Showing posts from November 2012
13 Nov 2012
Before the end of this month the government is expected to finally deliver its long-awaited Energy Bill, providing a policy which according to ministers will drive billions of pounds in new investment, bolster the UK's energy security, and ensure the country's climate change targets are met.
But with talks continuing at the highest level over several aspects of the bill and speculation mounting that a number of contentious issues will be kicked into the long grass of secondary legislation, will the bill prove as transformational as promised?
Here are 10 questions on the Energy Bill that still need answering:
Will the bill include a decarbonisation target or not?
It has become the totemic issue at the heart of the Energy Bill debate; a political virility test between those Lib Dems committed to the 2030 decarbonisation target and Chancellor George Osborne's vision of turning the UK into a "gas hub". The arguments for and against are well rehearsed with high profile nuclear, renewables, and carbon capture and storage developers insisting a target will give them the investor certainty they require, while gas industry lobbyists insist it could force them to shut down working power plants in 2030. With the bill imminent this crucial issue is still to be resolved. Nothing less than the inclusion of an ambitious target will be acceptable for green businesses and the Lib Dems.
If a decarbonisation target is included how "flexible" will it be?
When is a decarbonisation target not a decarbonisation target? When it is a "flexible decarbonisation" target. The Lib Dems are not in fact calling for a hard and fast target for 2030, but rather a carbon emissions range for the electricity sector of 50g-100g of carbon dioxide per kWh. This is actually higher than the Committee on Climate Change's original recommendation of a 50g/kWh target and as such would allow more unabated fossil fuel power to act as back up for renewables and nuclear. The question remains as to whether Davey will have to agree to an even more "flexible" target in order to get Treasury support for the bill.
Who is going to act as counter-party for the contracts for difference?
Several commentators maintain that while the decarbonisation target is important to environmentalists and low carbon investor confidence, it is the issue of who will act as guarantor for the proposed contract for difference (CFD) incentives that really has energy developers and investors worried. Under the government's proposals, feed-in tariff style CFDs will provide low carbon generators with guaranteed prices for the energy they deliver, but it is unclear who will act as the counter-party to these long term contracts. Developers want the Treasury to act as the counter-party, offering them real certainty as to the stability of the contracts. But the Treasury has made it plain it does not want to be signing contracts that could come back to haunt it. Davey has hinted at a possible compromise in the form of a new government-backed company designed to act as counter-party. It remains to be seen if the Chancellor will agree.
Will energy efficiency and demand management be included in the capacity mechanism?
The government has promised payments through a so-called "capacity mechanism" to those generators willing to provide back up for intermittent renewable energy sources. The proposal makes sense, but it also begs the question: if we offer payments to companies that help the UK cope with peak power demand why don't we offer similar payments to those that help lower those peak power demands? Campaigners are urging ministers to ensure the Energy Bill delivers some form of incentive that encourages both energy efficiency initiatives and the roll out of smart grid enabled demand response systems that reduce energy use on demand. DECC has signalled it is very keen on the idea, but is it too late for it to make its way into the bill?
How tight will the levy control framework be?
I recently chaired a debate on the Energy Bill during which one industry expert made the point the entire exercise could be rendered irrelevant if the Treasury imposes a levy control spending cap that restricts the number of CfDs DECC can offer. Green campaigners have been quick to realise that financial support for low carbon nuclear, renewables and CCS generators will effectively be controlled by the whim of the Treasury, while it looks as if no such cap will be imposed on the capacity mechanism payments that will be offered to gas power plants. The Treasury has argued it has an obligation to bill-payers to keep tight control on how much is being added to their bills through levy mechanisms, such as CfDs. But at the same time the success of the energy market reforms rests on the cap being set at a level that allows investment to accelerate. Even once the Energy Bill is published, we are likely to have to wait until the Chancellor's autumn statement to get a clearer steer on the future of the levy control framework.
How will Ed Davey's "comfort" measures for imminent projects work?
In a recent speech, Davey said he would seek to avoid an investment hiatus between now and 2017 by giving low carbon developers some "comfort" about the level of financial support they can expect to receive from CfDs when their projects come online. He hinted that if developers undertake to build their proposed projects in a timely manner he would be able to give them a steer about the level of support they can expect. EDF is already in talks with the government about the level of CfDs its proposed nuclear power plant would receive and a number of renewables developers are seeking similar assurances. The low carbon power sector's immediate future depends on how the Energy Bill enables these "comfort" measures.
What will the strike prices be?
It is the £330bn question (after all, that is the amount the LSE reckons needs to be invested in energy infrastructure through to 2030): how much financial support will the government offer to low carbon generators? Or, to use the Energy Bill jargon, what will the "strike price" be? In the longer term, auctions will be used to determine the strike price in an attempt to ensure only the most financially competitive technologies prosper. But in the medium term the Secretary of State will have immense power to set and approve the strike price. With negotiations with EDF and others underway cards are being kept close to chests, but the government's suggestion that it will only support widespread offshore wind developments if the industry can deliver power at £100/MWh by 2020 has set a benchmark ministers will be reluctant to go above for any technology. In addition, developers will want to know how long this first phase of the electricity market reforms will last and when they can expect to move towards a system of auctioned CfDs.
Can the Prime Minister really make good on his pledge to ensure customers are moved onto the cheapest energy tariff?
Anyone who knows anything about the energy market knows David Cameron cannot really deliver on his ill-fated pledge to legislate to ensure "energy companies have to give the lowest tariff to their customers". But Number 10 refused to issue a clarification in the wake of the Prime Minister's confusing appearance before the Commons and as such officials now have the dubious task of trying to ensure the Energy Bill in some way matches Cameron's commitment. How they attempt to deliver the undeliverable remains one of the great unknowns of the energy bill.
How many of the key issues will be pushed into secondary legislation?
The Financial Times this week quoted a Treasury source as saying there is no guarantee the ministerial row over the decarbonisation target will be resolved by the time the bill is released later this month. With reports suggesting that considerable distance remains between the Lib Dems and the Tories on a number of key issues concerns remain that chunks of the bill could be pushed into secondary legislation, again denying investors and developers the certainty they have been craving. If that happens, expect one almighty protest from the business community.
Will it work?
It is the only question that really matters, will the Energy Bill really deliver the fundamental reforms that all sides of the debate agree are desperately needed? Will Davey make good on his pledge to make the UK the most attractive place in the world for energy investment, in the process delivering secure, affordable, low carbon energy infrastructure for decades to come? We won't know the answer for several years, but it should become apparent pretty quickly as to whether the bill really is driving the billions of pounds of investment that the energy industry insists is in the pipeline. Succeed, and in one area at least the coalition will be owed a debt of gratitude, fail and the UK can kiss goodbye to both its climate change targets and its long term economic competitiveness.
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Previously known as the BusinessGreen Blog, James' Blog features musings, observations and occasional rants from BusinessGreen editor James Murray