The UK government is “in danger of botching its plans to boost clean energy” according to a much-anticipated report from MPs.
In particular, the framework for new ‘contracts for difference’ to power companies is highlighted as risking derailing investor confidence in the whole UK energy market.
The report from Parliament’s Energy Select Committee is published today and examines in detail the government’s Energy Bill, which proposes a radical shake-up of Britain’s power market.
A cornerstone of the Bill is the introduction of new long-term contracts to give power companies a guaranteed price for the electricity they produce. This is intended to reduce the risk of investment in projects with high up-front capital costs, such as nuclear reactors and offshore wind farms.
It had been believed that these ‘contracts for difference’ would be guaranteed by the State, in turn lowering the cost of capital. But the Treasury has backed off from this plan and instead wants to spread the liability across various energy companies.
But according to the committee’s report, this approach could impose unnecessary costs on consumers, lead to less competition and deter investment, and it questions whether the plans are now too complex and possibly not legally enforceable.
Committee chairman Tim Yeo said the Treasury’s stance meant “the government is in danger of botching its plans to boost clean energy”.
He added: “Electricity market reform is essential, but the new contracts proposed by the government will not work for the benefit of consumers in their present form.
“Nobody wants to see a blank cheque written for green energy, but the government must provide investors with more certainty about exactly how much money will be available.”
The MPs are calling on the government to use its AAA-credit rating to underwrite the new contracts in order to keep the costs of energy investment down for consumers.
Prior to writing its report, the committee heard several days worth of evidence from industry experts, who said that the spending cap set by the Treasury – which limits the green levies that can be passed on to consumers in energy bills – could introduce an “unacceptable” level of risk to companies who are looking to build new wind, solar, wave or tidal power plants.
The report states that this is because the levy cap will “ration the number of contracts available, creating uncertainty amongst investors about which projects will receive support. This is already having an impact of investment decisions and could paradoxically push-up energy costs for consumers.”
The committee is also concerned that the new contract system will reinforce the dominance of the ‘Big Six’ energy companies which dominate the UK market – British Gas, EDF, EO.N, nPower, Scottish Power and SSE.
The government says one of the aims of the Energy Bill is to increase competition and improve the opportunities for new entrants in the electricity market, but during the evidence sessions witnesses told the committee that the Bill as it stands will deliver the exact opposite of this intention, threatening the viability of smaller-scale independent energy companies.
Yeo said: “Community owned energy projects and small independent generators are in danger under the current plans of being squeezed out.
A further concern highlighted in the report is that decisions about support for new nuclear power stations are being made “behind closed doors”. The committee is calling for an independent expert to inspect any agreements to ensure that they are delivering value for money.
The report concludes that the government must “rethink its plans urgently so that the investment that is needed to replace the UK’s aging power stations, cut carbon emissions and maintain energy security can be delivered”.