The new Energy Bill that the government has introduced into parliament appears to pass the main tests that will ensure that the UK’s electricity system keeps the lights on while also reducing its impact on our climate. The basic principles are sound and there is a clear and encouraging sense of direction.
However, it still sends worrying signs that the internal bickering within the government over the future direction of energy policy may continue, undermining the confidence of potential investors in the power sector.
On the plus side, the new “contracts for difference”, should provide greater certainty about the returns on investments in renewables, carbon capture and storage and nuclear power, at least up to 2020, particularly as a new government-owned company will act as a single counterparty to these contracts, and hence limit the risks for private companies.
(These contracts mean that if the market price of electricity drops below a “strike price” set by the government, investors will be compensated.)
The cost to consumers, capped by the “levy control framework“, should be modest and affordable, with the Department of Energy and Climate Change estimating that low-carbon investments will add £95, or 7 per cent, to the average household bill in 2020, an average increase of less than 1 per cent a year, compared with £20, or 2 per cent, in 2011. According to the energy regulator Ofgem, average electricity bills have risen by more than 10 per cent over the past four years, and there are, of course, understandable concerns about how rising energy prices affect the cost of living.
Consumers could be paying less in 2020 if the government’s energy efficiency measures have the desired impact on homes and businesses; and the advantages of alternatives to fossil fuels will be greater if the wholesale price of gas rises more quickly than in DECC’s projections.
This means that the Energy Bill provides the clarity which could underpin the scale of the investment in low-carbon power that is needed up to 2020 to provide affordable electricity while reducing emissions of greenhouse gases.
The guarantee of support for renewables, carbon capture and storage and nuclear means that the UK low-carbon electricity supply system should include a portfolio of technologies that is diverse and robust enough to deal with further development.
The creation of the power capacity market, to provide insurance against blackouts via financial incentives, with the first auction tentatively scheduled for 2014, should provide a greater security of supply. The pressures on capacity are strongly influenced by the level and pattern of demand and markets can play a strong role in their management.
The key elements of managing demand in relation to supply should involve time-of-day pricing and contracts for “interruptibility”, as well as, fundamentally, using energy efficiency measures to reduce overall electricity consumption.
Taking all these measures together, the package represents an encouraging move towards using markets to provide for the medium and long run, as well as the short run, in contrast to the current system, with its excessive focus on near-term competition. Fundamental to the markets doing their work for efficiency, flexibility and discovery will be a strong carbon price – already a government commitment.
All these measures provide a clear market-based framework that will encourage investment. Unfortunately, there are still some signals that may ultimately put off investors.
Over recent months, the coalition has appeared unclear about the direction of energy policy and its commitment to low-carbon electricity.
Last year, the government dithered over accepting the recommendations by the independent Committee on Climate Change about the cuts in emissions required by the mid-2020s, insisting that the carbon budget should be reviewed next year, with the possibility that it would be weakened.
In addition, some ministers and senior cabinet members have given the false impression that economic growth and environmental responsibility are not compatible, or exaggerated the costs and challenges of deploying renewables, particularly onshore wind farms.
As a result, the very sensible CCC recommended in September that the government should include in the Energy Bill a target to decarbonise the power sector by 2030, to try to re-establish clarity for investors.
But the government has fudged its response, only creating a provision within the Energy Bill to introduce such a decarbonisation target in 2016 during the next parliament. This is a clear sign that the simmering internal disagreements between ministers over energy policy have not been truly settled, creating an impression to the outside world of risks that policy may unexpectedly change direction in future.
So it remains to be seen how investors react not just to the contents of the bill, but also to its passage through Parliament. If they remain confident and optimistic about the UK’s power sector, they could invest billions of pounds, giving a much-needed boost to growth.
But if investors are unconvinced and uncertain about the Government’s intentions, households and businesses will find it increasingly difficult to gain access to affordable and secure sources of clean electricity.