House of Commons - Draft Energy Bill: Pre-legislative Scrutiny

Draft Energy Bill: Pre-legislative Scrutiny - Energy and Climate Change Contents

2 Omissions and unintended consequences from the draft Bill

20. In this section we provide an overview of key aspects that are missing from the draft Bill as well as a number of potential unintended outcomes from the proposals. The details behind each of these aspects are provided in subsequent chapters.

A lack of detail: a framework Bill

21. The draft Bill contains 50 individual provisions for delegated powers.[20] A substantial amount of detail relating to the basic design of the Contracts for Difference (CfD) and Capacity Market will be contained in secondary legislation that is not available for scrutiny at this time. This includes important terms of CfDs that are key to their operation, such as the length of contract, any penalties payable (for not completing projects on time), and the setting of two key prices that will determine payments under CfDs (the "strike price" and "market reference price"). We consider that these are more than technical details because they are of direct and immediate interest to developers and investors.

22. In some areas the draft Bill provides for limited (negative procedure), or even no Parliamentary scrutiny of secondary legislation. The absence of detail raised concern among many witnesses, who stressed that they could not have confidence in the outcomes until they had seen the detailed workings for these mechanisms.[21] DECC's Delegated Powers Memorandum says (in respect of CfDs):

The key elements and principles of the CFD scheme are set out on the face of the draft Bill...[and associated documents]... Further detailed work will be undertaken to give effect to these provisions, and elements of the mechanism such as targets and support levels will need to be updated periodically over the lifetime of the mechanism. Therefore, the Department considers that it is appropriate to address the detailed design of the scheme in secondary legislation.[22]

23. Some witnesses perceived increased risk that future Secretaries of State would be able to amend the framework "with relatively low levels of Parliamentary scrutiny (because amendments will be subject to negative resolution procedure)".[23]

24. In the context of the challenging timescale we have been set for this inquiry, we have focussed on the policy objectives of the Bill. However, we note that the success of the EMR will lie in the detail. Since the basic design of CfDs and the Capacity Market will not be enshrined in primary legislation, the secondary legislation will be more than just technical implementation and the opportunities for further Parliamentary scrutiny should be maximised.

25. We asked the House of Lords Delegated Powers and Regulatory Reform Committee for its opinion on DECC's Delegated Powers Memorandum. Unfortunately it was not able to offer a formal view in the time available, but we will await with interest its view on whether the parliamentary procedures in the Bill provide for sufficient scrutiny of the detail of the proposals.

26. DECC has noted that elements of the detail embodied in secondary legislation such as generic CfD terms "are not intended to change substantially over time". It should therefore be possible to make generic designs available to Parliament to assist its scrutiny during the passage of the real Bill. We recommend that in order to increase confidence and ensure that there is an opportunity for rigorous Parliamentary scrutiny, the Government should publish draft secondary legislation, including a model Contract for Difference, in time for formal consideration of the Bill.

Clarity about the key goals of the Bill

27. The introduction to the draft Bill highlights the Government's ambition to move to a "secure, more efficient, low-carbon energy system in a cost-effective way".[24] It also reaffirms the Government's commitment to meeting the UK's legally binding emission reduction targets and 2020 renewables target.[25] The Secretary of State confirmed the objectives of the draft Bill, telling us that:

They are to get energy security, to keep the lights on; they are to decarbonise, to ensure we stop polluting; and they are to do that at the least cost, because affordability has to be a consideration.[26]

28. Nevertheless, we heard from many witnesses that the objectives for the Bill were not sufficiently clear.[27] We suggest that there are two reasons for this perception. First, the draft Bill does not specify the outcomes it is aiming to achieve: what level of reliability of supply is acceptable? What level of emissions would be considered "low-carbon"? How much is it reasonable for consumers to pay? Without providing a sense of what success looks like, stakeholders remain uncertain about what exactly the Government is hoping to achieve through these reforms.

29. We note that despite the Secretary of State's assertion that the objectives of the Bill were clear, they are not set out formally on the face of the Bill.

30. The second aspect of uncertainty stems from contradictory signals about which of these objectives takes priority. For example, achieving security and decarbonisation "at least cost" suggests that decarbonisation and security goals have priority over reducing costs. But the existence of the Treasury's levy control framework has created a perception that, in practice, caps on consumer costs might trump carbon reduction.[28] The Energy Technology Institute stated:

The Bill and the accompanying documentation also does not clarify how the government will ensure coherence between its carbon budget, its published Carbon Plan, and its approach to delivering EMR. This, along with the closeness of the department to the delivery plan, may cause investors to perceive a significant risk that the EMR delivery plan and associated funding commitments will be subject to short-term spending review pressures.[29]

31. We asked the Secretary of State to clarify whether the levy cap or climate change targets had primacy. He told us:

We are not going to break the law […] ultimately we need to make sure we meet our legal obligations.[30]

32. We welcome the Secretary of State's clarification that if faced with a choice between meeting legal climate change obligations and sticking within the levy cap, the Government would give primacy to statutory climate obligations. The investment community would have been further reassured had HM Treasury been able to confirm this. Because HM Treasury have told us that DECC spoke for all of Government in its evidence, we consider this a cast iron commitment to the primacy of statutory obligations over the Levy Control Framework. We would welcome an explanation from HM Treasury about how the working of the levy cap over the forthcoming funding period will be amended to make it compatible with the requirement to meet legal climate change obligations.

IMPROVING CLARITY ABOUT DECARBONISATION

33. The Committee on Climate Change has recommended that the carbon intensity of the power sector will need to fall to around 50gCO₂/kWh by 2030 if we are to take the most cost effective route to meeting our 2050 decarbonisation objective.[31]DECC adopted an "indicative target" of 100gCO₂/kWh by 2030 as the basis for the modelling that underpinned the White Paper.[32] However, the UK does not currently have any statutory targets relating to carbon emissions or the energy mix in 2030.[33]

34. Air Products told us that "the perception is that UK policy is becoming more uncertain and more unpredictable, particularly concerning the future of renewable energy post-2020".[34] Numerous witnesses told us that a specific carbon reduction target for the electricity sector on the face of the Bill would help to address this concern and would boost investor confidence in the UK's commitment to decarbonisation.[35] Green Alliance said:

Without a specific carbon objective, it will be unclear to investors whether government will continue to issue a sufficient volume of CfDs for low carbon plant and force existing and future gas CCGT to operate as peaking plant or fit CCS, especially if the costs of low carbon generation are higher than anticipated.[36]

35. Not everyone agreed that this was necessary and we heard that adding a carbon reduction target to the Bill would duplicate the existing targets in the Climate Change Act 2008.[37] However, the targets in the Act are not sector specific. Nick Molho (WWF) pointed out that the targets in the Act have not yet been sufficient to bring forward investment in the electricity sector so investors need more clarity about what is expected on a shorter timescale up to 2030.[38] David Kennedy (Committee on Climate Change) told us:

At the beginning of the Climate Change Act, we have, "This is about this is the long-term target". I think in this piece of legislation you write, "This is about decarbonising the power sector to achieve legally binding carbon budgets", and then you put a process in place to make sure that the governance arrangements following the legislation achieve the objective.[39]

36. He also highlighted the importance of linking to the Carbon Budget process:

A fourth carbon budget, which we legislated for last summer, will be reviewed in 2014, and a fifth carbon budget covering the period 2028 to 2032 will be set in 2015. So we will have all the debates around cost and affordability as we go through legislating for the fifth carbon budget. To join those up, and to make sure that the Levy Control Framework is adaptable to what is agreed in the context of carbon budgets, rather than the other way round—that we miss carbon budgets because it doesn't have the support in the Levy Control Framework—is the right way forward.[40]

37. It is right to prioritise the decarbonisation of the electricity system because this is likely to deliver the most cost effective route to meeting our 2050 climate change targets. Although statutory carbon reduction targets are set out in the Climate Change Act 2008, these are economy wide, rather than sector specific. We conclude that providing greater clarity about the contribution that the power sector is expected to make towards meeting these targets would help to provide certainty to investors. The Government should set a 2030 carbon intensity target for the electricity sector in secondary legislation based on the recommendation of the Committee on Climate Change.

38. We recommend that the Committee on Climate Change should be made a statutory consultee to the EMR delivery plan in order to assess whether the proposals are in line with legally binding carbon budgets.

39. We further recommend that the Committee on Climate Change should be given a role in advising whoever is the Transmission System Operator in the development of the delivery plan to ensure that it is in line with legally binding carbon budgets.

IMPROVING CLARITY ABOUT MINIMISING COSTS TO CONSUMERS

40. While decarbonisation is a priority, it should not be delivered at any cost. Consumer Focus recommended amending Clause 1, subsection (1) of the draft Bill to introduce a focus on keeping costs down.[41] The importance of minimising costs and protecting vulnerable consumers is also a high priority for the Committee and is addressed in paragraphs 117, 134, 136 and 172-175.

IMPROVING CLARITY ABOUT ENERGY SECURITY

41. Witnesses also recommended introducing a reliability standard in order to provide greater clarity about the security of supply objective. This point is addressed in more detail in Chapter 5.

PROPOSED AMENDMENTS TO THE DRAFT BILL

42. In this section we propose a number of amendments to the draft Bill to deliver the outcomes recommended in paragraphs 37, 38, 40 and 164. We do not have the benefit of Parliamentary Counsel advice on drafting but propose below what seems to be required. We request that the Government addresses the spirit of the amendments in its response and in the Bill it introduces in the autumn. We provide in Annex 2 a list of proposed amendments in conventional format for consideration during the Committee Stage of a Bill.[42]

43. We recommend that Clause 1, subsection (1) of the Bill be amended to read "The Secretary of State may make regulations about contracts for difference for the purpose of encouraging low carbon electricity generation in order to achieve legally binding carbon budgets at least possible cost to consumers".

44. We recommend that Clause 8, subsection (2) be amended to add "[…] (d) a 2030 target for carbon intensity of the electricity sector compatible with meeting statutory carbon budgets and the 2050 target (e) a reliability standard". We believe that setting a decarbonisation target should be a duty on the Secretary of State. However, the current wording of Clause 8 (the Secretary of State "may" by order provide for […]) suggests that the introduction of "other targets" would be at the Secretary of State's discretion. Therefore we recommend that the Bill be amended to make this a statutory obligation within a fixed timeframe, possibly by way of further amendment to Clause 8. We note that a carbon intensity of the order of around 50gCO₂/kWh by 2030 is compatible with legally binding carbon budgets.

45. We recommend that Clause 9, subsection (1) be amended to add "[…] (e) the Committee on Climate Change […]" and that Clause 44, subsection (4) be amended to add "(d) the Committee on Climate Change".

46. We recommend that Clause 20, subsection (1) of the Bill be amended to read "The Secretary of State may by regulations make provision for the purpose of providing capacity to meet the demands of consumers for the supply of electricity in Great Britain, while achieving legally binding carbon budgets at least possible cost to consumers"

47. We recommend that the long title should be amended to read "Make provision for contracts for difference and investment instruments in connection with encouraging low carbon electricity generation in order to achieve legally binding carbon budgets and provide security of supply at least cost to consumers […]". We recommend that the long title should be further amended to delete "contracts for difference" and insert "support mechanisms".

Demand-side measures

48. The predominant approach to meeting electricity policy goals (presented in the draft Bill and associated documents) is to focus on the supply side - to ensure sufficient power stations are available to meet demand. However, the demand-side can also contribute. By reducing the total demand for electricity, for example through improved energy efficiency, fewer power stations and power lines would be needed. By encouraging demand to become more flexible and responsive, it would be easier to accommodate low-carbon electricity from a combination of intermittent and inflexible power stations, such as wind and nuclear generators.[43] Reducing demand, and facilitating the management and prioritisation of demand to ensure the lights stay on, would almost certainly provide a cheaper, easier and less polluting way to meet our electricity needs.

49. We note that virtually the sole mention of the possibility of the inclusion of demand side measures in the Energy Bill is contained in a paragraph in the preamble to the Bill, which states that the Department is "currently reviewing the potential for incentivising further demand reduction in the electricity sector. This work will report over the summer, in time to fit with legislative timetables, should it be required".[44] DECC published a draft of this work the day before our scrutiny concluded, too late for us to be able to give it proper attention.[45]

50. The draft Bill and its associated documents are fundamentally flawed by the lack of consideration given to demand-side measures, which are potentially the cheapest methods of decarbonising our electricity system. Responsive demand features only to a limited extent in the proposed capacity market, a subject we discuss in Chapter 5. Reducing overall demand, meanwhile, is entirely absent from the Bill. Indeed, the Secretary of State admitted to us that "there is a lot of work we should be doing and are doing on that".[46] We recommended, over a year ago, that "demand reduction should be placed at the heart of EMR".[47] It is completely unsatisfactory that DECC's work was not completed in time to be published alongside the draft Bill. This suggests that DECC is still failing to give enough priority to ensuring that demand-side measures contribute to our energy policy goals. We are concerned that adding last-minute measures to an already pre-determined structure of a Bill may severely limit what can be achieved on demand reduction and management through EMR.

51. We note that DECC's draft report on capturing the full electricity efficiency potential of the UK identified approximately 155TWh of demand reduction potential in 2030 (which represents around 40% of total demand). Of this potential, current policy is estimated to capture only around 35%. We recommend that permanent end-use reduction in electricity demand should feature much more prominently in the Bill in order to realise some of the remaining 65% savings.

52. A systematic understanding of electricity demand and its interaction with wider energy policy will become increasingly important if, as the Government's Carbon Plan suggests, electricity is used increasingly for heating and transport, and if demand increases by 29-60% between 2007-2050.[48] This vision of increasing demand is in stark contrast to some other countries. Germany, for example, aims to reduce electricity demand by 25% by 2050, while at the same time reducing greenhouse gas emissions by 80-95%.[49]

53. A number of our witnesses emphasised the cost-effectiveness of reducing overall demand, although Professor Newbery did warn us of some "unsubstantiated claims that all demand-side is necessarily cost-effective".[50] Analysis by Garrad Hassan for WWF showed that energy efficiency measures could reduce the required capital investment in renewables, gas power stations, CCS and interconnection infrastructure by up to £40bn by 2030.[51]

54. A number of witnesses called for a Feed In Tariff for energy efficiency, although Professor Newbery and the CBI thought the existing demand-side policies outside of EMR were sufficient.[52] Dustin Benton of Green Alliance told us:

There is a refrigerator programme that has been running in the United States and it costs £33 per megawatt hour of electricity saved. The cheapest low-carbon form of power we can find right now is onshore wind at about £83 per megawatt hour. What we need the Bill to be able to do is procure that £33 megawatt hour of saved energy over the £83 megawatt hour of new low-carbon energy. That is what a Feed In Tariff mechanism would do.[53]

55. We note that any feed in tariff for energy efficiency would require robust methods to establish baseline energy use and then verify the energy savings subsequently achieved. The RSPB recognised this issue but also said that similar mechanisms in the US have demonstrably reduced demand and prices.[54]

56. DECC told us that the provisions of Chapter 1 of the draft Bill could not be used to introduce a FiT for energy efficiency, and that an amendment to the Bill would be required to enable this.

57. E3G called for the Bill to specify minimum volumes of demand reduction that the System Operator should procure, because current markets for energy efficiency are diffuse and immature, and hence a positive incentive is needed to develop those markets to become self-sustaining.[55]

58. We note the publication of DECC's draft report on capturing the full electricity efficiency potential of the UK and recommend that measures to encourage permanent end-use reduction in electricity demand are included in the Bill. We recommend an amendment to the draft Bill to provide the Secretary of State with powers to introduce a Feed In Tariff for energy efficiency, if this cannot be achieved through existing legislation. The Bill should also include stronger measures to encourage flexible, responsive demand, as we discuss in more detail in later recommendations.

An "Obligation" to source renewable energy

59. The Renewables Obligation provides an incentive for energy suppliers to purchase renewable energy. This will be removed under the CfD arrangements. This could make it difficult for independent renewable generators to sell their electricity at reasonable prices (see Chapter 3).

The Bill is likely to result in increased vertical integration and reduced competition

60. The electricity market is currently dominated by six "vertically integrated" companies that are involved in both generating electricity and supplying customers. Independent generators account for around 30% of power production and independent suppliers just 1% of Britain's domestic retail market.[56] Both the Government and Ofgem have stated a desire to increase competition in the electricity market and Ofgem is currently working to improve the opportunities for new entrants through its Retail Market Review. The Secretary of State reaffirmed the Government's aspirations to us in his oral evidence:

We want there to be many players. We want a competitive market. […] I am going to say in quite a strong way we need to see the market working so that these players [smaller independents] can get involved.[57]

61. Witnesses told us that the EMR proposals as they stand will in fact deliver the exact opposite of this ambition; they are likely to lead to greater levels of vertical integration and fewer independent players in the market. It will become a "big boys' game" that will not work for "little people".[58]

62. For independent generators, the proposals have introduced serious concerns about "routes to market" that is, whether they will be able to get a Power Purchase Agreement (PPA) on good enough terms to be able to sell their power in the future. This is addressed in more detail in Chapter 3.

63. For independent suppliers, the proposed counterparty arrangements for Contracts for Difference (CfDs) are a major difficulty. Requirements to provide letters of credit or cash as collateral against CfD payments and the potential balance sheet implications of the multiparty model might make independent supply businesses untenable. This is addressed at greater length in Chapter 3.

64. The EMR provisions as they stand are likely to undermine Ofgem's efforts to increase competition in the wholesale markets. We therefore recommend that the Government amend its current proposals to avoid the likelihood that they will lead to more- not less- vertical integration and consolidation in the market. (See Chapter 3).

FEWER OPPORTUNITIES FOR SMALLER-SCALE PLAYERS AND CHP

65. We heard that smaller- and community-scale projects in particular would be likely to be squeezed out by the proposals.[59] Again this outcome is in direct contradiction to the Government's declared ambitions; the Coalition Agreement states that "we will encourage community-owned renewable energy schemes where local people benefit from the power produced".[60]

66. The problems for smaller-scale projects include:

A lack of financial capability to deal with the complexities and uncertainties of CfDs, resulting in high transaction costs; and
Difficulties in obtaining the full "reference price" for the electricity they generate, resulting in lower income per unit of energy generated.

67. The Secretary of State told us:

Depending on the size, some of the smallest projects will get Feedin Tariffs under the micro-generation regime, so the smaller community projects, I think below five megawatts, would not be in the Contract for Difference regime.[61]

68. However, Co-operatives UK pointed out that many community and co-operative energy projects are mid-size in generation capacity (up to 10MW) and so would not be eligible for the micro-generation FiT. They would therefore only be eligible for the CfD and would encounter all of the difficulties described above.[62]

69. The Combined Heat and Power Association (CHPA) notes that combined heat and power (CHP) and district heating are omitted from the EMR proposals. It considers that EMR has focussed on three 'key' technologies that Government wishes to encourage (nuclear, offshore wind and CCS) even though these have limited prospects for deployment at scale within the next ten years. The CHPA suggests that the current small-scale Feed-in Tariff could support gas and renewables CHP if capacity limits were raised.[63] The Greater London Authority has also called for CHP low carbon electricity generating plants to receive more funding under the FiT scheme to reflect their production of heat as well as electricity and the cost of transporting that heat to its point of use. The GLA also calls for more support for smaller scaled decentralised renewable schemes.[64]

70. The Coalition Agreement states that "We will encourage community-owned renewable energy schemes where local people benefit from the power produced". However, the Renewable Obligation has not delivered community-owned schemes and the proposed CfDs are also unlikely to work for community schemes. A simple Fixed Feed-in Tariff would be a more appropriate form of support. We therefore recommend that this Bill provides for the Energy Act 2008 to be amended to allow for the eligibility threshold for small-scale FiTs to be extended to at least 10MW and potentially up to 50MW in size.

20 Ev w179 Back

21 Ev 130, Ev 137, Ev w86, Ev w148, Ev w167 Back

22 Ev w179 Back

23 Ev 168, Ev w74, Q 2 [Ms Vaughan] Back

24 Draft Energy Bill, CM 8362, May 2012, Introduction, p 9, para 1 Back

25 Draft Energy Bill, CM 8362, May 2012, Introduction, p 9, para 2 Back

26 Q 383 Back

27 Ev 123, Ev 127, Ev 137, Ev w37, Ev 161, Ev 168, Ev w71, Ev 172, Ev 187, Q 122 [Dr Kennedy], Q 231 [Mr Benton] Back

28 Q 21 [Mr Marchant, Ms Vaughn], Q 125 [Mr Skillings], Q 191 [Mr MacDougall] Back

29 Ev w139 Back

30 Q 485 Back

31 Committee on Climate Change, The Fourth Carbon Budget: Reducing emissions through the 2020s, 7 December 2010 Back