Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by ABB
Summary
ABB is a global leader in power and automation technology, proving products and systems for low carbon power generation, for example components for wind turbines, grid infrastructure and control systems.
We are concerned that the EMR timetable continues to slip and feel that Government should consider extending the RO transitional period.
The Energy Bill is drafted broadly and leaves a lot of discretion for Government to establish the detail of EMR at a later date. We feel that adequate controls should be placed on the Secretary of State in the exercise of those powers.
The term of the FiT CfD should more closely relate to the economic life of the generation technology, which is longer than proposed by Government.
We need to see the detail of the capacity mechanism quickly if we are to be ready to respond to issues.
Statutory definitions of transmission, offshore transmission and interconnectors need to be revisited to ensure compatibility with an offshore grid.
Introduction
1. ABB is a global leader in power and automation technologies and the ABB Group of companies operates in around 100 countries and employs about 135,000 people worldwide. Much of our innovation and new technology is focused on the twin challenges of increased energy efficiency and facilitating a more sustainable green energy supply. We provide a number of products, systems and solutions that are integral to the development of renewable energy projects, such as components for wind turbines, grid infrastructure and control systems. ABB has also recently made a major investment in Aquamarine Power, a wave energy company, which is developing a major wave energy array off the coast of Scotland.
2. We have committed to an ongoing programme of investments to support the growing demand for low carbon energy. In the UK and Ireland, ABB employs around 3,000 people and continues to invest in jobs, training and facilities to help build a low carbon economy. The successful delivery of Electricity Market Reform is therefore critical to the continued growth of our business in the UK. We are committed to working with Government to develop a workable package of Electricity Market Reforms to deliver a secure and affordable low carbon energy future.
3. We welcome the opportunity to provide evidence to the pre-legislative scrutiny inquiry for the draft Energy Bill 2012. We recognise that the Energy and Climate Change Committee has an important role in examining the detail of this critical piece of legislation. Our written evidence mainly focus on the proposed Electricity Market Reform package set out in Part 1 of the draft Bill. However, we also touch upon the offshore transmission provisions of the Bill set out in Part 4.
General Observations on EMR
Market context
4. The growth of the low carbon economy has the potential to secure local jobs, establish key skills and deliver economic prosperity, while meeting the UK’s binding renewable energy and carbon reduction targets. Fundamental to the success of EMR is the need to maintain investor confidence throughout the sector. In particular, the supply chain will require the confidence to invest to enhance capabilities necessary to meet future growth, while delivering the much sought after cost reductions that will ensure the long term sustainability of the UK power industry.
5. It is important to set EMR within the context that the UK is currently competing in global markets for capital, equipment and skills. The global power market is experiencing a sustained period of rapid growth as several countries embark upon ambitious investment programmes to deliver low carbon energy for the 21st century. The recent acquisition of Seajacks International, a major installer of offshore wind turbines, by Japanese investors highlights the level of competition that the UK now faces from international markets. The EMR must therefore play a critical role in providing a robust long term policy framework that is sufficient to attract and maintain interest from the global investment community in UK opportunities.
Timely delivery of EMR
6. We consider that the publication of the draft Energy Bill is an important step in the EMR process. However, we have real concerns that a number of detailed issues remain unresolved. The lack of clarity and certainty around the EMR has already had an adverse impact on investment in the low carbon economy. We note that several major offshore wind developers have stated that they will delay investment decisions for many projects that were previously expected to complete in 2016–17. The lack of clarity over the FiT CfDs framework and risk of project overruns taking their projects beyond the RO cut off point have already been cited as significant factors in these decisions. The ongoing uncertainty in the UK market was also cited as a major contributing factor underpinning Doosan’s recent decision not to invest in Scotland.
7. We believe that too little has been done to send the right signals to the industry to enable them to secure the investment that will ultimately be required. At present, the draft Bill creates an enabling framework, with much of the specific policy detail to be finalised at a later date and implemented through subsequent secondary legislation. This approach is understandable given the challenging timescales for delivering the primary legislation. Nevertheless, we do not expect that all of the detail of the market reforms will be finalised in detail by the time of Royal Assent.
8. We recognise the significant consequences of failing to deliver workable market reforms and therefore support a flexible approach that enables the details of the EMR to be considered fully. However, the approach leaves a number of open questions that will not be addressed for some time. We need firmer assurances and clearer mechanisms providing industry certainty for the long term, including supportive messaging from across Whitehall. Without this it is unlikely that the industry will have sufficient confidence in a bankable package of reforms until 2014.
9. Since the Government White Paper was published in July 2011, the EMR timetables have continuously slipped. In the latest timetable, Royal Assent has been pushed back by a further three months. There are a number of outstanding issues that will be challenging to resolve. As such the timely delivery of workable reforms remains a major area of concern. There is no apparent “slack” in the plan making the current timetable look like a big challenge with significant delay risk attached.
10. We feel that Government could maintain investor confidence and manage the risk of further timetable slippage by extending the transitional period during which the renewables obligation remains in force by up to two years. We believe that the impact on consumer bills would be offset by the stimulus to the wider economy from investment across the supply chain and the creation of long term jobs and growth.
Detailed Comments
Energy Bill Drafting
11. The Energy Bill has been drafted very broadly and a number of open ended powers are being taken by Government. This leaves a number of questions about how much detail will be captured under secondary legislation. Moreover, the change control framework appears to offer limited comfort to investors that they will have a long term government commitment. For example, developers and investors that have committed significant resources to progressing projects may find the economics undermined by changes that are implemented at short notice. Such a risk is likely to undermine investor confidence in the long term and lead to higher risk pricing. This could be mitigated by placing more onerous requirements on the Secretary of State when bringing about changes to key parameters of the regulations, for example a minimum 18 month lag before any change to the terms of the CfD can take effect. Such an approach would provide greater transparency and certainty to the market.
FiT CfD allocation & operation
12. The introduction of the FiT CfD support mechanism is a central element of the EMR framework. We are concerned by the lack of clarity in the process by which FiT CfDs will be allocated across projects. It is likely that the number of applicants will exceed the number of contracts available each year. It is important to recognise that for project developers and the supply chain, a significant resource commitment is made to progress a project to financial close. The consequences of not securing a CfD in a timely manner could have significant consequences, particularly for technologies that rely upon a constrained supply chain. The principles and process for allocating contracts must be transparent, fair and subject to independent review. It is also important that applicants have an appropriate route of appeal.
13. Decisions being made regarding the institutional design of the CfD counterparty are critical to whether future projects will be bankable under the proposed FiT CfD. In the absence of a direct counterparty, investors will need to be educated on the detail and reassured regarding the enforceability of the contract. In this regard, funders will want comfort that the legal framework offers appropriate protection to their investment.
14. We note that DECC propose a CfD term of 15 years for renewable technologies, as representing an effective balance between the need to attract finance and ensuring that the support mechanism remains affordable. In contrast, the approach for global infrastructure projects has been towards longer term contracts (30 years) in order to ensure that projects remain affordable year on year. We consider that longer term contracts offer more flexibility in terms of financing options and are potentially more consistent with the goal of keeping bills affordable.
15. Investors will aim to have achieved an appropriate return on their investment within the period of the contract. As such, shorter contracts will generally have a higher initial cost to customers and will be potentially more burdensome at the beginning whereas longer contracts can be more affordable year on year but a little more costly overall.
16. We would prefer to see an approach where contract lengths are related to the economic life of the generating plant. For many renewable technologies this is 20 to 25 years. This approach is consistent with the principles underpinning the existing RO. It should also be recognised that adopting a similar approach has been successful in attracting new sources of capital into the OFTO tender process, providing flexibility over raising both debt and equity finance.
17. The Government has stated that the EMR framework is intended to reduce risks and encourage investment. However, the proposal to hold auctions as a means of allocating CfDs appears counter to this aim. Auctions are extremely difficult to design effectively and are often subject to gaming by small numbers of bidders. We consider that an auction framework for CfDs is therefore likely to discourage some investors and slow project development, leaving large project developers to ration their projects in order to maximise returns. Such an outcome would be damaging to development of the UK supply chain. We therefore urge the Government to find an alternative mechanism for allocating CfDs in the longer term.
Capacity Mechanism
18. We support the rationale for the development of the capacity mechanism which recognises the potential role of demand side response. We note that the capacity mechanism is relatively underdeveloped at present and a substantial amount of policy development is still to be progressed.
19. DECC has acknowledged that under certain assumptions the UK may experience tight capacity margins in the middle of this decade. The draft framework document published alongside the draft Energy Bill highlights the need to give an appropriate lead time for industry to commit to capacity contracts. Given the potential risk to security of supply before 2020, it is important that the details of the capacity mechanism are resolved quickly so that the industry can respond in a timely manner.
20. Energy storage technologies potentially have an important role to play in managing capacity requirements. Having deployed the UK’s first battery energy storage device, we appreciate that there are significant legal challenges to be overcome in relation to the treatment of the energy offtake and energy then resupplied to the grid. The integration of non-generation technologies within the capacity mechanism potentially provides an opportunity to address some of these issues.
Offshore Transmission provisions
21. We welcome the intention set out in the draft Bill to enable offshore renewable developers to carry out, during the commissioning phase of their project, certain transmission activities prior to transfer of their project to the selected Offshore Transmission Operator. This had become a major concern for the offshore wind industry. The proposal will provide investors and contractors with the assurance that they can undertake commissioning tests prior to transfer of the offshore transmission assets without acting unlawfully. This is a pragmatic approach which should ultimately avoid unnecessary cost.
22. We believe that Government should adopt a similar pragmatic approach in relation to the internal conflict inherent in the statutory definitions of transmission, offshore transmission and interconnectors. DECC and Ofgem highlighted in the Offshore Transmission Coordination Project conclusions report that the conflict was a barrier to the development of a meshed offshore network. The conflict arises because the legal definitions of offshore transmission and interconnectors were developed in the early 2000s at a time when the likelihood of a meshed offshore grid was a remote proposition. As such, the definitions are intended to be applied exclusively. The potential development of meshed offshore networks now creates an overlap and the potential for transmission infrastructure in offshore waters to “flip” between regulatory regimes. This issue has already had significant impacts on projects in the Moray Firth and appears likely to become a significant risk to the proposed developments of the East Coast HVDC links and nearby offshore wind farms.
June 2012