Reaction to the draft energy bill - and the questions it raises

  • 22 May 2012, 16:00
  • Ros Donald and Christian Hunt

Government plans to reform the UK electricity market were unveiled in (some more) detail today with the publication of the draft Energy Bill, which aims to boost investment in low carbon infrastructure over the next decade, we look at how the plans have gone down, and what a few of the unanswered questions surround the bill are.

What will the impact on household bills be?

Much is being made of energy and climate change secretary Ed Davey's "admission" on the BBC's Today programme this morning that household energy bills will go up as part of the market reform. Ignoring nuclear, the Telegraph and lay the blame squarely at the door of renewable emergy. But how much is it going to cost?

John Humphrys seemed to think consumers were going to see an extra £200 on their energy bills, possibly echoing a piece by the Daily Telegraph earlier this month. In fact, as we pointed out at the time, this is DECC's assessment of bill increases if no reforms are introduced - something Davey noted in the interview. (Their actual figure is £160 - see here for more.)

Does the bill contain a stealth subsidy for the nuclear industry?

One measure introduced in the reform are so-called contracts for difference (CFDs). The replacement for existing subsidies and incentives like the Renewables Obligation, CFDs are supposed to ensure a guaranteed return for low-carbon electricity, to stop investors being put off by the higher upfront cost of building new nuclear and renewable capacity.

There's concern among green campaigners and renewable energy companies that CFDs are "overwhelmingly skewed to support new nuclear plants", according to BusinessGreen and the Guardian, as the government tries to spur the building of 16GW of new nuclear power without state support.

According to numbers from the UK's Department of Energy and Climate Change, it certainly appears that nuclear will do best out of CFDs. The EMR white paper (page 42) says that the cost of nuclear capital will fall more than any other energy source included in the scheme.

But the government seems determined not to accept that CFDs count as a subsidy. In July last year, DECC responded to concerns in a report by the Energy and Climate Change Committee that the government was favouring nuclear, saying:

"The government does not believe that measures taken to offset environmental externalities - such as the European Union Emissions Trading System and FIT CfDs - are properly regarded as subsidies. They are corrections to market failures," it said.

"The EMR package outlined in the White Paper will mean that by 2030 we will have a flexible, smart and responsive electricity system, powered by a diverse and secure range of low-carbon sources of electricity, with competition between low-carbon technologies helping to keep costs down. This is the rationale for having one CfD mechanism for all forms of low carbon technology."

DECC White Paper Table

Source: DECC

On the Today programme, Davey told Humphrys there would be "no public subsidy for nuclear", and that he wanted to level the playing field to end the "bias towards gas" in the UK energy market. He said unless nuclear was price competitive, nuclear projects "won't proceed".

Could CFDs be illegal?

The question of whether CFDs are a subsidy to the nuclear industry isn't just one for the students of government spin. EU law forbids member state governments from providing aid to companies that might give an unfair advantage over EU rivals. On nuclear, this could be a major stumbling block for the proposed energy market reform - leading to uncertainty about who is going to underwrite the CFDs. (The EU allows governments to cover 100 per cent of the extra costs of renewable technologies, subject to state aid approval, but it's less certain whether the EU wil allow the same for nuclear energy.)

UK proposals to give large energy companies money that would make up the extra upfront cost of generating power from new nuclear plants and renewables plants are still awaiting EU approval. On the Today Programme John Humphrys asked Tim Yeo MP whether CFDs could actually be illegal. Yeo's answer - that we don't yet know - hasn't caused much reaction.

The outcome of that decision could have serious implications for the whole package of reforms, especially given that EDF is in talks with the Office for Nuclear Regulation about potentially extending the life of some of the UK's existing nuclear sites. It doesn't look like anyone has picked up on Yeo's admission yet, but it shows new nuclear's apparent advantage could stand on some pretty flimsy foundations.

What about carbon targets?

The elephant in the room here is that the Committee on Climate Change have recommended that, in order to meet its climate change targets, the UK needs to decarbonise the power sector by 2030. The government appears to be resisting setting binding versions of such commitments in the energy bill, and BBC environment analyst Roger Harrabin points out there's some discrepancy between the CCC's recommendation and the stated aim of the draft energy bill, which is to "largely decarbonis[e] the power sector during the 2030s".

In the draft bill, DECC talk about an "illustrative level of decarbonisation" of 100g of carbon per kilowatt hour of electricity. This is what the Committee on Climate Change originally recommended as a target, but they then updated their advice to recommend a lower target of 50g/KWh. The bill relegates dealing with that to a footnote on page 275:

100gCO2/kWhin 2030 is an indicative target level consistent with modelling for the EMR Consultation and subsequent White Paper and with the previous recommendation for the power sector from the Committee on Climate Change (CCC).The CCC had advised in June 2010  that to meet the UK's 2050 target required decarbonising to around 100g/KWh in 2030 (they later reduced that to 50g/KWh).

On Twitter, Roger Harrabin said that the CCC had called the treatment of carbon targets in the draft Energy Bill "unhelpful and creating more uncertainty".

And all of this is only the draft bill! Expect all of these issues to be thrashed out in gory detail over the coming weeks and months.


UPDATE 22/05/2012 16.46:We amended the section on state aid - as it was quite rightly pointed out, there is no carte blanche for renewables under state aid laws. We've amended the section to reflect the fact that the whole scheme needs state aid approval, although EU state aid laws are more generous toward new renewables. Thanks to John Moriarty for pointing this out.

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