Described as a “once in a generation opportunity” to drive low-carbon economic growth by Energy Secretary, Ed Davey, the Energy Bill has been introduced to parliament today after repeated delays.
In a statement to the House of Commons, Davey said: “The Energy Bill will attract investment to bring about a transformation of our electricity market, moving from predominantly a fossil-fuel to a diverse low-carbon generation mix.”
“The bill will support the construction of a diverse mix of renewables, new nuclear, gas and CCS, protecting our economy from energy shortfalls and significantly decarbonising our electricity supply by the 2030s as part of global efforts to tackle climate change.
“This is an economic opportunity – there for the taking. It will stimulate supply chains and support jobs in every part of the country, capitalising on our engineering prowess and our natural resources, cementing the UK’s place at the forefront of clean energy development.
“In an era of rising global energy prices, by shifting to more home grown sources of power and by becoming more energy efficient, we can cushion our economy and households from the fluctuations of world gas markets. We intend to underpin this with reforms to the retail market to simplify tariffs and make sure consumers are able to get the best deal for them.”
The proposals have been broadly welcomed by the energy industry, which had been concerned that the politicised nature of energy in the UK was undermining long-term investor confidence.
Tony Ward Power & Utilities Partner at Ernst & Young congratulated the Coalition government, stating: “The fact that Treasury and DECC have finally reached an agreement that has preserved much of the long-standing intent behind the reform is welcome and will be a relief to potential investors and existing asset owners alike.
“The measures announced achieve the difficult balance of preserving the majority of the aspiration to meet our 2020 targets for emissions and renewable energy, while acknowledging the potential role of gas in our fuel mix and moderating consumer bill increases. Whilst undoubtedly reflecting a degree of compromise, the UK finally seems to be back on track to create the much needed environment of stability and trust in the energy policy framework.”
In summary, the Energy Bill will introduce:
Feed-in Tariff Contracts for Difference (FiT CfDs) that will stabilise revenues for investors in low-carbon electricity generation projects. Under FiT CfD, generators will generate revenue from selling electricity to the market as normal but when the market reference point is below the stated strike price, the supplier will receive a ‘top-up’ payment from suppliers. Conversely, if the market reference price is higher than the strike price then the generator must refund the difference.
A Final Investment Decision Enabling (FID) process that will enable investment in low-carbon projects to come forward for early projects
Transitional measures will allow renewable investors to choose between the new system and the existing Renewables Obligation (RO) which will remain stable up to 2017.
A new government-owned company will act as a single counterparty to the CfDs with eligible generators. Government also intend to develop a two stage process in which projects are able to apply for a CfD once they have cleared meaningful hurdles such as planning permission and a grid connection agreement, and then a small number of hurdles post CfD-award in order to retain the contract.
Government is taking powers to introduce a Capacity Market, allowing for capacity auctions from 2014 for delivery of capacity in the winter of 2018/19, if needed, to help ensure the lights stay on even at times of peak demand. A Capacity Market will provide an insurance policy against future supply shortages, helping to ensure that consumers continue to receive reliable electricity supplies at an affordable cost.
Electricity Market Reforms will be overseen by National Grid. This will include CfDs and the Capacity Market.
An Emissions Performance Standard (EPS) will ensure that any new coal fired power stations will have to have CCS fitted to be able to operate within limit.
A Carbon Price Floor from April 2013, to underpin the move to a low-carbon energy future.
However, as revealed last week, the omission of an explicit decarbonsiation target has worried a number of green groups. Joss Garman, Political Director at Greenpeace, warned: “There is a gaping hole in the Energy Bill in the shape of a 2030 decarbonisation target. Billions of pounds of investment rest on this target being made law. Without it, there is serious risk of an investment vacuum after 2020, and of jobs and money being lost to our economic rivals.”
The Energy Bill also confirms controversial plans to ensure energy companies help consumers get on the best available tariff, limiting suppliers to four “core tariffs” per fuel.
Other new measures unveiled today include plans by the Department of Energy and Climate Change (DECC) to put energy efficiency at the “front and centre” of energy reform. As part of the plans, DECC is consulting on new proposals published today that are aimed a promoting energy efficiency through electricity demand reduction.
During the announcement of the Energy Bill, Davey spoke about the importance of safeguarding the competitiveness of Energy Intensive Industries (EIIs) in the UK. In order to insulate these companies from the additional costs of CfDs, government will allow some EEIs to be exempt. Welcoming the news, John Cridland, Director-general for the CBI, said: “Energy-intensive manufacturing is finally getting its place in the sun today, by the exemption from necessary new energy costs. This is vital for such companies to play a key part in our low-carbon economy and it is good news that the Government has listened to our calls to build in support at this early stage, which will ensure we reap the full economic benefits at the earliest opportunity.”
Following the pre-announcement of some Energy Bill details last week, the media has been accused by Davey of over-inflating the cost to the consumer of supporting green technology. In addition, the REA has stated that it is keen to communicate the facts about the real costs to consumers of renewable energy policies – that supporting renewables currently costs around £22 for the average consumer. DECC states that as a direct result of the EMR reforms, average household electricity bills are estimated to be around 5-9% lower over the period 2016 to 2030, compared to what they would be if a decarbonisation intensity of 100gCO2/kWh were achieved in 2030 through existing policy instruments.
Davey concluded: “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.”
Renewable Energy Association Chief Executive Gaynor Hartnell said: “The devil will be in the detail, which we have yet to fully examine. 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.”