4 Providing a clear, coherent and
forward-looking policy
EMR:
A cohesive package?
44. The Government stated that its vision for EMR
was "to transform the electricity system to ensure it provided
secure, affordable and low carbon energy",[114]
with retired capacity to be replaced "with a cleaner mix
of generation to help us meet our climate change and renewables
targets and lay the pathway to a greener, more sustainable future".[115]
One of EMR's key objectives is to promote "investment in
secure and low carbon electricity generation".[116]
45. There is a risk that EMR as it is currently developing
will see its different strands pursuing competing aims rather
than complementing each other. The Capacity Market, which "supports
fossil fuel generation regardless of carbon emissions or plant
efficiency",[117]
risks locking us into a higher carbon and more expensive trajectory
than needed, and failing to address the low-carbon objective of
the overall EMR framework.[118]
Simon Moore, from Citizens Advice, explained that:
We have seen it with the treatment of demand-side
response and interconnection in the capacity market. I would also
say we have seen it with things like the way CCS [Carbon capture
and storage] has broadly been left outside the entire EMR package.
These examples are things that were not seen as being inherently
the focus of EMR so have been left behind. That potentially leads
to a concern for the bill payer if these are things that could
offer a more cost-effective solution to some of the problems that
EMR is attempting to tackle but are not being incorporated into
it.[119]
Sara Bell, CEO of Tempus Energy, warned that "the
two parts of EMR have not been looked at holistically".[120]
Similarly, Dr Skorupska's concern was that:
Most Capacity Market participation of the plants
will be at part-load or at lowest capacity, at the lowest efficiency
of that plant. Therefore, in a way, we are driving a market through
CfDs to introduce renewable energy and then securing the Capacity
Market mechanism, which locks in a high carbon future.[121]
46. A number of participants maintained that a diverse
mix of technologies was needed[122]
to achieve reliable and affordable electricity while meeting our
decarbonisation targets. However, over 80% of the 49.3 GW of successful
capacity in the 2014 Capacity Market auction was existing generating
capacity, with coal plants making up nearly a fifth of the total.[123]
While EMR was designed to replace the ageing generation plants
and bring forward investment, only one new-build gas power station
was successful in the auction. Mark Ripley, from National Grid,
acknowledged that:
We haven't seen a huge amount of new build in the [2014]
auction. I think that reflects the fleet we have. I would imagine
as you get into the 2020s, when some of the coal plant that is
on an [Industrial Emissions Directive][124]
exemption closes, you would see more capacity being built.[125]
The Minister stated that he was "very happy
with the outcome",[126]
of the first Capacity Market auction, which he considered had
"been fair across technologies"[127]
and produced "a good balance between supporting existing
generation, supporting refurbishment and supporting new build".[128]
The clearing price of £19.40 per kW per year, he said, was
"cheaper than we anticipated" and provided "good
value for bill payers".[129]
National Grid estimated the total forecast cost of Capacity Agreements
awarded to be nearly £1 billion.[130]
47. However, with only 5% of capacity being new-build
and less than 0.4% going to DSR, the "good balance"
is questionable. Similarly, while the clearing price was cheaper
than could have been expected had more new gas-fired power stations
been successful, much of the successful existing capacity bid
at much lower prices than this,[131]
but will receive the higher clearing price for their capacity-leading
to the question: Are we just paying existing generators to do
what they would normally have done anyway?
48. One reason for introducing the Capacity Mechanism
is that as renewables - particularly wind - grow to provide a
significant share of capacity it will be essential to provide
back-up capacity which can be speedily ramped up when there are
lulls in the wind. Evidence submitted to the Committee suggests
that using generators not designed for this purpose will be costly
in fuel and maintenance, have high carbon emissions and will shorten
plant life considerably.[132]
It is therefore surprising that the auction mechanism did not
seek to elicit capacity specifically designed for speedy, efficient
and sustainable back up.
49. While EMR was designed to bring forward investment
in the electricity infrastructure and replace the UK's existing
generation plants with lower carbon alternatives, there is a risk
that the current design of the Capacity Market could result in
a failure to meet these policy objectives. A diversity of sources
is clearly needed, but Contracts-for-Difference and the recent
Capacity Market results are in danger of pulling it in opposite
directions.
50. We recommend that the Government clarifies
its ambitions for the future of coal-fired power stations in the
Capacity Market and its expectations for both new plant and DSR
in the second four-year-ahead Capacity Market auction in 2015.
The Government's review of EMR should include a cost-benefit analysis
of the 2014 Capacity Market auction in terms of balancing low
clearing prices with long-term objectives to provide secure, affordable
low-carbon energy.
Greater visibility for investors
51. EMR is an important transformation of the current
energy market framework, and short consultation periods and fast
decisions have created a degree of investor uncertainty. The Independent
Renewable Energy Generators Group (IREGG) explained that "frequent
policy reversals make it almost impossible for the needed infrastructure
investments to be sensibly deployed".[133]
THE LEVY CONTROL FRAMEWORK UP TO
2021
52. The Levy Control Framework (LCF) is the means
by which the Government controls the expenditure paid for by households
through higher energy bills or industry passing on its higher
energy costs. The Government estimates that "the Levy Control
Framework (LCF) is likely to support enough renewable capacity
to achieve at least 30% of electricity generation from renewable
sources" by 2020-21.[134]
53. CfDs are to be paid for through the Levy Control
Framework. As the price of CfDs will depend on the difference
between the agreed strike price and the market electricity wholesale
price, an important factor in determining the low-carbon buying
power of the LCF will be future wholesale electricity prices.
If wholesale prices fall, the cost for each CfD will rise, therefore
increasing the burden on the LCF. This interaction between CfDs
and the LCF creates allocation risks for investors. Additionally,
the LCF is also used to fund the Renewable Obligation (RO) and
small-scale Feed-in Tariffs (FiTs), so the budget available for
CfDs will vary depending on the extent of other LCF expenditure.[135]
WWF expressed their concern that "the vast bulk of the Levy
Control Framework budget will be taken up by existing schemes
[…] with only a comparatively small amount available under
the enduring EMR regime".[136]
Statkraft, a Norwegian state-owned electricity company and generator
of renewable energy, called for more frequent updates on the resources
available under the LCF, and suggested that the Government should:
set out the remaining budget available for future
CfD allocation and […] include revised commodity price assumptions
underpinning the existing and projected costs of CfDs. Developers
could then determine their competitive position and engagement
strategy for future CfD allocation rounds and diminish the risk
of poor transparency, resulting in attrition of the development
pipeline.[137]
Infinis, an independent renewable energy developer
and generator, told us in October 2014 that:
The lack of a firm timetable for future [CfD]
auctions is preventing us from planning our investment effectively.
Currently there is very little commitment to any auctions beyond
the first auction in October 2014 and as a result it is placing
unnecessary pressure on companies to either drop projects or attempt
to expedite them into the current allocation round.[138]
54. Some stakeholders were also worried that a vast
proportion of the LCF had been committed to the "Final Investment
Decision enabling for Renewables" (FIDeR) projects.[139]
FIDeR was designed to enable developers of low carbon electricity
projects to take final investment decisions ahead of the Contract
for Difference regime being put in place as part of Electricity
Market Reform, with eight projects signed in May 2014. According
to the National Audit Office, the FIDeR contracts have committed
up to £16.6 billion (58%) of the funds available for renewable
CfDs to 2020-21.[140]
While Danielle Lane, from DONG Energy, explained that these projects
had successfully allowed investors and developers to manage the
transition to the new market,[141]
others judged that the decision of which projects would be awarded
these funds was conducted in an opaque manner.[142]
55. Mark Ripley, Director of Regulation at National
Grid, told us that:
One of the things DECC has done in setting the
Levy Control Framework is it can be reviewed. There is the scope
for additional moneys. What I would say is that we need to see
how things play out. We have not paid out any CfDs yet. We are
trying to think what prices will be at some point in the future.
But some of the sensitivities we modelled when we were providing
evidence to DECC about strike prices were high and low wholesale
price, to see whether, scenario-wise, you got to 2020 within the
7.6 billion. That has formed part of the analysis. On an annual
basis, that analysis will be reviewed to provide information that
Government is able to make decisions upon.[143]
56. The Levy Control Framework (LCF) finances
existing (RO and FiTs), transitional (FIDeR) and new low carbon
projects (CfDs). The scope for support of new renewable generation
under the CfDs is therefore dependent on the cost of a number
of existing commitments. There is a risk that such a large proportion
of the LCF is already allocated to the early contracts for renewables,
including an excessive proportion of very expensive offshore wind
capacity, that it has pre-empted better value-for-money in the
latter years of the LCF, when other technologies may have developed
and their costs reduced. The uncertainty in future wholesale prices
and corresponding uncertainty in the buying power of the LCF create
a difficult landscape for investors. More clarity and visibility
of the funds available for CfD projects is crucial to bring forward
investment.
57. We recommend that DECC sets out what its intentions
are across a range of potential future wholesale prices. DECC
should commit to publishing more frequent updates of the funds
left in the current LCF envelope and clarify rapidly what the
timetable and budget of future CfD allocation rounds will be.
ON THE ROAD TO 2030
58. With investment decisions having to be made years
in advance of delivery, industry and the supply chain need visibility
beyond 2020. DONG Energy told us that offshore wind projects have
a lead time of up to ten years, and "projects […] being
considered today would plan to be delivered after the end of the
decade".[144]
Dr Nina Skorupska, from the REA, told us that with the current
Levy Control Framework expiring in 2020-21, "we do not know
what is going to happen post-2020 at this moment in time".[145]
Urgent consideration therefore needs to be given to the future
of the LCF in the next decade.[146]
Paul Spence, Director of Strategy and Corporate Affairs at EDF
Energy, explained that:
The two things that are desirable under EMR are
that it provides a clear framework and it provides some predictability
that allows investment to happen. The questions that face all
of us, whatever technologies we are developing
at the moment, are all about what happens as we go into the 2020s
and towards 2030. Having a sense of how the categories are going
to be defined and a sense of how much is available in each of
those categories will help us as we look at the potential projects
that we need to develop. So having that sense of where this goes
beyond 2020 and out beyond 2030 will only be helpful.[147]
Andrew Buglass, former Head of Energy, Royal Bank
of Scotland, and Co-Chair of Low Carbon Finance Group, added that
visibility to 2020 "is not enough"[148]
for investors:
I had one offshore developer say to me a little
while ago that 2020 is almost tomorrow already because of the
lead times. […] As we look to industrialise the build-out
of the various technologies, it is increasingly challenging for
companies trying to bring forward projects that need to have visibility
beyond that 2020 to know where they will end up. It was very interesting to
hear a couple of the comments in the previous session about the
sheer volume of developments costs involved before one can even
know that one has a CfD. That is certainly consistent with comments
that I have had from clients and fellow members of the Low Carbon
Finance Group.[149]
59. The Secretary of State suggested that it "would
not be wise"[150]
to provide information on the future of the LCF before the general
election. He added that "investors in the UK have greater
long-term visibility on this issue than they do in any other country
in the world",[151]
and could "take quite a lot of confidence that this Government
and this country sets long-term frameworks and has long-term targets,
probably more so than almost any other country".[152]
He added that "the next government is going to have to have
another Levy Control Framework to support those legally binding
targets on us both from the Climate Change Act and from European
agreements".[153]
60. If EMR is to become a successful and enduring
policy that brings forward the investment in the electricity infrastructure
that is needed to ensure a secure, affordable and low carbon energy
to Britain, more clarity is needed beyond the life of the current
Levy Control Framework.
61. We recommend that the Government clarifies
the future of the LCF beyond 2020-21 as soon as possible after
the General Election. Rolling forward projections of LCF funds
should be published annually thereafter, so that investors are
always able to look at least seven years ahead to make their investment
decisions. The Government should also clarify its intentions in
the event that the Levy Control Framework total is exceeded because
gas prices remain much lower than previously anticipated.
114 Department of Energy and Climate Change, Implementing Electricity Market Reform (EMR)
(June 2014), p 7 Back
115
Department of Energy and Climate Change, Implementing Electricity Market Reform (EMR)
(June 2014), p 7 Back
116
Department of Energy and Climate Change, Implementing Electricity Market Reform (EMR)
(June 2014), p 9 Back
117
Renewable Energy Association (IEM 024) Back
118
Q41 [Dr Nina Skorupska and Leonie Greene] Back
119
Q67 [Simon Moore] Back
120
Q108 [Sara Bell] Back
121
Q41 [Dr Nina Skorupska] Back
122
Q43 [Paul Spence]. Q45 [Dr Nina Skorupska], Q124 [Sara Vaughan] Back
123
National Grid, Final Auction Results (January 2015) p 7 Back
124
The Industrial Emissions Directive (IED) commits EU member
states to reduce the impact of industrial emissions on the environment. Back
125
Q235 [Mark Ripley] Back
126
Q242 [Rt Hon Matthew Hancock] Back
127
Q287 [Rt Hon Matthew Hancock] Back
128
Q242 [Rt Hon Matthew Hancock] Back
129
Q242 [Rt Hon Matthew Hancock] Back
130
National Grid, Final Auction Results (January 2015) p 3 Back
131
National Grid, Final Auction Results (January 2015) p 4 Back
132
Stag Energy (IEM 003), Q158 [Jeremy Nicholson] Back
133
IREGG (IEM 036) Back
134
Department of Energy and Climate Change (IEM 023) para 13 Back
135
Scottish Renewables (IEM 016) para 7.1, Vattenfall (IEM 032),
Independent Renewable Energy Generators Group (IEM 036), RenewableUK
(IEM 040) para 30, 32, Statkraft (IEM 045) para 1.9 Back
136
WWF (IEM 031) para 20 Back
137
Statkraft (IEM 045) para 1.10 Back
138
Infinis plc (IEM 035) Back
139
WWF (IEM 031) para 21, Q11 [Dr Nina Skorupska] Back
140
National Audit Office, Early contracts for renewable electricity
(June 2014) p 7 Back
141
Q6 [Danielle Lane] Back
142
Q11 [Dr Nina Skorupska] Back
143
Q240 [Mark Ripley] Back
144
DONG Energy (IEM 022) para 5.3 Back
145
Q53 [Dr Nina Skorupska] Back
146
Horizon Nuclear Power (IEM 009), Scottish Renewables (IEM 016)
para 7.2, Vattenfall (IEM 032), Statkraft (IEM 045) para 1.10 Back
147
Q13 [Paul Spence] Back
148
Q79 [Andrew Buglass] Back
149
Q79 [Andrew Buglass] Back
150
Oral evidence taken on 21 January 2015, Q16 [Rt Hon Edward Davey] Back
151
Oral evidence taken on 21 January 2015, Q17 [Rt Hon Edward Davey] Back
152
Oral evidence taken on 21 January 2015, Q17 [Rt Hon Edward Davey] Back
153
Oral evidence taken on 21 January 2015, Q17 [Rt Hon Edward Davey] Back
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