Submitted by Malcolm Sullivan on 13-07-2011

Publishing the first Annual Energy Statement just under a year ago, Chris Huhne MP said that his approach was about “planning ahead and providing clarity and confidence in the policy framework”. At last, he said “we can have an energy policy with real direction and purpose.” 

Almost exactly a year on, Huhne has certainly demonstrated direction and purpose towards a low carbon electricity grid. However, this week’s publication of a White Paper on Electricity Market Reform will have left many investors frustrated about the ongoing lack of clarity, certainty, and the consequent confidence.

The EMR White Paper sets out some progress in key areas. A decision has been reached about the level at which an Emissions Performance Standard should be set. DECC has, as expected, opted for a Contract-for-Difference model of Feed-in-Tariff, and outlined that baseload and intermittent generators will have differently structured contracts. Arrangements for vintaging and grandfathering the Renewables Obligation (RO) have been confirmed in broad outline, which may go some way to restoring general investor confidence in the UK market.

But in many key aspects of the proposals, the detail is either vague or missing entirely. Proposals for a capacity mechanism have been refined, and the reasons for such a mechanism more clearly articulated than in the original consultation. But DECC remains entirely unclear as to whether to adopt a market-wide or targeted approach. Major questions, such as whether moves are needed to establish a route to market for generators, are left unanswered beyond a promise that action will be taken in future “should that prove to be necessary”, giving no clarity now and raising the prospect of further destabilising market changes at a later date.

Proposals for the design and operation of CFDs may be most troublesome. On a range of key issues – who the counterparty will be, how exactly prices will be set in the near and long term, how many CFDs, and for what technologies will be given – there are few answers, only questions. And in a move that is unlikely to be helpful for investors considering decisions on projects over the next five years, DECC promises to assess the new arrangements as early as 2016 to consider whether the new contract structure is “delivering all the benefits, especially for consumers….that we expect.”

Given that elsewhere the White Paper admits that CFDs are “likely” to be counted as indirect taxation and therefore the “overall size of the envelope” for contracts will be subject to the Government’s overall fiscal policy, this looks suspiciously like a concession to the Treasury. Investors who have seen endless tinkering to the RO, and more recently watched as solar FITs are reviewed and in some cases slashed at an early stage to meet Treasury concerns could be forgiven for being sceptical about the longevity of initial proposals.

So DECC still has a great deal of work to do if it is to convince a sufficiently wide range of investors that the UK market is an attractive one. And unfortunately, it has little time to do so. The timetable for EMR implementation is already tight, to the extent that DECC intends to have CFD contracts finalised in 2013, before the secondary legislation is even passed.  And meeting the 2020 targets will require a major raft of investment decisions to be taken in the years 2014-16, leaving almost no time for the new system to bed in.

The Secretary of State knows that the Government has to get this right. DECC now faces a busy summer filling in the detailed gaps if it is to retain confidence in its overall proposals.