Iberdrola and illogicality in energy


February 27, 2017

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A surreal, nightmarish and illogical world.

This is what “Kafkaesque” means, and it is how Iberdrola’s chairman Ignacio Galán described Europe’s energy regulations in an interview with the Financial Times last week.

He criticised the current regime because it encourages utilities to invest in technology to cut carbon emissions, but at the same time
ensure that energy prices don’t rise. Also, as a reaction to power shortfalls when there is little sun or wind, governments have kept providing subsides to keep polluting coal plants open instead of investing in renewables in the long-term.

To Galán, this is illogical, and we have to agree. It also has a direct impact on Iberdrola. The Spanish group is one of Europe’s biggest utilities, where it also owns Scottish Power in the UK, and has a large presence in countries including the US, Brazil and Mexico.

Galán said the UK is one country where this illogical situation is particularly evident. The UK has not built new power stations for many years because no incentives have been offered, while instead subsidies have been given to old coal-power stations.

In the capacity auction concluded by National Grid this month for power contracts to cover electricity needs next winter, coal-fired power generators won around 20% of the contracts, worth £378m in total. The UK government says they are necessary to the UK’s short-term security of electricity supply as a partner to renewable technologies, at times when there is little sun or wind.

But it makes little sense in the medium- or long-term. The UK
plans to phase out coal power by 2025, so continuing to provide subsidies to keep coal power stations open just looks odd.

It looks even stranger when the UK is under pressure from the European Union to raise the proportion of renewables in its energy mix from 20% now to 30% by 2020 – although we still have to see how these targets will be affected by Brexit.

The UK government must decide. If it really wants to eliminate coal within eight years then it should stop awarding subsidies to the coal sector now, and instead look at how to direct funds to sectors such as onshore wind, which it stopped subsidising last April. That could be a campaign to help local councils understand the benefits of wind, assuming it finds subsidies politically unpalatable.

It must also be more public in backing low-cost renewables, such as onshore wind, next to more expensive options like Hinkley Point C or Moorside nuclear power stations. It is bizarre to argue that the latter are better for consumers. Nuclear and wind can both be part of a low emissions system that balances cost with reliability. This approach certainly makes more sense than coal.

This would make the system simpler for all, including Iberdrola.

During the interview, Galán said that the firm is still committed to its investment plans for the UK, which amount to £2bn a year between 2016 and 2020. Its focus is on commissioning of 1GW of new offshore wind power and 450MW of new onshore wind power.

Iberdrola’s latest financial results showed a net profit of €2.7bn, posting an increase of 11.7% from 2015. However, the increase was driven mainly by investments in the US, while earnings in the UK from renewables were down 31% at £219m from the previous year’s £318m, suffering in particular from the steep depreciation of the pound after the Brexit referendum.

UK’s government and regulators need to be careful, then. An unfavourable economic and regulatory environment can easily discourage big players like Iberdrola to invest in the country. And push them to look elsewhere instead.

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