The government’s Energy Bill is meant to encourage the transition to a low carbon economy but in its current state there are growing fears that much needed investment will stall before the bill is passed next April.
The primary concern for industry and investors is whether the government will give their investment the support it needs. This fact is made even more critical when all are agreed that some £200bn is needed to update the UK’s electricity grid and support low carbon and renewable energy projects.
The Department of Energy and Climate Change (Decc) hopes to alter its existing feed-in tariff model, which is used to subsidise payments to generators.
It wants to offer large scale low carbon energy generators a guarantee of earnings - a concept that is deemed vital to this sector, which requires massive up-front investment because low carbon and renewable electricity is considerably more expensive per gigawatt generated than that produced from fossil fuel.
The idea being proposed by Decc is similar to the scheme that currently operates for small scale renewable energy generators.
In future the feed-in tariff would offer a subsidy to top up wholesale prices and prevent higher costs associated with low carbon energy production being passed on to consumers.
This would be facilitated via the proposed contract for difference - a long-term agreement between the generator and purchaser of the electricity that defines the amount of subsidy.
The perceived benefit of this system is that generators would not receive a subsidy windfall if the wholesale electricity price rises. Instead, consumers would benefit from fixed prices.
However, there is little clarity about how these complicated arrangements will work in practice - in particular about who pays the shortfall between electricity prices and production costs.
When Decc was in the early stages of developing the scheme, the government intimated that it would bear a large amount of the price risk burden.
Its July 2011 consultation document Impact Assessment, Electricity Market Reform - options for ensuring electricity security of supply and promoting investment in low carbon generation states: “Changes in wholesale prices only affect the amount of support paid out by government; hence the price risk is born by government balance sheets.”
However, in the draft Energy Bill published in June the plan was changed to a multi-party counterparty model where price risk would instead by borne collectively by all energy suppliers - the firms that sell on electricity to the end users - rather than the government.
Many point out that the scheme’s raison d’être - providing certainty for investors - is now being undermined.
“Industry does not know what the strike price will be”
Isobel Boira, EC Harris
Last month MPs on the Energy and Climate Change Select Committee demanded that the government provide investors with more certainty about exactly how much subsidy would be available.
The ICE added its voice to the committee’s calls, emphasising that there must be more certainty and transparency, especially with regard to price risk sharing, to make the new arrangements “effective and enforceable”.
According to the select committee, the Treasury had “apparently intervened” to prevent the contracts going onto on the government’s balance sheet.
EC Harris energy analyst Isobel Boira says she can understand why the government is reluctant to stand behind the contracts amid current economic woes but restates the case for it giving more certainty.
“Industry does not know what the strike price will be,” she says. “And that is making it nervous.”
Boira warns that, until this is cleared up, investment will remain stalled, with major investment decisions, particularly in the supply chain, being put off.
For instance, investment decisions by wind turbine manufacturer Siemens could be among the first to be hit by delays. The company is due to make a decision on whether to build a new manufacturing hub at Hull docks by the end of the year. Without clearer indications about government energy policy, a decision to go ahead is in jeopardy.
Energy secretary Ed Davey is convinced that all these issues will be ironed out before the Bill has its second reading in Parliament in the autumn. Responding to the committee’s calls, Davey last month stressed that all options were still being looked at and still “need to be resolved”.
It’s clear that Decc has an awful lot of work to do to turn this Bill into something that will release the cash to enable construction of many vital low carbon energy projects.