The Energy Bill had its second reading on 19.12.2012 (yesterday at time of writing, two days ago at time of posting). Now is as good a time as any to take stock. Apologies in advance for a fairly meaty blog…

The Bill as published – changes from the draft

Firstly, significant changes had been made to the architecture of the Bill as debated by the Commons yesterday from the draft Bill that was so carefully picked apart by the Energy and Climate Change Committee (“the ECC”). Unsurprisingly, most concerned the Bill’s centrepiece, EMR, provided for by Part 1. In particular:

  • Clause 1 now spells out the objectives of EMR as a list of the matters the Secretary of State must have regard to when exercising functions under Part 1. These include the 34% 2020 and 80% 2050 carbon reduction targets under the Climate Change Act 2008 and the 15% 2020 target set by the Renewable Energy Directive, along with security of supply and likely cost to consumers.
  • Chapter 1 to Part 1 as a whole now makes clear that each CFD is to be between an eligible generator and a single CFD counterparty (albeit multiple CFD counterparties may be designated). This removes the uncertainty created by the “multiparty counterparty” proposed in the draft Bill.
  • Chapter 8 to Part 1 now sets the initial Emissions Performance Standard (“EPS”) at 450g CO2/kWh and allows for the inclusion of Carbon Capture and Storage (CCS) plants. The 450g initial EPS, along with grandfather rights for new plants consented under it, signals what has been termed a “dash for gas” in the absence of a 2030 decarbonisation target (see below), much to the disquiet of the ECC and the Committee on Climate Change (“CCC”).

And there had been other adjustments.

Though the Government rejected the ECC’s concerns regarding National Grid’s role as the EMR delivery body, operating both CFDs and the capacity mechanism, Chapter 4 to Part 1 now provides for business separation and transfer of EMR delivery functions if necessary. Equally, whilst the Government refuses to underwrite CFDs, in the event the electricity suppliers fail to provide the required levies, suppliers may be required to post collateral (Clause 5), whilst Chapter 6 to Part 1 gives the Government the power to intervene to ensure independent generators can access the market and to improve market liquidity.

Outside the grand (and rather empty) spaces of the primary legislation itself, changes had taken place below stairs. One was DECC’s confirmation, in its Annex A CFD Operational Framework published alongside the Bill in November 2012,[1] that developers will be able to apply for CFDs “well ahead of financial close”, on proof of planning permission and an accepted network connection offer (or equivalent).[2] Another was the announcement that the annual levy cap for 2020 will be set at £7.6 billion in today’s money.

However, and for all this, the Bill as debated yesterday still fell some way short of meeting the demands of the ECC and the CCC, not to mention the Opposition.

The single most significant “principle” omission from the Bill as published was a decarbonisation/carbon intensity target. The CCC thought this essential to avoid gas consented now operating at baseload (rather than peaking) in 2030. Instead, the Government proposes to set it in 2016, so after review of the CCC’s 4th carbon budget in 2014 and instead when setting the 5th carbon budget (covering 2030), hence allowing the “dash for gas” even with the Bill by dint of grandfather rights for projects consented under the Part 1, Chapter 8 initial 450g EPS. The decarbonisation target is something of a cross-party cause celebre (see below).

Absent, too, were measures to reduce energy demand, though indications were (and are) that Government amendments would be tabled if necessary once its consultation there is complete.

Dashing for gas or targeting 2030 decarbonisation?

Secondly, the period after the Bill’s publication, immediately before its second reading yesterday, saw a rash of important announcements, many of them pointing in different directions, culminating in a swell of calls for a 2030 decarbonisation target:

  • On 05.12.2012 DECC published the Government’s Gas Generation Strategy (“the GGS”),[3] seeking to encourage and reassure investors in gas that the fuel would play a “major role” in our electricity mix over the coming decades “alongside low-carbon technologies as we decarbonise our electricity system”.[4] The “dash for gas” was confirmed by the Chancellor’s Autumn Statement to the Commons the same day.
  • The CCC responded immediately through its Chief Executive, David Kennedy.[5] It is fair to say he did not lavish praise on the GGS, but picked up where his predecessor (Adair Turner) had left off in his critique of any dash for gas. He noted that the GGS included one scenario which reflected “a new dash for gas, with very limited investment in low-carbon technologies through the 2020s”, describing this as neither economically sensible, nor compatible with the CCC’s carbon budgets and the 2050 target, unnecessary costs and price increases aside. In the CCC’s view, any such dash for gas should be “Plan Z”, with decarbonisation of the power section “Plan A”. He also called for ERM aimed at achieving a carbon intensity of 50gCO2/kWh in 2030.
  • On 13.12.2012 the CCC then updated its analysis of energy prices and household bills. [6] It warned that relying on unabated gas-fired generation risked annual household electricity bills some £600 higher than with a move to a decarbonised power system.[7] On the same day, Ed Davey announced that exploratory fracking could resume in the UK.
  • On 18.12.2012, the day before Second Reading, Tim Yeo, ECC Chair and, of course, an outspoken figure on green energy issues for many years, announced that he would be tabling an amendment to add a decarbonisation target of 100g CO2/kWh by 2020.
  • Labour immediately announced that it would table its own decarbonisation amendment to similar effect.[8]

What, then, were investors to think? Had any of this provided the investment security that politicians of all stripes have recognised as sadly lacking of late? One half-answer came from EDF. On 04.12.2012 it announced that it would extend the lives of Hinkley Point B and Hunterston B nuclear power stations by 7 years, to 2023, and at around the same time it became clear that it was no closer to reaching an “early-CFD” strike price for proposed Hinkley Point C with the Government. Hardly a sign that investors were queuing up to walk through the door of the Government’s energy show home and sign up.

A clearer picture after Second Reading?

The groundwork complete and some skeletal foundations laid, onto the Commons construction site yesterday strode strode Ed Davey and his Opposition counterpart, Caroline Flint, the latter wielding a reasoned amendment opposing the Bill as a whole, which amendment included as a centrepiece complaint regarding the lack of a decarbonisation target (col.906). They were joined by a host of Parliamentary energy architects, some better versed than others.

Davey was no sooner into his introductions than he was expressing sympathy with those calling for an immediate 2030 decarbonisation target, which he himself has of course long-supported, and so immediately highlighting the Coalition rift on the point (see, e.g., his exchange with Dame Joan Ruddock at col.898). However, having been blown slightly off course he attempted to offer reassurance there (that 2016 was still 14 years ahead of 2030, so plenty of time for a 2030 decarbonisation target to bite), then to generators regarding the security of CFDs, reminding the House that the Government had accepted the ECC’s proposal for a single counterparty to CFDs so that investors know who will pay, namely a new Government company.

On electricity demand reduction, Davey reiterated that the Government would bring forward amendments if necessary following the close of consultation (col.902).

Flint then rose to present the Opposition’s reasoned amendment, interrupted only by a typical Commons’ spat over etiquette (was she dishonourable or not? – see col.907). An immediate decarbonisation target for 2030 took centre stage, buttressed by digs at Davey for his inability to control his former junior Tory counterpart at DECC (Charles Hendry) and failure the Tories to sign up to any 2030 decarbonisation target before 2016 (Alan Whitehead thought the problem was “Liberal Democrat capture and storage” – col.919). Flint then moved to a proposal for energy openly traded in a pool, along the lines of the Nord Pool in northern Europe (col.910), before winding up with removal of Ofgem for a regulator with “teeth” (col.911).

Industry will have been watching Tim Yeo’s contribution with great interest, lest it forewarn of Government amendments. He too could not resist a dig at the coalition’s failure to present a clear and united policy front on energy, even within DECC (col.912), but soon reeled off the list of areas requiring alteration; a 2030 decarbonisation target set now, or at worst in 2014 alongside the review of the 4th carbon budget, clarity on strike prices, set through an auction system before too long and better incentives for demand-side measures along with clarity regarding their funding (cols.913-914).

Yeo had support there from Hendry in relation to the need to put energy efficiency “at the heart of the Bill”. Perhaps more tellingly, Hendry also appeared to support the calls for an early decarbonisation target, explaining that whilst he would not support the Opposition’s amendment he agreed on the need for a “long-term decommissioning target” (i.e. a decarbonisation target), on which the whole sector wanted long-term clarity and which it was right be debated and a consensus found (col.918).

The debate that followed was, on the whole, impressively well-informed. The call for cross-party unity in the national interest by the minister (John Hayes) in concluding the debate appeared realistic for all that it is traditional. If his statement that it would not be a case of nuclear at any price (col.957, responding to Michael Meacher) was predictable, then so was the defeat of the Opposition’s reasoned amendment and so were the calls on all sides for investor certainty (each successive call, with its differing solution for achieving investor certainty, thereby chipping away at the same).

But it is the comments from the Secretary of State, his Opposition shadow, big energy hitters such as Yeo that will stay in the memory until Public Bill Committee begins its scrutiny in the New Year.

What odds on a 2030 decarbonisation target set before 2016 after all?