Energy Bill: The good, the bad, and the ugly

James S Murray
@James_BG
23 November 2012

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The Energy Bill is a sizeable step in the right direction, but it could have been so much more if the coalition was united on the green economy

First, the good news. Next week the government will unveil its Energy Bill and, after a crippling two-year wait, UK businesses and investors will finally have some medium-term certainty about the country's energy policy landscape.

The deal brokered between energy and climate change secretary Ed Davey and chancellor George Osborne will deliver a Bill that contains plenty for business leaders to celebrate. The new contracts for difference (CfDs) should provide stable financial returns for low carbon energy projects, backed by a single counter-party and, critically, a substantial levy control framework that all but guarantees the UK will both meet its 2020 renewable energy targets and move forward with a new fleet of nuclear reactors.

It is a sad indictment of current relations within the coalition that simply ensuring the government complies with legally binding targets and honours the coalition agreement represents a significant victory for the Lib Dems. But confirmation that the CfDs will be backed by at least £7.6bn a year by 2020 represents a sizeable win for Davey - anyone doubting this should just look at the Tory blogs and the front page of The Telegraph this morning, which condemn the chancellor for caving in to green demands and putting up energy bills.

Investors will have to wait to see the detail of the Bill and the all-important "strike price" that will be offered through the CfDs before moving forward with low carbon energy projects. But the combination of the new subsidy mechanism, the stable levy control framework, and the planned capacity mechanisms mean we are likely to see a surge in energy infrastructure investment. It is easy to understand why the CBI, Energy UK, and RenewableUK were united this morning in their effusive praise of the Bill. RenewableUK's Maria McCaffery might have gone a bit over the top with her declaration that today's deal "blows the last few months of political infighting completely out of the water", but her members will be delighted they can finally start planning projects for the second half of the decade.

The green economy will continue to grow rapidly and emissions will continue to fall, driven by huge investment in innovative low carbon energy technologies and the realisation that the resulting short-term increase in energy prices makes a greater focus on corporate and domestic energy efficiency an absolute necessity. The next eight years should now be characterised by a historically significant £100bn plus round of investment in state-of-the-art renewable energy projects, nuclear plants, carbon capture and storage (CCS) demonstration sites, smart grid upgrades, and, of course, gas infrastructure.

The bad

Which inevitably leads us to the bad news. The Lib Dems are spinning furiously this morning to position the deal as a victory, which it is; but conversely it is also a crushing defeat. Davey and co set up a political battle by making it clear they wanted a flexible decarbonisation target for the power sector in the Energy Bill. They lost.

Importantly, Davey did wring some concessions from Osborne in the form of new guidance to National Grid on an "indicative range of decarbonisation scenarios for the power sector in 2030" and a commitment to revisit the issue of a decarbonisation target in 2016.

But the independent Committee on Climate Change (CCC) did not recommend the inclusion of a decarbonisation target for kicks. As the CCC's chair, Tory peer Lord Deben, pointed out this morning, the absence of a target "leaves a high degree of uncertainty for investors and does not address widespread investor concerns raised in recent months; it could adversely impact on supply chain investment and development of projects to come online after 2020".

Without the target, an Energy Bill that could have proven genuinely transformative and put the UK firmly on the path to a low carbon future instead simply enables business-as-usual in the form of a new "dash for gas", albeit with welcome new investment in lower emission energy sources bolted on the side.

Despite months of fractious negotiations, Lib Dems and green-minded Tories have singularly failed to convince the chancellor and the prime minister of the critical importance of the decarbonisation target. Remarkably, they also failed to flush Cameron and Osborne out into the open to explain precisely why they do not want to fully decarbonise the power sector and why they think a reliance on imported gas is good for the UK's energy security.

It is worth asking if Lib Dem MPs will now loyally file through the lobby in support of a Bill that not only increases support for the nuclear power that they once opposed, but also enables a "dash for gas" that many party members are virulently opposed to. They could legitimately argue that with the CCC recommending a decarbonisation target and numerous businesses in favour of its inclusion in the Bill, the legislation in its current form is not in the best interests of the country or the planet. They won't, but they could.

The ugly

Unfortunately, however, the bad bit of the Bill is not the really bad bit. The really bad bit is the ugly bit, and that is really ugly.

The fudged compromise that has kicked the decision on the decarbonisation target into the long grass of 2016 means the much-trumpeted policy certainty delivered by the Energy Bill is much less certain than it could have been.

Imagine you are a prospective gas developer. You'll be able to move forward with new projects safe in the knowledge that gas remains the default option for the energy industry, but you also know that, as of 2016, legal confirmation could come through that means you would have to drastically scale back the use of your facility in 14 years' time, well before the end of its lifespan. You know a Labour victory at the next election or the formation of a Lab-Lib coalition would almost certainly see a decarbonisation target adopted, just as you suspect a Conservative victory could result in a formal decarbonisation target being ditched.

The net result is that political risk will continue to drive up the cost of capital for all forms of energy, including gas. Ironically, it is possible that the uncertainty Osborne created by opposing a decarbonisation target means the cost of capital for gas infrastructure will end up being higher than it would have been if a clear target had been agreed, allowing gas plants to plan for a world where they are used as a source of back-up power post 2030.

The situation for low carbon energy developers is actually slightly better, as the CfDs promise to give them the kind of stable and predictable returns that should help attract investors. But anyone planning to invest in the renewable the energy, nuclear or CCS supply chain still faces major uncertainty as they have no idea whether demand for these technologies will accelerate post 2020 as the power sector continues to decarbonise, or whether they will still have to compete with cheap to build (but expensive to run) unabated gas plants. The Climate Change Act should provide certainty that the market will continue to develop, but we know from the last few months that a number of influential Conservatives are desperate to water down this flagship legislation.

It will be highly informative to see if those companies considering locating new offshore wind manufacturing plants in the UK now take the leap and invest or opt to delay their decision until the post-2020 outlook becomes clearer. Siemens has already poured some luke-warm water on the announcement this morning, insisting it needs to see more detail before making a decision.

The Energy Bill is undoubtedly a sizeable improvement on the status quo and it will allow investment to flow over the next few years; hence, the broadly positive response from investors and business groups. But it could have been more positive still if the coalition was not so riven with in-fighting over this critical part of our economy.

The really ugly aspect of the Bill is the way in which it has confirmed once and for all that the political consensus on the green economy and climate change has shattered.

Davey got the best possible deal available given he was negotiating with people who no longer respect the urgent need to decarbonise the UK economy, who are working with their own "facts" regarding the prospects for the global gas industry, and who are openly hostile to the Climate Change Act. Osborne has now tried twice to reject the advice of the CCC - once unsuccessfully over the fourth carbon budget, and now successfully over the decarbonisation target. On neither occasion has he respected the spirit of the Climate Change Act and explained why he is at odds with the government's independent advisors.

The UK's green economy will continue to prosper, because it is popular with the public, driven by increasingly impressive and cost-effective technologies, and underpinned by legal requirements and broadly effective policies. But the farcical handling of the Energy Bill proves that green businesses will have to adapt to a new reality in which an influential part of the UK's political community is openly hostile to the idea of green growth for purely ideological reasons.

The next election will now not only determine whether or not the Energy Bill actually delivers on its long-term goals and provides a decarbonisation target, it will also determine the UK's competitiveness in the world's fast-expanding green economy.