UKERC RESPONDS TO ENERGY BILL
The UK Energy Research Centre (UKERC) has responded to the publication of today’s Energy Bill by welcoming the principle of long-run, fixed price contracts for low carbon generation, and the agreement on the new levy control framework, but also highlighting the need for greater clarity to reassure investors, and for the inclusion of mechanisms to reduce energy demand.
The principle of long-run, fixed price contracts for low carbon generation aligns with longstanding UKERC analysis of investor needs. However there is still a great deal of detail to get right. Dr Robert Gross, UKERC Co-Director and leader of the Technology and Policy Assessment Theme, says: ‘Agreeing an adequate levy control framework to 2020 is a major step forward. It is also to be welcomed that the Coalition has reached a decision and announced it expeditiously. The highly public political wrangling over energy policy was undermining the very purpose of the Bill by creating political risk and investment uncertainty’.
Whilst there appears to be enough headroom in the levy control framework to finance the investment required – including to meet the 2020 renewables target – UKERC’s deliberations have highlighted the importance of getting the implementation right. Professor Jim Watson, UKERC’s Research Director Designate, says ‘It will be crucial to avoid a situation where the headroom in levy control framework is taken up prematurely with contracts for power plants that do not get built; thereby crowding out other projects that fail due to lack of public finance’.
The decision not to include a 2030 electricity decarbonisation target until 2016 at the earliest has attracted criticism from several sources. UKERC research stresses the importance of longer term signals; the Centre’s report on offshore wind found that investors fear a ‘cliff edge’ after 2020 and would like a clear indication of policy intent to the mid- 2020s and beyond. Other research from UKERC, due for publication early next year, clearly indicates that if the UK is to meet its legally binding long term carbon emission reduction targets, as set out in the Climate Change Act, then lack of clarity over 2030 targets is unlikely to get us there cost effectively.
Professor Paul Ekins, UKERC Co-Director and leader of the Energy Systems theme, comments: ‘The absence of a 2030 electricity decarbonisation target in the Bill may not persuade investors of the need for new manufacturing assets in the UK, as there is a risk that these could be stranded after 2020 once the current targets have been met. If low-carbon investors do not feel sufficiently secure in the UK actually to build their factories and their supply chains here, they may continue to source a large proportion of low-carbon equipment from overseas. The still large-scale deployment of low-generation technologies over the next eight years could mean a missed opportunity for a UK-based supply chain due to the lack of subsequent targets.’
Dr. Nick Eyre, UKERC Co-Director and leader of the Energy Demand theme, raises concerns about the lack of emphasis on demand reduction in the Bill: ‘the absence of measures to incentivise demand reduction within the proposed market reforms is a missed opportunity. UKERC’s research shows that the energy efficiency policy framework beginning next year, the Green Deal and the Energy Company Obligation, without additional measures, will be less effective than current policy. Incentives for electricity demand reduction are largely absent in the Bill. Our research shows that providing a comprehensive framework of incentives for low carbon electricity supply only, whilst itself welcome, will be more expensive for consumers than a framework that also includes support for electricity efficiency measures.’
However, UKERC believes it will be possible to amend the Bill to provide enabling mechanisms for demand reduction.We therefore welcome the announcement today that the government will consult on Electricity Demand Reduction - including on the prospect that energy saving could be eligible for long term contracts alongside low carbon supply investments. Dr Eyre concludes: ‘the introduction of a capacity market within wholesale electricity trading arrangements potentially allows for demand side response to play a role in ensuring energy security, which will be an important opportunity as the level of intermittent renewables rises. The extent to which the demand side will be successfully used will depend on the details of capacity market design.’
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