UK government’s draft Energy Bill runs into criticism from parliamentary committee.

The UK parliament’s Energy and Climate Change Committee recently published its views on the government’s controversial draft Energy Bill. The Committee’s conclusions and criticisms centred on the proposed Electricity Market Reform (EMR), and specifically the role of Contracts for Differences (CfDs). Of the four parts of the EMR, the heart is a subsidy mechanism based on a feed in tariff (FiT) with CfDs for all low-carbon generation. The other parts include a targeted capacity mechanism, a carbon price floor, and an emissions performance standard (EPS). The Bill aims for a “secure, more efficient, low-carbon energy system in a cost-effective way”. To inspire the investor confidence required to achieve these goals, the Bill needs to be more transparent and precise.  Lack of clarity and complexity of the arrangements are the Committee’s main conclusions. The Committee described the Bill’s objectives as “vacuous”. To give the market confidence to make long-term investment in low-carbon generation, more precision is required on the design of the CfDs and of the capacity mechanism. Not only must the CfDs be more precise, they must be simple enough to outweigh the damage done until now by what the Committee calls “highly complex implementing arrangements”. A core problem of the CfD mechanism is who the counterparty will be. The White Paper preceding the draft Bill stated that the government would play the single counterparty role, in which it would underwrite the CfDs. However, the draft Bill contained a significant shift to a multiparty model where payments flow between suppliers and generators, with collateral posted by suppliers. Of note is the detrimental effect on the cost of suppliers under this option. Indeed, to reduce the cost of capital for investors, the Committee’s recommendation is for a single counterparty model underwritten by the UK government. The question is still undecided, with Department of Energy and Climate Change now considering a third model in which there would be a single counterparty that would not be underwritten by the government. This is an imperfect solution so the issue is essentially unresolved. As for the other parts of the EMR, the capacity mechanism, although recognised as being a good idea, is criticised for not being clear enough.Even stronger criticism was made by the committee of the Emissions Performance Standard. They called it pointless and a danger to the EMR’s goal of achieve low carbon generation, as it encourages new gas-fired generation. The committee also criticised the absence of demand-reduction measures and the heavy concentration on future generation. In addition, it suggested that including reference to carbon budgets would give confidence in the UK’s commitment to meeting its 80% de-carbonisation target by 2050. Despite these criticisms the committee emphasised that the EMR is not a lost cause but that it must be revised with haste. The challenge is now with DECC to meet its timetable and to provide more detail and an impact assessment on its choice of counterparty model.  A full energy bill is due later this year and a law is planned to reach the statute book by mid-2013.

Written by Yasmin Valji.Analyst, Datamonitor Energy & Utilities