Energy Bill provides clarity on operation of low carbon incentives says expert

Simon Hobday of Pinsent Masons, the law firm behind Out-Law.com, said that the change to a single, Government-backed counterparty for Contracts for Differences which will underpin a new system of financial incentives for low carbon energy developers was a "significant step forward". He also welcomed the publication of a 74-page 'heads of terms' document (78-page /) on these new Contracts for Difference (CfDs), which he said was indicative of a "layer of detail" on the proposals "finally coming through".

The Energy Bill (195-page / 788KB PDF), which builds on an early draft published by the Government for pre-legislative scrutiny in May, is intended to deliver certainty for investors and protect consumers. It proposes a new system of financial incentives designed to ensure that low-carbon forms of electricity generation can compete fairly in the marketplace, backed with a 'capacity market' aimed at ensuring that consumers continue to benefit from reliable electricity supplies at an affordable cost.

As announced last week, the Government will make £7.6 billion available for investment up to 2020, to be funded through an increase on energy bills. National Grid will be appointed System Operator, tasked with administering the capacity market and delivering CfDs, while energy regulator Ofgem's role will be strengthened to safeguard consumers.

Energy Secretary Ed Davey described the new Bill as "the culmination of two years' work" and said that it would attract investment needed to bring about the UK's "once in a generation transformation" from predominantly fossil fuel-based generation to a diverse, low-carbon mix.

"The challenge is big," he said. "Over the next decade, the investment needed to upgrade our energy infrastructure is almost half of the infrastructure investment needed in the UK. This is far more than is taking place in transport, telecoms, or in water, and dwarfs the investment that was needed for the Olympics or Crossrail."

"This is an economic opportunity there for the taking. It will stimulate supply chains and support jobs in every part of the country, capitalising on our engineering prowess and our natural resources, cementing the UK's place at the forefront of clean energy development," he said.

"In an era of rising global energy prices, by shifting to more home-grown sources of power and by becoming more energy efficient, we can cushion our economy and households from the fluctuations of world gas markets. We intend to underpin this with reforms to the retail market to simplify tariffs and make sure consumers are able to get the best deal for them," he said.

The Energy Bill is expected to receive Royal Assent next year so that the full programme of reform will be up and running by 2014. It will apply in England and Wales, with the majority of its provisions also extending to Scotland and a number also applying in Northern Ireland.

CfDs are long term contracts that provide stable revenues for investors in low carbon energy projects, and will be made available for nuclear and carbon capture and storage (CCS) as well as renewable energy sources. Payments made under the CfD will be calculated with reference to a technology-dependent 'strike price' and a market reference price. The payments are intended to replace existing subsidies and incentives such as the Renewables Obligation, and will also protect consumers by enabling the system operator to 'claw back' money if the market price is higher than the strike price. A consultation on the first set of strike prices will take place in October 2013 for implementation in mid-2014.

Last week, the Government announced the creation of a state-backed, single counterparty which will underwrite the new CfDs. This body will be given levy-raising powers, enabling it to raise funds from suppliers to meet its costs. In its report on the draft Energy Bill, the House of Commons Energy and Climate Change Committee recommended that the counterparty be backed by the Government. CfD applications will be handled through a two-stage process in which projects that have cleared meaningful hurdles, such as obtaining planning permission, would be able to apply immediately, and be allowed to retain the contract post-award after they fulfil certain other criteria.

The Government has also agreed to exempt some energy intensive industries from any additional costs arising from CfDs, intended to ensure that the UK retains the industrial capacity needed to deliver a low carbon economy. The proposed exemption, which will complement a separate scheme to compensate these companies for the costs associated with national and EU emissions trading schemes, will be subject to further consultation and state aid clearance from the European Commission. However, Simon Hobday pointed out that this "significant" proposal was similar to an exemption which already exists in Germany.

Further proposals will also be added as the Bill makes its way through Parliament, depending on the results of ongoing consultations and further research. These could include proposals to ensure that energy companies will help consumers get the best energy tariff and incentives to promote energy efficiency through electricity demand reduction. A consultation setting out a package of energy efficiency measures, including 'premium payments' for energy saved and a supplier obligation for the non-domestic sector, has been published today.

The Government also intends to introduce a power under the Energy Bill which will allow it to set a decarbonisation range for 2030 in secondary legislation. It will take a decision on whether to do so in 2016, following further evidence from the Committee on Climate Change.