Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by Climatechangematters ltd

Some of the suggestions made in this submission were first included in separate reports to Friends of the Earth, Transform UK and the REA (see 3. below) and reflect widespread consultation with a number of industry players, banks and investors: they have been updated for developments since the original reports, and remain the views of the author. In part they have been occasioned by early oral testimonies in which the attractions of a more straight forward feed in tariff and substantial savings that would be occasioned for the taxpayer/consumer whilst providing better incentives to industry and investors have not fully featured (see 2.1 and 2.2 below).

1. Summary

The introduction of fixed feed in tariffs for renewables to replace the RO is to be welcomed.

However, the introduction of the contract for difference mechanism and the lack of certainty as to how it is to work greatly undermines the benefits that a feed in tariff normally provides in broadening the investment market and also reducing the cost of capital by reducing risk.

Unless greater clarity is provided quickly then it is quite likely that investment in the UK will be below levels that would occur with a more straight forward feed in tariff and costs for the taxpayer consumer will be higher. Certainty and simplicity must be a priority.

More straight forward feed in tariffs would provide certainty simplicity and much better value for money for the taxpayer consumer—with electricity thereby purchased auctioned to the wholesale markets by Ofgem or other body thereby facilitating competition in the supplier Market.

Steps also need to be taken to facilitate direct purchases of renewable energy from generators, thereby increasing direct investment by high energy users in off site projects and allowing collective purchasers to gain economies of scale.

If the cfd approach is to be followed small and medium sized players must be protected from the value leakage that could result from the complexity of the scheme otherwise they may simply choose not to engage—leaving a gulf between projects supported by the small scale feed in tariff and rhi and the large-scale feed in tariff. So much so that an increase in the banding for the small scale fit may be necessary for medium-scale community projects for example.

2. Detail of Submission

2.1 It is concerning that the EMR consultation in rejecting a straight forward feed in tariff, modelled such a tariff in the case of onshore wind at a flat 90 euros whereas in Germany feed in tariffs drop considerably towards the wholesale electricity price after five years. As a consequence of this approach the savings to the taxpayer consumer from a fixed feed in tariff approach (without cfd) were greatly underestimated. Such savings could be between 10 and 20% of the costs shown in the EMR consultation model if a two tier system similar to that in Germany were followed.

2.2 It is unfortunate that the EMR consultation chose to model the fixed feed in tariff in the way that it did as discussion has since polarised on the cfd or premium tariff models (as evidenced in some of the submissions to the committee): it is suggested that more appropriate modelling of the fixed feed in tariff on a two tier basis would have allowed it properly remain under consideration : and would have allowed less complex legislation to have providing forward providing very substantial savings to taxpayers and consumers whilst providing greater investment certainty.

2.3 It is suggested that a more straight forward feed in tariff should even now be considered with a purchasing body auctioning electricity to provide the required interface with the wholesale markets—thereby dealing with the concern about interface with the wholesale markets mentioned in the EMR.

2.4 This would also allow greater access to electricity for small suppliers dealing with one of the other concerns of Ofgem that there is insufficient Market access for new entrants to the supply Market. The NFPA already successfully auctions electricity as does SSE.

2.5 In Germany the feed in tariff has been successfully supplemented by a market alternative which provides direct exposure to wholesale markets, whilst providing compensation for developers taking this risk. This system has been widely adopted and has attracted new players from the capital markets who are typically taking the Market risk on the part of developers for 50% of the compensation fee.

2.6 Given the reduced number of utilities willing to finance nuclear power there is less of a need for a contract for difference mechanism which was primarily designed to advantage that industry: and which itself would benefit from a different mechanism given recent developments.

2.7 Feed in tariffs could instead be awarded for nuclear by way of straightforward capacity auctions whereas other technologies eg renewables would at present operate on Government set tariffs until the Market is ready for auctions (circa 2020 for more mature technologies). At present negotiations in relation to the nuclear CFD are happening behind closed doors and do not appear to being subject to the same degree of public consultation that has happened in relation to the appropriate levels of support under the RO for individual renewable technologies. The current approach risks successful legal challenge under state aid rules.

2.8 To further reduce uncertainty current RO contracts could be simply converted to a new fixed tariff by taking average receipts for the three years prior to the 2017 conversion date.

2.9 On this basis industry would have a unified feed in tariff structure ( small and large ) rather than two greatly different feed in tariff structures and a run off RO portfolio of uncertain cost in the circumstance of rising energy prices. A cap should be considered on future RO exposure to ensure that a distorted Market does not occur in the circumstance of very high wholesale electricity prices.

2.10 It is not too late to modify the energy bill to go to a simpler and cheaper structure.

2.11 If the contract for difference is to remain then steps should be taken to ensure that developers of small projects SME’s an community projects have proper access to markets at low cost: the danger is that the value leakage that occurs under the RO system would be repeated.

2.12 Legislators also need to understand that the complexity of the CFD mechanism make it very likely that unforeseen anomalies and distortions arise which will require further modifications to the system. It was this type of difficulty that blighted the early years of the RO and which continues to dog that mechanism. It is suggested that industry investors, taxpayers and consumers would prefer a simple mechanism that does what it says on the tin: not a mechanism that is so complex it can only be operated by informed insiders.

2.13 One further significant matter: the Energy bill contains insufficient measures to stimulate the direct purchase of renewable energy from producers. At present regulations make this difficult to achieve without complex and costly contractual structures which only a few utilities currently provide and do not extensively promote.

2.14 Regulations should be amended to compel suppliers provide offers for transmission and balancing only to allow high energy users and other collective purchasers to contract direct with generators for renewable electricity, allowing new investment to flow into the sector and accelerating the decarbonisation of those industries. The establishment of mechanisms to support remote net metering markets would greatly facilitate the transition towards an unsupported renewables Market post 2020 or 2025 as would the regular auctioning of renewable capacity by Ofgem or other body referred to above.

3. About the Author

3.1 The author founded and led Ernst and Young’s renewable energy practice for a number of years. He has authored a number of reports on energy policy and testified before the US Senate on renewable energy support mechanisms. He has over 20 years experience of financing renewable projects for a number of technologies under a number of jurisdictions.

3.2 Since founding Climatechangematters limited on his retirement from Ernst and Young in March 2009 to express an independent view on policy matters and to mentor businesses engaged in the Green economy, he has authored a number of reports for NGO’s including “Renewables fit for 2050” “High energy users and renewables “and “the Big society and renewables” copies of which may be downloaded from http://renewablematters.biz/

June 2012