The government has announced details of measures it intends to implement in order to keep the lights on in the UK and energy prices down as well as action to unlock up to £110 billon of energy infrastructure investment by 2020. The government claims the measures would support an estimated 250,000 jobs while also enabling the provision of flexible energy and helping renewables to contribute more than 30 percent of total power by 2020.
Chief Secretary to the Treasury, Danny Alexander, and Energy and Climate Change Secretary Edward Davey, today announced more details concerning the reforms to be implemented by the governments Energy Bill which is currently making its way through parliament. These reforms are intended to give developers and investors the confidence they need to progress with new projects at a time when huge investment needs to be made in Britain’s energy infrastructure Around a fifth of Britain’s ageing power plants are due to close over the coming decade with further closures in the 2020s and recent Ofgem updates anticipate that the buffer between peak demand and supply could in fact be lower than previously expected.
The government intends to introduce Capacity Agreements under the new Capacity Market, alongside long-term Contracts for Difference (CfDs) for low-carbon power which will make it cheaper to deliver low-carbon generation. The Capacity Agreements are intended to boost energy supplies into the next decade while protecting consumers against volatility in market prices. Similar capacity markets already operate in the US and a number of EU countries with another currently being introduced in France.
In addition to the Capacity Agreements, Renewable Strike Prices will be available from 2014 to 2019 for renewable electricity generation including onshore and offshore wind, tidal, wave, biomass and large-scale solar. The Strike Prices will also remove price volatility risk but are specifically aimed at electricity generated from low-carbon sources under CfDs. Support for the Strike Prices comes from the £7.6 billion Levy Control Framework, a cap to limit the costs passed on to consumers through long-term contracts. The LCF covers all of DECC’s support mechanisms for low-carbon energy generation and will be set at £7.6 billion in 2020-21 starting in 2015-16 at £4.3 billion.
“No other sector is equal in scale to the British power market, in terms of the opportunity that it offers to investors, and the scale of the infrastructure challenge” said Ed Davey. “Our reforms will renew our electricity supply, attracting up to £110 billion investment in a mix of clean, secure power and demand reduction, and will support up to 250,000 jobs up and down the supply-chain.
The Capacity Market will incentivise investment in new gas plant and other flexible capacity to maintain an adequate supply margin – the safety blanket over and above expected demand – for 2018 onwards. Ofgem and National Grid will consult on possible steps they could take to ensure that mothballed power plant or demand response is available if needed in the middle of the decade.
The Strike Prices for renewable technologies announced today aim to make the UK market one of the most attractive for developers of wind, wave, tidal, solar and other renewables technologies, whilst minimising the costs to consumers. This will help boost home-grown sources of clean secure energy, and enable us to decarbonise the power sector, with renewables contributing more than 30% to our mix by the end of this decade.”
Responding to the government’s announcements, REA Chief Executive Gaynor Hartnell said that the really striking thing about the draft Strike Price list is what has been omitted from it, particularly dedicated biomass technologies. She said that the REA will be pushing for clarification on these as soon as possible given that a cap has been imposed for dedicated biomass under the Renewables Obligation (RO).
“There are hundreds of megawatts of biomass projects looking to commission under the new support regime and their contribution of clean, baseload electricity will help keep the lights on when the capacity crunch comes” Ms Hartnell added. “This is a technology with a long-term role to play. It helps with the objective of keeping waste wood out of landfill and is a good use for agricultural by-products such as straw and chicken litter. In the long term, when coupled with carbon capture and storage, this technology could actually be carbon negative. Biomass has been a mainstay of renewable energy policy since the mid-1990s and over the last few months biomass projects have been encouraged to apply for CfDs. It would be inconceivable and nonsensical for Government to turn its back on this technology.”
Ms Hartnell added that capping the amount of biomass projects is profoundly unhelpful when there is an impending capacity crunch and given the international market in debt financing for renewables. She also pointed out that lenders look at the UK regime and are questioning its reliability. Capping biomass is not, therefore, the right message when tens of billions of pounds of investment in renewables is required.
In a separate announcement, the government has also released estimates of the amount of shale gas in the UK in order to give industry and regulators an indication of how best to plan future exploratory drilling. The government intends to introduce reforms enabling shale gas exploration alongside a package of community benefits in areas where shale gas is commercially extracted.
While accepting that shale gas would, subject to public approval, be better than reliance on imports, the REA warned that development of shale gas resources should not be a distraction from renewables.
“The UK needs eventually to produce electricity with virtually zero carbon emissions” said Ms Hartnell. “If shale gas can revolutionise our economy, we must invest the proceeds in building a resilient energy system for the future, dominated by renewables.”
In relation to renewables targets Ms Hartnell further pointed out that the UK has the most demanding target of all the EU Member States and that the prospects for getting on track to meet 15% in 2020 seem remote.
“The effect of a steep drop in lending decisions taken in 2008 will manifest itself, there will inevitably be a hiatus with the closure of the Renewables Obligation and the Government seems to have gone lukewarm on renewables” she said. “It is important that the UK meets its renewables target in the most cost-effective way possible. Heating from biomass is one of the cheapest means of doing this. This poor settlement, coupled with next week’s tariff reductions for medium scale biomass installations, sends a very bad message over the Government’s long term support for this sector. The UK needs a massive expansion in renewable heat to meet climate change objectives – which will create jobs and growth all along the supply chain. The Government should be doing all it can to get the RHI back on track, not cutting its budget.”