Energy Bill threatens low-carbon generation

15th August 2012

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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 low carbon technologies, according to Tim Yeo MP

Yeo, the chair of the energy and climate change committee, made the claim when launching the committee's pre-legislative scrutiny report on the draft Energy Bill.

The committee is particularly critical of the Bill’s plans for a new system of long-term agreements – contracts for difference (CfDs) – to provide a degree of certainty for investors in nuclear, wind, wave and carbon capture and storage.

The MPs point out that DECC’s initial consultation had indicated the CfD would be guaranteed by the state, therefore lowering the cost of capital, but say the Treasury has intervened so that the Bill includes a new model for contracts, which will spread the liability across various energy companies instead.

The committee wants the government to underwrite the new contracts in order to keep the costs of energy investment down for consumers.

“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,” said Yeo.

The MPs also criticise the cap on green levies imposed by the Treasury, which the committee says will ration the number of contracts available and create uncertainty among investors looking to fund new wind, solar, wave or tidal power plants. This is already having an impact on investment decisions and could paradoxically push up energy costs for consumers, the committee warns.

There is concern among the MPs that the Bill fails to include any meaningful reference to improving energy efficiency, labelling it as “fundamentally flawed by the lack of consideration given to demand-side measures”.

The committee argues that DECC is not prioritising tackling energy demand in its policymaking, even though reducing consumption is acknowledged to be one of the most cost-effective ways of meeting the UK’s legally binding targets to reduce carbon emissions.

The committee wants the Energy Bill to include a target to largely decarbonise the electricity sector by 2030.

“If the Bill does not set a target, then the UK may miss one of the biggest opportunities it has to create a low-carbon economy in the most cost-effective way,” concluded Yeo.

Energy companies largely welcomed the committee’s report. SSE said it shared the MPs’ concerns that the current model for CfDs could make them unworkable. It wants the proposed multi-party payment model scrapped and replaced by a counter-party model that is underwritten by the government.

Meanwhile, the business department (BIS) has revealed that policies designed to support renewable energy and cut carbon emissions, including the proposed carbon floor price, will push UK electricity prices higher than in competitor countries.

It says the cost of electricity in the UK will rise by £28.30 per MWh in 2020 due to climate change policies, whereas Germany and France are likely to increase electricity prices only by £17.30/MWh and £15.20/MWh respectively.

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