Approach to draft Energy Bill indicates more thinking still to be done, says energy law expert

Simon Hobday of Pinsent Masons, the law firm behind Out-Law.com, said that "much of the detail" needed to flesh out the draft Energy Bill (307-page / 1.9MB PDF) would follow in secondary legislation, due in draft form later this year or next.

"A significant amount of ground has been covered in the published papers - more than was, perhaps, anticipated - yet little seems set in stone," he said. "Whether these developments genuinely provide the certainty required for investors to build significant new infrastructure remains to be seen."

Following the announcement in the Queen's Speech earlier this month that electricity market reform would be considered in this Parliamentary session, the Energy and Climate Change Committee of the House of Commons issued a call for evidence on the upcoming draft. The Committee plans to report its findings soon after the House rises for the summer recess on 17 July.

"While laudable, the timescale for the inquiry is tight – we understand that the Committee is looking for evidence by 4 June to inform oral evidence sessions," Hobday said. "This is to allow preparation of what DECC refers to as the 'real Bill' due to be published in the autumn."

The reforms are, the Government said, designed to provide investors with "transparency, longevity and certainty" to attract around £110 billion worth of investment in low carbon power generation.

"Leaving the electricity market as it is would not be in the national interest," said Energy Secretary Ed Davey. "If we don't secure investment in our energy infrastructure, we could see the lights going out, consumers hit by spiralling energy prices and dangerous climate change. These reforms will ensure we can keep the lights on, bills down and the air clean."

Davey did however stop short of imposing a deadline for full decarbonisation of the energy sector, announcing the Government's plans for "largely decarbonising the power sector during the 2030s".

The rising cost of fossil fuels meant that household electricity bills were "likely to increase over time" with or without reform, the Government said. However, its programme of reforms would result in electricity bills estimated to be on average 4% lower over the next two decades than would have been the case otherwise.

The Government has claimed that its electricity market reform (EMR) programme will bring about the widest reforms of the electricity market since privatisation. The Bill proposes a new system of financial incentives designed to ensure that low-carbon forms of electricity generation can compete fairly in the marketplace, backed with a capacity market aimed to ensure that consumers continue to benefit from reliable electricity supplies at an affordable cost. Around one fifth of the UK's existing power generating capacity is due to come off-line over the next decade due to aging power plants and more stringent environmental standards, while an increasing amount of the country's power will be generated from intermittent sources such as wind.

A new system of feed-in tariffs with Contracts for Difference (FiT CfDs) will offer producers of low carbon power, including nuclear as well as renewable energy sources, a fixed price for energy supplied to the National Grid. They will be set up between energy providers and the National Grid, acting as an independent 'system operator', with payments made by reference to a technology-dependent 'strike price' and a market reference price. The payments are intended to replace existing subsidies and incentives such as the Renewables Obligation, and will also protect consumers by "clawing back" money from generators if the market price is higher than the strike price. The first strike prices will be published in next year.

The capacity market will enable the National Grid to purchase the total volume of generation capacity it requires through a central auction including all providers willing to offer capacity whether in the form of generation or non-generation technologies. The market will also provide incentives for energy companies to invest in new capacity or keep existing capacity operational.

In addition, a new Emissions Performance Standard (EPS) will prevent the construction of new coal plants which emit more than 450g of emissions per kWH generates, and a Carbon Price Floor will be introduced on any emissions generated.  The price floor will be set at an initial level of around £16/tCO2 in 2013, which will rise to £30/tCO2 by 2020. The EPS will affect any new coal plants, which without the use of carbon capture and storage (CCS) technology emit nearly 800g/kWh, but is above the 400g/kWh typically emitted by new gas-fired power stations.

The Bill, which will apply in Scotland and Wales as well as England with some of the provisions extended to Northern Ireland, is expected to achieve Royal Assent in 2013 so that the first low-carbon projects can be supported in 2014.