Energy Bill fails to give the right answers

The draft Energy Bill has failed to provide sufficient clarity of the govenrment's plans for electricity market reform (EMR), with full details on some aspects unlikely to materialise until 2014

Several measures outlined in the 307-page Bill are designed to encourage investment in low-carbon energy generation.

These include:

• a new system of long-term contracts – feed-in tariffs with contracts for difference (CfDs) – providing revenue certainty for investors in low-carbon generation;
• a capacity market, to ensure the security of electricity supply; and
• an emissions performance standard to limit CO2 emissions from new fossil fuel power stations.

However, important detail on these policies remains sketchy. CfDs aim to facilitate investment in renewables, carbon capture and storage (CCS), and nuclear power through removing long-term exposure to electricity price volatility.

Yet the government does not expect to make a decision on draft tariff levels for the first contracts until late 2013, with the CfD regime starting in mid-2014.

The Bill says CfDs for renewables will last for 15 years, five years less than the Renewables Obligation, which it replaces and which closes for new generation from 1 April 2017.

It is less clear on the time frame for either CCS or nuclear.

The duration of CfD for projects supported under the government’s CCS commercialisation programme is initially set at 10 years, although that is subject to negotiation, says DECC, while the length of the CfD for nuclear and long-term CCS-equipped plants has still to be determined.

And, while the government says that once a project has been awarded a CfD at a particular level it will receive that tariff for the duration of the contract, the entire programme must operate in line with the budgetary constraints imposed on DECC. That means there could be a limit on the number of contracts offered.

“There needs to be visibility in terms of how much is spent across different technologies and when constraints might kick in,” said Gaynor Hartnell at the Renewable Energy Association.

The continuing lack of clarity around some aspects of the electricity market reform is worrying business groups, potentially putting at risk the £110 billion investment needed to fund new generating capacity in the UK.

“We are still some way from having a detailed picture of how the electricity market will look in the future. With major investors waiting in the wings, these details are needed as soon as possible,” said CBI deputy director-general Neil Bentley.

Matt Bonass, a corporate finance and climate change lawyer in Bird & Bird’s energy and utilities team, is also concerned about the lack of detail.

“The draft Bill sets out the broad themes of the EMR, [but] the devil remains in the detail and there is still considerable uncertainty as to the final form of any secondary legislation, for example on CfDs and the capacity market,” he said.

Ronan O’Regan, director, energy, at PwC, agreed: “There are still question marks around the legal structure and payment model for the CfDs. This is an important issue in the EMR proposals and if it is not resolved it risks delaying the overall timetable.”

The renewables industry is concerned that the EMR is favouring nuclear power at the expense of other low-carbon technologies. “The government’s persistence with CfDs is playing with fire,” said Juliet Davenport, chief executive at Good Energy.

“These overly complex instruments risk skewing the market towards nuclear and the Big Six [energy companies] at the expense of renewable energy and smaller suppliers.”

Prior to the launch of the Energy Bill, DECC published research claiming that the government’s energy policies would help ameliorate the negative impact that spikes in global oil, gas and coal prices have on the UK.