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Draft Energy Bill: renewables take centre stage

23 May 2012

The Energy Bill was published in draft last week, enabling the process of 'Pre-Legislative Scrutiny' whereby interested parties are able to address their concerns to a joint parliamentary committee before the passage of the Bill through both Houses next year.

Introducing the draft, energy secretary Edward Davey hailed it as a package of measures that will deliver the electricity market reform (EMR) necessary to secure investment in clean and affordable electricity. It proposes a variety of long-term fiscal instruments designed to attract the £100bn plus investment that will be needed to reduce our dependence on geo-politically unstable sources of energy and our all-too-obvious vulnerability to energy market price volatility.

Industry reaction was mixed to say the least. The Engineering Employers' Federation (EEF), which represents the interests of a large proportion of energy-intensive industries in the UK, concedes that the draft bill lays the foundations for a radical shake-up of the electricity market, but policy director Steve Radley wants a better balance struck between encouraging investment in low carbon energy and, as he put it, keeping a lid on rising subsidies for renewable energy. With government estimates showing that its policies are already adding 22% to electricity prices for business, and forecasting this to rise to 34% by 2020 and 45% by 2030, the focus must be on developing the most cost effective mix of low carbon energy, he says.

EMR needs to address a persistent competitiveness gap in electricity prices since the middle of the last decade, according to Mr Radley. Government statistics show that since 2006, UK industrial prices have, on average, been 7-14% higher that the EU/G7 median. The issue is most acute for energy-intensive industries. Since 2006, the UK’s largest industrial consumers have been paying 17-24% more than the EU average. Compounding the issue is the fact that, unlike in the UK, in countries such as France, Germany and Sweden these companies receive a significantly greater discount on energy taxes. The impact of green policies is becoming more and more widespread in the sector, and even small, non-energy intensive, manufacturers are now increasingly feeling the strain.

The cost of green policy measures is a key factor. Unlike fossil fuel price increases, the causes of which have their origins beyond our shores, policy costs are difficult for manufacturers competing in global markets to pass on to their customers. The EEF is concerned that businesses will just have to pick up the tab for government policies.

Alistair Smith, who chairs the IMechE’s power division said these reforms are essential if the UK is to maintain a secure energy supply, while at the same time cutting carbon emissions at an affordable cost to the consumer. While he believes the bill effectively kills off the idea of a truly open UK electricity market, the legislation is necessary in order to encourage companies to build a balanced electricity generating mix, with the correct proportion of base load nuclear power along with the right balance of intermittent forms of renewable energy such as offshore wind power backed-up by reliable gas-fired generation.

But as the bill is only in draft and thus subject to powerful industry lobbying, he introduces a note of caution: “If these reforms are rejected by the power industry because they don't like certain elements, it may be time for the government to consider re-taking control of this essential element of our national infrastructure. The UK needs certainty now if we are to avoid jeopardising our security of supply in the relatively near future.”

The focus of the Renewable Energy Association’s (REA’s) chief executive, Gaynor Hartnell is on the fiscal instruments proposed in the bill, particularly the feed-in tariffs and the contracts for difference (CfD). “The feed-in tariff must continue to cater for projects up to 5MW in size, but we must make sure that the new CfD arrangements are accessible for larger industrial on-site renewables projects,” she says. “While the large scale utilities have a huge role to play in ensuring the security, affordability, and sustainability of our electricity supply, renewable energy has also drawn in a significant number of small and mid-range investors and generators, such as homeowners fitting PV to their roofs and farms installing biogas systems.

On the allocation of CfDs, Ms Hartnell says: “Several balances need to be struck. Government must give an indication of what it is seeking by way of renewable generating capacity, but we don’t want it being too prescriptive. The market must have its say. There also needs to be visibility in terms of how much is spent across different technologies and when constraints might kick in.”

The REA is concerned that some technologies will be favoured above others and is calling for fair treatment. Ms Hartnell points out that the government insists that nuclear is not receiving a public subsidy just because it’s nuclear, but because it’s low carbon. “On that basis,” she says, “it stands to reason that whatever payment nuclear receives, that should be the floor price for any other low carbon technology.” Under existing arrangements, the Severn Barrage would not qualify for subsidy, and from 2013 onwards nor will landfill gas. “Will these be treated on a par with nuclear,” she asks. “And if not, why not?"

CBI deputy director-general, Neil Bentley wants to see things moving apace. He is reassured that the Energy Bill is now in draft and now wants parliament, not only to get it right, but to do it as a matter of urgency. “With over a fifth of the UK’s generating capacity coming off stream over the next ten years, we face a real risk of electricity shortages in the second half of the decade,” he warns. “The clock is ticking to create the market certainty that will unlock billions of pounds of private sector investment, generating many new jobs across the UK, and securing an affordable supply of energy. 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.”

Corin Taylor, who is a senior economic adviser at the Institute of Directors, concedes that businesses need clean, secure and affordable energy, but his concern is that the draft Energy Bill may fail to deliver. “We need to see a technology-neutral approach adopted as soon as possible,” he says, “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. 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.”

Les Hunt

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