Energy Bill leaves investors in limbo

by Janet Wood

The draft Energy Bill published by the Department of Energy and ­Climate Change (Decc) will not start to provide the clarity needed to enable investment decisions to be made until at least the end of 2012.

As expected, Tuesday’s draft Bill set out plans for contracts for difference (CfDs) for new nuclear and renewables, a capacity market, and an emissions performance standard. Also as expected, the Bill left much of the detail about these mechanisms and how they would be implemented to further work over the next two years.

First on Decc’s agenda was new nuclear power plants and investment in gas that would provide capacity and flexibility over the next ten years. For both, the future will not become clear until the end of the year.

For the most complex instrument – CfDs – decisions on the “strike price” and the duration of contracts would be taken by ministers, and the CfD could be offered at final investment decision stage, Decc said. The detailed design would be the subject of an indicative plan in mid-2013 and a consultation late next year. But key parameters will be clear by the end of this year.

That is because Decc must negotiate with EDF Energy to provide “comfort arrangements” on both strike price and contract length to enable the company to make its final investment decision on the Hinkley Point nuclear plant by the end of the year.

The comfort arrangements will have to pass European state aid rules, potentially delaying or even halting the project.

The comfort arrangements will have to be in place before Decc has solved the problem of who will be the counterparty for the CfDs. Although it named National Grid as the administrator and said it was “minded” to employ Elexon to transact payments, the question of who would be the formal counterparty was left open. It will remain so until a framework is published for consultation in the autumn.

Decc’s earlier suggestion that the counterparty could be a “multi-party” involving the suppliers got short shrift – at least from Npower, which said it knew of no stakeholder who thought it was bankable. Decc bowed to the inevitable, saying it would “actively consider alternatives”, and was reduced to asking for feedback from ­industry and the Energy and

Climate Change Committee on other options.

Suppliers who want to invest in new gas-fired generation and participate in the new capacity market were also left waiting until year-end to make decisions.

New and existing plant is expected to be treated differently in this new market, with longer contracts available for new capacity. However, it is not clear whether plants that begin construction between now and the start of the market – expected in 2014, after consultation in 2013 – will be treated as new or existing. That uncertainty was highlighted by SSE chief executive Ian Marchant as a “known unknown” that had halted any construction. Now Decc says it is minded to allow such plant to be treated as new – but it will not take a final decision until the end of the year.

Decc had little to say on demand-side measures in the Bill. It raised the possibility of both demand-side response and storage participating in the capacity market, but on energy efficiency it had only the Green Deal to offer, asking stakeholders for ideas on other potential measures.

Time line: where do we go from here?

by Roger Milne

Consultation on how independent generators will fit into the new electricity market arrangements was launched this week, but it remains another unknown. However, other aspects of the timetable are becoming clearer.

The draft Energy Bill will be consulted on over the summer and will be the subject of an inquiry by MPs, courtesy of the Commons Energy and Climate Change Committee. Their recommendations will feed into the full Bill, which will be published in the autumn, conceivably by the end of October, for parliamentary scrutiny. Ministers expect the legislation to gain Royal Assent by the summer of 2013. The measures themselves will be implemented over the following three years.

During the period up to 2017 the current arrangements for the Renewables Obligation will sit alongside new CfD prices, which will be set administratively (by Decc, after consultation with National Grid as the administrator). The first capacity auctions could kick in during this stage.

Decc envisages a second stage between 2017 and the 2020s, which should see the capacity market becoming fully operational, and some technology-specific ­

auctions.

In the third stage (also during the 2020s), there will be a move to technology-neutral auctions. In the fourth stage (late 2020s and beyond), the expectation is that technologies will be mature enough and the carbon price high enough to “allow all generators to compete without intervention”.

Ofgem’s role in all this has yet to be determined. Ministers promised further detail on its and Decce’ roles and responsibilities in autumn.

This article first appeared in Utility Week’s print edition of 25 May 2012.

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