Monday, July 23, 2012

MPs slam Treasury, send draft Energy Bill back for redrafting

Chloe Smith, Treasury Minister
Cowboy antics: This woman (Chloe Smith, Treasury Minister) with her boss, George Osborne is delaying and damaging investment in low carbon generation. They should both get out of the way of the experts.

Government policy needs to do more to reduce the demand for energy, say MPs examining the draft Energy Bill, as well as find better ways of subsidising low carbon energy.

They also say that, as it stands, the Bill will reduce competition in the market and raise costs. Furthermore, vacillation in Government is causing delays in the much-needed investment in new energy infrastructure.

The “demand-side needs to be given a much higher priority in the Bill," not least because it is likely to deliver much more cost effective solutions than building ever greater levels of generating capacity," says the Select Committee on Energy and Climate Change, which is scrutinising the Bill.

The MPs want the Bill to be redrafted in order to capture much more than the 35% of possible energy saving already in the draft, as identified by last week's report on energy efficiency, commissioned by the Department for Energy and Climate Change (DECC).

They condemn the Treasury for failing to provide a witness to their enquiries or even answer their questions in writing, which has “seriously undermined" their ability to do their job. The MPs were told by numerous witnesses that Treasury policy, and in particular the levy control framework, under which the Treasury holds the purse strings of DECC, is having a direct impact on decisions about investing in new energy infrastructure.

Tim Yeo MP, Chair of the Committee, said: "Electricity market reform is essential, but the new contracts proposed by the Government will not work for the benefit of consumers in their present form." He said the Government needs to get back to the drawing board over the summer "to make sure that the Bill is fit for purpose in the autumn and is not subject to any further delays".

Commenting on the report, John Cridland, CBI Director-General, said:
“The Committee rightly highlights the importance of agreeing the design of the contracts for difference, and this must be done by the autumn. But companies are also eager to get on with investing now, and the decision on the renewables obligation support rates cannot wait any longer.”

The Bill’s key measures

The draft Bill contains four key measures: a Feed-in Tariff for low-carbon energy, a Carbon Price Floor, an Emissions Performance Standard and a Capacity Mechanism. The Carbon Price Floor has already been legislated for through the Finance Act 2011, so the Bill focuses on the remaining three measures.

The MPs say that Feed-in Tariffs with a Contract for Difference (CfD) are far too complicated in their presently proposed form. These are a contrivance at the heart of the Energy Bill designed to make it more attractive for investors to put money into low carbon generation, because it is more expensive to construct but cheaper over the long-term.

There are three problems associated with the model, they say. Firstly there is “genuine uncertainty" whether they are legally enforceable.

Secondly, Treasury insistence on capping DECC's spending will increase the risk to developers, possibly causing funding streams to dry up. Drily, the MPs send a message to the Treasury, that in the absence of any word from them, they assume that the statement in the Bill that the UK's statutory climate obligations have priority over the levy cap, means that the Treasury would allow further spending than the cap permits, in order to meet the country's climate change targets. They therefore invite an explanation from the Treasury about how the working of the levy will be modified to make this possible.

The third problem with the model is that by removing an obligation on the part of utilities to purchase renewable energy, this could actually lead to fewer players in the market, and “greater levels of vertical integration", reinforcing the power of the Big Six, which is the opposite of what the Bill is supposed to do. In fact, they say, the Bill should do more to support the entry of smaller players into the market and their continued existence.

They want to see a single counterparty to contracts that is underwritten by the Government, with a contract and design that is legally enforceable, because this is the best way to reduce the cost of capital. At present, what is proposed is a "multiparty payment model" whereby liabilities are borne collectively by all energy suppliers.

They also want to change the registration process for allocating CfDs in order to reduce risk, and extend the eligibility threshold for small-scale Feed-in Tariffs to at least 10MW, again to permit smaller scale generators and community-owned schemes to take part, and call for a fixed Feed-in Tariff to support community renewable energy schemes "up to at least 10MW and potentially up to 50MW in size".

Regarding nuclear power, they want to see more transparency for the process for agreeing a strike price to avoid the perception that decisions are being made “behind closed doors". They want to see a committee of independent experts appointed to oversee this negotiation process.

They don't believe that auctions of strike prices are a great way to deliver a cheaper outcome, because they can actually deter participation by smaller generators due to the uncertainty and expense of taking part. Instead, they propose that the Government should set out a planned reduction pathway for strike prices. This would guarantee a reduction in the level of subsidy paid by consumers over time.

They also want Government to provide clarity on the strike price level beyond 2017 as soon as possible, to help secure investment for emerging technologies like wave and tidal power.

Whilst admitting that the Government is right to prioritise security of supply as a policy condition, they say that ironically the possibility of a capacity mechanism appears to be freezing the prospect of new investment. Therefore, the Government must urgently give more clarity about how the capacity mechanism will work, and give more consideration to the consequences of feeding a large quantity of intermittent generation into the National Grid.

Further modelling is also required to reduce the likelihood of policies leading to a new dash-for-gas, they say. This should include the modelling of demand-side reduction strategies and energy storage, which themselves may need some form of support in order to gain traction in the marketplace

They slam the Emissions Performance Standard as “at best pointless" and, at worst, by grandfathering the initial level until 2045 undermining our ability to meet long-term carbon targets.

They want to see MPs scrutinise any decision taken to exempt generation plant from Emissions Performance Standards, which is permissible in the draft Bill for reasons of maintaining security of supply.

Nor do they think the National Grid should be the body that delivers Electricity Market Reform because it would lead to unnecessary extra costs to consumers and represents a potential conflict of interest.

The Energy Bill is a framework Bill, and will need secondary legislation in order to effect the required changes. Because time is slipping away, the MPs suggest that draft secondary legislation, including a model Contract for Difference, is prepared in time for the House of Commons' formal consideration of the Bill.

Tim Yeo concluded his comments on the Bill by saying that if it “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."

No comments: