UK energy policy takes center stage

By Jillian Ambrose in London

January 9, 2013 - UK energy policy took center stage in 2012 as the Department of Energy and Climate Change battled persistent speculation of in-fighting and departmental dissent to bring forward its landmark Energy Bill into primary legislation.

UK Energy Secretary Ed Davey introduced the long-awaited Energy Bill to parliament November 29, outlining support for low-carbon generation technology alongside retail reform.

A week later the government announced its new gas strategy, which aims to support the construction of 26-37 GW of new gas-fired power stations over the next two decades.

Although Davey has been consistent in assuring all sectors of the UK energy industry that both gas and low-carbon generation will work together to create a decarbonized energy sector in the decades to come, the tension between the renewables and fossil-fuel factions dogged the pre-legislative scrutiny of the bill and prompted industry concern that investor confidence would be undermined by the perceived uncertainty within DECC.

At the same time DECC came under renewed pressure to intervene in both the wholesale and retail energy markets following calls to investigate alleged marketing rigging in the UK gas wholesale market and rising retail energy bills.

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Coalition rifts and pre-legislative gloom

DECC submitted the draft energy bill for pre-legislative scrutiny in May 2012 and drew strong criticism for the lack of Treasury involvement in the contracts-for-difference (CfD) scheme, which underpins the government's plan to bring forward investment in low-carbon energy generation.

The absence of a legislated decarbonization target for the power sector -- which would deter gas-fired investment -- received further criticism from the UK's Committee on Climate Change, amid reports of opposition within the Conservative-led Treasury.

Deepening rifts within the coalition government were reported in late October when Conservative junior UK energy minister John Hayes threw the country's renewable energy industry into turmoil with an open attack on onshore wind farms a day after apparently wholeheartedly endorsing the sector at a renewables conference.

His statement in interviews with two Conservative-supporting newspapers that "enough is enough" for onshore wind farm development prompted Liberal Democrat Davey to issue a statement insisting there had been no change in the government's policy.

Although the Treasury agreed to limit the cut in Renewable Obligation Certificates for onshore wind to 10% -- after press speculation that finance minister George Osborne had called for a doubling of the subsidy cut to 20% -- and a role supporting the government-backed counterparty to underpin the CfD scheme, a decarbonization target did not appear in the Energy Bill presented to parliament in late November.

UK Energy Bill to support low carbon future

"The Energy Bill will attract investment to bring about a once in a generation transformation of our electricity market, moving from predominantly a fossil fuel- to a diverse low carbon-generation mix," Davey said in a statement following the bill's submission to Parliament.

Key among the measures unveiled was the confirmation that a new government-owned company will act as a single counterparty backing CfDs, which may help alleviate the cost of capital for low carbon projects due to the strong credit rating of the UK government.

CfDs will be made available to investors in renewables, new nuclear or CCS. For renewables investors, DECC said the government will consult on the first set of CfD "strike prices" -- which largely determine the overall level of support -- in mid-2013 and expects to be able to announce the 2013-2018 prices by the end of the year.

Gas strategy, decarbonization targets

Following the security extended to the low carbon industry, on December 5 DECC announced its new Gas Generation Strategy.

DECC said that up to 26 GW of new gas-fired power generation capacity could be needed by 2030.

It said most of this would replace older retiring nuclear, coal and gas plants, "so it is expected there will be a net increase of around 5 GW."DECC added in its statement, however, that "gas could play a more extensive role, with higher load factors, should the 4th Carbon Budget be revised upwards" following advice from the Committee on Climate Change in 2014.

The move came under fierce criticism from the low carbon sector, which believes that without a clear legislated decarbonization target the Treasury support of the gas industry will leave the door open for a renewed dash for gas at the expense of the UK's long-term carbon emissions reduction targets.

Tim Yeo, Conservative chairman of the all-party Energy and Climate Change Committee, announced December 18 that he would push ahead with plans to amend the UK's Energy Bill to set a 2030 power sector decarbonization target of 100g of CO2/KWh of electricity produced.

Retail, wholesale market reform

The Energy and Climate Change Select Committee said December 20 that the UK's "big six" suppliers must make their wholesale energy market activities more transparent in a bid to increase consumer engagement in the energy markets.

The report called on energy regulator Ofgem to ensure that the big six vertically integrated energy companies -- British Gas, E.ON UK, EDF Energy, RWE npower, Scottish Power and SSE -- report annually on how much electricity they have bought or sold to themselves and outline clearly the profits being made.

"Even before the recent reports of wholesale price-fixing, we were extremely concerned about the lack of transparency around wholesale prices and suppliers' trading arrangements," Yeo said in a statement accompanying the report.

Ofgem must also clarify its plans to implement fairness proposals in the retail market to eliminate loss-leading tariffs which hinder the entry of new market participants and force legacy customers to pay "above the odds," the committee said.

The measures followed a flurry of retail price hikes over the second half of 2012.

In December E.ON UK became the last of the big six to announce higher retail energy costs following earlier announcements in which suppliers blamed rising costs of wholesale energy and government schemes for the tariff increases.

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