Written by Rupert Dorey, 2 March.
Following GPEGs January 2022 publication entitled “States Trading Supervisory Board- with great power comes no accountability; the 10 year failure of Guernsey Electricity”, which characterised GEL as “being out of control” and the STSB/States of Guernsey “proving that they are incapable of running an efficient utility for the island”, Chamber arranged to meet both GEL & GPEG independently to discuss, understand and examine these claims, as well as to opine on the best way forward.
Chamber was interested to read GPEG’s critique of GEL in its recent paper. Chamber notes that GPEG had, rather surprisingly, not sought any comment from GEL on their findings. Chamber is pleased to clarify a number of misunderstandings in the GPEG paper to set the record straight. Pleasingly, the headlines do not tell the whole story and that there is much common ground.
In opening this discussion, Chamber notes that GPEG’s principal concerns are encapsulated in the terms “Governance” & “Objectivity” which can be summarised as follows:
- That GEL should have an appropriate return on capital target.
- That there should be more positive engagement between the regulator GCRA and GEL
- That the GCRA should be properly funded
- That GEL should offer greater transparency in the source of its electricity, and commit to sourcing electricity from renewable origins.
- That efficiency savings may be achieved by merging GEL with JEL.
Governance & Objectivity
Chamber agrees with GPEG in believing that GEL should be subject to an agreed return on capital, so it was interesting to hear from GEL that they have already set a regulatory target of 5.97% for post commercialisation assets, and a shareholder set target return of 4% on net assets, after taking account of the leverage targets and banking covenants associated with the commercial loans and rolling credit facility. GEL explain that by not making profits for distribution to the States, the return target can be better aligned to the future Capex plan.
GEL has historically had no revenue control as far as pricing is concerned, leaving it with no scope to adequately cover both operating costs and fund Capital expenditure. This means that they have never been able to generate their required regulatory returns, and explains in the most part why they have made consistent losses
The recently approved 2020 Energy Policy assists in offering greater guidance and transparency, but this policy is not specific to GEL.
From a regulatory pricing perspective GEL has maintained its underlying prices static since 2012, aside from two increases associated with the recovery of uncontrollable wholesale prices and FX rates. These increases at 6.8% and 4.8% were for a period of three years only. The rise in RPI alone over the last 10 years is 20%, meaning that despite the special recovery claims described above, real prices have fallen by the same 20% in a decade, in a period when GEL investment has totalled over £120m, and on which GEL has been unable to seek financial recovery by adjusting tariffs. We understand from GEL that the GCRA was insufficiently resourced to spend the time to consider tariff restructuring, after an indication from the States that GEL were coming out of regulation, and had previously asked GEL not to make any revised tariff requests, as they would be unable to consider them. We also understand that price rises of at least 5% should be expected in the near future to fund necessary infrastructure investment, and suggest that much larger rises may be required before long, reflecting the impact of recent and ongoing geo-political events amongst others.
Chamber has questioned in the past whether a wholly States owned quasi monopoly should be regulated, or whether regulation is a waste of tax-payers money. Our rationale being that unless the ownership structure of GEL, or the local competitive environment were to change significantly, there would be little incentive or room within which a regulator could operate, particularly as current competition law might be regarded as a proxy for regulation. GEL respond by questioning whether the benefits of creating economic regulatory structure rather than a more proportionate licensing environment outweigh the very significant costs involved, for what is a very small market. GEL would support a licencing framework approach for the entire energy market, rather than just for the electricity market.
GEL has been criticised for allegedly obfuscating on the source of its imported “renewable” electricity, and GPEG make a strong evidential case for suggesting that the electricity Guernsey customers receive cannot be as renewable as claimed (GEL claim largely from solar/hydro/wind), with some compelling arguments that not more that 30% of our imported electricity comes from these sources. Without going into the minutiae, the claims GEL make are based on their payment of GOO’s (Guarantees of Origin), which confirm the provenance of the imported electricity. GOO’s are a tradeable regulated commodity created under a European directive that represents a claim to the environmental benefits associated with renewable power generation and are not something that GEL have any control over, GEL being just a customer. We also understand that certain EU members are seeking to classify nuclear derived electricity as being “renewable” based on it zero carbon at point of production, which would make GELs claims credible, but probably not strictly accurate when measured on a lifecycle basis. In any event, GPEG are arguing here of GOO payments totalling a mere £22k (based on their own numbers), which one can read as either being insignificant in the scheme of things, or deliberately misleading.
Many commentators have suggested over the years that the merging of GEL & JEL could provide the catalyst for efficiency and cost gains, and we have few doubts that some of these do exist, albeit we are doubtful that we could quantify them with any degree of confidence. The rationale is that JEL is an LSE listed entity with 25% independent shareholder base who ensure that commerciality (amongst a host of other things) is a core consideration, and that these could equally apply to GEL. Indeed, this could be true, but we have no appetite to go down this road as we believe that it is a non-starter politically, absent a federation of Channel Islands States; and that looks pretty unlikely!
Discussions and decisions
It is pleasing that the constructive dialogue developing out of our engagement with GPEG and GEL expanded more broadly into other topical areas such as overall Energy Policy, technological developments in energy markets and most importantly what are likely to deliver the best outcomes for Guernsey in aggregate in the long term.
In summary, the Energy Policy approved by the States in 2020 is now moving forward with an electricity strategy expected later this year focussing on the three pillars of a) Supply, security & renewables, b) Demand management and c) markets and competition.
In what is a fearsomely complex subject, we all recognise that there are no options that tick all the boxes, and that each option has advantages and disadvantages depending on one’s perspective.
Most people are aware of the increasing pace of the energy transition from fossil fuels to non-fossil fuelled sources, just as they are aware that electrical energy will likely double its share of the energy mix from around 30% -60% in Guernsey by 2050. They are also aware of our obligations to reduce GHG gases to net zero by 2050.
In our collective view we all agree that the single most important investment we can make, that has the highest net benefit, deliverable in the fastest time is the proposed new direct 100MW cable to France, which will offer easily the most security, resilience, highest economic return, and crucially act as an enabler for on island & for offshore renewables (largely wind and solar) in the Bailiwick over the longer term. Without the investment in a direct cable commercial scale renewables are a non-starter.
There are plenty of critics who suggest that the risks of political interference from both France (& Jersey, who currently have pre-emptive rights over Guernsey’s electricity supply) is too great to bear, but we would counter that the alternatives are not without significant risks and expense too. We believe that a sound commercial supply contract transcends much of the political rhetoric. Clearly the events in Ukraine underscore that the implicit supply risks are in reality far greater than we had previously supposed, and that we are not immune from global events, much as we might like to be.
Let’s take the c.£85m cost of a new cable and examine what renewable investments that sum can buy. £85m currently buys 12MW of solar panels and around 290MWh of storage, equivalent to about 25% of aggregate daily summer demand in Guernsey combined with storage for only one day at 12MW output! Remember that 12MW of solar is at peak supply. In reality the levelised supply will be around 10-15% of that, which means that 12 MW actually means around 1.5MW in levelised terms. 12MW of panels would also require around 48 acres of valuable land. That displaces a lot housing! Alternatively, £85m buys around 30MW peak equivalent of offshore wind generation, and no storage. At an average efficiency factor of 30% a 30MW windfarm would generate 10% of our peak demand, or around 25% of aggregate demand, at best.
How about spending the equivalent sum on all on island fossil fuel generation? That’s fine until one realises that on island fossil fuel derived generation currently costs around twice that of electricity sourced via the interconnector (at current prices) , and that’s before one considers the massive adverse environmental impact from emissions and the implicit risks of securing vastly greater stocks of fuel via ever more complex and costly supply lines, quite apart from driving a coach and horses through our climate related commitments of net zero by 2050.
There are attractive potential new technologies such as SMR’s (Small Modular Reactors), and tangentially hydrogen sourced energy, but these are at least a decade away from commercial application, with nuclear fusion a possibility, but much further out. Similarly, tidal energy remains firmly in the “further out camp”.
Outlook and other considerations
Guernsey has been well insulated from the electricity price rises that we read about in newspapers daily. This is largely down to GELs decision to hedge forward its supply with EDF until 2025, which has given Guernsey a stability in pricing that most jurisdictions would envy. Broadly, the standard unit rate per kWh in Guernsey is around 20ppu, which is at the higher end of the recent range in the UK of 15-20ppu, but that was before the recently announced price hikes, which could see rises of 30% or more.
It is pretty clear that we in Guernsey will have to brace ourselves for significant price rises after 2025, hence the urgency to make the right decisions now. A decision not to commission a new cable is a decision for ongoing hydrocarbon generation on island, carrying with it all of the attendant adverse environmental issues, quite apart from the relatively far higher prices for electricity being generated on island using hydro-carbon fuelled assets, than could alternatively be sourced via a direct cable to France.
It is also useful to contextualise the significance of strategic decisions of this nature bearing in mind the current discussions in the States surrounding the creation of the proposed independent Development Agency to manage the East coast redevelopment.
It is clear to us that the sequencing and timing of development initiatives will be crucial in achieving desirable outcomes in the most expedient and cost efficient way.
For instance, a new electricity supply cable could pave the way for the reallocation of what is currently prime development land in St Sampson’s currently occupied by GEL. The requirement to have underused generation assets to provide the security we currently need could largely fall away. This is not to say that some hydrocarbon backup may be required in emergencies, but more to highlight the development potential that could be monetised by using prime land for say attractive waterfront residential development, to create a stunning new urban environment.
Similarly, if a new direct cable is commissioned, the hugely expensive new port infrastructure required to accommodate a significantly increased hydrocarbon demand would fall away, leaving significant funds available for more productive uses, and better allocation of capital.
Hard decisions need to be made on back up supply, as a second cable is not without its own commercial, political, and technical failure risks. Right now, hydrocarbon powered back up is probably the only realistic option, but the cost of supporting a very significant and underutilised asset base is considerable.
The States currently stipulates an N-2 back up for on island generation (an approx. excess capacity of c.40% over current peak demand), but this could legitimately fall to N (no excess capacity), if we have a second cable. Clearly, this would typically cover network failure events in Normandy, which are more likely to last hours rather than the months, rather than when we had a cable failure in 2018. So, the question is, how much are we prepared to pay for an “insurance policy”, where the risk of failure would be far smaller than we currently experience, but where the impact is enormous? Just to give you a clue, over the last ten years power has been supplied continuously for around 99.95% of the time, so our “insurance policy” premium is paying to backfill for the 0.05% of the time when normal power sources may be unavailable. Remember, there is no insurance policy that provides 100% security.
The dreadful events in Ukraine serve to highlight that “we are not an island” when it comes to global events and that this will remain a fact of life. Neither can we swim against the tide by trying to insulate ourselves from global events by using independent hydro-carbon generation sources, as all energy prices are linked through the market based pricing system. All we can do is to try to mitigate and manage our risks in the best and most effective way we can, and pave the way for alternative sources of energy longer term when more cost effective technologies become available. The best insurance policy we can buy now that paves the way for a more stable and less risky future is to invest in a new direct cable to France. This keeps our options wide open for a fraction of the cost of the alternatives. Not investing in a new direct cable to France is akin to trying to put a roof on a house before the walls are built.
Chamber has found it very productive to engage with both GPEG and GEL, as somewhat counterintuitively reading through the somewhat melodramatic headlines in the opening paragraph, above, we all appear to be fundamentally agreed on the main principles and solutions to solve our energy predicament over the next fifteen to twenty years. What happens after that will depend on the development and commercialisation of new technologies.
The right decisions now are:
- To enter into a long-term commercial rolling supply contact with EDF/RTE, then
- Build a direct 100MW cable to France
- …as soon as practically possible!
Please contact firstname.lastname@example.org with any questions or comments.