UK Energy Bill approaches

18 October 2012

The British government has moved to reassure energy market players ahead of an Energy Bill that will bring a program of reforms next month. A market for capacity is planned, alongside feed-in tariffs and the contract for difference scheme.

Energy and Climate Change secretary Ed Davey spoke to the Confederation of British Industry this morning. He said he wants the UK to be "the best place in the world to invest in new, clean energy infrastructure," and noted that electricity demand is expected to double in a time when most nuclear power plants, as well as some polluting coal units, are set to retire.

Key to maintaining the country's power supply will be consistent private investment in new nuclear and renewable generation capacity, which the government wants to help by supporting certainty on returns. The "ultimate goal" is for low-carbon power to compete on cost alone with virtually no government involvement. Before this will come a four-step program of reforms that will be explained in an Energy Bill put to parliament next month.

Shaping markets

The first phase of reform will see feed-in tarriffs for renewables and 'contracts for difference' for all low-carbon power producers. If the market price of power is below a 'strike price', then a guarantor will make up the difference, while market prices above the strike price will see the generator will pay back the difference. Crucial to this scheme is to set fair strike prices for each technology as well as an appropriate guarantor. The first step towards setting the strike price was taken this month when the National Grid published its Call for Evidence, said Davey.

Davey said, "Global fund managers have told me... they prefer the long term contracts we are proposing - because they would give them the predictable revenue streams they need to invest in big projects, and with lower cost of capital." However, Davey did not indicate when he expects contract for difference to come into play though he noted that plans for them were only finalised this week.

Before these arrangements are in place, Davey has sought to "give comfort" to developers hoping to make progress "in the next 15 months or so." This includes talking to EDF "about what this can do to help bring forward new nuclear at Hinkley Point," but he stressed: "this offer is intended to benefit all low-carbon technologies."

The second phase of the market reforms could come in about five years, when "technology-specific auctions" will see market players in maturing generation forms compete. Technology-neutral auctions would follow in the third phase, and in the fourth phase: "...when all technologies are mature enough, and if the carbon price is high enough and sustainable enough, all generators could compete without any intervention." Davey did not hint at when this might be.

Capacity payment

An influx of intermittent renewables to the UK power system would mean other types of plant run less often and would be less sure of revenue. For these reasons, Davey said the Energy Bill would include a 'market for capacity' that would encourage the construction on non-intermittent power sources, like fossil fuels or nuclear, to avoid shortfalls during "cold, windless periods."

"The capacity market would work by guaranteeing a steady payment for providing reliable capacity, giving developers of new power stations the certainty they need to invest." Details on this should come later this year.

He told the CBI the changes planned in the country's energy markets should meet the 'six tests' put forth by the organisation for energy policy: that it be market-oriented; technology-neutral; should safeguard existing investments; be politically durable; minimise consumer costs; and enable sufficient investment.

Researched and written
by World Nuclear News