Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by Statoil UK Limited

Statoil UK Limited (STUK) supports the Government’s policy to move the UK to a low carbon electricity market, and we welcome the opportunity to respond to this call for evidence on the draft Energy Bill published on 22 May 2012 and participate in an on-going constructive dialogue on key energy policy issues. We also welcome the introduction of the Strategic Policy Statement which STUK hopes will provide greater certainty to participants in the UK energy markets. We would urge that the first statement is formulated and shared with the industry at the earliest possible opportunity.

As the largest supplier of gas from the Norwegian Continental Shelf to the UK, Statoil takes a direct interest in the UK electricity market. Our interest is further reinforced by our recent investments in the Sheringham Shoal offshore wind farm, as well as our role as a development partner in the Dogger Bank offshore wind zone.

Our concern is that the supplementary documentation issued at the same time as the draft Bill provided little clarity for potential investors on several key issues. We believe that clarification of the issues described below is fundamental to investor confidence.

Key Points

1. Contracts for Difference:

The proposed timing for the award of CfDs immediately before FID will make investments in large offshore wind farms unattractive as significant investments are required in the consenting process and to mature the project to FID.

The postponement in the decision on the value of ROCs post 2027 to 2015 creates additional uncertainty for investors faced with investment decisions prior to 2015.

Continuing assessment of the single counter party model to ensure bankability.

2. Lack of detail and progress in the design of the capacity mechanism, key areas need to be developed as a priority, notably:

Assessment of capacity required.

Duration of contracts.

Payment levels.

Contracts for Difference

Statoil sees the merit of introducing a Contract for Difference Feed-in tariff (CfD) for renewable projects which could add increased certainty both to investors and consumers. We have however some important reservations to the proposals that we would like to use the opportunity to address.

In our view the proposals regarding the timing for award of CfDs will make investments unattractive. As proposed, a developer of a renewable energy project may apply for a CfD immediately before Financial Investment Decision (FID). This is however too late for an offshore wind developer, especially those with large zonal agreements from the Third Round. In the period between receiving consent and FID, developers will spend substantial amounts maturing large offshore wind projects through detailed engineering, gathering geotechnical information and through entering into supply contracts for long lead-time items. These costs could amount to as much as GBP 40–50 million.

We believe that developers of large wind farms need confirmation regarding their ability to enter into a CfD already from time of consent. We recognise that entering into a CfD at such an early stage would require obligations to progress the project according to an agreed plan and are happy to engage with DECC to work out further details on this matter.

This expenditure of risk capital after receiving consent comes in addition to that spent during the consenting process itself. For large zones, this can be in the order of GBP 100 mill. or more. Hence we are worried about the signals given by DECC regarding “cost controlling measures” for CfDs which in reality is a strong signal on rationing of contracts. While we fully understand the need to reduce the cost to the consumer and ensure the affordability of future renewable generation, we are worried that such signals may have substantial negative effects on the development of offshore wind projects and of a renewable industry supply chain. The major commitments under the offshore wind zone agreements can only be justified if developers have long term visibility on the opportunity to build the wind farms and retain the ability to optimize projects in a zone through phased, sequential developments. Rationing—or auctions if brought in too early—would jeopardise this.

We also note that the decision on the value of ROCs post 2027 is postponed to 2015. We believe this is too late as it introduces unnecessary uncertainty for investors facing RO-based investment decisions before 2015. Furthermore, we believe that flexibility with respect to extending the registration under the RO post 2017 should be considered should the timing of the introduction of CfDs be delayed.

It is important that the legal framework and payment model proposed in the Bill is “bankable” and is suitable both for investors and suppliers. We observe that DECC has taken note of the substantial reservation from industry regarding the proposed model based on an instrument issued by statute and has stated a willingness to continue to assess an alternative “single counterparty” model. We support further discussions in finding a legal framework that is fit for purpose.

Capacity Mechanism

We welcome the Government’s recognition of the need to incentivise additional generation capacity beyond energy sources supported by the existing Renewables Obligations and future CfD scheme. However, the lack of clarity and commitment expressed in the supporting documentation to the draft Energy Bill on the capacity mechanism, introduces a greater level of uncertainty into potential investment decisions in gas-fired power. It is STUK’s view that this uncertainty has further undermined the ability of investors to effectively calculate their return in the current market outlook. Whilst we appreciate the difficulties associated with the process and the forming of industry experts groups to progress the design, it is of concern that the expert group, in our view, under represents participants in different parts of the gas supply chain. The design of the capacity mechanism is in STUK’s view, key to incentivising gas generation, notably, how the capacity requirement is calculated, the level of payments and the duration of contracts. If the mechanism is entirely focussed on the provision of peak capacity, to be determined by National Grid and verified by a panel of experts, then it is in essence paying generators not to generate outside peak times. This in itself would require significant levels of capacity payments to justify the project economics of new plant with significantly lower load factors. It is our view that the length of contracts should match as closely as possible to the approximate 25 year plant life of CCGT’s. Obviously, the level of CfDs awarded to other base-load generation providers will also have a strong bearing on the role of gas as well, as it competes with these technologies.

Statoil UK believes that gas still has a vital role to play in the UK energy mix and therefore welcomes the Government’s call for evidence on the role of the gas in the electricity market. We will provide a comprehensive submission to the gas generation call in due course.

Statoil UK Limited welcomes the opportunity to contribute to this process. Please do not hesitate to contact me if you require any further information.

June 2012