U.K. reforms to the electricity market boosted plans for low-carbon generators such as wind and nuclear power and offered industry a reprieve from costs, though left environmental groups demanding emissions-cutting targets.
The government plans to exempt energy intensive industries such as steel and cement from costs arising from contracts guaranteeing low-carbon generators a price for power, the Department of Energy and Climate Change said yesterday.
The so-called contracts for difference are one of the raft of measures that will cost consumers 7.6 billion pounds ($12 billion) in 2020, according to DECC estimates. Prime Minister David Cameron’s government is seeking to boost incentives for investors in new nuclear power and renewable plants without damaging business as it seeks to shore up the economy.
The Confederation of British Industry called it a vital step. Mark Kenber, chief executive officer of The Climate Group, said “it does very little to shield households from higher energy bills and reduce fuel poverty.”
DECC said the proposals will add about 95 pounds to the average home bill in 2020 from about 20 pounds now. The main mechanism, the contracts for difference, will be allocated on a “first come, first served” basis and last 15 years, DECC said in documents with the bill.
Low-carbon power generators such as wind farm operators or nuclear providers that want to apply for the contracts will be able to do so before a project’s financing is finalized, according to the reforms. Technologies including solar and biomass that can be built more quickly will be allocated their own budget.
“Developers will not have to risk taking a project right through to the final investment decision with no guarantee that they would be awarded a contract,” the Renewable Energy Association said in a statement welcoming the plan.
The contracts offer “stability and value” for customers as well as long-term assurance for investors, EDF Energy, Electricite de France SA’s local unit, said in a statement.
The guaranteed prices, or “strike prices” given in the contracts will be set by government at first and won’t be known until late next year. Until price details for the technologies are agreed and the capacity involved clarified, it was “too premature” to fully welcome the measures, Tom Delay, chief executive of the Carbon Trust, an adviser on emissions reduction, said in a statement.
“The worrying thing is how much government intervention there is in that process,” Richard Slark, a director at Poyry Management Consulting Ltd. said by phone.
“We’re stripping out the market risk but we’re leaving some policy regulatory risk,” he said.
A government-owned company will act as the single counterparty to the contracts with its running costs likely met by industry. Tim Yeo, chairman of the Energy and Climate Change Committee, said government should back the contracts directly to reduce the costs of capital for projects.
The measures also include introduction of a capacity market paying generators for staying online, with auctions from 2014 for capacity provided from 2018. There will be additional capacity earlier, in 2015 to 2016, for “demand-side” measures, Davey told reporters. The costs of payments will be shared between electricity suppliers in the delivery year.
SSE Plc (SSE), the U.K.’s second-largest energy supplier, said earlier it stalled a gas plant investment decision based on the lack of capacity-market detail. Energy regulator Ofgem, which won consumer redress powers in the bill, has warned electricity shortfall risks emerge from 2015.
The “gaping hole” in the bill is a lack of 2030 targets to cut power sector emissions, Greenpeace said in a statement. Clause 39 of the bill allows emissions limits on fossil-fuel plants to be lifted if there is a risk of an electricity shortfall, Malcolm Dowden, a consultant at Charles Russell LLP, said in an interview.
Energy Secretary Ed Davey said today he wants a second reading of the bill before Christmas. The government wants the bill to clear its final legislative step in 2013, with the first low-carbon projects supported under the legislation beginning in the following year.
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