TRANSACTIONAL: Corporate / London: UK Energy Bill designed to reform the UK electricity market is a "train wreck" says renewables industry By Susanna Marshall

by King & Spalding

A group of renewable energy companies including Scottish and Southern Electric (SSE), one of the UK's biggest energy providers, has warned the UK government that its proposed Energy Bill will not deliver the support for development of renewable energy sources it promises, but instead will dissuade long-term investment in British renewables and only benefit nuclear generators.

The Queen's Speech in May announced that there will be an Energy Bill in the upcoming Parliamentary session, and the Bill could be brought before government within the next month. A spokesperson for the Department of Energy and Climate Change called the Energy Bill “crucial legislation.” She added that "the Energy Bill will reform the electricity market to keep the lights on and emissions down in a more cost-effective way, while reaping the economic benefits. It is designed to provide investors with long-term certainty and incentives to invest in low-carbon." However, Keith MacClean, Head of Policy at SSE, called the proposals “too complex,” “unworkable,” and “looking more and more like a train wreck.”

The proposals in the Energy Bill include new electricity pricing mechanisms designed to subsidise the energy companies generating “green” electricity. The existing framework to support low-carbon technologies through feed-in tariffs for electricity pricing and Renewable Obligation Certificates will be replaced by a carbon floor price and contracts for difference (CfD) electricity pricing mechanism. The CfD system is designed to provide low-carbon generators a guaranteed long-term price for energy generated. Under the CfD arrangements, a reference price will be set for low-carbon electricity, with electricity buyers paying sellers if the strike price is below the reference price, and vice versa.

In a joint letter to the government, six major renewable energy developers including SSE, Ecotricity, Good Energy, Renewable Energy Systems, Natural Power, and Red Olsen Renewables expressed their concern that the proposed electricity market reforms, which will be implemented by the Energy Bill when it passes into law, will not be capable of supporting major renewable energy financing but will instead have the following consequences:

  • Consumer Cost Increases

The government has acknowledged that the new subsidies generated via the CfD system will increase the average annual household energy costs by £205 over then next 15 years.

  • Reduction in Investment

The CfD pricing mechanism is so complicated, say the energy companies, that it will discourage investors and financial backers who are unable to establish accurately the likely return on their investment and so will look to other markets for opportunities.

  • Lack of Transparency

The new mechanism lacks transparency and prevents consumers understanding what it is they are paying for and how subsidies will be distributed within the new CfD mechanism.

  • Subsidy Legality

The CfD pricing mechanism bundles nuclear and renewables subsidies into one package. By doing so, there is a serious risk that the package will be blocked or at least delayed by the European Commission under state aid restrictions which permit government subsidisation except in very restricted circumstances, including promotion of renewables. This uncertainty and risk will further deter investors.

The energy companies called on the government to resort to its “plan B”: a premium feed-in tariff mechanism which resembles support schemes for renewables currently operating in Europe. The group also called for the government to define separate support schemes for renewables, carbon capture and storage and nuclear to make the allocation of subsidies transparent for both consumers and investors.

The opinion of the UK renewables industry over the Energy Bill, and CfDs in particular, has been supported by major overseas investors in the UK energy market. Speaking at a recent climate change symposium, representatives of German energy giant E.On and Norwegian firm Statkraft echoed the criticisms of the UK market that there remained uncertainty around a CfD system for supporting renewables investment.

Only time will tell if the government will bow to industry pressure and move to scrap the CfD pricing mechanism in favour of the market-preferred premium feed-in tariff.

  Susanna Marshall
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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