The Energy Act and State Aids

The big news is that, following more than a year’s debate in both Houses of Parliament, the Energy Bill has finally received Royal Assent. This means the legislation is now in place for electricity market reform to go forward.

As I write DECC, with the support of industry, are pursuing their detailed implementation plans, and are promising to bring forward secondary legislation shortly. Some important unresolved issues remain, but given the real political commitment to EMR on all sides these will surely be overcome quickly.

This is great news both for low carbon generators – nuclear; renewables; and carbon capture and storage – and for electricity consumers. Our politicians, with their short term electoral cycle, occasionally forget they also need to protect the longer term interests of their electorate.

In this case, in backing the Energy Act that will provide a framework for secure clean electricity over many years, they have done so. Because of their higher up-front costs low carbon sources such as nuclear and renewables are difficult to finance in the current electricity market. By providing stable and predictable prices over a set term, the EMR proposals will address this market failure, enabling the UK to deliver its energy security and low carbon objectives. This is crucial to all of us – no-one wants the lights to go out, and the recent floods underline the potential risks of unchecked global warming!

That said I was asked at a conference recently whether the Energy Act’s provisions would actually convince power generation and utility companies to make the necessary investment. My response was that it would – and I was able to pray in aid the Chinese interest in investing in the Hinkley project; Horizon/HGNE’s progression of the ABWR design through the Generic Design Assessment process; and Toshiba’s recent purchase of a 60% stake in NuGen. Taken together these developments, all of which involve major expenditure by the companies concerned, are a real vote of confidence.

Of course it is not all plain sailing. Two years ago Mark Higson compared the new nuclear build journey as a giant rollercoaster – with violent ups and downs along the way – and this remains very much the case. We have already had both this year, including the ‘ups’ set out above.

A current ‘down’ is the vexed question of state aids clearance for the Hinkley CfD deal – on which the European Commission published its initial view (Opening Decision) at the end of January. The Commission’s document, comprising 69 closely typed pages, raises a host of ‘legal’ issues, relating to such arcane matters as whether the UK has a ‘market failure’, and whether, if it does, the CfD arrangements are the best means of addressing this.

The British Government and nuclear industry have firmly pointed out that the EMR measures are designed to help achieve the EU’s security of supply and carbon reduction objectives, and that they are compliant with EU rules. They have a very strong case, but there is a detailed process to be gone through.

Joaquin Almunia (the EU Competition Commissioner) has indicated he wants to see the investigation concluded before the end of the current EU Commission term in October 2014, and there is ‘optimism it will be completed by summer 2014’. It is important that this timetable is kept to, not just because the current Commission will leave office at the end of the year but because we need to make progress on our new nuclear build programme and the UK supply chain is itching to get started.

In this context it is interesting that in its recent consultation on draft guidelines for environmental and energy state aid the Commission stated that for renewables (and CCS) support is justified to meet the common good of mitigating climate change. Nuclear is not mentioned, but if mitigating climate change is the objective it surely makes sense for the Commission to support a member state – such as the UK – that has developed a technology neutral approach to achieve this.

Peter Haslam, Public Policy Advisor, NIAPeter Haslam
Head of Policy

This article was first published in Industry Link magazine on 12.03.14

The Energy Pricing Dilemma

Energy has been front page news ever since Ed Milliband’s price freeze promise in 2013. The focus – reducing the cost of consumer bills. Labours politically astute manoeuvre to do this through a price freeze either “gave hope to millions” or will “bankrupt suppliers” depending on the newspaper you read…

The coalition Government countered with the removal of green levies, saving the average consumer £53 a year. This comes in the wake of increases across the board on energy bills. We can expect energy to play a significant role at the forthcoming budget, and to be an even bigger issue at the election on 7th May 2015.

To this end, the Labour Party has published the ten actions they would take to reset the energy market. These include abolishing Ofgen, separating supply and generation businesses, and the much trumpeted price freeze.

This competition to reduce costs, whilst understandable, could have a significant impact on the view of Britain as a destination for investors. In the wake of the price discussions, Paul Massara, Npower’s Chief Executive commented that the price promise had led to a “dramatic cooling of investment into the UK”. He went on to comment that “companies [were] asking hard questions about whether Britain had become a riskier place to invest.”

Interventions by politicians of all parties have a dramatic impact on a companies balance sheet – and often not in a positive way. On 11th February the Energy Secretary Ed Davey threatened to break up the UK’s largest supplier of gas, British Gas. This announcement wiped £300million off the share price of Centrica on one day as the market reeled from the mere suggestion of this policy move.

This is a tough time to be an electricity generator or supplier. The intervention from Davey comes amid an independent market assessment of energy pricing by the Office of Fair Trading which will report in March, as well as stinging and prolonged criticism from the media and politicians.

What is often forgotten is that Britain comes 5th in a ranking of the cheapest domestic electricity prices in Europe. But according to DECC figures we need to spend £110billlion on new power plants and upgrades to the UK’s electricity networks over the next eight years.

How does this huge capital investment and need to attract funds from around the world to support it, marry with politicians of all hues looking to drive down costs in the energy markets?

Arguably it doesn’t, and we are yet to see any politicians stick their heads above the parapet to make this point. If UK growth is to continue it is vital that we attract the essential investment to these shores – especially in the energy market – and this is what happens without investor confidence.

The Energy Act has given more clarity and significantly more certainty to investors. But there is a risk that political uncertainty on energy policy could undermine this. Politicians are right to protect consumers – but they need to ensure they look after their long term interests as well. People want cheap power, but not at the cost of the lights going out.

Alastiar Evans Alastair Evans
Communications Officer