"Treasury has made energy policy unworkable" say MPs
23 July 2012
The proposals in the Government’s draft Energy Bill could impose unnecessary costs on consumers, lead to less competition and deter badly needed investment, according to MPs on the Energy and Climate Change Committee who have examined the draft legislation.
- Report: Draft Energy Bill: Pre-legislative Scrutiny
- Inquiry: Pre-Legislative Scrutiny: Draft Energy Bill
- Energy and Climate Change Committee
Tim Yeo MP, Chair of the Energy and Climate Change Committee, said:
"The Government is in danger of botching its plans 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."
In the biggest shake-up of the electricity market since privatisation, the Energy Bill will introduce new system of long-term contracts to give power companies a guaranteed price for the low-carbon electricity they produce. This is intended to reduce the risk of investment in projects with high up-front capital costs, such as nuclear reactors and offshore wind farms.
Initial consultation last year led investors to believe that the "Contracts for Difference" (CfD) would be guaranteed by the State – therefore lowering the cost of capital. But the Treasury has apparently intervened to ensure that the contracts are not government guaranteed. The new model for contracts will spread the liability across energy companies instead; raising concerns that the plans are now too complex and possibly not legally enforceable. The MPs are calling on the Government to use its AAA-credit rating to underwrite the new contracts in order to keep the costs of energy investment down for consumers.
Tim Yeo MP, Chair of the Committee, added:
"Electricity market reform is essential, but the new contracts proposed by the Government will not work for the benefit of consumers in their present form.
The Government has a lot of work to do over the summer to make sure that the Bill is fit for purpose in the autumn and is not subject to any further delays."
The Committee heard that the spending cap set by the Treasury – which limits the green levies that can be passed on to consumers in energy bills – could introduce an "unacceptable" level of risk to companies who are looking to build new wind, solar, wave or tidal power plants. This is because the levy cap will ration the number of contracts available, creating uncertainty amongst investors about which projects will receive support. This is already having an impact of investment decisions and could paradoxically push-up energy costs for consumers, the Committee warns.
Tim Yeo MP, said:
"Nobody wants to see a blank cheque written out for green energy, but the Government must provide investors with more certainty about exactly how much money will be available."
The Committee is also concerned that the new contract system will reinforce the dominance of the "Big Six" energy companies and prevent new entrants into the electricity market. The Government says it wants to increase competition and improve the opportunities for new entrants in the electricity market. But witnesses told the Committee that the Energy Bill as it stands will in fact deliver the exact opposite of this ambition, threatening the viability of smaller-scale independent energy companies.
Tim Yeo MP said:
"Community owned energy projects and small independent generators are in danger under the current plans of being squeezed out. The Committee is worried that decisions about support for new nuclear power stations are being made "behind closed doors" and calls for an independent expert to inspect any agreements to ensure that they are delivering value for money. Energy efficiency could be one of the cheapest way of cutting carbon and improving energy security and the MPs urge the Government to consider incentives for power companies to reduce demand. The Government should also set a clear target to largely decarbonise the electricity sector by 2030 to provide investors greater certainty about the direction of energy policy."
The Government must rethink its plans urgently so that the investment that is needed to replace the UK’s aging power stations, cut carbon emissions and maintain energy security can be delivered. The Committee says that the Government must come up with a stronger contract design before the Bill is expected to be introduced to Parliament in the autumn.
Tim Yeo MP concluded:
"If the Energy Bill does not set a target to largely decarbonise the electricity sector by 2030, then the UK may miss one of the biggest opportunities it has to create a low-carbon economy in the most cost effective way."