|Energy secretary Ed Davey has promised an energy ‘renaissance’
The wait is over. After months of delay and disagreement between political parties and government departments, the UK’s Energy Bill has been published.
The Bill is the most anticipated piece of proposed legislation to affect the electricity industry in Britain for years. It is intended to give investors some certainty on how the British energy landscape will look for the next two decades and so kickstart funding, especially for low-carbon energy.
The need for such action is pressing. Much of the UK’s power generation fleet is ageing, with many coal plants due to come offline to comply with European Union (EU) regulation.
Meanwhile, the country has not built a new nuclear plant since Sizewell B, which went fully operational in 1995. The UK government has pinpointed eight sites for new plants and potential operators are poised to make financial go-ahead decisions. But they have been waiting for an indication of their likely return on investment and assurance over nuclear’s long-term place in UK policy. Similar signals are sought by renewables players before they set up bases in the UK. And the gas market has its own questions, notably over shale gas policy, some of which were answered in the government’s Gas Strategy, published a week after the Energy Bill (see story in World News, p.4).
When the Conservative-Liberal Democrat coalition came to power in May 2010, Prime Minister David Cameron promised “the greenest government ever”. The Department of Energy – led by then energy secretary Chris Huhne and energy minister Charles Hendry – unveiled plans for an Electricity Market Reform within a groundbreaking Energy Bill.
Since then, both Huhne and Hendry have gone – Huhne was succeeded by fellow Lib-Dem Ed Davey, while Conservative Hendry was replaced by John Hayes, another Tory. Hayes is an outspoken opponent of many onshore wind farms and within days of his appointment was heard to say that “enough is enough” of such developments. The Chancellor, George Osborne, also favours gas over renewables.
A lot is therefore riding on the 187-page Energy Bill – billions of pounds in international investment, a revival of British skills and manufacturing, and the security of the UK energy supply. The Bill was published on 29 November, but some key aspects were released a week earlier, the most notable being that it would set no decarbonisation target for 2030 – this has been deferred until 2016 – and a levy would allow utilities to raise £7.6 billion ($12.2 billion) by 2020 from customer tariffs for low-carbon investment.
The politicians shaping UK energy policy
|Left to right: Energy secretary Ed Davey, energy ministers John Hayes and Greg Barker, Chancellor George Osborne and Prime Minister David Cameron|
Contracts for difference (CfD) were another previously announced element to the Bill. These establish a long-term contract between a government-launched counterparty and power companies to guarantee a ‘strike price’ for electricity generated. The other key reforms to the electricity market in the Bill are:
- A capacity market to allow for capacity auctions from 2014 for delivery of capacity in the winter of 2018/19;
- National Grid, the UK transmission and distribution company, to be appointed to deliver the Electricity Market Reforms, including CfDs, administer the capacity market and provide analysis and evidence to Government;
- A Final Investment Decision Enabling (FID) process to will facilitate investment in early low-carbon projects, guarding against delayed infrastructure investment;
- Transitional measures to allow renewable investors to choose between the new system and the existing Renewables Obligation, which will remain in place up to 2017;
- An Emissions Performance Standard (EPS) to curb the most polluting fossil fuel power stations, ensuring any new coal-fired power plants feature carbon capture and storage;.
- A carbon price floor, which the government already legislated to establish from April 2013.
So has the Bill delivered? Davey thinks so. “We are on the cusp of a renaissance in British energy,” he told Parliament. “The UK is open for energy investment.” And his sentiments are backed up by many in the industry, particularly those in renewables and nuclear power.
Both these sectors stand to gain from the £7.6 billion raised by utilities by 2020 for low-carbon power generation. But as no new nuclear plants are due online before 2020, Davey has admitted to reporters that most cash will go to renewables, especially wind. “Wind will get a lot of it,” he said.
For Gordon Edge, policy director for wind trade body RenewableUK, the Bill will “create a strong framework for investment”.
“The Bill provides welcome clarity on how contracts for difference will be allocated, reducing the financial risk to developers.” He says the counterparty “will decrease risk and lower the cost of capital.”
The Renewable Energy Association also welcomed the Bill. Chief executive Gaynor Hartnell cautioned that “the devil will be in the detail”, but said consumers and green generators should both win “if the new regime is implemented sensitively”
“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. Generators should get a stable price, provided they achieve the fair market price for their electricity. That’s why it’s essential we have a route to market which guarantees this.”
Jeff Champman, chief executive of the Carbon Capture and Storage Association, said the Bill will “give a good deal more confidence to those businesses that are developing the UK’s first CCS projects”.
And George Borovas, head of the international nuclear projects team at global law firm Pillsbury, sees the Bill as “a firm endorsement of new nuclear projects by both current and potential investors in the UK’s nuclear programme”.
“Long-term nuclear investors have been waiting for both clarity and an illustration of commitment, and will therefore welcome many of the agreements that have been announced,” he said.
Establishing CfD and a counterparty “will reassure many investors who have previously shown justifiable uncertainty”, he added. “Furthermore, the establishment of the capacity market and the enhanced Levy Control Framework also demonstrate a renewed commitment by the government to support Britain’s much-needed nuclear revival.”
Keith Parker, chief executive of the Nuclear Industry Association, agrees that the Bill “provides much needed investment certainty”.
“A major nuclear new build programme will lead to substantial industrial and employment benefits – including considerable opportunities for the UK nuclear supply chain and a boost for UK manufacturing and construction.”
Tony Ward, power & utilities partner at Ernst & Young, sees the Bill as opening the final chapter in the UK’s Electricity Market Reform process. He adds that the fact that the Treasury and the Department of Energy “have finally reached an agreement that has preserved much of the long-standing intent behind the reform will be a relief to potential investors and existing asset owners alike”.
“The measures 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,” he explains.
However, consultancy Frost & Sullivan believes the clarity the Bill claims to provide “is something of an illusion”. Although a carbon budget has been agreed to 2027, there is provision for a review in 2014. “This creates fresh uncertainty as the review could see the carbon budget maintained or relaxed,” states Frost & Sullivan. It is also wary of the CfD: “The Bill explains how it will work, but there is no mention of where the price will be set. If the minimum price is too low, investors will ignore the UK and go elsewhere.
“This situation highlights a key challenge for the government: foreign ownership. Most of the UK’s generating capacity is owned by large European utilities that can easily invest elsewhere if the return on investment is not good enough.
Ultimately Frost & Sullivan believes that the government will do enough to make the economics work for nuclear and renewables, at least to ensure that the 2020 targets can be met. “Politically it cannot afford for its entire energy policy to be abandoned.”
Irene Hurrel, partner in the Finance & Projects group at global law firm DLA Piper, acknowledges the Bill is “a significant step forward in creating a credible and clear framework to achieve the objectives of attracting significant investment and transitioning to a low-carbon generation mix” but cautions that “any sense of real certainty remains elusive”. She says this is because it is likely the Bill will change, possibly significantly, during the Parliamentary process; a lot of the detail underlying the EMR remains to be addressed in secondary legislation; strike prices for the first five years of the CfD scheme may not be published until the end of 2013; and a decarbonisation target is not proposed.
But Tony Cocker, chief executive of utility E.ON UK, is upbeat. He has long argued that the Bill needs to provide “a robust basis for the tens of billions of pounds of investment that the UK needs” and adds that “it looks as though the Bill is a good move in the right direction. It provides important certainty to investors looking to deliver a secure, low-carbon energy mix at an affordable cost to customers.”
Crucially, the OEMs on whose money and skills the UK’s power sector will rely, share in the postive response for the Bill from trade bodies and analysts. Alstom found “much to applaud” in the Bill – “especially as we can now move away from a two-tier energy system of renewables and the rest”. The French engineering giant considers the Bill will “deliver billions of pounds of investment and tens of thousands of jobs to the UK”.
Steve Burgin, Alstom UK president, expressed disappointment over the lack of a 2030 decarbonisation target – “we need to get on with setting the actual figure: leaving it until 2016 presents the risk of reducing both the scale and pace of much needed long-term investments” – but welcomed the move “to embrace all technologies, from nuclear to renewables, with each being treated in a similar way”. “As the UK looks to decarbonise at a faster rate, this policy provides the fundamental building block upon which companies can look to invest in nuclear and carbon capture and storage, and all forms of renewables,” he said.
Offshore wind is set to be a big winner in the medium-term, he added, “for the simple reason that new nuclear and large-scale carbon capture and storage projects will not take a major slice of the CfD pie before 2020”.
But in the longer term “it is also clear that we are going to have to wait until 2016, unless something unforeseen happens, and another Parliament, to discover how much encouragement the full range of low-carbon technologies may receive. It is a waiting game that some, including Alstom, believe could and should have been resolved in the Bill.”
The lack of a 2030 decarbonisation target is also seen by others as a failure of the Bill.
Clare McNeil, senior research fellow at the Institute of Public Policy Research, says the Bill “will give investors and the market some of the assurances they have been craving, but 2020 is already in the rear mirror for many investors and businesses.” She sees a 2030 carbon target as the Bill’s litmus test, which it “failed”. “Kicking this decision into the long grass and leaving the door open for changes to the UK’s fourth carbon budget and a dash for gas will leave the government’s energy policy mired in the kind of uncertainty it needs to avoid.”
David Elmes, academic director at Warwick Business School’s Global Energy Group, also fears the Bill “still fails to provide a clear framework for a successful future. The Prime Minister’s commitment to be the ‘greenest government ever’ has been fudged by pushing any decision on a decarbonising target until after the next election.”
If the Energy Bill proves one thing, it is that you cannot please all of the people all of the time. Whatever it delivered, it was always going to have its fans and detractors. But it has set the bar very high for Britain’s energy aspirations. It is an attractive piece of legislation because all forms of power generation are in play, and for the nuclear and renewables’ industries in particular, a manufacturing and skills’ boom could finally materialise.
Combined with a gas strategy that opens the door for up to 37 GW of new capacity and a push for shale gas exploration, foreign investors and power companies really can believe that the UK is a power market that is open for business.