The energy bill must provide certainty for investors

A version of this article by Green Alliance director Matthew Spencer first appeared on BusinessGreen.

The energy bill maintains the government’s track record of private enthusiasm and public reticence on its low carbon reform agenda. The Coalition appears to have maintained interdepartmental and cross-party support for electricity market reform, but has missed the opportunity to be clear about its low carbon ambitions. As a result it is losing support for reforms which had widespread acceptance two years ago, and the debate has deteriorated into hand to hand fighting between lobbies for renewables, nuclear and unabated gas.

Officials and ministers have spent two years wrestling with the complexity of the new contracting and institutional arrangements, but the draft bill shows that they do not yet have an answer to the most basic question: ‘What is the bill supposed to deliver, and by when?’

A reticent approach to bold reform
Without a stated aim and a strategy people can support, the bill can’t deliver the clarity and the simplicity that investors need. It means that the bill will be subjected to endless lobbying because the mechanisms are, by design, flexible enough to deliver a dash for gas or a significant subsidy for nuclear. All sides are suspicious about the motives of the government, leaving no room for a consensus which can enable risk averse investors to put their money into clean energy.

Choosing flexibility over certainty has another perverse outcome: because government hasn’t chosen to clarify its low carbon aims, its strategy essentially amounts to paying companies through contracts for difference to invest in low carbon generation rather than gas, the default option. It then pays those companies again through the capacity market to build gas power stations to help balance intermittent renewables and inflexible nuclear. A strategy of paying twice may keep minister’s options open, but it is bad politics at a time when consumer bills are the main source of public concern. And there is a risk of exacerbating policy uncertainty because the more risk averse investors will only commit if they believe that the public will continue to pay energy bill.

The need for level playing field for investment
The government can help itself by being clear about how low carbon its wants the power sector to be: the Committee on Climate Change recommended a goal of 50g CO2/kWh for average emissions from electricity by 2030. Providing this would create a level playing field for all technologies and help create confidence amongst investors that there will be sufficient low carbon contracts on the market to make early investment decisions. Early investment will mean costs fall faster and the government and consumers should benefit.

Paying for energy efficiency is cheaper than new power stations
The government can also lower costs by ensuring these reforms capture low cost electricity efficiency. It should introduce an efficiency feed-in tariff, and purchase efficiency ahead of new power stations. Vermont, California, and Texas have all been running similar programmes for over a decade so the argument that it’s too complicated looks weak. Their experience shows that paying for efficiency saves over three times the cost of new power stations, and that efficiency measures can be rolled out faster than new power stations can be built.

The justification for electricity market reform is as strong now as it was when the process began two years ago. To decarbonise the UK we need a close to zero carbon power sector by 2030. It will be a more secure and lower cost system than one dominated by unabated gas. But modernising the UK’s electricity system requires billions of pound of low risk institutional capital, which will only enter the market if government de-risks long term contracts. The energy bill can achieve that, but only if the government abandons its public timidity and puts its low carbon objective at the heart of the reform.

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