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Still Too Much Policy Uncertainty

Submitted by on 13 Sep 2011 – 16:32

Huw Irranca-Davies MPHuw Irranca-Davies MP, Shadow Energy Minister

After what seemed like an age, the Coalition Government finally published its Electricity Market Reform (EMR) White Paper in July 2011.  Like the fabled parson’s egg, it was good in bits, and bland in others.

Everybody knew long before then what was in it for them: some (not all) renewables and nuclear generators were positive about the Contract for Difference Feed-In Tariff (CfD FiT) and the Carbon Floor Price (CFP); gas and other fossil-fuel generators like the Capacity Mechanism as it means they’ll continue to have a role in the future energy-mix; and there was even something for the carbon capture and storage industry who will be exempt from the Emissions Performance Standard (EPS) for their eventual initial demonstration projects.

There was undoubtedly something for everybody, and even though industry experts will query the efficacy of each overlapping mechanism, we need to refine and finalise the details in the next few months.  To reach our legally enshrined goal of reducing UK carbon emissions by 80% in 2050, the energy generation sector must be decarbonised by 2030.  That’s a big task, and one that’ll involve some tough choices.

And those choices are only half taken in the EMR White Paper.  So many questions remain to be answered.  The lack of answers on these questions continues to provide the uncertainty for industry and their future investments that has been the hallmark of the Tory-led Governments first 18 months in office.

The Contract for Difference Feed-In Tariff (CfD FiT), which is designed to provide “clear, stable and predictable revenue streams for investors in low-carbon electricity generation,” could be delivered by a range of possible delivery organisations, including private sector bodies.  There is no clarity on how exactly this will be delivered.  The result?  Continued uncertainty for investors.

The Carbon Price Floor (CPF) was announced four months before the EMR White Paper in Budget 2011, and according to the White Paper “represents an early and long-term signal to investors that the Government is serious about encouraging investment.”   It will be introduced on 1 April 2013.  It is a Treasury-led policy, however, and will continue to be despite its integral nature to UK energy policy.  The impact it will have on UK energy intensive industries is cause of concern to many, and even the Department for Energy and Climate Change are looking to mitigate its impact on these industries; whilst green groups are up in arms as they believe it is a backhanded incentive for nuclear generators.  All the while the Treasury will be responsible for setting the level at which the CPF is set in each year’s Budget.  The result?  Continued uncertainty for investors.

The Emissions Performance Standard (EPS) sets an annual limit equivalent to 450g CO2/kWh for the amount of carbon emissions a new fossil-fuel power station can emit when running at baseload.  It was welcomed by the CCS industry as they will receive exemptions for their initial demonstration projects.  The Government envisage the EPS being administered separately from the delivery organisation that will control the CfD FiT.  It will likely be the environmental regulators in each part of the UK, but no clarification yet.  The result?  Continued uncertainty for investors.

The EMR White Paper sets out two possible options for a Capacity Mechanism: a Strategic Reserve or a Market-Wide Mechanism.  These are still two possible options and further consultation will need to be held, whilst it is “likely” the Capacity Mechanism contracts will be administered by the same body that “could” deliver the CfD FiT contracts.  The result?  Continued uncertainty for investors.

Even the laudable aim of removing the number of barriers to entry and growth in electricity generation and supply markets, designed to increase the number of independent energy generators and providers, is racked with uncertainty.  Very few people believe that Ofgem’s proposal to mandatory auction 20% of energy generation will impact upon the dominance of the Big Six, and all the Government will say is that they “will work with all stakeholders to identify appropriate solutions.”  Industry experts have been telling the Government the appropriate solutions since they came to office, and it is why Labour Leader Ed Miliband announced at the end of July that Labour wants energy companies to pool 100% of the energy generate and to make it available to any retailer.  Not only will it open up the market, but it will put downward pressure on prices for consumers and British business.

So whilst we’re clearer on the mechanisms that the Government believe will deliver the decarbonisation of our energy sector by 2030 and ensure security of energy supply, it is only marginally clearer how and by whom they will be delivered, let alone how effective they will be.  The tough choices are still to be taken, including on the role of decentralised energy, amongst others.  Industry has been waiting for this White Paper before committing to further investment in Britain, but even after its publication they are still stuck in limbo needing more clarification; whilst consumers and British business continue to be baffled by Government inaction on the dominance of the Big Six and rising energy prices.

So the jury is still out on the Tory-led Government’s EMR White Paper, as it is still riven with uncertainties.  Only one thing is certain: it has to work so that we can keep the lights on, keep our bills down, and stick to our low-carbon ambitions.  Labour will help the Government get this right, for the future of the planet and for UK PLC.