Electricity pylons spanning across countryside

Three-pronged Bill aims to encourage UK energy investment

Mark Venables looks at reaction to the Energy Bill, with its strong focus on market measures.

After a great deal of consulting, pontificating and internal budget wrangling, the UK government finally released its much vaunted Energy Bill on 29 November. But after all the expectations it failed to catch the imagination of the sector and faced a mixed reception from the power industry.At its launch in Parliament, Energy and Climate Change Secretary Edward Davey declared that the bill was a three-pronged solution to the country’s energy needs: it would power low-carbon economic growth, protect consumers and keep the lights on. “The Energy Bill will attract investment to bring about a once-in-a-generation transformation of our electricity market, moving from predominantly a fossil-fuel to a diverse low-carbon generation mix,” he said. “This is the culmination of two years’ work in designing a new market-based approach that will deliver certainty for investors and fairness for consumers.

“The challenge is big. Over the next decade, the investment needed to upgrade our energy infrastructure is almost half of the infrastructure investment needed in the UK. This is far more than is taking place in transport, in telecoms, or in water, and dwarfs the investment that was needed for the Olympics or Crossrail.”

He continued: “The Bill will support the construction of a diverse mix of renewables, new nuclear, gas and CCS [carbon capture and storage], protecting our economy from energy shortfalls and significantly decarbonising our electricity supply by the 2030s as part of efforts to tackle climate change.”

During the bill’s passage through Parliament, the government may add clauses following on from various consultations that are taking place, including over the power to set a decarbonisation range for the power sector and measures to cut electricity demand, which would decrease carbon emissions and reduce the need for new generation capacity.

One influential group that has concerns about the bill’s content is the Warwick Business School’s Global Energy Group. David Elmes, professor of practice and academic director for Warwick Global Energy, says it is vital the bill succeeds, but he is worried it will only further complicate the picture. “We are concerned this bill still fails to provide a clear framework. The Prime Minister’s commitment to be the ‘greenest government ever’ has been fudged by pushing any decision on a target for decarbonising electricity until after the next election.”

Monica Giulietti, associate professor of Global Energy at Warwick Business School, agrees that the Energy Bill needs to produce an environment that attracts significant investment, but she is also worried the government has picked nuclear and offshore wind power too early. “The key issue is investment and how it is going to happen,” she said. “Will the bill promote the necessary investment and to some degree are the choices of investment that this bill promotes still the right choices? There is still a lot of research going on into the different types of energy supply, storage and consumption. Other countries are promoting a much broader base to pick from.”

One major concern is that the government is already beginning the process of picking winners, which may lock the door on some fledgling technologies. The risk is that other countries will invest in methods of producing energy that are cheaper, or ways to use their energy more efficiently, and the UK will have committed itself to expensive solutions. Also, nuclear and offshore wind are big long-term projects that might not be delivered on time or work as planned.

Several of the bill’s measures have resonated with the aims of the renewable sector, particularly the establishment of a government-owned company to act as single counterparty for the proposed Contracts for Difference (see sidebar) and the decision to allocate CfDs on a first-come, first-served basis and not on a six-monthly allocation round as originally proposed.

“The devil will be in the detail, which we have yet to fully examine,” commented Gaynor Hartnell, chief executive of the Renewable Energy Association. “However, if the new regime is implemented sensitively consumers and green generators should both win. Electricity customers will only pay what is necessary to move the UK towards a more sustainable and secure energy future. That’s because, with these new contracts, if the price of electricity increases, the amount of subsidy required can fall. Generators should get a stable price, provided they achieve the fair market price for their electricity. That’s why it’s essential we have a route to market which guarantees this.

“We can’t afford to be complacent, however. It is vital that confidence in the policy framework is established quickly given the investment hiatus we face. There is still much work to do, to translate the legislation into clear and effective policy. We look forward to working closely with DECC to ensure our members can have full confidence in the new framework as quickly as possible.”

The REA’s attention is now focused on two critical areas in the bill’s proposals for Electricity Market Reform (EMR) – a term that Hartnell regards as a misnomer, as the market itself is not being reformed. REA’s concern is that independent generators may still not be able to sell their power into the market. In order to be financially viable under the new CfD, generators must achieve the reference price for their power sales. Evidence suggests this is unlikely to be achieved in the UK’s illiquid power market. Unless the route to market is clear and assured, the government’s objective of achieving stable and bankable contracts for generators will not be achieved.

The other area of concern is on-site self-supply. Industrial sites and businesses can potentially meet much of their own energy needs through installing renewables on-site. Whilst the existing Feed-in Tariffs cater for on-site projects at the smaller scale, it is not at all clear that larger industrial scale renewables will be able to benefit from CfDs. REA argues that either the Feed-in Tariff must be extended to address this, or EMR must be made to work for potentially very large industrial users of on-site power.

From the traditional generating sector there was a greater consensus in favour of the contents of the bill. RWE Npower said it strongly supported the triple target of radically reduced carbon emissions, guaranteed security of supply, and competitive energy prices for British businesses and households.

“Whether you’re a householder investing in your home’s energy future, or you’re a major investor, like RWE, investing billions of pounds in Britain’s energy future, today’s announcement is fundamental to the decisions you will be prepared to take.” said Volker Beckers, RWE Npower Group CEO. “It’s now that the real work begins. It’s vital for our customers and British business alike that these reforms are implemented swiftly and effectively, and do not add unnecessary cost to future energy bills. We look forward to getting down to the detail of implementation with the government.

“However, the cost of energy should not be higher than it needs to be,” Beckers continued. “The UK enjoys some of the lowest energy prices in Europe, but energy is still expensive. Energy supply companies like Npower can already influence just a fifth of the costs that make up a customer’s bill, and the impact of government policy will continue to make up a larger and larger proportion of the bill in future.”

Another concern among fossil fuel generators is that the Capacity Mechanism sets out government’s proposals for a new intervention in the supply market that would reward some generation technologies whenever they are able to produce electricity in addition to the price they are paid for the electricity they actually do generate, thus acting as a back-stop to security of supply.

Many fossil-fuel generators do not believe the case has been made for the introduction of a capacity mechanism at this time. An RWE spokesman explained: “There has been, and will continue to be, substantial investment in Britain’s energy sector such that the introduction of a capacity mechanism will add significant unnecessary cost to the British economy and our customers.”

The IET welcomed the bill as well as the proposals for a dramatic reduction in electricity demand. “The announcement of Government plans to reduce electricity consumption is an important, and long overdue, step forward,” said Dr Simon Harrison, chair of the IET’s Energy Policy Panel. “It echoes calls from the engineering profession for the UK to get serious about the contribution that energy-use reduction and energy efficiency can make to security of supply, environment, and costs.

“That it is announced on the same day as the Energy Bill underlines the importance of seeing energy demand and supply as a whole system, not picking off individual elements piecemeal. The IET believes that demand management measures should be fully integrated into energy policy, and that to be effective this needs to include all sources of energy demand, not just electricity. For example, technology will enable consumers to shift demand to avoid using high cost or high carbon generation in exchange for cheaper tariffs, to store energy within the home or within a locality, and reduce demand through remote control of domestic heating.” *

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