Generating heat

Written by Civil Service World on 18 June 2012 in Feature
Feature

Arguments over the Energy Bill have pitched the Treasury against the energy department, and veteran Tory MP Tim Yeo against the government. Colin Marrs examines what has emerged from its third Commons reading

 

Last week, the Energy Bill passed its third reading in the Commons by 396 votes to eight – one of the largest majorities of this Parliament. Following the vote, energy secretary Ed Davey said the strong backing should give potential investors the confidence to get involved in the UK energy markets. But the scale of the vote in favour hides considerable continuing uncertainty over the final shape that the legislation will take.

The draft bill was unveiled in May 2012, when Davey claimed it would meet the twin aims of safeguarding the country’s energy supply and helping to reduce carbon emissions. However, the proposals were swiftly savaged by Commons’ energy and climate change committee: with the Treasury unwilling to put its financial weight behind DECC’s preferred subsidies regime, it said, the energy department’s plans had been rendered “unworkable”.

The select committee warned that HMT’s refusal to underwrite new ‘contracts for difference’ (CfDs) – designed to guarantee a stable price for energy providers – was likely to scare investors off, and argued that new contractual mechanisms for energy provision could prevent new entrants from joining the market. It also voiced worries that decisions over new nuclear plants were being made behind closed doors, and called for the Bill to give statutory weight to an energy industry decarbonisation target set for 2030.

The ensuing negotiations between ministers at the Department of Energy and Climate Change and the Treasury were, the Financial Times has reported, among the most bitter held between the coalition partners. They were made more difficult by David Cameron’s appointment in last autumn’s reshuffle of right-winger John Hayes as a DECC minister – a move seen by many Liberal Democrats as an attempt to tone down the department’s enthusiasm for measures to combat climate change. The Bill was finally published in late November, with Davey dropping his support for a statutory 2030 target in return for the promise that CfDs would be guaranteed by the Treasury.

As is the way with compromises, the resulting Bill failed to wholly satisfy anyone. A raft of amendments was drawn up for the third Commons reading debate, backed by a range of environmental groups, and a number of them received crossbench support. Meanwhile, on the Conservative backbenches a cohort of MPs stood ready to face down what they saw as burdensome requirements on business. In addition, the government introduced its own, less radical amendments aimed at mollifying the Bill’s critics.

The most high-profile amendment was put forward by energy and climate change committee chairman Tim Yeo, with the aim of ensuring that a 2030 decarbonisation target for the UK’s energy sector be put front and centre in the Bill. Arguing that this target should be set by the Committee on Climate Change – the body that advises government on its progress towards the emissions reduction targets set by the 2008 Climate Change Act – Yeo was backed by major companies which argued that a target would encourage investment in the energy supply chain. But new energy minister Michael Fallon said the Bill’s provision allowing the introduction of a target in 2016, after the next election, was sufficient; he described the Yeo amendment as “decarbonisation by dogma or by default, which can only drive our [traditional] industries offshore”.

Despite 16 Liberal Democrats and eight Conservatives joining Labour to back Yeo’s amendment, it was defeated by 290 votes to 267. Doug Parr, chief scientist and policy director at Greenpeace UK, says the decision could have serious consequences for renewable energy provision. “The government argued that we already have carbon budgets and the Climate Change Act to provide investment certainty,” he says. However, Parr argues this is insufficient: because the government’s commitment to fund renewables – secured by the Lib Dems during the negotiations over the draft Energy Bill – expires at the end of this decade, “at the moment, policy comes grinding to a halt in 2020, and supply chain companies are already making investment decisions for after that date”.

Yeo’s was only the most notable of many backbench amendments. A pair tabled by Green MP Caroline Lucas would have either banned any payments to nuclear providers, or ensured they would be no larger than those to other renewable providers. However, Fallon made clear the government’s support for nuclear, adding that the second measure could prove cumbersome and “restrict our discretion to set support levels that might otherwise provide value for money.” Parr argues that the government’s stance flies in the face of common sense: “Subsidies are there to allow a transition to a fledgling technology,” he says. “The idea that nuclear, which has been around for 60 years, is a fledgling industry is ludicrous.”

Another amendment to fall by the wayside would have stopped payments to biomass plants with a generation capacity of more than 15MW unless they met strict criteria. Harry Huyton, head of climate change at the RSPB, says the failure of this amendment is another blow to the decarbonisation agenda. He says: “There are some very serious questions over some forms of biomass – in theory, you could be subsidised to generate energy from unsustainable wood that increases greenhouse gas emissions.”

In an attempt to address one of the climate change committee’s main criticisms – the possible barriers to smaller renewable generation companies entering the market – Labour MP Alan Whitehead introduced an amendment to establish a dedicated green power auction, allowing small renewables companies to sign shorter contracts than the regular 15-year CfDs for renewables outlined in the Bill. David Handley, chief economist at renewables company RES, says: “Unlike the big six energy companies, it is hard for small renewables firms to predict their energy supplies and costs over such a long period.” The amendment was not put to the vote, after assurances from climate change minister Greg Barker that the coalition would consider bringing forward proposals to address the issue.

Other amendments failing to progress included a proposal to raise the capacity cap on schemes selling electricity back to the national grid; one promoting carbon capture and storage; and another aimed at closing a loophole which will allow coal-fired power stations to stay on the grid for another 45 years.

The government’s own amendments did pass, including one designed to reduce the secrecy around nuclear contracts. The Bill now allows Parliament and the National Audit Office to scrutinise contracts after they have been signed in order to judge whether they provide value for money. However, a number of MPs pointed out that by this stage the country would have committed itself for 30 years or so.

Two weeks before the debate, the government also tabled an amendment to allow energy efficiency schemes to compete in capacity auctions – prior to this there had been no encouragement for efficiency measures – and this amendment was passed in the Commons. However, environmental group WWF’s head of policy Nick Molho points out such auctions will only take place when an energy shortage has been predicted, and argues instead that energy efficiency contracts should be routinely included alongside power generation contracts or sold off in regular, dedicated auctions. “You only have an auction when you think your energy provision is going to be tight,” he says, so under the government’s solution “you are capping energy efficiency, because you can’t be sure how often these auctions are going to take place.”

Despite the failure of many measures to make it into the Bill, their proponents remain optimistic. Yeo’s abrupt resignation this week as committee chair, amidst a lobbying scandal, will weaken the power of green-minded MPs in the Commons – but as Molho says, the Bill still has to pass through the Lords. “Because the vote on [Yeo’s] decarbonisation amendment was so close, if anything it has signalled to the Lords that it is worth them voting on it and discussing it in detail,” he comments. And green-minded MPs were encouraged by Barker’s comments on a number of the failed amendments, which suggested the government will come forward with further tweaks to the Bill.

Whether these changes will generate the necessary confidence among investors is a moot point. Indeed, many investment decisions will not be taken until a number of other issues outside the remit of the Bill are clear – most notably the level of the ‘strike price’, which determines the compensation to energy providers through the CfDs. The government has delayed publication of these a number of times, but has promised to produce figures before July.

Despite Davey’s claim that the successful third reading is a boost to investor confidence, the shape of the final Bill and the future energy market remains uncertain. “The fact that so much remains to play for at such a late stage is remarkable,” says Friends of the Earth climate and energy campaigner Donna Hume.

Meanwhile, Handley is appreciative of the positive noises the government is making about the potential for further amendments. While acknowledging the urgency of getting the Bill on the statute books, he says: “From our point of view, it is most important that the government gets the details of this Bill right first time.”

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