Norton Rose election briefing: climate change and energy
The law firm looks at how the way we vote could impact on policy and regulation.
The outcome of the General Election will have significant implications for the legal and regulatory framework in which business operates.
This briefing identifies and explains some of the key policy proposals as they relate to energy and climate change matters, and highlights areas of both consensus and disagreement between the Labour and Conservative Parties.
It also includes a short summary of the Liberal Democrat Party’s position on energy and climate change.
Both main parties are committed to the transformation of the UK into a low carbon economy.
In addition to targeting a reduction in carbon emissions, they share a vision of greater security of energy supply through diversity, improvement of energy efficiency in UK homes and businesses, development of a “smarter” electricity grid and the promotion of the UK as a world leader in green technologies.
Experts have estimated that investment in the region of £200 billion will be required between now and 2020 in order to transform the energy sector in time to meet the Government’s climate change obligations. In addition, significant new investment will be needed to replace the 16 power stations (representing 18 GW, or about 25 per cent of the UK’s electricity generating capacity) which are scheduled to close by 2018.
It is clear that the next government will face an unparalleled challenge to deliver the necessary financial incentives and regulatory reform required to meet the ambitious decarbonisation targets set by the Climate Change Act 2008.
All participants in the energy sector, from energy generators and suppliers to private and business consumers, will need to adapt to the new market and a regulatory framework intended to promote low carbon generation of electricity and corresponding reductions in carbon emissions.
The Labour Government published its White Papers on future energy and climate change policy in July 2009, the most important for the purposes of this briefing being the UK Low Carbon Transition Plan and the UK Renewable Energy Strategy (which together will be referred to here as the 2009 Government Energy Papers). National Policy Statements (NPSs) in respect of key areas of energy policy have also been published.
The NPSs establish the national case for energy infrastructure development and set the policy framework for Infrastructure Planning Commission (IPC) decisions.
In January 2009 the Conservatives published a consultation paper, The Low Carbon Economy: security, stability and green growth (referred to here as the 2009 Conservative Paper). In March 2010, the Conservatives launched plans for what David Cameron described as the biggest shake-up of Britain’s energy policy in a generation, in a policy paper entitled Rebuilding Security (referred to here as the 2010 Conservative Paper). This sets out 12 key actions that the Conservatives propose in order to encourage the very substantial investment needed to secure energy supplies and cut greenhouse gas emissions.
UK renewable energy targets
Under the EU’s Renewable Energy Directive, the UK is legally bound to obtain 15 per cent of its energy use (heat, transport and electricity) from renewable sources by 2020. In order to meet this target, the Labour Party estimates that around 30 per cent of the UK’s electricity generation (including 2 per cent from small-scale sources), 12 per cent of its heat generation and 10 per cent of transport energy will need to come from renewables by that date. Currently, the renewables component of the energy mix in the UK is 2.25 per cent.
The Renewables Obligation
The Renewables Obligation is the main support and incentive scheme for renewable electricity projects in the UK. Introduced by the Labour Government in 2002, it places an obligation on UK suppliers of electricity to source a proportion of their electricity from renewable sources (the figure is currently 10.4 per cent and is set to increase by 1 per cent annually for the next five years).
Renewables Obligation Certificates (ROCs) are generated in respect of megawatt hours (MWh) of renewable energy generated. At the end of each one-year obligation period suppliers are required to present sufficient ROCs to meet their obligations under the Renewables Obligation. Where suppliers do not have sufficient ROCs to cover their obligation, they can buy ROCs on the market or a payment (linked to RPI) may be made into a buy-out fund.
The proceeds of the fund are then paid back to suppliers in proportion to how many ROCs they have presented. The scheme has come under criticism for lack of certainty with regard to ROC values (dependent on supply and demand in each year), the complexity of the scheme and its tendency to favour more established renewable technologies.
A Conservative government may review the banding of the existing ROCs regime in order to ensure a greater amount of the pot is used to support less emerging/pre-market technologies such as offshore wind, tidal and wave power. Any potential changes in banding will be of particular interest to developers of existing large-scale renewable projects such as onshore wind farms, as this may alter the revenue which such projects can generate.
Developers are advised to consider whether any potential changes would be sufficient to trigger “change in law” provisions under existing power purchase agreements. Developers of existing projects may take some comfort from a statement in the 2009 Conservative Paper referring to the “grandfathering” of the existing ROCs regime. This states that if any radical changes are made to the existing banding of ROCs, “our proposals will ensure that contracts already made by electricity suppliers with generating companies that have invested in renewable energy on the basis of the Renewables Obligation Certificate scheme are honoured”.
In order to meet the Government’s ambitious target of generating 15 per cent of all the UK’s energy from renewables by 2020, two-thirds of this energy will need to come from wind, some 33 GW of capacity, requiring over £60 billion of investment and potentially creating 160,000 additional jobs.
In June 2009, The Crown Estate announced the commencement of the Round Three Licensing programme for the delivery of new offshore wind farm sites with a capacity of up to 25 GW by 2020, creating one of the world’s largest offshore wind markets and a great opportunity for UK business.
In recent months, talks have been taking place between the Government and wind energy manufacturers to establish a manufacturing base in the UK, although Vestas, the world’s largest manufacturer, has confirmed that it will not be investing in production in the UK until at least until 2014, at which point it would consider the opportunities being presented by the UK offshore wind sector.5 The Marine and Coastal Access Act is also intended to facilitate marine power development and expansion.
Reports suggest that the UK currently has 2.6 GW of installed onshore large-scale wind generating capacity with another 0.8 GW under construction. A further 3.4 GW of large-scale onshore wind generating capacity has received planning permission but has not begun construction and 7.1 GW is currently awaiting planning permission.
Developers of onshore wind will welcome the Conservatives’ apparently pragmatic approach, but may have concerns about the additional requirements in respect of discounted tariffs. Offshore wind developers will welcome both parties’ commitment to provide government support to expand the offshore grid and to provide greater incentives for investment in offshore wind.
In relation to the investment that will be needed to develop offshore wind, neither of the main parties has provided detailed policy proposals on how they intend to attract necessary investment in infrastructure and the supply chain, for example, to speed up the construction of additional and larger vessels dedicated to the installation of offshore wind farms.
The UK is sitting on the biggest source of marine energy in Europe. However, funding and therefore development have lagged significantly behind other forms of renewable energy.
Both Labour and the Conservatives see tidal and wave power as enormous untapped natural resources, capable of providing a sustainable source of energy to help the UK meet its longer-term climate and energy goals as well as presenting a significant economic opportunity for the UK given its current position as the world leader in this technology.
Both major parties would invest in the development of offshore infrastructure and new marine technologies; however, given predicted levels of future funding, it may be difficult for marine energy to become a commercially viable renewable option in the short term.
Carbon capture and storage (CCS)
CCS refers to the capture of carbon dioxide from emissions from power plants and other industrial sources, transporting it, usually via pipelines, to storage points and storing it safely in geological sites such as depleted oil and gas fields. The feasibility of each individual element of CCS technology has been demonstrated, but the integration and scale-up needed for routine application to large-scale power generation will require significant research and demonstration. The UK is seen by many experts as already possessing the technical expertise, historical industry base and close proximity to geological sites to make it a world leader in CCS.
The energy industry has been critical to date of the Labour Government’s slow pace of progress in implementing the first commercial-scale CCS projects. Both main parties have expressed their enthusiasm for large-scale CCS projects.
Some potential developers have raised concerns over development of the transportation and storage stages of the process and the need for clarity on the Government’s contingency scheme in the event that CCS is not viable.
Whoever forms the next government will need to act quickly and decisively to deliver the right incentives for potential developers to ensure that the UK capitalises on its strong starting position to demonstrate the viability of the technology.
In 1997, 26 per cent of the UK’s electricity came from nuclear power. In the past 13 years – the period of the Labour Government – that figure has halved and is likely to fall further in the short term as more nuclear power stations are decommissioned. After a decade-long period of consultative review the Government is now committed to increasing nuclear power’s contribution to the UK’s energy mix.
In response to the Government’s policies on nuclear power, three consortia of leading energy companies7 have announced their intention to develop around 16 GW of new nuclear power generation capacity by the end of 2025.
EDF of France, which hopes to build the first of a new generation of nuclear plants in Britain, particularly welcomes the Conservatives’ aim to support the price of carbon (see below). Given that the Conservatives are generally in agreement with the Government on this issue it is likely that, barring a hung parliament, steps will be taken towards the construction of a new generation of nuclear power plants in the UK regardless of which party wins the General Election.
The UK is short of gas storage capacity. North Sea gas production is declining, there are concerns about security of foreign supply and demand for gas is rising. Compared to its European neighbours, the UK has little existing gas storage capacity.
As a result of these and other factors, gas price volatility has increased and with it the desirability of, and predicted returns from, gas storage projects. The deficiency in the UK’s gas storage capacity was highlighted recently when National Grid PLC was forced to cut off gas supplies to several large industrial users.
Some organisations have confirmed their opposition to government interference, stating that “a move to strategic storage could completely undermine the economics” of those commercial storage projects currently in development.
However, not all potential storage developers are against some form of government intervention and some have suggested imposing a storage obligation on utilities.
Climate change levy /Carbon floor price
The climate change levy (CCL) was introduced by the Labour Government in 2001 to encourage the business and public sectors to improve energy efficiency and reduce emissions of greenhouse gases through a price-based signal on energy usage.
The CCL is chargeable on the industrial and commercial supply of certain taxable commodities (including electricity, natural gas supplied by a gas utility and coal). All revenue raised through the CCL is recycled back to business through a 0.3 per cent cut in employers’ national insurance contributions and support for energy efficiency and low carbon technologies.
The CCL has attracted criticism for being too complicated and for failing to distinguish between energy-intensive businesses which are already committed to cutting energy bills and firms in the commercial sector for which energy is such a small relative cost that an extra 5 per cent levy makes no discernible difference.
Proponents of CCS and nuclear development have long suggested the need for a carbon floor price. It is likely to be favourable to those seeking to invest in large scale low-carbon development. Other industry players may be less supportive of the Conservatives’ proposal.
Feed-in tariffs (FITs) and Renewable Heat Initiative (RHI)
The Renewables Obligation, outlined above, was not originally designed with small-scale projects in mind and has been criticised for being difficult to understand and navigate for those not familiar with the electricity market, and the very small scales the returns offered were not sufficient to justify investment.
In response to such criticism, the Labour Government has introduced feed-in tariffs (FITs) and is consulting on the Renewable Heat Initiative (RHI) scheme to work alongside the Renewables Obligation. The Renewables Obligation will remain the primary mechanism to incentivise deployment of large-scale renewable electricity generation.
A feed-in tariff works by guaranteeing a long-term premium payment for electricity generated from low carbon sources and fed into the grid. The Government fixes the level of the tariff to be paid for each renewable technology and sets the length of contract.
Heat generated from renewable sources accounts for approximately 1 per cent of total heat demand. This may need to rise to 12 per cent to meet the UK’s binding EU targets. In order to expand the use of renewable heat to meet these targets, the next government will need to provide some form of financial assistance given the current abundance of cheaper heat sources.
The global financial crisis has led to volatility in carbon and energy prices, tighter finance conditions and exchange rate fluctuations, all of which have eroded investor confidence in future renewables and related infrastructure investment.
In order to mitigate the impact of these factors, the next government will have to provide greater certainty and protection for developers (in particular of small to medium-sized low carbon projects, both centralised and decentralised) and ensure that a supply chain is delivered to meet the demanding levels of renewables built.
Green investment bank
Policy-makers have grown increasingly concerned that companies in the renewables sector struggle to fund early-stage project developement even though the worst of the credit crunch is over and the banking system has stabilized.
With the idea of creating a single institution to handle government funding and secure private investment, both Labour and the Conservatives have shown commitment to the establishment of a “green investment bank” to mobilise investment for green businesses.
The creation of a green investment bank will help to boost the UK’s renewable energy production. If Labour continues in government, this new fund should help to unlock lending, particularly for offshore wind projects.
However, compared with the £200 billion of investment considered necessary over the next decade to meet the government’s carbon reduction goals, the green investment bank pledge is relatively small-scale.
Other policies on energy
The 2010 Conservative Paper sets out a number of other key policy initiatives which are aimed at addressing reform of British energy policy. These include ensuring that Britain has a clear, consistent and stable energy policy and establishing a “capacity guarantee” in the electricity market.
Stable energy policy
The Conservatives underline their belief that Britain needs an energy policy that is clear, consistent and stable, partly in order to reduce the cost of investment. They are keen that Ministers, not quangos, advisory bodies or regulators, should be unambiguously responsible for determining policy and that policy should be implemented swiftly.
In this vein, the Conservatives propose that the Department of Energy and Climate Change must be made clearly responsible for determining energy policy, an Annual Energy Statement will be made to Parliament in the place of “inconclusive reviews and consultations” and the energy regulator OFGEM will be reformed to focus on executing, not developing, policy. Other (unnamed) delivery bodies will be abolished and the Green Investment Bank will streamline access to finance.
The Conservatives also believe that developers should be incentivised to build enough generating capacity to provide a reliable electricity supply at times of peak demand. They criticise the new electricity trading arrangements brought in by Labour in 2001 and 2005, which abolish capacity payments and focus on “just in time” electricity supply.
They believe that the energy regulator Ofgem should have a similar role to that of a central bank, including:
The regulator would be able to make long-term commitments on behalf of consumers to provide certainty of payment for new capacity. The Conservatives believe that this would allow investments to be planned in advance (thereby assuring security of supply) and at low risk (thereby cutting costs).
Although business is likely to appreciate a clear, consistent and stable policy regime, it remains to be seen whether the proposed Annual Energy Statement will be able to fully replace the role of “inconclusive reviews and consultations”.
It seems highly improbable that such consultations will be able to be fully replaced, particularly in view of the need to put in place regimes in respect of, for example, CCS, which is a constantly evolving area and which requires a certain degree of ongoing regulatory flexibility and formal interaction with interested parties.
The Conservatives’ plans to reallocate regulatory and policy powers and functions also seem to contrast with their desire to provide regulatory certainty by way of providing capacity guarantees, at least in the short term.
However, there are likely to be industry players keen to invest in new build who will favour the introduction of capacity guarantees, which may avoid the current situation where generators are not incentivised to invest in new assets until demand for new capacity is very clear.
The interaction of this policy and the proposed reform of the CCL (see above), which has a similar purpose in respect of the development of new renewable generation, will have to be carefully considered.
Liberal Democrats policy
The Liberal Democrats have been clear that the expansion of green technology is at the heart of their Election message. On 11 January 2010 they cited creating a “fair and sustainable economy” as one of their four key Election policies, within which growth should come in a way that creates lasting jobs through green, non-nuclear technology.
They are broadly aligned to Conservative energy policies, particularly in seeking changes to the Climate Change Levy and the Renewables Obligation and in what form these policies should be replaced. However, they regard themselves as the “greenest” of the three largest parties.