UK government's draft Energy Bill runs into criticism from parliamentary committee
26 July 2012, Electricity, Nuclear, Solar, Wind
Of the four parts of the Electricity Market Reform (EMR), the heart is a subsidy mechanism based on a feed-in tariff (FiT) with Contracts for Differences (CfDs) for all low-carbon generation. The other components are 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." However, according to the committee, to inspire the investor confidence required to achieve these goals, the bill needs to be more transparent and precise, with its main criticisms being a lack of clarity and overly complex arrangements. Indeed, the committee described the bill's objectives as "vacuous."
To give the market sufficient confidence to make long-term investment in low-carbon generation, more precision is required in the design of the CfDs and of the capacity mechanism. However, as well as being more precise, the CfDs must be simple enough to outweigh the damage done so far by what the committee calls "highly complex implementing arrangements."
A core problem of the CfD mechanism is who will be the counterparty. The white paper preceding the draft bill stated that the government would play the single counterparty role and 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. Yet this option would have a detrimental effect on the cost of capital. To reduce the cost of capital for investors, the committee recommends the model set out in the white paper. The question remains unresolved, however, with the Department of Energy and Climate Change (DECC) now considering a less than satisfactory third model in which there would be a single counterparty that would not be underwritten by the government.
As for the other parts of the EMR, the capacity mechanism, although recognized as being a good idea, was criticized for not being clear enough. The committee's other criticisms included that the EPS is pointless and a danger to the EMR's goal of achieving low-carbon generation, as it encourages new gas-fired generation; the absence of demand-reduction measures; and the heavy concentration on future generation. In addition, it suggested that including reference to carbon budgets would boost confidence in the UK's commitment to meeting its 80% de-carbonization target by 2050.
Despite these criticisms, the committee emphasized that the EMR is not a lost cause but that it must be revised with haste. The challenge is now for 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.
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