Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by Scottish Renewables

Scottish Renewables

1. Scottish Renewables is Scotland’s leading renewables trade body. We represent 320 organisations involved in renewable energy in Scotland. Further information on our work and membership can be found on our website www.scottishrenewables.com.

2. Scotland is making a disproportionate contribution to the UK’s renewable energy targets, with hundreds of millions of pounds being invested in the industry each year and employment estimated at 11,000 full time jobs. In 2011, it is estimated that renewable electricity output was equal to around 35% of total annual electricity demand.

Draft Energy Bill

3. The draft Energy Bill will radically alter the existing support mechanism for renewable electricity generation and therefore has the potential to dramatically impact on the development of the renewable energy industry and on progress towards the country’s renewable energy targets.

4. The Bill and the wider Electricity Market Reform (EMR) programme are designed to reduce the level of risk and uncertainty over the return on long term investments in renewable energy developments. This would in turn encourage greater investment in the industry and reduce the cost of capital, pushing down costs of development and therefore electricity prices for consumers.

5. However, the complexity of the EMR proposals, the risks of timetables slipping and the introduction of new risks to investors could all potentially run counter to these aims. We believe that the key focus of the committee’s inquiry should therefore be to assess how and whether EMR can deliver its intended outcomes of greater levels of investment at lower costs, given the significant challenges to implementation.

6. At this stage Scottish Renewables is firmly committed to working with the Department of Energy and Climate Change to address the concerns of our members over the detail of the Contracts for Difference (CfD) and to develop the frameworks and processes required to underpin the CfD; however, given the tight timescales for completion of this work, we would urge ministers to keep an open mind on the need to extend transitional arrangements and even on the need to leave other options open at this stage.

7. We recognise that the draft Bill sets out enabling powers for the Secretary of State and support this approach to the implementation of the CfD mechanism.

8. Given the recent publication of the draft Bill and the need to engage in a more thorough process of engagement and consultation with our members on some of the key aspects of the Bill, we have restricted our response to a high level summary of the key areas that impact upon the renewable energy industry in Scotland, namely CfD and offshore transmission. We aim to follow up with more detailed information and policy positions as the Electricity Market Reform process develops further over the summer.

High Level Principles

9. Given the strong debate on renewable energy within Parliament and elsewhere, there are five strong messages from Government in the draft Bill which Scotland’s renewable energy industry very much welcome:

(a)Explicit commitment to the UK’s 2020 renewable energy targets and wider climate change targets.

(b)The need for government intervention in the electricity market to ensure that the country does not become over dependent on gas generation, which would:

(i)lessen energy security;

(ii)leave us exposed to price fluctuations in wholesale gas markets; and

(iii)increase climate change emissions.

(c)The need for some form of revenue support for low carbon electricity, including renewables, nuclear and carbon capture and storage (CCS) in order to overcome the “barrier to entry” of the capital intensive nature of these technologies.

(d)The huge potential economic and employment benefits from future investments in renewable energy development and its supply chains.

(e)Supporting investment in renewables and other forms of low carbon electricity will keep bills down for domestic and commercial and industrial consumers in the longer term.

10. Together these constitute a welcome statement of support for the renewable energy sector.

Contracts for Difference

11. The introduction of the CfD is the main way in which the Bill will impact our industry. Our members support the general principle of greater certainty over long term revenues in exchange for lower levels of revenue support.

12. However, the CfD may be a simple concept in theory, but it is incredibly difficult to design a framework with which to implement the mechanism in practice. It will mean the creation of a hugely complex set of arrangements and processes to underpin its implementation, and there are still many fundamental aspects of the CfD mechanism where thinking is at an early stage with concrete proposals to be developed over coming months. Our members are nervous that at this stage there is still little detail on many of the key aspects of the CfD mechanism.

13. The key features of the CfD and the areas where significant levels of detail are still to be developed are summarised in Table 1, which is taken from the relevant Draft Operational Framework.

Table 1

KEY FEATURES OF THE CFD AND “EMERGING PROPOSALS” (SOURCE: FEED-IN TARIFF WITH CONTRACTS FOR DIFFERENCE: DRAFT OPERATIONAL FRAMEWORK)

Feature	Description	Emerging proposal
Price setting and allocation
Administrative price setting	How strike prices will be set for different technologies.	Renewables: similar to RO banding review process. CCS: initially through the CCS Commercialisation Programme competition in conjunction with the FID Enabling process. Nuclear: initially on a project by project basis, through the FID Enabling process.
Competitive price setting	When and how strike prices will be set using a competitive process.	Move to competition as soon as market conditions allow; this could be 2017 for certain renewable technologies.
Eligibility	Which technologies will be eligible for support under the CfD regime.	Minded that new low-carbon technology plants that are not eligible for the small-scale FIT will be eligible for a CfD.
Allocation	How developers can apply for a CfD before the move to a fully competitive process.	Renewables: through allocation rounds run every six months. CCS: initially through the CCS Commercialisation Programme or the FID Enabling process. Nuclear: initially through the FID Enabling process.
Managing financial exposure	Ensuring costs of CfDs remain affordable.	Minded to instruct the System Operator to remain within an agreed budget when issuing CfDs. Considering whether further controls are required for particular technologies.
CfD terms
Pre-commissioning	The arrangements for monitoring the development of plant after CfD award.	Minded to place obligations on developers to build within agreed timescales, with proportionate penalties to incentivise compliance.
Reference Price	The market price for electricity that is referenced in the CfD for the purpose of calculating CfD payments.	Intermittent: Hourly Day Ahead Auction Price for the GB Zone (as established under North West European Market Coupling). Baseload: Year Ahead, price source to be determined.
CfD Volume	The definition of the volume of electricity for the purpose of calculating CfD payments, and the resulting metering requirements.	Minded to pay the CfD on the basis of metered output unless the price in the reference market is negative, in which case to pay on a measure of availability.
Allocation of supplier payments	How suppliers’ payment obligations/entitlements are calculated.	Minded to base suppliers’ payment obligations on market share (as defined by “supplier cap take”).
Settlement	Process and timing for invoicing and administering CfD payments.	Minded to base processes on Balancing and Settlement Code processes. Minded that settlement periods will be monthly or possibly shorter.
CfD Length	The length of the CfD from the payment start date as defined in section C.	Initial view that CfD length for renewables should be 15 years. 10 years (subject to negotiations) for early stage CCS project(s) supported under CCS Commercialisation Programme. Nuclear and long-term CCS-equipped plant to be determined.
Inflation indexation	Arrangements for adjusting the CfD strike price in line with inflation.	Minded to choose CPI as a standardised and established inflation measure that is familiar to international institutional investors.
Fuel Price indexation	Arrangements for adjusting the CfD in order that payments reflect a generator’s input fuel costs.	Minded not to link the CfD strike price to fuel costs for biomass. For the first CCS project(s), minded that the CfD should provide indexation needed to hedge against long term fuel price variability.
Credit and Collateral	The requirements on generators and suppliers to provide credit/collateral.	Minded to place a collateral requirement based on an estimate of likely settlement amounts due in a given trading (settlement) period.
Amendment of the reference price and other CfD parameters	The arrangements for amending CfD parameters in response to changes which might impact the validity of the indices used.	Minded to include an “independent expert” role in the CfD framework to manage any review of CfD parameters and determine any amendments required.
Change in Law	Arrangements for adjusting the CfD in response to relevant changes (eg regulatory) that materially affect the value of the CfD to either party.	Minded in principle that the CfD should contain change in law provisions, the form and scope of which remain to be determined. Further detail will be set out in the autumn.
Dispute Resolution	Procedures for resolving any disputes arising under the CfD.	The Government will seek further legal advice in this area before engaging with stakeholders later in the year.
Legal Framework and Payment Model
Legal status of the CfD	The arrangements for promoting investor certainty.	The draft Energy Bill outlines that the CfD will be an instrument created by statute that sets out obligations on suppliers and generators. However, Government is considering industry concerns around whether a conventional contractual model would be preferable.
Route to market and liquidity
Route to market	Independent generators are often reliant on Power Purchase Agreements to secure project financing.	The Government plans to issue a call for evidence in June 2012 to set out understanding of the issues, the evidence that is needed to move forward, and to outline initial options that may address market concerns.
Liquidity	A liquid electricity market is an important factor underpinning the operation of the CfD.	Government welcomes recent positive developments in the markets, but believes further measures are necessary and will work with industry and Ofgem to ensure liquidity strengthens.

14. These questions will effectively “make or break” the implementation of the CfD and the industry is investing significant time, resource and energy to working with officials to develop more concrete and practicable proposals in all these areas.

15. It is vital that all these questions are answered in a way which is legally robust, practicable and transparent, which sets out the obligations on all relevant parties and which delivers certainty to investors. There is a sense that the Government must be in a position to provide clear answers to questions in all these areas by the time of the publication of the final Energy Bill if it is to count on the renewables’ industry’s support at that time. Likewise, future investment in the sector is dependent on contracts being seen as “bankable”, so it is vital that banks and other investors are comfortable with and understand the mechanism and its impact on revenues and liabilities for renewable electricity projects.

16. We would urge the committee to look at as many of the areas set out above as possible within the time constraints that it is working to, but the key issues that we would ask the Committee to focus on at this stage are:

(a)Allocation.

(b)Amendment of the reference price and other CfD parameters.

(c)Legal status of the CfD.

(d)Counter Party.

(e)Route to market.

(f)Liquidity.

17. Scottish Renewables would be happy to provide more information on the challenges to be overcome and our emerging thinking in any of these areas. We would also urge the committee to seek not just the views of those taking forward projects, but also the views of organisations which may be the counter party to these contracts and the views of investors in order to assess how government can ensure that the provisions will satisfy the needs of these parties.

18. We would also urge the Committee to assess how the provisions of the Bill will interact with other ongoing reforms of the electricity market, including Ofgem’s Retail Market Review.

Offshore Transmission

19. The other area of the Bill where we wish to comment at this stage is the provisions on offshore transmission.

20. Scottish Renewables supports the general principle of greater coordination of the offshore transmission network. This is of particular importance to Scotland, where there is the potential to integrate not just offshore wind farm connections, but also inter-connectors between parts of the Scottish mainland, the Scottish islands and between Scotland and other parts of the UK.

21. For example, the proposed offshore transmission hub in the Moray Firth would connect Shetland, Caithness and the Beatrice and Moray offshore wind farms with Moray. This would have the benefit of reducing costs, complexity and the visual impact of associated onshore works. However, at this stage it is unclear if the project will proceed due to the location of the hub and whether it is compliant with the licence of SHETL.

22. Similarly, there may be significant merit in connecting offshore developments in the Firth of Forth and Tay directly to the proposed inter-connector between the north east of Scotland and the north east of England. However, it is not yet clear if the current rules on offshore transmission and the differing roles of National Grid, SHETL, and Scottish Power Transmission would facilitate this option.

23. We would urge the Committee to ensure that appropriate mechanisms and powers are in place to allow rational decisions to be made on the integration of offshore grid connections in the north east and east coast of Scotland in order to ensure that the optimal solutions for generators, the environment and for consumers are taken forward.

Scottish Issues

24. There are a number of other issues which have a particularly Scottish dimension, including the transition from the RO, the high transmission charges paid by Scottish generators and the higher levels of constraints within the Scottish electricity transmission network.

25. We would urge the Committee to ensure that these issues are properly examined during its inquiry.

Conclusion

26. Scottish Renewables welcomes this opportunity to contribute to the Committee’s and DECC’s thinking on the draft Energy Bill. We are committed to working with both Parliament and Government to develop a set of arrangements for the electricity market which meet our shared ambitions for greater deployment of renewables and lower costs for consumers. However, we are concerned at the lack of detail on many aspects of the Contract for Difference mechanism at this stage, and further development of more concrete proposals which meet the needs of developers, suppliers, and investors is essential to ensuring that ministers meet their desired outcomes for the Bill.

27. We are keen to provide oral evidence on any of the issues outlined above to the Committee and aim to follow up in more detail on many of these points during the inquiry.

June 2012