The Energy Bill: What Will It Mean for 'New' Energy Investment?

“Essential legislation to power low-carbon economic growth, to protect consumers, and to keep the lights on” was introduced to Parliament by Edward Davey on 29 November 2012 in the form of the much awaited Energy Bill.

The Energy Bill

The Bill aims to reform the electricity market by providing certainty and the financial motivation to invest in the construction of low-carbon energy infrastructure.  It also aims to provide certainty to investors if the market falls and protection to the consumer if the market rises through a system of feed in tariffs coupled to ‘contracts for difference’.

But when the government refers to moving from predominantly fossil-fuels to a low-carbon mix, ‘low-carbon’, doesn’t necessarily mean only renewable technologies. The Bill is aimed at supporting the construction of a mix of renewables, new nuclear, gas/fossil fuelled (probably with some carbon capture and storage) largely to replace older fossil fuel and nuclear plant, coming to the end of their working lives.

Increased funding

The funding capacity for this low carbon investment will increase from £2.35 billion for 2012/13 to £7.6 billion per year in real terms in 2020/21 under the Levy Control Framework. These costs, of course, will be ultimately passed onto the consumers, although the Government maintains that taking all the energy measures currently proposed into account will result in a saving of £94 per annum for the average householder, compared to rising energy costs if the low carbon policies were not to be pursued.

This increase in available funding is welcome from an investment point of view but the levels of the so called ‘strike prices’ for individual technologies, which are yet to be finalised, will be critical in terms of which technologies move forward more quickly.

This £7.6 billion represents a net increase of £5.25 billion from the current £2.35 billion funds. But this net increase will not be consumed by building new plants and infrastructure. By way of example, Drax’s coal fired power station in Selby, North Yorkshire is already preparing to convert from co-firing with 10% biomass materials to 50% biomass.

First-mover advantages

At Muckle, we have tried to calculate the net proportion of this £5.25 billion that could remain to fund virgin infrastructure low-carbon investments. However, we were unable to because government figures have not been produced to forecast this with any certainty. The conclusion we can make is that there will be first-mover advantages to whichever technologies begin producing new and/or additional low-carbon power.

So which technologies are likely to gain the upper hand by moving before others? Well, consider the following:

• the development cycle for North Sea offshore wind is currently moving slowly so taking an early advantage may prove difficult;
• onshore wind can expand more quickly but the planning and consent  process may hinder its limited additional capacity;
• nuclear expansion would be through new builds replacing our aging reactors and this Bill may provide the certainty that this industry has been waiting for. However, these plant typically have a long gestation period and will only come on-stream towards the end of the decade at the earliest;
• biomass consumption at co-firing and converted power stations is likely to expand earlier than many technologies, provided fuel supply can keep up with demand.  However,  the government and the EU are mindful of the detrimental impact that incentives may have on developing the land for food crop based biofuels;
• gas generation may take the early mover advantage, to the disadvantage of renewable energy, due to an established fuel supply network and the relatively short gestation period and lower capital cost of typical gas fired plant. Although, of course, any need for carbon sequestration would need to be factored in.

The Energy Bill still has to pass through the parliamentary process and is anticipated to gain Royal Assent sometime next year, hopefully before the Summer recess. The transition period for moving from the Renewables Obligation to the new scheme is from April 2014 to March 2017.

For more information, help or advice please contact Andrew Davison on 0191 211 7950 or email [email protected].