Complexity risks short-circuiting energy reforms

The Government has an energy conundrum. It must provide a reliable supply of energy while reducing carbon emissions, and it must do it cost effectively.
The Electricity Market Reform White Paper spells out how the Government plans to achieve these goals.

The White Paper includes plans to create a more stable financial support mechanism, to provide guaranteed returns that will attract investors. This in turn should lower the cost of capital.

The new mechanism proposes a ’contract for a differences’ (’CfD’) approach to convert volatile market prices, which can discourage investors, into a fixed price. This will be done by making a top-up payment or repayment of the difference between the average market wholesale price and the agreed tariff level.

While the CfD approach looks neat on paper, it is unlikely to address certainty of build costs, a particular concern for nuclear. In addition, calibrating it to suit a wide range of technologies will be a very complicated task in practice.

Legislation following the White Paper is not expected until 2013 at best, so investment decisions are going to be difficult to make in the meantime.

For example, there are a lot of unanswered questions in this paper, such as a lack of solution on distributed energy and no clarity as to what happens to guarantee energy supply. This makes it difficult for investors looking at energy projects to understand the full picture.

The one bright spot is that the Government sees the need to encourage early investment in energy despite the reforms not yet being in place.

It has provided clarity on the timing of the transition of the Renewables Obligation (RO), the main support scheme for renewable electricity projects in the UK. The RO is an obligation for UK suppliers of electricity to source an increasing proportion of their electricity from renewable sources.

However, RO is expected to be rebanded shortly with different levels of support for each energy area being reset.

The main concern is the sheer complexity of the White Paper programme. The UK has the most labyrinthine package of support mechanisms for clean energy in the world, and it just got more complicated.

The details of the White Paper need to be spelt out as soon as possible to allow pension funds to make educated investment decisions.

It is therefore essential that the Government has a dialogue with the energy industry to test the deliverability of proposals in the White Paper.