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Britain’s Power Market Proposal ‘Unworkable,’ Lawmakers Say

July 23, 2012

The U.K. government’s proposal to overhaul the electricity market is “unworkable” because the Treasury isn’t willing to back contracts needed to spur clean energy, a panel of lawmakers in Parliament said.

The Energy and Climate Change Committee said Chancellor of the Exchequer George Osborne’s department is refusing to use the U.K.’s AAA credit rating to underwrite energy contracts, a measure that would reduce the cost of improving Britain’s power plants and electricity networks.

“The government is in danger of botching its plan to boost clean energy because the Treasury is refusing to back new contracts to deliver investment in nuclear, wind, wave and carbon capture and storage,” said Tim Yeo, a Conservative member of Parliament who leads the committee.

The comments escalate a feud within Prime Minister David Cameron’s coalition over the nature of support granted to the renewable and nuclear industries. The government’s legislation, now in a draft form, is due to be introduced in the House of Commons later this year as part of a program to lure 200 billion pounds ($320 billion) by 2020 for upgrading electric power plants and distribution grids.

Osborne, a Conservative, is pushing to limit subsidies for solar and wind and spur natural gas as an alternative. He notes that subsidies for clean energy are driving up electricity costs for manufacturers.

Helpful for Davey

Ed Davey, the Liberal Democrat who leads the energy department, says gutting subsidies for renewable would hurt jobs and economic growth. Davey’s department was unable to announce subsidy levels for wind projects last week because a debate with the Treasury over the plan is continuing. In a statement, Davey said the committee report would be “extremely valuable” to his efforts to shape the legislation.

“We welcome the committee’s report,” Davey said in a statement. “ We are determined to use the pre-legislative scrutiny period to develop a robust and effective bill with the interests of both consumers and investors at heart.”

A spokesman for the Treasury said it was working closely with DECC and planning an announcement on renewable subsidies in due course. The nation’s biggest business lobby group criticized the government for delaying the review on subsidies and it needed to work more quickly on the legislation.

‘Critical Decisions’

“Major energy investments are hanging on critical decisions the government must make in the coming weeks and months,” said John Cridland, director general of the Confederation of British Industry. “If they are to plan long- term investments, businesses need to know what the electricity market will look like in years to come.”

The draft legislation published in May would guarantee prices for low-carbon electricity and pay producers for providing back-up supply when wind power falls short. It also includes measures to secure commitments from utilities to fund nuclear reactors and wind farms.

It’s unclear how the electricity sector is expected to contribute to targets for reducing Britain’s carbon dioxide emissions, the Parliament committee said. The law also focuses on how energy is supplied rather than on measures to reduce electricity demand, it said.

“The pre-legislative scrutiny process has identified some serious concerns with the proposals as they currently stand, which could make the reforms unworkable if they are not resolved,” the Energy and Climate Change Committee said.

Price Guarantee

Proposals to guarantee prices for low-carbon electricity including nuclear reactors and offshore wind farms using a so- called feed-in tariff with contracts for difference have “become so complex that the proposal has now arguably become unworkable,” the lawmakers said.

Under the proposal, if wholesale power prices drop below a government-established level known as the “strike price,” investors in nuclear power stations and renewable projects will be compensated by suppliers up to that level. If prices are higher, suppliers and consumers will be reimbursed by investors.

Problems with the contracts-for-difference model include uncertainty over who will act as the counter-party to the contracts and how many of the arrangements will be allowed, the committee said. The panel wants the Treasury to be the ultimate guarantor of the contracts, while Osborne wants to avoid potential costs accruing to taxpayers.

Credit Risk

“The hybrid counterparty introduces a degree of credit risk,” Yeo said in an interview. “It certainly should be a single counterparty and backed by a government guarantee without that it will be too expensive. What is so paradoxical about this is most of the Treasury interventions are to keep the cost to the consumer as low as possible, and here is one that will have the result of raising consumer prices. It’s a simple error that could be put right.”

Yeo serves as president of the U.K. Renewable Energy Association and a director of AFC Energy, whcih makes fuel cell technology, and TMO Renewables Ltd., whcih supplies material for second-generation biofuels, according to Parliament filings.

The law would also remove obligations to buy renewable energy, possibly reducing the number of independent generators participating in the energy market, they said.

The committee suggested using a single counter-party, underwritten by government, which would help drive down the cost of capital. There should also be a two-step registration process for allocating contracts and the eligibility for small-scale feed-in-tariffs should be extended to at least 10,000 megawatts, they said.

The government should also consider a “buyer of last resort” or incentives to drive the use of low-carbon power to open up the market, the panel said.

Negotiations over a strike price with investors in nuclear power should be overseen by an independent committee of experts, they added.

To contact the reporter on this story: Kari Lundgren in London at klundgren2@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net


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