12 Transition period and implementation
of the new regime
AVOIDING AN INVESTMENT HIATUS
272. Any change in the policy framework creates uncertainty
and investors may delay investment decisions to see whether they
could secure a better return under a future policy regime. For
this reason, the publication of the EMR consultation has already
created an investment hiatus. As E3G put it: "the 'Pandora's
box' of reform is well and truly open and it is far from clear
that even existing investment plans will be pursued whilst uncertainty
over the market arrangements remains".[314]
273. A protracted hiatus could jeopardise the 2020
renewables target since there are long lead times associated with
construction in the energy sector (DONG Energy told us that an
offshore wind farm project can take around five years to complete).[315]
274. Equally, a hiatus could delay the construction
of new nuclear power plants. Industry currently has plans for
16GW of new nuclear capacity in the UK, and DECC's latest indicative
timeline for the first new nuclear power stations (published in
August 2010) concluded that the path to commercial operation of
the first new nuclear power station by 2018 was achievable.[316]
However, investment decisions are unlikely to be finalised before
the details of the proposed low-carbon generation revenue support
are confirmed. EDF suggested in its written submission that if
commercial operation of a new nuclear reactor was to be achieved
in 2018, then financial investment would be needed "soon".
To achieve this, it recommended that legislation to implement
the EMR White Paper would need to be presented to Parliament in
2011.[317]
275. While it is clear that a speedy conclusion to
the EMR process could help to expedite investment in new electricity
generating capacity, the Government faces something of a dilemma.
If the reforms are concluded too hastily, further interventions
may be needed in future to correct design flaws and redress any
unintended outcomes. This would cause additional disruptions to
investment. The Committee heard from a number of organisations
that wanted the Government to take its time to examine and develop
all proposals in order to produce an EMR package that is robust,
enduring and that avoids unintended outcomes.[318]
The CHPA told us:
The EMR is a process that occurs every 10-20
years and, as such a long term reform, sufficient time needs to
be given to ensure that it will deliver what Government wants.
The time spent in designing and implementing a robust and enduring
market framework will be rewarded through fewer interventions
to correct design flaws once the new arrangements become operational.[319]
276. We recognise the risk of making poor policy
decisions if analysis of potential Electricity Market Reform packages
is conducted too hastily. However, we are also mindful of the
Government's legal obligation to achieve 15% of energy from renewable
resources by 2020 and the significant role renewable electricity
will play in meeting this objective. We therefore believe the
Government's proposed timetable of producing a White Paper in
"late Spring" must not slip and we recommend that it
introduces an Electricity Market Reform Bill before the end of
this Parliamentary session.
TRANSITION FROM THE RENEWABLES OBLIGATION
TO FEED-IN TARIFFS
277. The proposals set out in DECC's EMR Consultation
Document envisage change in the way that revenue support is provided
to renewable electricity. There is a risk that the transition
from the current mechanism—the Renewables Obligation (RO)—to
the proposed Feed-in Tariff will create uncertainty for investors
and hence disrupt investment in renewables. It could also affect
existing investments in renewables, which have been made on the
basis of support available under the RO regime.
278. DECC's consultation document contains a proposal
that the current Renewables Obligation (RO) would be maintained
until 2017 for new projects. This is intended to avoid disruption
to developers who are making initial plans now under the RO. It
also states that all existing support commitments will be maintained,
as part of retaining investor confidence.[320]
279. While there is broad support for the principles
behind these proposals, it is clear that more detail about how
they will be achieved in practice is required by industry. The
Welsh Power Group told us that recent decisions on grandfathering
and the banding review had delayed investment in renewables and
that "developers will want more details on FIT levels, [...]
grandfathering, etc before progressing projects".[321]
Several other energy companies and associations made similar points
in their submissions.[322]
280. RenewableUK told us that there were other potential
threats to the deployment of renewables associated with the transition
to new market arrangements under the EMR :
It is not just the level of support under the
RO that needs to be protected, but the overall position of projects,
and in particular the contracting terms of existing or near-term
projects. Other parts of the EMR package could result in deterioration
of the terms available for the power side of the contract, and
this is not reflected in the grandfathering principles set out
by DECC.[323]
281. Government needs to explain fully how the
transition from the Renewables Obligation to a Feed-in Tariff
will work in practice. In particular, greater clarity is needed
how DECC plans to ensure that existing investments are not undermined
by the Electricity Market Reform. The White Paper should set
out proposals for an effective transitional regime.
NEED FOR A ROADMAP
282. It will take time to design and implement the
EMR measures. Providing clear information and detail about the
proposals (such as the specific design features of each measure
and how different policy measures will interact) will minimise
the likely investment hiatus. Joan MacNaughton (Alstom Power)
told us:
I do think we need more granularity around what
is said in the document about how some of these decisions are
going to be taken. If you take the contract for difference, which
has a lot to commend it as a proposal, we don't yet know how it
is going to apply across the different technologies, and how the
strike price is going to be set. Until investors have some confidence
in those issues—not just the formal statement, but how that
regulatory regime is going to work in practice—there will
be a high value to wait-and-see.[324]
283. In addition, many witnesses to our inquiry called
for a "roadmap" or implementation plan that would set
out clear timescales and milestones, including when each of the
measures would be introduced.[325]
The Institution of Engineering and Technology (IET) said:
A key objective should [...] be clarity over
the total package at the earliest opportunity, along with a very
clear timeline for implementation. This should be thoroughly
"road tested" with investors".[326]
284. We recommend that the Government publishes
a proposed Electricity Market Reform implementation plan as part
of or alongside the White Paper.
314 Ev 151 (E3G) Back
315
Ev 158 (DONG Energy) Back
316
DECC, Energy mix: nuclear, www.decc.gov.uk Back
317
Ev 191 (EDF Energy) Back
318
Ev w10 (CHPA), Ev 143 (E.ON UK), Ev w19 (ESB International), Ev
158 (DONG Energy), Ev w35 (RES), Q 84 Back
319
Ev w10 (CHPA) Back
320
DECC, Electricity Market Reform Consultation Document,
Cm 7983, December 2010, p 122 Back
321
Ev w26 (Welsh Power Group) Back
322
Ev 153 (International Power), Ev 158 (DONG Energy), Ev w17 (REA),
Ev 191 (EDF Energy), Ev 197 (ScottishPower), Ev 208 (GE Energy),
Ev 214 (SSE), Ev 216 (RenewableUK), Q 172 [Mr Campbell] Back
323
Ev 216 (RenewableUK) Back
324
Q 225 Back
325
Ev w10 (CHPA); Ev 139 (RWE npower); Ev w19 (ESB International);
Ev 153 (International Power); Ev 197 (ScottishPower); Ev w45 (IET)
Back
326
Ev w45 (IET) Back
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