Inching towards 21st century

Policy reforms to help bring about a low-carbon economy are eagerly awaited, but investors want a 2030 decarbonisation target, as Flemmich Webb reports


British energy policy is once more on the move. In 2006, the then Labour government set up an energy review, which was a much needed, comprehensive overhaul of policy. Now, seven years later, the Energy Bill, the culmination of hours of lobbying, consultation and negotiation, is inching its way through the legislative process.

The bill is critical for a number of reasons. The country’s energy infrastructure is creaking, inefficient and ancient, and needs a complete overhaul to drag it into a low-carbon 21st century. New capacity is required as old power stations, first-generation nuclear and the most polluting coal-fired have been or are being decommissioned.

New transmission networks are needed to accommodate increasing amounts of renewable generation. All this while ensuring the UK cuts greenhouse gas emissions by at least 80 per cent of 1990 levels by 2050, as mandated by the 2008 Climate Change Act.

The government drew up the Energy Bill to tackle these challenges. Within it are details of the Electricity Market Reform (EMR) framework, the proposed regulatory backdrop to the more than ÂŁ110 billion of investment that’s estimated to be needed to create a secure, affordable, low-carbon energy supply.

We are starting to nail down ways of incentivising investment in different technologies

EMR comprises a number of key components. Contracts for difference (CFD) are long-term agreements, active from 2014 onwards, which set out a subsidy framework, and provide a stable and predictable electricity price for companies investing in low-carbon generation, as well as a carbon floor price, a UK-specific tax that will underpin the EU Emissions Trading Scheme’s carbon price to a value that will help achieve the EMR goals.

There are plans for a capacity market to help new-build gas development to cover generation shortfalls from renewable and nuclear generation; an emissions performance standard to ensure carbon capture and storage (CCS) technology is used by new fossil-fuel power plants; initiatives to support liquidity and market access, including long-term power purchase agreements, to make it easier for independent renewable generators to enter the market; and measures to reduce electricity use.

In some ways, this is the kind of policy direction that investors have been clamouring for. Until now the recent inertia and uncertainty surrounding UK energy policy has made investors nervous; it’s hard to make long-term investment decisions when government’s direction of travel is unclear.

“We have come off the back of several years of significant uncertainty,” says Tony Ward, head of power and utilities at Ernst & Young. “It’s positive that we are coming to a conclusion and starting to nail down ways of incentivising investment in different technologies, which we haven’t had previously.

“The key question will be, once the framework is delivered, will individual investors choose to invest in one, all or some of those technologies?”

But unsurprisingly, given the complexity of such a bill, not everyone is satisfied. In February, a coalition of 35 organisations, including energy and supply chain companies, investors, unions, church groups and NGOs, called on MPs to back the inclusion in the bill of a 2030 decarbonisation target for the power sector.

Tim Yeo, who chairs the House of Commons Select Committee on Energy and Climate Change, supports this motion and in the same month tabled an amendment to the bill, co-sponsored by Labour MP Barry Gardiner, calling for such a target.

A month later, six of the world’s largest energy manufacturers, Alstom, Mitsubishi, Doosan, Areva, Vestas and Gamesa, who together employ 12,500 people in the UK, wrote to the government also calling for a decarbonisation target, saying that “further investment in low- carbon power generation is critically dependent on a long-term, stable policy framework”.

They have to set policies now that will have repercussions over the next 50 years

The concern is that companies will invest elsewhere if they don’t see the UK as a good long-term bet. Renewable energy investors operate in a global marketplace; if conditions aren’t amenable in one country, they’ll invest elsewhere, taking with them potential jobs and the economic growth of the green sector.

“It will be a serious setback if we don’t set a decarbonisation target,” says Friends of the Earth’s lead energy campaigner Guy Shrubsole. “The UK will be a less attractive place to invest in the green economy whereas, if we took action, we would have the chance to be a world leader.”

Chancellor George Osborne, who doesn’t want to set a decarbonisation target until 2016, after the next election, has so far held firm amid the maelstrom. This is in part because he wants to focus on the cheaper, “low-carbon” option of gas. Hence the government’s recent Gas Generation Strategy, which sets out plans for as many as 30 new gas-fired power stations with 26 gigawatts of capacity by 2030, and the tax incentives for shale gas exploitation announced in the Budget.

This move draws to attention broader concerns over continued subsidies for fossil fuels. “Fossil-fuel subsidies are public enemy number one for green energy,” says International Energy Agency chief economist Fatih Birol, calling for governments to end the $523 billion in annual subsidies that support global oil and gas production.

It’s an old cliché, but the devil is in the detail and there’s a lot of it to be finalised before the Energy Bill becomes law as planned by the end of the year. It’s not easy for policymakers; they are dealing with constantly changing energy markets – witness the recent price drop of solar – where advances in technology can swiftly change perspective and relative economics, for example with shale gas. They have to set policies now that will have repercussions for society, the economy and the environment over the next 50 years.

It’s hard to predict with any degree of certainty what Britain’s energy landscape will look like by then, there are too many variables, but one thing’s for sure, a greenhouse gas emissions reduction of at least 80 per cent by 2050 will require decarbonisation of the economy.

The government’s Pathways to 2050 report says this will require the electrification of heating, transport and industry, and a doubling of decarbonised electricity supply; smart grids to cope with renewable energy inputs; sustainable bio-energy for those in sectors that can’t be electrified, aviation for example; and a substantial reduction in demand.

Through the Energy Bill, the government hopes to set in motion policies that will allow these crucial changes to take place. By overhauling the country’s energy infrastructure and regulatory framework, it aims to attract enough investment, back the most robust technologies and achieve emission reduction targets.