The Energy Bill & The REI Perspective

A piece of legislation is currently going through the UK Parliament that has been described as “probably the most significant development in the UK’s energy market since privatisation in 1989” (Pinsent Masons, 2013). The ‘Energy Bill’ covers a comprehensive range of aspects of energy policy across the UK, such as making provision for the setting of a decarbonisation target with the purpose of reforming the electricity market to promote the generation of low carbon electricity and addressing issues of security of supply. The bill also tackles the subject of nuclear power, government infrastructure – for instance government pipe-line and storage systems – and a variety of other regulatory issues. The Energy Bill was introduced to the House of Commons in November of last year by the Secretary of State for Energy and Climate Change, Ed Davey. The bill is designed to “establish a legislative framework for delivering secure, affordable and low carbon energy”  (DECC a, 2013) [the Department of Environment & Climate-Change]; due to its complexity and the range of issues that it affects, a range of measures of secondary legislation will also be added to complement different aspects of the bill.

Wider context of the Energy bill

The Energy bill is being passed in a wider context of the UK setting very strict carbon emissions reduction targets; the 2008 Climate Change Act sets the UK the target of achieving a reduction in carbon emissions of 80% compared to a 1990 baseline level of emissions (www.legislation.gov.uk, 2013). In line with these targets, a number of power plants that produce high levels of carbon emissions, primarily coal plants, are to be closed down (Wintour & Inman, 2013). At the same time, the majority of the UK’s nuclear power fleet is reaching the end of its life and will require replacing with new stations or alternative technologies in the near future. These issues, combined with increasing international demand for resources and supply constraints due to issues such as peak oil, have led to concerns of energy shortages in the UK (BBC News, 2013). The bill aims to mitigate these issues by increasing energy usage efficiency, reducing demand where possible and providing a timetable for various forms of infrastructure replacement.

The progress of the bill

The bill, which is currently before Parliament, will most likely become law next year when it is planned to be put before ‘royal assent’ and be signed into law (www.parliament.uk, 2013). The complexity of this legislation warrants consideration of each sub-section in turn:

Decarbonisation

Decarbonising electricity production in the UK will be critical to meeting obligations to reduce carbon emissions; in order to achieve this, the bill provides for the Secretary of State for Energy and Climate Change to set a 2030 target for decarbonising electricity production in the UK in secondary legislation (DECC a, 2013). The UK government has set itself a series of ‘carbon budgets’ in order to reduce emissions between now and 2030 (DECC a, 2013). In order to decide on this matter, the UK government Committee on Climate Change will first provide advice on the level of the 5th Carbon Budget, 2028-32, and a decision will be made by the Secretary of State in 2016 (DECC a, 2013).

Electricity Market Reform

‘Electricity Market Reform (EMR)’ is another major aspect of the bill; measures to attract £110 billion in investment will be put in place in order to replace current generating capacity, upgrade the UK national grid by 2020 and provide for increasing demand for electricity (DECC c, 2013, p. 1). This will include providing long-term contracts to provide predictable, stable incentives for companies to encourage low-carbon investment known as ‘Contracts for Difference (CFD)’ (DECC c, 2013, p. 1). In advance of the CFD coming into effect in 2014, long-term ‘Investment Contracts’ to allow for early investment will also be made available (DECC c, 2013, p. 2). Provision will also be made for the Secretary of State for Energy and Climate Change to make ‘Capacity Market’ regulations to meet consumer electricity demand in the UK by providing, or reducing demand for, electricity (DECC b, 2013, p. 13) (DECC c, 2013, p. 3). ‘Conflicts of Interest and Contingency Arrangements’ are also provided to ensure schemes can be delivered effectively (DECC c, 2013, p. 2). To ensure access to the electricity market, in case of the need to improve liquidity and ensure the availability of long-term contracts for independent renewable generators, ‘Power Purchase Agreements (PPAs)’ have been proposed (DECC c, 2013, p. 2). In addition, transition arrangements for investments under the Renewables Obligation scheme have been made, along with Emission Performance Standards to limit carbon dioxide emissions from new fossil fuel power stations (DECC c, 2013, p. 2).

Nuclear

High carbon emission plants such as coal and the current generation of nuclear plants are being retired and new nuclear power generation is being considered as a low carbon means of replacing this capacity for future energy generation in the UK (Bakewell, 2012). The bill will include the creation of ‘the Office for Nuclear Regulation [ONR]’, a new independent statutory body to regulate the industry with regards to safety and security (DECC a, 2013) (DECC c, 2013, p. 2).

Government pipe-line and storage system

Provisions have also been made in the bill to facilitate the sale of a Ministry of Defence asset, the ‘Government pipe-line and storage system’ [GPSS], which supplies RAF and US airbases and 40% of the aviation fuel in the UK to major commercial airports in the UK. This aspect of the legislation has been put forward by the MoD as it is required to create “transferable rights of access” to land  the pipeline runs through in order that future sale of the asset is feasible (DECC c, 2013, p. 2).

Strategy and policy statement

A ‘strategy and policy statement’ will be introduced, setting out government strategic priorities for the UK energy sector, government roles and responsibilities, for those of other relevant bodies such as Ofgem [Office of Gas and Electricity Markets] and to demarcate “policy outcomes that Government considers Ofgem to have a particularly important role in delivering” (DECC c, 2013, p. 2).

‘Consumer Protection’

Regulation of energy providers is considered in the bill with a number of new regulations; limits are placed on the number of energy tariffs that providers can offer to domestic consumers, stipulations are made for the provision of clear information about the best value deals for customers and providers are required to move customers from poor value closed tariffs to cheaper deals. This aspect of the legislation also allows Ofgem to extend its licence regime to third-party intermediaries and provides Ofgem with a new enforcement power to require energy providers that “breach gas or electricity licence conditions, or other relevant regulatory requirements, to provide redress to consumers who suffer detriment as a result of the breach” (DECC a, 2013).

Additional details

The bill will also cover a number of technical issues, such as ensuring that offshore wind turbine installers do not break them by participating in the transmission of electricity during construction [something which is usually prohibited] (DECC c, 2013, p. 1).  It will also include a provision to allow DECC to charge fees for providing energy resilience services in the event of a disruption, or threatened disruption to energy supplies (DECC c, 2013, p. 3). This will be in order to levy appropriate fees and recoup costs for government services and to recoup costs from business users. An amendment to the Energy Act 2008 has also been made to extend the existing method for recovering costs from the nuclear industry for covering decommissioning costs (DECC c, 2013, p. 3).

Criticisms of the legislation and potential success of overall goals

The Energy Bill covers a range of different aspects of government energy policy; in spite of the breadth of the issues covered by the legislation its overall goal to provide affordable, secure energy whilst reducing carbon emissions can be reviewed in advance of the legislation’s passing: There appear to be a number of legitimate concerns about the scale of the investment required and the speed at which it has to be delivered in order to rapidly decarbonise the UK’s energy infrastructure, whilst ensuring reliability of supply. There are also concerns that the delay in setting a decarbonisation target will deter investment by causing too much uncertainty (Commodities Now, 2013). The government has, however, shown a willingness to provide funding for key projects to go ahead. One example is the provision of £10 billion in financial guarantees to the nuclear power industry, to ensure the building of new nuclear power plants to provide replacement capacity (Wintour & Inman, 2013). International obligations to reduce carbon emissions, which are catalysing the mothballing of high emissions plants, have meant the UK government have also given Drax coal power station a financial incentive to reduce its emissions by converting to biomass and therefore stay open. As the UK’s largest power plant, it is understandably of too great a strategic importance to be allowed to close down (Harrabin, 2012). It will also provide a 10% increase in subsidies for wind farms from next year, under government reforms of the electricity market, though this will be levied from the bills of energy consumers and there are concerns as to whether this is sufficient to encourage the required investment in the sector (Harvey, 2013).

Wider context within which government action is situated

There are laudable criticisms of government policy affecting levels of investment and previous decisions made, such as signing up to stringent carbon emission reduction targets that exacerbate constraints on government freedom of action to ensure affordable, secure energy supplies. Such decisions are, of course, well founded but there are a number of issues that would have arisen irrespective of government policy. For example, even if the UK were not retiring high emitting power stations due to climate legislation, there would still be a potential electricity supply shortfall from the majority of UK nuclear power stations reaching the end of their lives (Wintour & Inman, 2013). Even if new nuclear power plants are constructed on schedule, the logistics in terms of capital, planning and the physical construction time of such plants could lead to such a situation. The highly laudable, and very desirable aim, of reducing carbon emissions can be substantially aided through energy conservation measures and lower carbon forms of electricity generation, such as gas power stations. However, there are potential problems with security of supply, due to long supply chains and unconventional sources of fossil fuels – such as ‘fracking’ – have potentially high ecological impacts (Foss, 2013).  Various forms of renewable power generation, such as on and offshore wind, biomass and solar p.v. have grown and have further capacity for substantial increases in electricity generation capacity. However, it must be said these could not necessarily, on their own, be scaled up quickly enough to provide for current demand on the timescale required by climate legislation. (Foss, 2011). As a result of such factors, it may well be that not bringing forward the decarbonisation target is an understandable strategic move by government. There is a risk that an over reliance on imports such as gas, with issues of security of supply, combined with a risk of delays or underinvestment in new low carbon energy infrastructure, could lead the UK with energy shortfalls if it is unable to use high carbon intensity fuels for electricity generation. For example, Ofgem has been given new powers to bring online plants that have been ‘mothballed’ to meet peaks in demand (Wintour & Inman, 2013). Most of the [fossil-fuel] plants that are being taken offline are coal plants, which could still operate if required as a contingency. Coal, whilst a high carbon fuel, can provide a low cost, energy dense fuel with large domestic reserves that could serve to meet a shortfall in supply. Such a situation would of course be highly undesirable but illustrates well the issues that can face policy makers even if they are wholeheartedly aiming towards a low carbon economy.

Overall chance of success

Whilst potential limitations in legislation design and constraints on government action may compromise the success of the policy as a whole, there is still potential scope within the remit of the legislation to make substantial differences to the UK energy system.  For example, even if the UK were to miss its carbon emission reduction targets, it still may be able to reduce emissions, increase energy security and affordability to a considerable degree.

Implications for the renewables sector

Consumer protection legislation and electricity market reform will help to provide a market conducive to new investment and a greater diversity of participants in energy generation, which is likely to promote investment in renewables. The bill also facilitates the construction of offshore wind by technical changes in legislation and political support remains for subsidies for renewable energy production which will further aid the sector.

REI perspective on legislation

The legislation is generally positive in effect and should help maintain confidence to invest in the UK energy sector. It can provide much needed infrastructure development to meet the requirements of maintaining energy security, reducing carbon emissions and upgrading the UK energy system to increase efficiency and cost effectiveness.  There are limitations in certain aspects of the legislation such as the delay in setting a decarbonisation target. The paradox this creates is that the risks that this entails are too great to bring this forward but in doing so risks undermining other aspects of the bill. If a decarbonisation target can be brought forward this is likely to increase investor confidence and will encourage the use of renewables further, something we are keen to promote as a means to combat climate change. The complexity of the legislation, with the need for secondary legislation for a number of its components, make it too early to judge the likelihood of many specific aspects of the bill. Irrespective of arguments as to the efficacy of nuclear power the time scales involved in new plant construction and near date that current plants must be taken offline make this more probable to be a longer term possible solution to energy shortages. In the near term renewable technologies and energy conservation offer a feasible method of providing much of the energy, combined with greater efficiency, that the UK will require to meet legislative carbon reduction targets. This can also be achieved whilst minimising the use of potentially harmful unconventional fossil fuel sources or relying on potentially expensive and volatile imports. Aspects of this legislation are very constructive at reaching this goal; once the legislation becomes law and its implications for the renewables sector and the implications for investment are clear it could potentially be very constructive to achieving the UK’s carbon reduction targets and promoting the use of renewables. Policy and legislation has shown greater importance within the renewable energy sector in recent years. The Renewable Energy Institute has a number of courses which can help in most notably our dedicated Green Deal course and the Renewable Energy Management and Finance course, each eligible for the internationally recognised Galileo Master Certificate.

Bibliography

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Written by Cora Moran for the REI