The Energy Select Committee has today launched a scathing 82-page report on the coalition government’s draft UK Energy Bill yesterday, claiming the new bill could do far more harm than good for private and commercial energy investment. Committee chairman Tim Yeo MP and his colleagues were tasked with evaluating the claims that the new draft UK Energy Bill is set to move Britain “to a secure, more efficient, low-carbon energy system in a cost-effective way” – but the MP for Suffolk South declared that it takes far too greater risk in doing the polar opposite.
“The proposals in the Government’s draft UK Energy Bill could impose unnecessary costs on consumers, lead to less competition and deter badly needed investment,” they warn, with their report dissecting the fiendishly complicated legislation, highlighting a plethora of design faults.
The ESC also concluded that the cumbersome demands of ‘New Nuclear’ were the driving force behind making the draft Energy Bill so complex and inaccessible, with the cornerstone of the reforms being the proposal to establish a “Feed-in Tariff with a Contract for Difference (CfD)”
The concept behind this proposal is simple; Ministers wants investors to stump up billions of pounds to build low-carbon private and commercial energy generation, such as nuclear reactors and offshore wind farms, but the economics and risks of such projects may not stack up.
The proposed solution is that long-term agreements will be created, setting a price in proportion to the energy generated by the investors project; theoretically guaranteeing a return on any investment and encouraging others to do likewise.
“There is a great deal of merit in the idea of CfDs,” the committee finds. “But the implementing arrangements have become so complex that the proposal has now arguably become unworkable.”
The Energy Select Committee has also ruffled a few feathers within government by squarely blaming the Treasury for the bill’s overcomplexity. Investors thought the CfD would be “guaranteed by the State – therefore lowering the cost of capital”. “But the Treasury has apparently intervened to ensure that the contracts are not government guaranteed”.
Energy ministers were left to draw up a complicated substitute, called a “synthetic or virtual counterparty”. Unfortunately, the committee found, this would not be “bankable” and worryingly for investors – might be “neither legally enforceable, nor creditworthy”.
The ESC’s recommendation? To get the government to “use its AAA-credit rating to underwrite the new contracts in order to keep the costs of energy investment down for consumers”.
But while there is clearly no love lost between the committee and the Treasury, the report nevertheless acknowledges the problem may not be so simple. There may be good reason why the Treasury has not backed the contracts: because overt Government support for nuclear power could fall foul of EU state aid rules.
As energy minister Charles Hendry told the committee in May: “We believe that the approach we are taking is most likely to be acceptable under the rules on state aid. The views that some in industry have put forward we believe may be more likely to fall foul of those rules.”
The EU is unlikely to object to the simple system of subsidies investors want when it comes to renewables – but it may take a dim view of subsidies for nuclear. Nuclear bundled up with renewables, and distanced from direct government backing, however, has a chance of getting through.
How the government resolves the problems with CfD remains to be seen. Ministers are spending the summer consulting on redrawing the contracts and will have their work cut out to jump the state aid hurdles and mollify investors.
Whether or not they succeed, what is clear is that they have already gone to great lengths to try to facilitate new nuclear.
Is a new nuclear era of low-carbon energy what people want? Or is the thought of a nuclear-powered commercial energy future an inherently worrying one?
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