Hill+Knowlton Strategies

 In its report on the Electricity Market Reform (EMR) of April 2011 the Energy and Climate Change Select Committee recognised the “potential” of the new low carbon generation delivery mechanism, but cried out that the consultation paper’s proposals were “overly-complex, potentially expensive and fail to recognise the urgency of the transformation that needs to take place”. In short, EMR for all its innovation and cross-party political support would not attract the investment needed soon enough.

 Fifteen months later and the committee have had another chance to review the government’s plans to attract new investment in the UK’s electricity market. In today’s report Draft Energy Bill: pre-legislative scrutiny the committee cast their judgement on every aspect of the government’s 2012-13 Energy Bill and its central tenet, the EMR.

 Tim Yeo, the chair of the committee, and his colleagues did not hold back. “Unworkable,” “unacceptable” and “counter-productive” where just some of the salvos fired at DECC, who will sponsor the bill, and HM Treasury, who will have the final say on the financial instruments under-pinning so much of the Bill. In his statement accompanying the report Yeo concludes:

 “The Government has a lot of work to do over the summer to make sure that the Bill is fit for purpose in the autumn and is not subject to any further delays.”

 Select committees tend to find provocative language in order to help them secure media interest in their often very dull reporting but this is pretty strong stuff from the ECCC. The damning report picks holes into several of EMR’s central components and takes aim at the lack of detail provided by the Government. The later charge is hardly surprising to those following the committee’s progress with the Bill. Its chair Tim Yeo has complained very publicly in recent weeks about the Treasury’s refusal to give oral evidence to his committee on the essential features of its measures in the Bill over which it has control.

 Today’s report addresses those measures by attacking the government for failing to back the EMR’s new system of long-term contracts. These new contracts seek to give power companies a guaranteed price for the low-carbon electricity they produce. The theory goes that the long-life of the contracts will reduce the risk of investment in projects with high up-front capital costs – a key barrier to investment in the sector – by providing certainty for a longer-period of time.  

 The prospered ‘Feed-in Tariffs with Contracts for Difference’ mechanism in the Bill was declared “too complex” and “unworkable”. The committee also warns that the proposed reforms will probably consolidate the dominance of the big six energy companies. Instead the Committee would like to see the Government use its strong credit rating to underwrite the new contracts in order to keep the costs of energy investment down for customers. The report also criticises the Treasury for the spending cap on green levies that can be passed on to consumers in energy bills as they “could mean unacceptable risk to investors”. This is because the levy cap will ration the number of contracts available to the various competing low carbon technologies.

 Other concerns around the Bill include:

 The draft Bill and its associated documents are fundamentally flawed by the lack of consideration given to demand-side measures – potentially the cheapest methods of decarbonising the UK’s electricity system.

• Given that the Government (and the Committee on Climate Change) see nuclear playing a key role in the future energy mix, Government should consider how carbon and security objectives could be delivered if no new nuclear is forthcoming.
• The ECCC want a clearer understanding of the likely impact of the EMR proposals on the future role for gas. They recommend that the Government, in its forthcoming Gas Strategy, considers the interrelationship between EMR and the capabilities of the gas infrastructure, in particular the potential need for more gas storage.
• They do not believe that it is appropriate for National Grid, a private company, to act as the EMR delivery body.
• The FT quotes Mr Yeo as saying: “If the energy bill does not set a target to largely decarbonise the electricity sector by 2030, then the UK may miss one of the biggest opportunities it has to create a low-carbon economy in the most cost effective way.”

 The report comes at a time when the UK media are also reporting on George Osborne’s blocking of a new subsidy regime for renewable energy, as he fights another coalition battle with the Liberal Democrats, this time to ensure that gas remains central to Britain’s future power needs. The FT reports that the stand-off between Mr Osborne and Ed Davey, the Lib Dem energy secretary who wants to prioritise renewables, has infuriated business. John Cridland, head of the CBI employers’ group, claims the “political row” is holding back investment in Britain’s energy infrastructure.

Following the Queen’s Speech, today the Government publishes its landmark piece of legislation to reform the electricity generation market in the UK. The draft Energy Bill contains the long-awaited Electricity Market Reforms, which are intended to provide the support necessary to balance future electricity generation over a mix of energy sources in order to reduce dependence on any one source and to meet carbon reduction targets. Against a challenging economic backdrop and with a fifth of existing generating capacity due to be retired from the grid in the next decade, these reforms are critical to ensuring the lights stay on while meeting our commitments to cut carbon emissions.

Overview

The key part of the Electricity Market Reform (EMR) are ‘market mechanisms’ designed to transform our generating capacity. The first of these is the introduction of Feed-in-Tariffs with Contracts for Difference (CfDs), long-term instruments designed to provide stable and predictable incentives for companies to invest in low-carbon generation. This will replace the system of Renewables Obligations (RO), which is due to end in 2017.  DECC has also committed to working with industry on Final Investment Decisions (FID) Enabling to enable some investment to begin in advance of the CfD regime coming into force. The second is an Emissions Performance Standard (EPS) that will limit carbon dioxide emissions from fossil fuel power stations by setting emissions standards for all new fossil fuel powered generation. This will prevent the construction of new coal plants which emit more than 450g/kWh.

Further support for the market mechanisms is the introduction of a Carbon Price Floor. This was announced by the Chancellor in the 2011 Budget and was introduced in the Finance Bill. This provides a clear economic signal to move away from high carbon technologies by increasing the price paid for emitting carbon dioxide. It places an initial value on the price of carbon of around £16/tCO2 (2009 prices) in 2013, which will rise to £30/tCO2 (2009 prices) by 2020. This will be complemented by a Capacity Market that will, if required, provide security of electricity supply by ensuring sufficient reliable capacity is available.

The measures are set to increase consumer bills, although the Government argues the rises will be less than if the UK carries on without reforms. The Department of Energy and Climate Change estimates the average bill will increase by GBP160 by 2030 instead of the GBP200 rise predicted if the market is left as it is. The costs of this investment will preoccupy media interest today and in the coming weeks, especially as consumer bills continue to rise and incomes tend to fall. One aspect of energy policy that will be critical to ensure that the cost increases stay within Government targets is the drive to improve the energy efficiency of the UK’s housing stock, and therefore reduce energy usage. The Green Deal is not part of the Energy Bill, but will be very important to achieving the Government’s affordability ambitions.

In addition to EMR, the Energy Bill also aims to ensure that Government and regulator Ofgem are aligned at a strategic level through a Strategy and Policy Statement (SPS). The Bill also establishes a new nuclear regulator, the Office for Nuclear Regulation, to regulate the building of new nuclear power stations. Finally, the Bill contains provisions that will enable the sale of the Government Pipeline and Storage System (GPSS). The Parliamentary Under Secretary of State for Defence Equipment, Support and Technology, at the Ministry of Defence provided a separate Written Ministerial Statement about this.

Gas

The Government have said that gas will continue to play an important role in the transition to a low-carbon economy, to provide flexibility and help maintain security of supply. A separate strategy on the role of gas will be published in autumn 2012. This is the subject of a public consultation and the deadline for submissions is 28^th June 2012. Also the Government announced earlier this year that the Emission Performance Standard for gas fired power stations in the UK that will allow them to continue to operate until 2045. Gas may well play a critical role in filling any gaps in supply created by a delayed roll out of the EMR.

Nuclear

The introduction of CfD for nuclear, together with other forms of low-carbon generation, is an important part of the Government’s plans to support the construction of new nuclear capacity. Some commentators have suggested that the EMR has been designed firstly to accommodate the nuclear consortia that are bidding to build new nuclear reactors, to the detriment of other energy sources. This is primarily because the Government have stuck to their no subsidy line for nuclear. This appears to provide very positive reading for nuclear and DECC appear very ready to engage with project developers in the short term before CfD comes into force. This will be welcomed by EDF Energy, who today suggested that they may apply to extend the life of their existing nuclear power stations.

Renewables

The CfD is seen by many commentators as favouring developers of larger renewables projects, but as an industry the EMR will be welcomed as a first step to providing the investment certainty required to build new capacity, especially the third round of offshore wind. For developers though the devil will be in the details and there remain some questions about issues like the tenure of CfDs, the details about contracting parties on CfDs, but perhaps most importantly around the proposed timeline for implementing EMR. The industry suggests these timelines look ambitious. The CfD must be in place to support investment decisions before the end of the RO, which currently expires in 2017.

Which? The consumer affairs group today launches the Big Switch campaign, designed to get the more than six in ten households who have never switched their energy supplier to consider doing so. Featured today in The Mirror and The Sun the campaign is encouraging consumers to submit their (non-binding) interest in order to collectively negotiate a better deal from the large energy suppliers.

The timing couldn’t be better and the Which? team deserve credit for launching in the middle of a cold snap when interest in energy prices is set to peak again. It is also just days into the term of new Secretary for Energy & Climate Change, Ed Davey, who began his Cabinet career by suggesting his focus would be on enabling consumers to get a better deal from their energy supplier. 

Which? Has long been a trusted consumer brand and I remember blogging last year about CBI research around the Green Deal that showed Which? to be the most trusted brand by consumers looking for advice. This campaign is in my mind overdue and I hope that it will be successful. I’ve signed up this morning and it was dead simple. Congratulations to Which? for kicking it off.

They will though face an uphill struggle in encouraging consumers to make the switch if the latest research from Ofgem is to be believed. In a report available on the regulator’s website they review attitudes to switching and new devices aimed at simplifying bills. It’s clear from the opening of the report though that the vast majority of energy users fall within a ‘disengaged’ category of people who don’t understand their bill, don’t appear to want to understand their bill and/or don’t feel there is much value in better understanding their bill because ultimately they do not trust that their time and interest will save them money. As I mentioned the Which? campaign faces and uphill struggle, but they have made the right start. I also just noticed the first tweets about this from @whichaction and @whichconvo. This is encouraging because a campaign like this is made for social networks. A shame though that Facebook hasn’t also been engaged by Which? I did look for their page to show an example of what they are doing, but perhaps they are waiting for the new Facebook timeline to launch on 29^th February.

Either way don’t delay, expressions of interest need to be logged on the campaign site by 31^st March.

So, it seems there will be an announcement tomorrow morning on whether the Energy Secretary Chris Huhne will be prosecuted. This bring to an end months of speculation over allegations that Huhne asked his former wife to take speeding points on his behalf.

Nick Clegg has already made it clear that if charged, Huhne will have to step down, prompting speculation on who will replace him on the energy and climate change brief. The quota of Liberal Democrat ministers will of course need to be maintained, narrowing it down somewhat. Junior business minister Ed Davey appears to be the front runner, with junior Foreign Office Minister Jeremy Browne and former Treasury Secretary David Laws also mentioned in passing.

The Coalition Government has been under fire recently for backsliding on environmental policy, with even key initiatives such as the Green Investment Bank, feed-in tariffs and the Green Deal falling victim to a strong Treasury keen to keep public spending to a minimum wherever possible.

Of the three contenders named above, two contributed to the Orange Book of 2004, widely regarded as the manifesto of the right wing of the Liberal Democrats. If tomorrow does mark the end of Chris Huhne’s cabinet career, all eyes will be on his successor for any hint that the ‘greenest government ever’ is not living up to its name…