Energy Bill announcements

The UK government have announced their decisions on the future shape of the energy market in the forthcoming Energy Bill.

Electricity Market Reform (EMR) introduce two key mechanisms: Contracts for Difference and the powers to implement a Capacity Market that aims to attract the £110 billion of private sector investment needed to replace ageing energy infrastructure with a more diverse and low-carbon energy mix.

Contracts for Difference (CfDs) will be introduced via the Energy Bill. CfDs are long term contracts that aim to provide stable revenues for investors in low carbon energy projects at a fixed level known as a strike price. By providing a fixed price they will help lower the cost of capital. There will be a claw back mechanism if the market price of electricity rises above the strike price.

Counterparty. The government will establish a new body to act as a single counterparty to the CfDs with eligible generators. The counterparty will have levy-raising powers to enable it to raise funds from suppliers to meet its costs, including payments to generators.

A Capacity Market will provide an insurance policy against future supply shortages as a fifth of existing generating capacity is set to close and more intermittent (wind) and inflexible (nuclear) generation will be built over time to replace it. Ofgem and National Grid will forecast where there could be shortages in supply and, if needed, auction for capacity in advance to ensure enough energy backup to meet consumer demand.

Decarbonisation Target. To meet the legally binding decarbonisation targets the Energy Bill will include powers to set a decarbonisation range in secondary legislation. The decision on whether to set a range for carbon emissions in 2030 will be taken when the Committee on Climate Change has provided advice in 2016.

The Levy Control Framework (LCF) budget is currently £2.35 billion for low carbon electricity in 2012/13. It will rise to £7.6bn in real terms in 2020/21.

Commentary on these latest measures has focused on the increase in low carbon energy levies and the delay in the 2030 carbon target.

Based on government estimates that green measures make up £20 of the average domestic gas and electricity bill of £1,249 a year, the cost of increasing the cash set aside to pay for renewable investment would rise to about £80 according to the Guardian or £90 on the Telegraph’s estimate. Their excitable headline figure of £175 includes support for nuclear and fuel poverty.

More critical commentary includes Michael Meacher MP who said:
“There are two central issues that matter in this Bill. Will it enable Britain to de-carbonise the electricity supply sector by 2030, without which we will not be able to meet our carbon emissions reduction target of an 80% cut by 2050? And will the central thrust of the Bill be towards a renewables future driven by a major uplift in feed-in tariffs or is it framed to provide a massive hidden subsidy to nuclear? The Bill fails on both counts.”

Predictably Green MP Caroline Lucas was also critical of the back door subsidy for nuclear: “Coalition ministers have stated again and again that their pledge to spend no public money on new nuclear will hold, yet it’s obvious that EMR [electricity market reform] has been designed to allow subsidy via the backdoor. At an estimated cost of up to £7bn per power station according to EDF, nuclear is eye-wateringly expensive and there’s a real risk that funding will be sucked away from renewables.”

Energy Minister Ed Davey admits that the failure to secure a decarbonisation target by 2030 is his biggest disappointment. “This was the most difficult issue in discussion, and a genuine issue of disagreement”. The renewable energy sector also claims the delay is a big mistake, since investment lead times in the energy sector are so long that the industry needs to know now what demands will be placed on it by the government for 2030.

UNISON national officer for energy Matthew Lay said: “The Bill is simply a sticking plaster on an open wound. It is a bitter disappointment because customers cannot keep waiting for solutions to address the huge problems facing the energy industry. Only radical reform of the way energy is produced and delivered to households will deliver some relief. Too many people in Britain are worried about keeping warm this winter, let alone in 20 years’ time.”

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