Draft plan for energy infrastructure will increase investor certainty, says Government

Out-Law News | 23 Jul 2013 | 9:58 am | 3 min. read

Potential investors in renewable energy projects have been asked for their views on proposed financial incentives under the Government's Electricity Market Reform (EMR) programme.

The draft EMR Delivery Plan, published for consultation by the Department of Energy and Climate Change (DECC), sets out the methodology behind draft strike prices under the new Contracts for Difference (CfD) support mechanism, which were published at the end of last month. The Plan also sets out the Government's plans for the Capacity Market, which will guarantee reliable energy supplies, as well as the latest assessment of the costs of the EMR programme for businesses and on consumer energy bills. The consultation draft seeks views on the policy proposals for strike prices and the reliability standard for the Capacity Market.

"The Delivery Plan will provide investors with further certainty of government's intent, so that they can get on and make crucial investment decisions that are supporting green jobs and growth," said Energy Secretary Ed Davey. "The strike prices we have set will make the UK market one of the most attractive for developers and investors in renewable energy."

DECC also published a second consultation on the transitional arrangements that will apply between the introduction of CfDs from mid-2014 and the closure of the existing support mechanism for renewable energy, the Renewables Obligation (RO), in 2017. New generating capacity will be entitled to apply for either scheme in the transitional period between mid 2014 and March 2017. Both consultations will end on 25 September 2013. A final version of the EMR Delivery Plan is due to be published in December.

"Developers will welcome the opportunity to comment on strike prices and the proposed Capacity Market, but will be especially grateful for the detail on the transition from the RO to CfDs," said environment and energy law expert Fiona Ross of Pinsent Masons, the law firm behind Out-Law.com.

The RO will close to new generation on 31 March 2017, but will continue to provide support to accredited projects over a 20 year period at levels applying when the scheme closes. From mid-2014 until this date, new renewable generation capacity will be able to choose between the two schemes or to apply for an investment contract under Final Investment Decision (FID) Enabling. All applications will be subject to the rules of the scheme in question, and to confirmation that the project is not receiving support under one of the other schemes.

CfDs are long term contracts that will provide stable revenues for investors in low carbon energy projects, and will be made available for nuclear and Carbon Capture and Storage (CCS) as well as renewable energy generation. Payments made under the CfD regime will be calculated with reference to a technology-dependent 'strike price' and a market reference price. The payments are intended to replace existing subsidies and incentives, and will also protect consumers by enabling the system operator to 'claw back' money if the market price is higher than the strike price.

The Government published draft strike prices for onshore and offshore wind, tidal, wave, biomass conversion and large solar projects last month. It has not yet finalised strike prices for new nuclear or CCS projects, while large scale hydro, tidal stream and tidal array projects will be subject to case by case consideration. The draft Delivery Plan makes it clear that CfDs will not be available for electricity-only biomass, for the co-firing of coal and biomass or for bioliquids.

"CfD strike prices for the first three years, during which time the CfD scheme will be running in parallel to the RO, are set to be competitive with the RO, though adjusted to account for the shorter contract term of 15 years under CfDs and the anticipated lower capital costs resulting from increased revenue certainty under the new mechanism," Ross said. "Strike prices will drop over time, as the cost of deployment falls."

"The terms of CfD are not set out in the draft Plan, and are expected to be consulted on in August, with final terms and strike prices to be published in the final Delivery Plan in December. Issues associated with the design and operation of the CfD and Capacity Market mechanism will be consulted on in October. If the Government sticks to its programme we can expect a further rash of consultation documents and calls for evidence at the end of the summer and through the autumn, with the picture in terms of CfDs in particular likely to be fairly clear by the end of the year, in time for the first contracts being signed up in the latter half of 2014," she said.

Alongside CfDs, the Government plans to introduce a capacity market aimed at ensuring that consumers continue to benefit from reliable electricity supplies at an affordable cost. The Government proposes using a 'reliability standard' to provide guidance on how much generating capacity should be auctioned as part of the first capacity market in 2014. Participants will bid  to provide this electricity, and will receive a steady payment to deliver electricity in 2018-19 if successful. The reliability standard is proposed at a level which would see demand exceed supply for around three hours a year.