UK’s leading renewable energy companies warn that changes will deter investment and expose consumers to price volatility
Government plans to reform the electricity market to favour low-carbon power are “unworkable” and will lead to “a train wreck” in the sector, and higher and more volatile energy prices for consumers, according to a group of the UK’s leading renewable energy companies.
Instead of promoting low-carbon electricity, as ministers have claimed, the reforms – which will scrap current subsidies and replace them with long-term contracts – will deter investment and make it harder for the UK to meet its renewable goals, the group of six companies has said, in a letter and statement to the energy secretary Ed Davey. The main beneficiaries, the companies believe, will be nuclear generators.
Keith MacLean, head of policy at Scottish and Southern Energy, the utility leading the charge, told the Guardian: “These proposals are too complex – they are unworkable, and they are looking more and more like a train wreck.”
He predicted that households would suffer as a result: “This will expose consumers even more to price volatility. It’s taking the risk of volatility away from the generators, who are best equipped to deal with it, and passing it on to consumers.”
Nuclear power, by contrast, is likely to benefit from the reforms, because investors are demanding subsidies and other forms of support from the government if they are to back plans for new reactors, which will cost billions. The government has repeatedly denied that its plans – which would apply to all forms of low-carbon power – represent a subsidy to reactors.
“The only logic we can see in this is that they [ministers] are still trying desperately to hide the nuclear support. They seem to be prepared to make life more difficult for renewables in a last-ditch effort to keep the nuclear option open,” said MacLean.
The group of companies – which include SSE, Ecotricity, Good Energy, Renewable Energy Systems, Natural Power and Fred Olsen Renewables – are urging the energy secretary, the Liberal Democrat Ed Davey, to make major changes to the policy.
A spokesman for the Department of Energy and Climate Change said: “The white paper we published in July 2011, which followed the consultation published in December 2010, set out our conclusions that the contracts for difference (CfDs) will provide the most efficient long-term support for all forms of low carbon generation. The CfD controls costs for consumers, provides stable returns for investors, and maintains the market incentives to generate when electricity demand is high.”
Electricity market reform is the cornerstone of the coalition’s energy policy, flagged up in last week’s Queen’s speech. It was billed by the government as necessary to “ensure secure, affordable and low-carbon electricity”.
At the heart of the reforms are a new form of energy supply management known as “contracts for difference”. These will be long-term contracts among low-carbon electricity generators, grid operators and energy retailers that will guarantee a supply of power at a certain price. That price could be higher than wholesale electricity prices, but may end up being lower than generators could sell their power for on the open market – the attraction is supposed to be the long-term guaranteed price.
Many details of how the contracts will work have still not been laid out, including the likely prices, the length of time the agreements will be allowed to run, and what will happen if electricity prices rise to be far higher than the contract price.
The new contracts are likely to be highly complex, however, and it will be difficult for generators and their financial backers to judge the likely returns and build business plans. This in turn will also make it harder for new entrants to gain finance.
“It seems quite bizarre that this is being put forward as encouraging new entrants, when it makes it far more risky and expensive – it raises the barriers to entry,” said MacLean.
Dale Vince, founder of Ecotricity, said: “Contracts for difference, which are essentially a subsidy for new nuclear, could put small suppliers out of business and kill the independent market. This risk does not exist under the current Renewables Obligation.”
In place of these reforms, many renewable companies would prefer the government to extend the system of subsidies – called feed-in tariffs – that supports domestic renewables, and make them available to large-scale installations such as windfarms. Feed-in tariffs guarantee a price for electricity as it is generated, at a premium over the wholesale price, and are widely used in countries such as Germany that have successfully built renewable energy infrastructure.
By contrast, the contracts could provide a perverse incentive, according to MacLean, to generate at times when the electricity is less needed.
There are also concerns over a potential hiatus in investment as the current subsidy system is replaced. New renewable installations, such as offshore windfarms, will continue to qualify for the current system – the renewable obligation, by which renewable generators receive certificates that they sell, in addition to the money they receive for their power – if they come onstream by 2017, and their subsidies under that scheme carry on until 2037.
The first new contracts should be ready to come into force by 2017, so that in theory there should be no gap. Under the reforms, however, generators must apply for contracts for difference before their turbines are built, and this can take several years in the case of big offshore windfarms. That means developers must begin to apply for the new system soon, at the risk they would have been better off under the current system.
MacLean said investment in offshore windfarms was already becoming more difficult. Several offshore wind turbine manufacturers recently told the Guardian they were waiting for details from the government on how the reforms would work in practice. General Electric said its investment, which could run to more than £100m, was “on hold” until the full plans were laid out.
Green campaigners are also concerned about the impact of the proposed reforms. Paul Steedman, of Friends of the Earth, said: “Contracts for difference are bad news for renewable energy. We’re moving from one highly complex system – the renewable obligation – to something even more fiendishly complex.”
He said the aim of policy should be to encourage more renewable generators into the market, especially smaller players. For instance, he said, if local councils were to engage in developing renewable resources, it could lead to a massive expansion and lower bills for consumers, who would be less dependent on expensive imported gas. “That’s what we’d like to see – but these reforms will go in the opposite direction.”
Steedman said there was still time for the coalition to change its plans. The current proposals were drawn up before Davey took over from former minister Chris Huhne earlier this year. “We and many others will be urging them to look again,” he said.