UK publishes draft Energy Bill but industry still wary

The UK government today published its long-awaited draft Energy Bill, which outlines how it plans to reform the British electricity market.

Energy secretary said the Bill was “a game-changing agenda and a world leading agenda” and maintained that without the reforms the UK would be unable to “keep the lights on”.

But the draft Bill has received a mixed welcome from business leaders and trade groups.

The intention of the Bill – which encompasses the government’s Electricity Market Reform (EMR) – is to stimulate investment in low carbon generation technologies and, in turn, secure energy efficiency and climate change targets for the UK.

It aims to do this via four mechanisms. Firstly, Contracts for Difference will replace existing subsidies with the intention of stabilizing returns for generators at a fixed level known as a strike price. If the market price is higher than the strike price, then the excess money will be clawed back from generators. The contracts will differ for each type of energy source. The first strike prices are due to be published within in 2013.

Secondly, a Capacity Market will be established to ensure there is sufficient reliable capacity to meet demand, particularly as a back-up to intermittent forms of renewable energy, and thirdly an Emissions Performance Standard will provide a regulatory cut-off point to prevent construction of new coal plants which emit more than 450g/kWh.

Finally, a Carbon Price Floor will place an initial value on the price of carbon of around £16/tCO2 in 2013, which will rise to £30/tCO2 by 2020.

The government has appointed the UK’s transmission operator National Grid as the delivery body for the reforms, which it will start to implement in 2017 and have fully operational by the late 2020s.

At a press conference today, Davey and energy minister Charles Hendry stressed that the object of the Bill was to ramp up energy investment in the UK. “This Bill is about growth,” said Davey, while Hendry added: “We need to secure twice the [energy] investment this decade as we raised in the last decade.”

Since it was announced in 2010, the EMR has made slow progress through Parliament, leading many in the power industry to accuse it of deterring, not encouraging, investment.

But Davey said he welcomed opposition from the industry: “I am pleased that there may be some criticism. It shows that we have got it right,” he said, adding that “if government was pleasing industry all the time then the consumer should be worried.”

And criticism was exactly what the publication of the Bill drew from some quarters of industry. Corin Taylor, senior economic adviser at the UK’s Institute of Directors, said that he felt the reforms “may fail to deliver”. 

“We need to see a technology-neutral approach adopted as soon as possible, so that the cheapest low-carbon energy sources are prioritised, but the Bill confirms that the government will try to pick energy winners for at least another decade,” he said. “We hope that the contracts for difference framework will succeed, but it looks like an overly-complex way of delivering much-needed investment in Britain's energy infrastructure.”

Matt Bonass, a climate change lawyer in Bird & Bird’s energy team, said that the Bill’s impact on investment and project development “remains a concern, as it is presented for pre-legislative scrutiny only at this stage”. 

“While this gives more time for debate on the details, it will do little to provide investors with the certainty they are looking for. Further, while the draft Bill sets out the broad themes of Electricity Market Reform, 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 there can be a long lead time between primary legislation and secondary legislation, “so uncertainty is likely to continue for some time yet. The great enemy of investment is uncertainty, and there remains much of that in the Bill.” 

Neil Bentley, deputy director-general of the Confederation of British Industry, said it was vital that the government delivered the Bill’s mechanisms “as a matter of urgency”.

“The clock is ticking to create the market certainty that will unlock billions of pounds of private sector investment,” he said. “We are still some way from having a detailed picture of how the electricity market will look in the future, on which the success of these reforms depends. With major investors waiting in the wings, these details are needed as soon as possible.”

 

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