REA responds to Energy Select Committee report on Government’s Energy Bill

Gaynor Hartnell, Chief Executive of the REA, responds.

Responding to the Energy and Climate Change Select Committee’s report on the Government’s draft Energy Bill, Gaynor Hartnell, Chief Executive of the REA and who gave oral evidence to the Committee, said:

“DECC is right to seek to transform our electricity sector, but the Committee rightly concludes there are very serious problems with the current proposals.

“It is clear from the Report that the Select Committee, like many in the energy sector and the investment community, has serious concerns about the Bill’s lack of clarity in key areas, and levels of complexity which it could create, that could stifle investment. Complexity and uncertainty risk adding to costs, as well as raising questions about meeting the UK’s renewables targets.

“The renewables industry, which should be a powerful engine for economic growth, wants to work with Government, but there is real uncertainty in the sector now, which is hugely damaging to the sector’s future prospects. As well as working with Government to get EMR right, we want to see the current support mechanism for large scale power, the Renewables Obligation, extended to 2020. And like the Committee, we want to see the current Feed-in Tariff mechanism for small power increased to at least 10MW. That would ensure the industry could continue to invest and expand with confidence, while we get these proposals right.

“We are urging Government to take heed of the recommendations in the Report and to ensure that all of the concerns and issues are addressed with some urgency to ensure the Energy Bill, to be published in the autumn, carries the support and confidence of Parliament, industry and the investment community.”

The REA agrees with the recommendations of the Energy and Climate Change Select Committee in four crucial areas:

• The contract for difference (CFD) counterparty must be the Government as stated in the White Paper Impact Assessment last year in order to give investors confidence and to reduce the cost of capital;
• that small and medium-sized power generation has been left behind and that the existing Feed-in Tariff (FIT) should be extended from 5MW to at least 10MW;
• that the issues with nuclear as part of CFD are creating the impasse that currently exists within Government and should be separated out;
• concerns whether renewable power generators will be able to achieve the reference price. The Reference price means the price they are expected to be able to achieve in the market.

Gaynor Hartnell comments:

“If renewable generators can’t achieve the reference market price, the whole rationale for the new types of contracts falls away. It’s good to see the committee acknowledge the importance of this and make recommendations to ensure it happens.”

The REA believes that, given the lack of clarity, the Energy Bill is unlikely to pass through Parliament until the end of next year (2013). Therefore the Renewables Obligation (RO) should be extended until 2020 to give the confidence needed during what will be a complex and uncertain transition period for renewable support mechanisms, coupled with potential political uncertainties in the future.

On the issue of the counterparty to the CfD contracts

The counterparty is the body with which electricity producers will contract to produce power.

Gaynor Hartnell comments:

“The Committee agrees with the REA and many others that a single counterparty underwritten by the Government is the best way forward. If this isn’t possible for new nuclear plants, because it would fall foul of State Aid rules or get snarled up in wrangles at EU level, that should not be allowed to hold up renewables. Government favoured a single counterparty initially, as it is the most cost-effective approach, reducing risk and therefore lowering the cost of capital. A coalition agreement not to allow public subsidy to nuclear, arrived at in haste, must not be allowed to drag renewables down.”

“Rationing” CfDs under the Treasury’s levy cap and the “two-step registration process” Gaynor Hartnell comments:

“The way the Government intends the new contracts to work piles on risk for project developers and this must be avoided, or quite simply the pipeline of projects will dry up.

“The REA has been recommending a ‘two stage commitment process’ since the market reforms were first mooted to mitigate risk for developers. We are delighted to hear this reinforced by the Committee.

“We want to see the numerous penalties proposed for the new contracts removed too. Government cannot micromanage the contract allocation process to the extent it wishes to, without it seriously backfiring.”

On increasing the small scale Feed-in Tariff size threshold from 5 to at least 10 MW Gaynor Hartnell comments:

“Extending the current Feed-in Tariffs, which are simple and accessible, would help address the industry’s concerns about the ‘squeezed middle’ of renewable energy. By that, we mean investors who get squeezed out of the mainstream support framework because the arrangements are too complicated and squeezed out from the Feed-in Tariffs as their projects are too large.

“The new contracts for difference will be too complex for the larger community schemes or on-site renewables projects for energy intensive industries installing renewables to insulate themselves from increasing and fluctuating energy bills. The great majority of investment in renewable power in Germany is coming from these mid-sized and smaller investors, so they are not a niche concern.”