional third of conventional gas-fired capacity standing idle but ready to kick in to provide alternative supply when the wind does not blow. So as well as building all these wind farms with their huge cost, we are also going to have to build the additional capacity, obviously not a third as much again, but substantial nevertheless.
The difficulty which then arises is how do you pay for the standby capacity? How do you get an economic return on plant which by definition is only going to be in use for a small part of the day or week? And the answer is that you cannot, unless the cost of electricity from these plants when they are running is massively high.
The theory is that they make as much money from running for one or two hours a day as they would if they were running like a normal plant 18 to 24 hours a day.
This is operationally quite feasible but it will introduce a new volatility to electricity prices, assuming of course that government sticks to the targets. Customers are going to have to get used to the fact that bills will be substantially higher, because when the wind does not blow, the cost of marginal supply will go through the roof. The costs will be eye-watering.
Energy policy is probably the most important issue in a modern economy. What a pity we do not seem to have one which is remotely coherent.
Forced into bed with a Hoare?
Readers of yesterday's Financial Times may have been slightly bemused by a cryptic letter from Oliver Hemsley — head of mid-market securities firm Numis — in which he asserted that “some banks have exerted enormous pressure on indebted UK companies to use them for underwriting”.
In private at least several of Hemsley's rivals have been just as angry but a lot more blunt. The allegation which they make is that Royal Bank of Scotland is using its power as a lender to mid-cap companies to force them to move their corporate stockbroking business to Hoare Govett — a firm which came under the RBS umbrella when it acquired ABN Amro — as a condition of continued banking support. Presumably this is the “pressure” Hemsley had in mind, albeit he drew back from saying so in print.
It's a great story, and it is also in wide circulation, but is it actually true? The essence of corporate broking, surely, is that it is a relationship business and it is patently clear that bullying or strong-arming a client into signing on with Hoare Govett is hardly the best way to build a relationship. One might even think it counterproductive.
What may be true, however, is that some corporates sign on with Hoare Govett because they are looking for ways to generate some extra revenue to their principle lender — to keep the bank sweet in these troubled times. It is probably easier for them to tell the broker they are sacking that they were forced into it — hence the rumours.
One hopes so anyway. If this bullying is going on at the very time when people are worried about the size of the banks and suggesting that they separate their commercial lending from their investment banking activities, it could scarcely be more tactless.
