Industry focuses on forthcoming government policy proposals

The energy industry awaits details of reform measures with a sense of keen anticipation, as Tim Probert discovers

The Coalition Government is poised to publish details of its long-awaited Energy Bill which will transform the UK power supply landscape.

The bedrock of the Bill will be an Electricity Market Reform (EMR) package, aimed at allowing low carbon energy to compete better in the marketplace with fossil fuel energy, which remains much cheaper.

EMR will see the replacement of the system, which has nurtured the UK renewables sector from its birth, with a new scheme reflecting the increased scale of the industry and the need for a structure which gives investors the confidence to invest.

The current system requires electricity suppliers to buy a certain proportion of their output from renewable generators (via Renewables Obligation Certificates or ROCs, which the generators earn for their renewable output).

The new policy will guarantee low carbon generators, including nuclear power stations as well as wind farms, a minimum price for their power through a Feed-in Tariff with Contracts for Difference (CfDs). This should make it easier for them to attract funds from investors because the returns on low carbon energy projects would be more predictable.

The Energy Bill is a once-in-a-generation opportunity to boost our economy as well as head off our energy challenges

The aim of CfDs, according to Energy and Climate Change Secretary Ed Davey, is “to bring all technology groups down in cost and begin levelling the playing field”.

CBI deputy director-general Neil Bentley says it is crucial the government acts to shore up investor confidence. But he warns that it is just as important for government to present a unified political message.

This is not the case at the moment, with divisions between the Department of Energy and Climate Change (DECC) and the Treasury. Chancellor George Osborne seems determined to push the case for more gas generation even though there is clear evidence that it is higher gas prices that have pushed up consumers’ household bills in the last couple of years.

Gas alone is not the answer, Dr Bentley argues. “Are you for green or for growth? Are you for renewables or for gas? Fruitless debates over these false choices can seem like they’re just noises off, but they really matter,” he says.

“The Energy Bill is a once-in-a-generation opportunity to boost our economy as well as head off our energy challenges. To grab that opportunity before it is too late, we need less politics, more policy,” he adds.

While most large energy generators and investors are generally happy with the concept of CfDs, SSE and Npower have called for an extension to ROCs until 2020, and a period of “parallel running” between the old and new systems to avert an investment hiatus in offshore wind.

DECC says the new system will offer better value for money, so prolonging the transition would push up consumer bills. But it is looking at ways to ease the path from the current system to CfDs and to reassure investors.

“I’ve undertaken to explore what form of comfort might be given to keep investments on track for project developers looking to make progress over the next 15 months or so,” Mr Davey says. “I will seek powers in the Energy Bill to give the market certainty on these arrangements and demonstrate our commitment to supporting new investment.”

Despite this commitment, one place where the EMR is causing some concern is Scotland, where renewables policy has seen a divergence from that of Westminster over the last few years. Under current arrangements, the Scottish government is responsible for setting support levels for ROCs, and First Minister Alex Salmond wants guarantees that Scotland will retain a similar level of self-determination in the EMR era.

While the draft Energy Bill pledged to consult Scotland before making key policy decisions, Mr Salmond wants an assurance that the new system will deliver the same level of support as the current arrangements, and that it will give ministers north of the border a say in creating and operating the CfD system in Scotland

Renewables targets in Scotland are considerably more ambitious than in England. The Scottish Parliament hopes to generate the equivalent of 100 per cent of its energy from renewables by 2020. This is reflected in a more welcoming climate for wind farm developers, particularly onshore. The percentage of wind farm projects approved by councils in Scotland is far higher than in England – 62 per cent as opposed to just 25 per cent south of the border last year – although English approval rates have improved considerably this year.

Yet smaller Scottish wind power developers fear phasing out the Renewables Obligation will make it harder for them to secure viable power purchase agreements and thus project financing.

DECC announced in July that the level of support for onshore wind power is set to fall by 10 per cent in both England and Scotland to reflect falling costs. But, while Scotland has guaranteed that the new level will remain in place until 2017, the Treasury has been angling for a 25 per cent cut in the support level, to the consternation of many in the industry.

Scotland has also pledged to introduce extra support for offshore wind deployment in deep waters. Scots at the Holyrood parliament want to ensure they retain independence to make such decisions in the future.

PRICING

What is a CfD?

The government’s proposed Feed-in Tariff with Contracts for Difference (CfDs) is a long-term fixed arrangement that will pay low carbon generators the difference between a reference market price for electricity and an agreed “strike price” based on the cost of particular technologies.

If the market price is below the strike price, the government pays the difference to the generator, ensuring that generators’ revenues are constant. But it is also meant to protect consumers from excessive price rises by clawing back money from developers if the market price is higher than the strike price.

The level of the strike price for CfDs is therefore crucial to the future health of the sector. It will be determined by an “arm’s length” counterparty, expected to be an organisation owned by government. Further details will be unveiled in the Energy Bill, but the price will be partly based on evidence from the industry about technology costs.

CfDs will be set at different rates for different technologies, and they will distinguish between base load and intermittent low carbon generation. The contracts are expected to be signed from 2014. But, until 2017, renewable generators will be able to choose between CfDs and the Renewables Obligation, when the RO will close to new projects. All generation accredited under the RO will receive its full 20 years of support.