4 Investment Instruments
147. The White Paper
stressed the need for clarity
and certainty to engender investor confidence. But it also recognised
that changes to the market under EMR could lead to some investment
decisions being delayed because they are planned to be taken before
the introduction of CfDs in 2014.[170]
148. Chapter 2 (Clauses 14-19) of the draft Bill
provides for the Secretary of State to issue "investment
instruments" in order to prevent investment decisions being
delayed by the EMR process. The instruments will in effect be
as binding as the forthcoming CfD regime and seek to avoid a hiatus
by providing "certainty for developers on the revenue stream
that will be forthcoming".[171]
149. DECC will enter into discussions with developers
whose projects meet certain criteria (including timing, and ineligibility
for support under the RO). [172]
A range of "Final Investment Decision [FID]-enabling products"
may be used varying from letters of comfort to an issue of a CfDs
once powers exist; to be determined on a case by case basis.
[173]
The negotiation process may produce binding arrangements on the
terms of the CfD, including the contract duration, risk allocation,
strike price and financeability.[174]
150. The main focus of the debate on investment
instruments has been the plan for a new nuclear power plant, Hinkley
Point C. EDF said:
EDF Energy and our co-investor Centrica have recently
started discussions with DECC on Final Investment Decision (FID)
Enabling to support our project at Hinkley Point C. It is important
that this process is conducted in a timely manner and results
in a legally binding agreement. [175]
151. As with the general debate on setting the
strike price for nuclear (see paragraphs 131-134), many witnesses
expressed concern that there was a lack of transparency and accountability
in the investment instrument negotiations for Hinkley C[176].
EDF and Centrica have sent in their letter of eligibility for
Hinkley C, so the negotiations "have not really started"
although the next step is how to arrive at a strike price.[177]
EDF assured us that there would be openness and transparency in
the process and that the outcome would be "as good as if
there was an auction".[178]
RWE npower (who are trying to sell their Horizon Nuclear Power
project) were not convinced and wanted to see more transparency
around the Hinkley C project.[179]
Given that EDF and Centrica was the first project to be put forward
for consideration, RWE wanted transparency around the terms and
conditions offered, so that subsequent projects were not disadvantaged.[180]
152. SSE argued that if an investment instrument
was provided to a nuclear developer, it would be hard to see how
it would not be challenged by the Commission as state aid.[181]
However, EDF were not perturbed and told us that the "principle
of the transitional arrangements is to make early investment possible,
for which there is a strong case. It is simply a practical arrangement
with, we believe, no bias and therefore no State Aid implications".[182]
153. We share the concerns of
many witnesses about the transparency of the FID-enabling process.
Hinkley C is the first project to be considered under the process.
We recommend that DECC ensures that any contract terms agreed
are published as soon as possible. We also recommend that, as
with setting strike prices under the CfD mechanism, an independent
panel of experts should be appointed to oversee the investment
instrument negotiations, and should report to Parliament on value
for money for consumers (see paragraph 134).
154. Under Clause 14 an investment instrument
may provide for payments based on a strike price and a market
reference price and include such provision as the Secretary of
State considers necessary or desirable and, in particular, provision
about various matters listed in clause 14(6) and covering the
same areas as those to be covered in provisions included in a
CfD. The draft Bill provides for investment instruments to be
issued during the passage of the legislation and, if they comply
with certain conditions including being laid before Parliament,
puts a duty on the Secretary of State to issue the instruments
after the Bill is enacted.[183]
Clause 16 provides for a similar process for the issuing of instruments
between the Bill's enactment and the end of 2015.
155. Although Clause 19 does provide for further
provision to be made in regulations about investment instruments
(and those regulations will be subject to the negative procedure),
there is no provision for formal Parliamentary scrutiny of investment
instruments (no negative or affirmative procedures), beyond the
requirement for the instruments to be laid. The implication is
that instruments which may form a key aspect of the development
of the electricity market until at least the end of 2015, will
not be subject to the same level of Parliamentary scrutiny as
those made through CfD regulations (which will be negative procedure),
after the Bill becomes an Act. This may lead to concerns over
a lack of transparency and Parliamentary control.
170 DECC, Planning our electric future: a White Paper
for secure, affordable and low-carbon electricity, CM 8099, July
2011p 37; DECC, Electricity market reform: policy overview, Annex
B, Feed-in tariff with contracts for difference: draft operational
framework, May 2012 Back
171
Draft Energy Bill, CM 8362, May 2012, Explanatory Notes, pp 199-200,
paras 39-40 Back
172
DECC, Planning our electric future: technical update, December
2011, p 38 Back
173
DECC, Electricity Market Reform (EMR): Final Investment Decision
(FID) Enabling, Impact Assessment, IA No: DECC0083, 16 April 2012
Fig. 3, p 13 Back
174
DECC, Electricity Market Reform (EMR): Final Investment Decision
(FID) Enabling, Impact Assessment, IA No: DECC0083, 16 April 2012
p 7 Back
175
Ev 161 Back
176
Ev 123, Ev 137, Ev 151, Ev w37, Ev w71, Ev w74, Ev 187, Ev w112 Back
177
Q 51 [Mr Sambhi] Back
178
Qq 51-52 [Mr Sambhi and Mr de Rivaz] Back
179
Ev 178; In 2009 RWE npower formed a joint venture with E.ON UK
called Horizon Nuclear Power to explore the possibility of developing
new nuclear power station in the UK Back
180
Q 52 [Mr McElroy] Back
181
Ev 151 Back
182
Ev 161 Back
183
Clause 15 imposes a duty on the Secretary of state to issue investment
instrument if it has been laid before Parliament in the period
between introduction of the Bill and Royal Assent (together with
a statement containing specific information see Clause 15(2))
and that and that the consent of the relevant generator/supplier
was given. Back
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