The Government’s recently published White Paper on Electricity Market Reform has generated a great deal of public comment. The blogs are buzzing with views both for and against.
The intention behind the proposals in the White Paper is to kick-start the £110 billion investment in electricity infrastructure that the Government says is needed to replace soon-to-be-decommissioned generating plant, and to do so with low-carbon infrastructure.
If it works, and new investment is forthcoming, then the construction sector and its supply chain will be well positioned to benefit from the construction of new wind, biomass, gas and nuclear plant, as well as new distribution infrastructure.
The real question is, will it work?
The figures speak for themselves: investment in UK renewables fell from $10.8billion in 2009 to $2.9billion in 2010.
In the meantime, generous Government support for renewable investment elsewhere, notably in China in particular, as well as a sharp rise in the availability of asset finance in China, not mirrored in the UK, has pushed renewables investment away from developed countries towards developing economies.
This situation has been exacerbated in the UK as investors have become nervous about policy changes. First, the Government withdrew generous support for sub- 5MW installations and then it announced the replacement of the UK’s main incentive mechanism, the Renewables Obligation, with a feed-in tariff arrangement.
The proposals in the White Paper have failed to provide sufficient detail on the new so-called Feed-in Tariffs with Contracts for Differences (“FiTs with CfDs”) and, in any event, these will not be available for another 2 years at the earliest.
In addition, the proposed “regime change” to FiTs with CfDs could have unforeseen consequences for existing or currently planned projects, as the existing regime will be scrapped.
The changeover from the Renewables Obligations to FiTs with CfDs may, depending on the particular drafting, trigger “change in law” provisions in existing Power Purchase Agreements or finance documentation. Investors in existing projects should be checking this now.
The White Paper also makes clear that the level of support available under the FiT with CfD is fiscal expenditure: as such it is (subject to grandfathering) subject to the short-term consideration of Budgets and Spending Reviews. This is another factor which is likely to frighten potential investors.
Another key issue is the impact of the EMR proposals on energy bills. Someone has to pay for these incentives and, ultimately, this will be the consumer. Energyintensive industries are up in arms about the impact of the proposals on their margins and what this will do to their industries. Some businesses are threatening to leave the UK. In response, the Government has promised to introduce exemptions for those industries expected to be hardest hit, but, as yet, there is no detail on which businesses will be protected.
All of which, when added to other concerns about the White Paper, leaves the clear impression that the Government may well have overreached itself in the wholesale nature of its proposed changes.