Coalition in a tangle over energy policy

BryonyW4x3.jpgMinisters continue to miss opportunties to real reform of the energy sector

Tomorrow, Ed Davey will give evidence to the Commons Select Committee responsible for scrutinising the government’s draft Energy Bill. As a LibDem, he may find himself getting tied up in knots defending a Bill which supports nuclear: a technology his party currently does not support.

As the need to reduce greenhouse gas emissions becomes more pressing, the electricity sector is undergoing a significant shift. New capital intensive projects, such as off-shore wind and nuclear, will be much more likely to happen if they can control some of the uncertainties that could undermine their ability to pay back the original investment. One of those uncertainties is the price at which you can sell power, which tends to fluctuate according to gas prices. These have been particularly volatile of late and look like continuing to be hard to predict. If gas becomes cheap then the pay back for competing nuclear and off-shore wind projects could be seriously undermined, so the government is offering a complex series of inter-related policy proposals.

Paradoxically, by announcing new incentives to invest, Ministers have effectively stalled existing investment plans while everyone waits for the new regime to be agreed. The final Bill is unlikely to receive Royal Assent until late 2013 but one company, EDF, has been vocal in outlining its plans to make a decision by the end of this year to build a nuclear power station at Hinkley Point – the first new reactor in the UK for 17 years.

These conflicting timetables have lead to some curious contortions of the democratic and legal process. The draft Bill contains specific clauses that are supposed to enable the Energy Secretary to sign contracts that come into force the moment Royal Assent is achieved. But to give companies comfort, those contracts will require detailed clauses relating to their duration, guaranteed price levels and who to sue if anything goes wrong.

The problem is that none of those details have yet been made public and we understand that the all important strike price which will determine the level of subsidy will not be published until next summer – long after EDFs self-imposed deadline. So how can contracts be negotiated before policies and laws are in place to guide them? Is this another example of Ministers putting the cart before the horse, entering into a tick box exercise in consultation and showing contempt for parliamentary process?

While we need timely investments to take place to secure jobs and increase long term security of supply, if negotiations with EDF are delayed or fall apart there is absolutely no risk of the lights going out in the short term. Our electricity system currently has more than a quarter more capacity than is needed, even above its highest peak. Such over-capacity explains why there are currently no new traditional projects under construction: they are just not needed. Especially as interest in renewables is holding up thanks to the Renewables Obligation, which doesn’t close for business until 2017.

One of the key tests of this Bill will be to manage the transition for renewables in a way that does not do more harm than good. Even at this late stage, we are anticipating a new call for evidence, as Ministers try to ensure their proposals do not have the unintended consequence of causing independent project developers to exit the market, further consolidating the power of the ‘big six’ integrated utility companies.

To date, the focus has been on a new financing model for capital-intensive projects and this has proven a huge drain on resources. Sadly, this means the opportunity for real reform has been missed; when it would have been a far better to task officials with increasing competition, by making supply companies buy electricity in an open market and rewarding those working to reduce demand.

Peers do have the good fortune of being able to consider issues with a longer-term perspective and a new Lords Committee, chaired by cross-bencher Lord Oxburgh, will help with pre-legislative scrutiny. An Energy Bill worth having will hopefully emerge in the months ahead, but it now seems certain that this will look almost nothing like the draft we have – and that can only be a good thing.

Bryony Worthington is a member of Labour’s Shadow Energy and Climate Change team in the Lords

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