2 Omissions and unintended consequences
from the draft Bill |
20. In this section we provide an overview of
key aspects that are missing from the draft Bill as well as a
number of potential unintended outcomes from the proposals. The
details behind each of these aspects are provided in subsequent
A lack of detail: a framework
21. The draft Bill contains 50 individual provisions
for delegated powers.
A substantial amount of detail relating to the basic design of
the Contracts for Difference (CfD) and Capacity Market will be
contained in secondary legislation that is not available for scrutiny
at this time. This includes important terms of CfDs that are key
to their operation, such as the length of contract, any penalties
payable (for not completing projects on time), and the setting
of two key prices that will determine payments under CfDs (the
"strike price" and "market reference price").
We consider that these are more than technical details because
they are of direct and immediate interest to developers and investors.
22. In some areas the draft Bill provides for
limited (negative procedure), or even no Parliamentary scrutiny
of secondary legislation. The absence of detail raised concern
among many witnesses, who stressed that they could not have confidence
in the outcomes until they had seen the detailed workings for
DECC's Delegated Powers Memorandum says (in respect of CfDs):
The key elements and principles of the CFD scheme
are set out on the face of the draft Bill...[and associated documents]...
Further detailed work will be undertaken to give effect to these
provisions, and elements of the mechanism such as targets and
support levels will need to be updated periodically over the lifetime
of the mechanism. Therefore, the Department considers that it
is appropriate to address the detailed design of the scheme in
23. Some witnesses perceived increased risk that
future Secretaries of State would be able to amend the framework
"with relatively low levels of Parliamentary scrutiny (because
amendments will be subject to negative resolution procedure)".
24. In the context of the challenging timescale
we have been set for this inquiry, we have focussed on the policy
objectives of the Bill. However, we note that the success of the
EMR will lie in the detail. Since the basic design of CfDs and
the Capacity Market will not be enshrined in primary legislation,
the secondary legislation will be more than just technical implementation
and the opportunities for further Parliamentary scrutiny should
25. We asked the House of Lords Delegated Powers
and Regulatory Reform Committee for its opinion on DECC's Delegated
Powers Memorandum. Unfortunately it was not able to offer a formal
view in the time available, but we will await with interest its
view on whether the parliamentary procedures in the Bill provide
for sufficient scrutiny of the detail of the proposals.
26. DECC has noted that elements of the detail
embodied in secondary legislation such as generic CfD terms "are
not intended to change substantially over time". It should
therefore be possible to make generic designs available to Parliament
to assist its scrutiny during the passage of the real Bill.
We recommend that in
order to increase confidence and ensure that there is an opportunity
for rigorous Parliamentary scrutiny, the Government should publish
draft secondary legislation, including a model Contract for Difference,
in time for formal consideration of the Bill.
Clarity about the key goals of
27. The introduction to the draft Bill highlights
the Government's ambition to move to a "secure, more efficient,
low-carbon energy system in a cost-effective way".
It also reaffirms the Government's commitment to meeting the UK's
legally binding emission reduction targets and 2020 renewables
target. The Secretary
of State confirmed the objectives of the draft Bill, telling us
They are to get energy security, to keep the lights
on; they are to decarbonise, to ensure we stop polluting; and
they are to do that at the least cost, because affordability has
to be a consideration.
28. Nevertheless, we heard from many witnesses
that the objectives for the Bill were not sufficiently clear.
We suggest that there are two reasons for this perception. First,
the draft Bill does not specify the outcomes it is aiming
to achieve: what level of reliability of supply is acceptable?
What level of emissions would be considered "low-carbon"?
How much is it reasonable for consumers to pay? Without providing
a sense of what success looks like, stakeholders remain uncertain
about what exactly the Government is hoping to achieve through
29. We note that despite the
Secretary of State's assertion that the objectives of the Bill
were clear, they are not set out formally on the face of the Bill.
30. The second aspect of uncertainty stems from
contradictory signals about which of these objectives takes priority.
For example, achieving security and decarbonisation "at least
cost" suggests that decarbonisation and security goals have
priority over reducing costs. But the existence of the Treasury's
levy control framework has created a perception that, in practice,
caps on consumer costs might trump carbon reduction.
The Energy Technology Institute stated:
The Bill and the accompanying documentation also
does not clarify how the government will ensure coherence between
its carbon budget, its published Carbon Plan, and its approach
to delivering EMR. This, along with the closeness of the department
to the delivery plan, may cause investors to perceive a significant
risk that the EMR delivery plan and associated funding commitments
will be subject to short-term spending review pressures.
31. We asked the Secretary of State to clarify
whether the levy cap or climate change targets had primacy. He
We are not going to break the law [
we need to make sure we meet our legal obligations.
32. We welcome the Secretary
of State's clarification that if faced with a choice between meeting
legal climate change obligations and sticking within the levy
cap, the Government would give primacy to statutory climate obligations.
The investment community would have been further reassured had
HM Treasury been able to confirm this. Because HM Treasury have
told us that DECC spoke for all of Government in its evidence,
we consider this a cast iron commitment to the primacy of statutory
obligations over the Levy Control Framework. We would welcome
an explanation from HM Treasury about how the working of the levy
cap over the forthcoming funding period will be amended to make
it compatible with the requirement to meet legal climate change
IMPROVING CLARITY ABOUT DECARBONISATION
33. The Committee on Climate Change has recommended
that the carbon intensity of the power sector will need to fall
to around 50gCO2/kWh by 2030 if we are to take the
most cost effective route to meeting our 2050 decarbonisation
adopted an "indicative target" of 100gCO2/kWh
by 2030 as the basis for the modelling that underpinned the White
Paper. However, the
UK does not currently have any statutory targets relating to carbon
emissions or the energy mix in 2030.
34. Air Products told us that "the perception
is that UK policy is becoming more uncertain and more unpredictable,
particularly concerning the future of renewable energy post-2020".
Numerous witnesses told us that a specific carbon reduction target
for the electricity sector on the face of the Bill would help
to address this concern and would boost investor confidence in
the UK's commitment to decarbonisation.
Green Alliance said:
Without a specific carbon objective, it will be unclear
to investors whether government will continue to issue a sufficient
volume of CfDs for low carbon plant and force existing and future
gas CCGT to operate as peaking plant or fit CCS, especially if
the costs of low carbon generation are higher than anticipated.
35. Not everyone agreed that this was necessary
and we heard that adding a carbon reduction target to the Bill
would duplicate the existing targets in the Climate Change Act
2008. However, the
targets in the Act are not sector specific. Nick Molho (WWF) pointed
out that the targets in the Act have not yet been sufficient to
bring forward investment in the electricity sector so investors
need more clarity about what is expected on a shorter timescale
up to 2030. David
Kennedy (Committee on Climate Change) told us:
At the beginning of the Climate Change Act, we have,
"This is about this is the long-term target". I think
in this piece of legislation you write, "This is about decarbonising
the power sector to achieve legally binding carbon budgets",
and then you put a process in place to make sure that the governance
arrangements following the legislation achieve the objective.
36. He also highlighted the importance of linking
to the Carbon Budget process:
A fourth carbon budget, which we legislated for last
summer, will be reviewed in 2014, and a fifth carbon budget covering
the period 2028 to 2032 will be set in 2015. So we will have all
the debates around cost and affordability as we go through legislating
for the fifth carbon budget. To join those up, and to make sure
that the Levy Control Framework is adaptable to what is agreed
in the context of carbon budgets, rather than the other way roundthat
we miss carbon budgets because it doesn't have the support in
the Levy Control Frameworkis the right way forward.
37. It is right to prioritise
the decarbonisation of the electricity system because this is
likely to deliver the most cost effective route to meeting our
2050 climate change targets. Although statutory carbon reduction
targets are set out in the Climate Change Act 2008, these are
economy wide, rather than sector specific. We conclude that providing
greater clarity about the contribution that the power sector is
expected to make towards meeting these targets would help to provide
certainty to investors. The Government should set a 2030 carbon
intensity target for the electricity sector in secondary legislation
based on the recommendation of the Committee on Climate Change.
38. We recommend that the Committee
on Climate Change should be made a statutory consultee to the
EMR delivery plan in order to assess whether the proposals are
in line with legally binding carbon budgets.
39. We further recommend that
the Committee on Climate Change should be given a role in advising
whoever is the Transmission System Operator in the development
of the delivery plan to ensure that it is in line with legally
binding carbon budgets.
IMPROVING CLARITY ABOUT MINIMISING
COSTS TO CONSUMERS
40. While decarbonisation is a priority, it
should not be delivered at any cost. Consumer Focus recommended
amending Clause 1, subsection (1) of the draft Bill to introduce
a focus on keeping costs down.
The importance of minimising costs and protecting vulnerable consumers
is also a high priority for the Committee and is addressed in
paragraphs 117, 134, 136 and 172-175.
IMPROVING CLARITY ABOUT ENERGY SECURITY
41. Witnesses also recommended introducing a
reliability standard in order to provide greater clarity about
the security of supply objective. This point is addressed in more
detail in Chapter 5.
PROPOSED AMENDMENTS TO THE DRAFT
42. In this section we propose a number of amendments
to the draft Bill to deliver the outcomes recommended in paragraphs
37, 38, 40 and 164. We do not have the benefit of Parliamentary
Counsel advice on drafting but propose below what seems to be
required. We request that the Government addresses the spirit
of the amendments in its response and in the Bill it introduces
in the autumn. We provide in Annex 2 a list of proposed amendments
in conventional format for consideration during the Committee
Stage of a Bill.
43. We recommend that Clause
1, subsection (1) of the Bill be amended to read "The Secretary
of State may make regulations about contracts for difference for
the purpose of encouraging low carbon electricity generation in
order to achieve legally binding carbon budgets at least possible
cost to consumers".
44. We recommend that Clause
8, subsection (2) be amended to add "[
] (d) a
2030 target for carbon intensity of the electricity sector compatible
with meeting statutory carbon budgets and the 2050 target (e)
a reliability standard". We believe that setting
a decarbonisation target should be a duty on the Secretary of
State. However, the current wording of Clause 8 (the Secretary
of State "may" by order provide for [
that the introduction of "other targets" would be at
the Secretary of State's discretion. Therefore we recommend that
the Bill be amended to make this a statutory obligation within
a fixed timeframe, possibly by way of further amendment to Clause
8. We note that a carbon intensity of the order of around 50gCO2/kWh
by 2030 is compatible with legally binding carbon budgets.
45. We recommend that Clause
9, subsection (1) be amended to add "[
] (e) the
Committee on Climate Change [
]" and that
Clause 44, subsection (4) be amended to add "(d) the Committee
on Climate Change".
46. We recommend that Clause
20, subsection (1) of the Bill be amended to read "The Secretary
of State may by regulations make provision for the purpose of
providing capacity to meet the demands of consumers for the supply
of electricity in Great Britain, while achieving legally
binding carbon budgets at least possible cost to consumers"
47. We recommend that the long
title should be amended to read "Make provision for contracts
for difference and investment instruments in connection with encouraging
low carbon electricity generation in order to achieve legally
binding carbon budgets and provide security of supply at least
cost to consumers [
]". We recommend that the long title
should be further amended to delete "contracts for difference"
and insert "support mechanisms".
48. The predominant approach to meeting electricity
policy goals (presented in the draft Bill and associated documents)
is to focus on the supply side - to ensure sufficient power
stations are available to meet demand. However, the demand-side
can also contribute. By reducing the total demand for electricity,
for example through improved energy efficiency, fewer power stations
and power lines would be needed. By encouraging demand to become
more flexible and responsive, it would be easier to accommodate
low-carbon electricity from a combination of intermittent and
inflexible power stations, such as wind and nuclear generators.
Reducing demand, and facilitating the management and prioritisation
of demand to ensure the lights stay on, would almost certainly
provide a cheaper, easier and less polluting way to meet our electricity
49. We note that virtually the sole mention of
the possibility of the inclusion of demand side measures in the
Energy Bill is contained in a paragraph in the preamble to the
Bill, which states that the Department is "currently reviewing
the potential for incentivising further demand reduction in the
electricity sector. This work will report over the summer, in
time to fit with legislative timetables, should it be required".
DECC published a draft of this work the day before our scrutiny
concluded, too late for us to be able to give it proper attention.
50. The draft Bill and its associated
documents are fundamentally flawed by the lack of consideration
given to demand-side measures, which are potentially the cheapest
methods of decarbonising our electricity system. Responsive demand
features only to a limited extent in the proposed capacity market,
a subject we discuss in Chapter 5. Reducing overall demand, meanwhile,
is entirely absent from the Bill. Indeed, the Secretary of State
admitted to us that "there is a lot of work we should be
doing and are doing on that".
We recommended, over a year ago, that "demand reduction should
be placed at the heart of EMR".
It is completely unsatisfactory that DECC's work was not completed
in time to be published alongside the draft Bill. This suggests
that DECC is still failing to give enough priority to ensuring
that demand-side measures contribute to our energy policy goals.
We are concerned that adding last-minute measures to an already
pre-determined structure of a Bill may severely limit what can
be achieved on demand reduction and management through EMR.
51. We note that DECC's draft
report on capturing the full electricity efficiency potential
of the UK identified approximately 155TWh of demand reduction
potential in 2030 (which represents around 40% of total demand).
Of this potential, current policy is estimated to capture only
around 35%. We recommend that permanent end-use reduction in electricity
demand should feature much more prominently in the Bill in order
to realise some of the remaining 65% savings.
52. A systematic understanding of electricity
demand and its interaction with wider energy policy will become
increasingly important if, as the Government's Carbon Plan suggests,
electricity is used increasingly for heating and transport, and
if demand increases by 29-60% between 2007-2050.
This vision of increasing demand is in stark contrast to some
other countries. Germany, for example, aims to reduce electricity
demand by 25% by 2050, while at the same time reducing greenhouse
gas emissions by 80-95%.
53. A number of our witnesses emphasised the
cost-effectiveness of reducing overall demand, although Professor
Newbery did warn us of some "unsubstantiated claims that
all demand-side is necessarily cost-effective".
Analysis by Garrad Hassan for WWF showed
that energy efficiency measures could reduce the required capital
investment in renewables, gas power stations, CCS and interconnection
infrastructure by up to £40bn by 2030.
54. A number of witnesses called for a Feed In
Tariff for energy efficiency, although Professor Newbery and the
CBI thought the existing demand-side policies outside of EMR were
Dustin Benton of Green Alliance told us:
There is a refrigerator programme that has been running
in the United States and it costs £33 per megawatt hour of
electricity saved. The cheapest low-carbon form of power we can
find right now is onshore wind at about £83 per megawatt
hour. What we need the Bill to be able to do is procure that £33
megawatt hour of saved energy over the £83 megawatt hour
of new low-carbon energy. That is what a Feed In Tariff mechanism
55. We note that any feed in tariff for energy
efficiency would require robust methods to establish baseline
energy use and then verify the energy savings subsequently achieved.
The RSPB recognised this issue but also said that similar mechanisms
in the US have demonstrably reduced demand and prices.
56. DECC told us that the provisions of Chapter
1 of the draft Bill could not be used to introduce a FiT for energy
efficiency, and that an amendment to the Bill would be required
to enable this.
57. E3G called for the Bill to specify minimum
volumes of demand reduction that the System Operator should procure,
because current markets for energy efficiency are diffuse and
immature, and hence a positive incentive is needed to develop
those markets to become self-sustaining.
58. We note the publication
of DECC's draft report on capturing the full electricity efficiency
potential of the UK and recommend that measures to encourage permanent
end-use reduction in electricity demand are included in the Bill.
We recommend an amendment to the draft Bill to provide the Secretary
of State with powers to introduce a Feed In Tariff for energy
efficiency, if this cannot be achieved through existing legislation.
The Bill should also include stronger measures to encourage flexible,
responsive demand, as we discuss in more detail in later recommendations.
An "Obligation" to
source renewable energy
59. The Renewables Obligation provides an incentive
for energy suppliers to purchase renewable energy. This will be
removed under the CfD arrangements. This could make it difficult
for independent renewable generators to sell their electricity
at reasonable prices (see Chapter 3).
The Bill is likely to result
in increased vertical integration and reduced competition
60. The electricity market is currently dominated
by six "vertically integrated" companies that are involved
in both generating electricity and supplying customers. Independent
generators account for around 30% of power production and independent
suppliers just 1% of Britain's domestic retail market.
Both the Government and Ofgem have stated a desire to increase
competition in the electricity market and Ofgem is currently working
to improve the opportunities for new entrants through its Retail
Market Review. The Secretary of State reaffirmed the Government's
aspirations to us in his oral evidence:
We want there to be many players. We want a competitive
] I am going to say in quite a strong way we need
to see the market working so that these players [smaller independents]
can get involved.
61. Witnesses told us that the EMR proposals
as they stand will in fact deliver the exact opposite of this
ambition; they are likely to lead to greater levels of vertical
integration and fewer independent players in the market. It will
become a "big boys' game" that will not work for "little
62. For independent generators, the proposals
have introduced serious concerns about "routes to market"
that is, whether they will be able to get a Power Purchase Agreement
(PPA) on good enough terms to be able to sell their power in the
future. This is addressed in more detail in Chapter 3.
63. For independent suppliers, the proposed counterparty
arrangements for Contracts for Difference (CfDs) are a major difficulty.
Requirements to provide letters of credit or cash as collateral
against CfD payments and the potential balance sheet implications
of the multiparty model might make independent supply businesses
untenable. This is addressed at greater length in Chapter 3.
64. The EMR provisions as they
stand are likely to undermine Ofgem's efforts to increase competition
in the wholesale markets. We therefore recommend that the Government
amend its current proposals to avoid the likelihood that they
will lead to more- not less- vertical integration and consolidation
in the market. (See Chapter 3).
FEWER OPPORTUNITIES FOR SMALLER-SCALE
PLAYERS AND CHP
65. We heard that smaller- and community-scale
projects in particular would be likely to be squeezed out by the
this outcome is in direct contradiction to the Government's declared
ambitions; the Coalition Agreement states that "we will encourage
community-owned renewable energy schemes where local people benefit
from the power produced".
66. The problems for smaller-scale projects include:
- A lack of financial capability
to deal with the complexities and uncertainties of CfDs, resulting
in high transaction costs; and
- Difficulties in obtaining the full "reference
price" for the electricity they generate, resulting in lower
income per unit of energy generated.
67. The Secretary of State told us:
Depending on the size, some of the smallest projects
will get Feedin Tariffs under the micro-generation regime,
so the smaller community projects, I think below five megawatts,
would not be in the Contract for Difference regime.
68. However, Co-operatives UK pointed out that
many community and co-operative energy projects are mid-size in
generation capacity (up to 10MW) and so would not be eligible
for the micro-generation FiT. They would therefore only be eligible
for the CfD and would encounter all of the difficulties described
69. The Combined Heat and Power Association (CHPA)
notes that combined heat and power (CHP) and district heating
are omitted from the EMR proposals. It considers that EMR has
focussed on three 'key' technologies that Government wishes to
encourage (nuclear, offshore wind and CCS) even though these have
limited prospects for deployment at scale within the next ten
years. The CHPA suggests that the current small-scale Feed-in
Tariff could support gas and renewables CHP if capacity limits
The Greater London Authority has also called for CHP low carbon
electricity generating plants to receive more funding under the
FiT scheme to reflect their production of heat as well as electricity
and the cost of transporting that heat to its point of use. The
GLA also calls for more support for smaller scaled decentralised
70. The Coalition Agreement
states that "We will encourage community-owned renewable
energy schemes where local people benefit from the power produced".
However, the Renewable Obligation has not delivered community-owned
schemes and the proposed CfDs are also unlikely to work for community
schemes. A simple Fixed Feed-in Tariff would be a more appropriate
form of support. We therefore recommend that this Bill provides
for the Energy Act 2008 to be amended to allow for the eligibility
threshold for small-scale FiTs to be extended to at least 10MW
and potentially up to 50MW in size.
20 Ev w179 Back
Ev 130, Ev 137, Ev w86, Ev w148, Ev w167 Back
Ev w179 Back
Ev 168, Ev w74, Q 2 [Ms Vaughan] Back
Draft Energy Bill, CM 8362, May 2012, Introduction, p 9, para
Draft Energy Bill, CM 8362, May 2012, Introduction, p 9, para
Q 383 Back
Ev 123, Ev 127, Ev 137, Ev w37, Ev 161, Ev 168, Ev w71, Ev 172,
Ev 187, Q 122 [Dr Kennedy], Q 231 [Mr Benton] Back
Q 21 [Mr Marchant, Ms Vaughn], Q 125 [Mr Skillings], Q 191 [Mr
Ev w139 Back
Q 485 Back
Committee on Climate Change, The Fourth Carbon Budget: Reducing
emissions through the 2020s, 7 December 2010 Back
DECC, Planning our electric future: a White Paper for secure,
affordable and low-carbon electricity, CM 8099, July 2011, para
The UK has legally binding greenhouse gas emissions reduction
targets for 2020 and 2050 and a renewable energy target for 2020. Back
Ev w98 Back
Ev 127, Ev w26, Ev 137, Ev w37, Ev 161, Ev w71, Ev 172, Ev 187,
Ev w163, Q 119 [Dr Kennedy], Q 231 [Mr Steedman and Mr Benton] Back
Ev 172 Back
Q 124 [Prof Newbery], Q 232 [Ms Kelly] Back
Q 233 Back
Q 122 Back
Ev 123 Back
Annex 2 Back
Parliamentary Office of Science and Technology, February 2011,
POSTnote 372: Future Electricity Networks Back
Draft Energy Bill, CM 8362, May 2012, Introduction, p 21, para
DECC, Draft Report: Capturing the full electricity efficiency
potential of the UK, July 2012 Back
Q 513 Back
Energy and Climate Change Committee, Electricity Market Reform,
Ev w126, HM Government, The Carbon Plan: Delivering Our Low Carbon
Future, December 2011 Back
German Federal Ministry for the Environment, Nature Conservation
and Nuclear Safety, The Energy Concept and its accelerated implementation,
October 2011 Back
Ev 137, Ev 172, Ev 187, Q 135 [Professor Newbery], Q 235 [Ms Kelly] Back
Ev 187, Ev 241 Back
Q 96 [Professor Mitchell], Q 235 [Mr Benton], Ev w26, Ev 172 Back
Q 235 [Mr Benton] Back
Ev w26 Back
Ev 127 Back
Ev 193, "Ofgem sets out road map to open up electricity market
for independent suppliers", Ofgem Press release, 22 February
Q 510 Back
Annex 1: Note from roundtable meeting Back
Ev w26, Ev 137, Ev w37, Ev w50 (Co-Operatives UK), Ev w66, Ev
172, Ev 198, Ev w137, Ev 217 Back
HM Government, The Coalition: our programme for government, May
2010, p 17 Back
Q 512 Back
Ev w50 (Co-Operatives UK) Back
Ev w101 Back
Ev w137 Back