The energy market may have served the UK well for many years, but energy security and climate change objectives have spurred a review which has resulted in the proposed Electricity Market Reforms. These may prove to be beneficial to the extractive industry, Sonya Bedford of
The aggregates industry sector is traditionally a very high energy consumer. Any opportunity of purchasing energy at a fixed price, whilst also generating its own supplies using renewables, will doubtless be the element of most interest within the proposed Energy Bill.
In November 2012, the Energy Bill was finally introduced to the UK Parliament. It will shape how energy is used to power Britain for the next half century or so. With the need to attract in excess of £100 billion (€117 billion) in investments over the next decade to upgrade and indeed replace the UK’s energy infrastructure (which is incompatible with European laws), the choices made will have long-standing consequences for the economy, energy prices and ultimately consumer bills.
In his speech in February 2013, the UK Prime Minister, David Cameron, stated: “We are in a global race and the countries that succeed in that race, the economies in Europe that will prosper, are those that are the greenest and the most energy efficient.”
However, do the proposals put forward within the Bill support Mr Cameron’s aspirations for green energy, or is there conflict between desire and expected ability?
Part of the Energy Bill 2012 is the framework to implement electricity market reform (EMR) with an aim for ‘secure, clean and affordable’ energy supplies. Thus the EMR has a crucial role to play in securing a clean and reliable electricity system for the future, at a minimum cost to consumers.
The shape of EMR
At the heart of the Energy Bill reforms is the proposal to establish a Feed-in-Tariff, with a new system of support for low-carbon generation, called Contracts for Difference (CfD). They will provide a long-term contract for revenue certainty which encompasses not only renewable generation, but also nuclear energy.
The terms of the CfD will be standardised across all energy producing technologies, but an element of difference is to be expected, especially across baseload (the amount of power required to meet minimum demands) and intermittent plants (with sources that are not continuously available due to factors outside of control, such as wind or solar).
In the UK, baseload power is usually supplied by hydro and gas turbines, in France nuclear, and in Germany fossil fuels.
The CfD will be a commercial contract with a 15-year duration for renewables projects, the duration for nuclear and carbon capture technologies is yet to be determined.
Part of the CfD provides for a fixed or ‘strike’ price, linked to the consumer price index. If the market falls below the specified level, the generators get a top-up: if the prices soar, then the generators pay something back. With start-up costs being so high, this form of underwriting risk is vital to encourage new players into the generating game, especially with the uncertainty of the market.
Allocation of CfDs will initially be on a first-come-first-served basis for projects meeting specified eligibility criteria. The budget will be split between technologies that have a slow and dependable rate of distribution and those, such as solar and biomass, which are capable of rapid growth. A special ring-fenced pot for the latter will be separated from the general pot of funds available.
Power Purchase Agreements (PPAs) will be available with the government having new powers to intervene and modify electricity supply licences and industry codes to eliminate any barriers to access this market.
How this affects, or is affected by, Europe
French-owned energy group,
It would potentially provide 7% of the UK’s electricity but the UK government is showing reluctancy in setting the strike price, perhaps in case it is seen to be favouring non-UK owned power generators at this time of financial austerity.
Perhaps it is also an indication that home-grown applications may be viewed more favourably.
Over the past year in particular, the tremendous growth of photovoltaics (PV) in Germany has offset demand for more expensive peak power, thereby bringing down spot market prices. Could this also happen in the UK?
Overseas projects will be eligible for participation in the CfD scheme but the contract terms may be more burdensome than for domestic schemes in relation to regulatory issues, mainly to protect the UK consumer.
Uncertainty or opportunity?
Renewable energy sources are big business. In 2012 the environmental sector in Britain was worth £122 billion (€142.6 billion). It employs tens of thousands of people and over the past five years has been growing at 2% a year.
Manufacturers however say that progress is being threatened by a perceived lack of investor confidence in the government’s commitment to the sector.
Ensuring a timely delivery of electricity market reform cannot be overstated. Reform is imperative if we are to meet low-carbon targets for 2020. The scale of the challenge that the government is facing in creating a Bill fit for purpose for late 2013 is huge, but one which must be grasped with gusto to ensure our energy security for current and future generations and to keep industry moving..
Sonya Bedford heads the renewables team at Stephens Scown LLP in the UK.
She can be contacted on +44 (0)1392 210700 or email
