Posted by

Tom Nolan, Policy Adviser

14 May 2012

To overcome the challenges of ageing power stations, increasing energy dependency and climate change will require tens of billions of private sector investment. But investors aren’t going to come forward in the required numbers unless they believe they will be investing in a stable and predictable market. That is why the inclusion of an energy bill in the government’s legislative programme for the coming year is to be welcomed. The bill on its own won’t solve the country’s energy problems but if the design is right – and it is a big if - it will act as the biggest possible catalyst for private sector investment.

After speculation that the bill wasn’t going to appear until next year it now seems that we will get first sight later this month when a draft bill will be presented to Parliament. A full bill is expected in late autumn and, barring a major unforeseen development, by 2013 the biggest reform of the UK electricity market since a range of privatisations over 20 years ago will have taken place.

Reform is needed because the market current design will not deliver the required diverse energy mix. And without energy coming from a variety of different sources then energy security will always remain a concern.

They are four pillars to the proposed reform. The pillar that we have the most reservations about is the carbon floor price, which is effectively a tax on business with little or no environmental benefits. However the carbon floor price won’t form part of the bill. But the other three pillars of the reform will be in included. They are an extension of feed-in tariffs to large scale energy projects, emission performance targets for power stations and measures to ensure there is excess capacity in the system to provide security of supply.

We will have to wait until we see the detail, but based on what is expected our views are that a feed-in tariff with a Contract for Difference is the preferred approach as it as could lead to the quickest roll-out of new nuclear and other low carbon sources. We believe that an emissions performance target is probably unnecessary as it is may be just duplicating existing policies.

It is the capacity mechanism pillar that is perhaps most significant. At present the UK has an ‘energy only’ market and this means that generators only get paid for the electricity they generate. While that might sound reasonable it does impact on energy security as it can mean there may not be enough backup capacity during times of peak demand. Other countries provide a form of a capacity payment and a similar type of payment is something the UK requires. We would also like to see the bill address gas security of supply.  At present the UK’s current storage capacity amounts to only 14 days’ of gas supply compared to 87 days in France and 69 in Germany.

The complexity of the bill will probably mean it won’t receive much media coverage beyond the expected disagreements about the impact on household bills. But this complexity might also have an impact on investment. If the final design of the market is overly complex then investors might be put off because it may make investments seem too risky. The government will have to keep this potential consequence in mind.

UK business requires a secure and affordable energy future, and that requires a predictable market. The Energy Bill promises to deliver that predictability. The coming Parliamentary year will show if it can deliver on that promise.