Draft Energy Bill Report

As part of its ongoing reports on the Government’s energy and climate change policy the Parliamentary Information Office of the Parliamentary Yearbook has been monitoring progress on the draft energy bill. This will form part of a major feature on environment, sustainable energy and climate change in the next edition of the Parliamentary Yeabook

In a report published today MPs on the Energy and Climate Change Committee say that the proposals in the Government’s draft Energy Bill could impose unnecessary costs on consumers, lead to less competition and deter badly needed investment.

On Tuesday, May 22nd 2012, the Secretary of State for Energy and Climate Change announced in a Written Ministerial Statement the publication of a draft Energy Bill.

The Energy and Climate Change Select Committee have been conducting an inquiry to scrutinise the draft Bill. They have finished collecting written and oral evidence and have published their report today.

An informal Lords working group has also been established to consider the Bill. The members of this group are: Lord Oxburgh (Chair), Lord Teverson, Baronness Maddock, Lord Jenkin of Roding, Baronness Worthington, Lord Grantchester, Lord Dixon-Smith, Lord Lawson of Blaby, Lord O’Neill of Clackmannan, Lord Judd, Lord Whitty and Lord Roper. They will be working towards writing to the Department at the end of July:

The Bill is structured to establish a legislative framework for delivering secure, affordable and low carbon energy.

The Bill includes provisions on:

• ELECTRICITY MARKET REFORM (EMR)

The bill puts in place measures to attract the £110 billion investment which is needed to replace current generating capacity and upgrade the grid by 2020, and to cope with a rising demand for electricity. This includes provisions for:

• Contracts for Difference – long-term instruments to provide stable and predictable incentives for companies to invest in low-carbon generation;
• Investment Instruments – long-term instruments to enable early investment in advance of the CfD regime coming into force;
• Capacity Market – to ensure the security of electricity supply;
• Conflicts of Interest and Contingency Arrangements – to ensure the institution which will deliver these schemes is fit for purpose;
• Renewables Transitional – transition arrangements for investments under the renewables obligation scheme, and
• Emissions Performance Standard – to limit carbon dioxide emissions from new fossil fuel power stations.

As set out in the policy overview that was published alongside the draft Energy Bill on 22 May, the Government recognised that industry has strong concerns about the proposed legal framework and payment model for Contracts for Difference. They are seriously considering these concerns and are assessing an alternative model which includes a single counterparty to the CfD, and welcomed consideration of this issue by the Energy and Climate Change Committee as part of its scrutiny of the draft Energy Bill.

• STRATEGY AND POLICY STATEMENT

In addition to EMR, the Energy Bill will also improve regulatory certainty by ensuring that Government and Ofgem are aligned at a strategic level through a Strategy and Policy Statement (SPS), as recommended in the Ofgem Review of July 2011.

• NUCLEAR REGULATION

The Bill places the interim Office for Nuclear Regulation (ONR) on a statutory footing as the body to regulate the safety and security of the next generation of nuclear power plants. This includes setting out the ONR’s purposes and functions.

• GOVERNMENT PIPE-LINE AND STORAGE SYSTEM

The Bill includes provisions to enable the sale of the Government Pipe-line and Storage System (GPSS). This includes providing for the rights of the Secretary of State in relation to the GPSS, registration of those rights, compensation in respect of the creation of new rights or their exercise, and for transferral of ownership, as well as powers to dissolve the Oil and Pipelines Agency by order.

• MISCELLANEOUS

A minor measure to provide an exception to the prohibition of participating in the transmission of electricity during testing in the commissioning period of Offshore Transmission connections constructed by or on behalf of developers also constructing an offshore generating station.

However, publishing the report today, Tim Yeo MP, Chair of the Energy and Climate Change Committee, said:

"The Government is in danger of botching its plans to boost clean energy, because the Treasury is refusing to back new contracts to deliver investment in nuclear, wind, wave and carbon capture and storage."

In the biggest shake-up of the electricity market since privatisation, the Energy Bill will introduce new system of long-term contracts to give power companies a guaranteed price for the low-carbon electricity they produce. This is intended to reduce the risk of investment in projects with high up-front capital costs, such as nuclear reactors and offshore wind farms.

Initial consultation last year led investors to believe that the "Contracts for Difference" (CfD) would be guaranteed by the State – therefore lowering the cost of capital. But the Treasury has apparently intervened to ensure that the contracts are not government guaranteed. The new model for contracts will spread the liability across various energy companies instead; raising concerns that the plans are now too complex and possibly not legally enforceable. The MPs are calling on the Government to use its AAA-credit rating to underwrite the new contracts in order to keep the costs of energy investment down for consumers.

Tim Yeo MP added:                          
                                        
"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.

“The Government has a lot of work to do over the summer to make sure that the Bill is fit for purpose in the autumn and is not subject to any further delays."

The Committee heard that the spending cap set by the Treasury – which limits the green levies that can be passed on to consumers in energy bills – could introduce an “unacceptable” level of risk to companies who are looking to build new wind, solar, wave or tidal power plants. This is because the levy cap will ration the number of contracts available, creating uncertainty amongst investors about which projects will receive support. This is already having an impact of investment decisions and could paradoxically push-up energy costs for consumers, the Committee warns.

Mr Yeo said:

"Nobody wants to see a blank cheque written out for green energy, but the Government must provide investors with more certainty about exactly how much money will be available."

The Committee is also concerned that the new contract system will reinforce the dominance of the "Big Six" energy companies and prevent new entrants into the electricity market. The Government says it wants to increase competition and improve the opportunities for new entrants in the electricity market. But witnesses told the Committee that the Energy Bill as it stands will in fact deliver the exact opposite of this ambition, threatening the viability of smaller-scale independent energy companies.

And Mr Yeo added:

"Community owned energy projects and small independent generators are in danger under the current plans of being squeezed out. The Committee is worried that decisions about support for new nuclear power stations are being made "behind closed doors" and calls for an independent expert to inspect any agreements to ensure that they are delivering value for money. Energy efficiency could be one of the cheapest way of cutting carbon and improving energy security and the MPs urge the Government to consider incentives for power companies to reduce demand. The Government should also set a clear target to largely decarbonise the electricity sector by 2030 to provide investors greater certainty about the direction of energy policy."

The Government must rethink its plans urgently so that the investment that is needed to replace the UK’s aging power stations, cut carbon emissions and maintain energy security can be delivered. The Committee says that the Government must come up with a stronger contract design before the Bill is expected to be introduced to Parliament in the autumn.

Tim Yeo MP concluded:

"If the Energy Bill 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."

The Parliamentary Information Office of the Parliamentary Year book will continue to report on the progress of the bill as we go through the months ahead.