U.K. to Plan Budget for Low-CO2 Power Deals This Year

The U.K. government said it plans to propose by year-end budgets for each successive round of long-term power contracts that will be awarded under new laws to boost nuclear and renewable power.

The money available for the so-called contracts for difference, or CFDs, must fall within annual caps that the government has set for assistance to low-carbon energy through to 2021, the Department of Energy and Climate Change said today in an industry consultation on its website.

“Whilst it is hoped that the CFD budget will not need to be frequently amended it is sensible to ensure that the budget assigned to the allocation of CFDs can be quickly amended when this is needed,” the government said, explaining why it plans to publish the details in a document rather than in legislation.

The contracts are the centerpiece of the government’s efforts to reform the power market and stimulate 110 billion pounds ($175.7 billion) of investment it says is needed to build new generation capacity and power grid infrastructure by 2020.

With energy regulator Ofgem warning that the risk of blackouts is increasing, ministers are trying to spur utilities from Electricite de France SA to SSE Plc (SSE) to build new power plants.

Under contracts for difference, utilities will receive a guaranteed price per megawatt-hour of power they produce, over a fixed number of years. The deals aim to provide investors in new capacity the security they need to build plants.

Indicative budgets for each tax year from 2014-15 through 2018-19 will be be published in a delivery plan scheduled for publication in December, the ministry said.

Ring-fence Debated

They’ll also be included in a draft document called the “CFD Allocation Technical Framework” early in 2014, with a final version coming in “late spring,” the government said. That document may also detail how often allocation rounds will be held, it said.

The government said it’s considering dividing the budget up between different technologies, using either “maxima” to determine the maximum amount that can be allocated to a given power source, and “minima” to ring-fence a portion of the budget for one technology.

The CFD program must operate within already-fixed spending allowances for low-carbon generation that also funds the government’s existing Renewables Obligation and feed-in-tariffs for small-scale renewables. Those concessions rise from 4.3 billion pounds in the 2015-16 tax year to 7.6 billion pounds in 2020-21.

Nuclear Talks

The government said the reforms may become law by year-end, though many of the details need to be spelled out in secondary legislation. The first applications for the contracts are expected to be made in the second half of next year, with the contracts beginning in the 2018-19 tax year, it said.

In the interim period before contracts for difference can be awarded, the government plans to award interim investment contracts that can later be converted to CFDs.

The government is already in talks with EDF subsidiary NNB GenCo to sign an investment contract for a proposed new nuclear plant at Hinkley Point in southwest England.

Those talks have dragged on for more than a year over disagreements on what “strike price” the generator should receive for its power, and EDF has had to postpone a final investment decision it initially wanted to make by the end of 2012. Energy Minister Michael Fallon said earlier this month he hopes a deal will come “in the next few weeks.”

The consultation document contains new information on how the contracts will work and be awarded, and how the government plans to introduce and operate a capacity market designed to ensure generating capacity is available to be brought online at times of peak demand. The consultation closes on Dec. 24.

To contact the reporter on this story: Alex Morales in London at amorales2@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

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