UK Government Announce Energy Policy

The Government has reached a agreement on energy policy that will deliver a clear, durable signal to investors according to Energy and Climate Change Secretary  Edward Davey. With a fifth of the UK's electricity generating capacity due to close this decade, reforms are needed to provide certainty to investors to bring forward £110 billion investment in new infrastructure to keep the lights on and continue the shift to a diverse, low carbon economy as cheaply as possible. It will support as many as 250,000 jobs in the energy sector.

The Energy and Climate Change Secretary said, "This is a durable agreement across the Coalition against which companies can invest and support jobs and our economic recovery. The decisions we've reached are true to the Coalition Agreement, they mean we can introduce the Energy Bill next week and have essential electricity market reforms up and running by 2014 as planned. They will allow us to meet our legally binding carbon reduction and renewable energy obligations and will bring on the investment required to keep the lights on and bills affordable for consumers."

Mr Davey announced a package of decisions around the Energy Bill, which will be introduced next week. The creation of a Government-owned company to act as a single counterparty to give investors confidence to enter into new long term Contracts for Difference for low carbon electricity projects. Powers to introduce a capacity market, allowing for capacity auctions from 2014 for delivery of capacity in the winter of 2018/19, if needed, to help ensure the lights stay on even at times of peak demand. The Government is also seeking to provide certainty to gas investors and a Gas Generation Strategy will be published alongside the Chancellor's Autumn Statement.

An amendment during passage of the Bill to take powers to set a decarbonisation target range for 2030 in secondary legislation. A decision to exercise this power will be taken once the Climate Change Committee has provided advice in 2016 on the 5th Carbon Budget which covers the corresponding period. In the meantime, the Government will issue guidance to National Grid setting out an indicative range of decarbonisation scenarios for the power sector in 2030 consistent with the least cost approach to the UK's 2050 carbon target and reflecting both the existing fourth carbon budget and a scenario in which it is reviewed up, as outlined when the budget was set.

The amount of market support to be available for low carbon electricity investment (under the Levy Control Framework) up to 2020 has also been agreed. This will be set at £7.6 billion (real 2012 prices) in 2020, which corresponds to around or £9.8 billion (nominal 2020 prices). This will help diversify our energy mix to avoid excessive gas import dependency by increasing the amount of electricity coming from renewables from 11% today to around 30% by 2020, as well as supporting new nuclear power and carbon capture and storage commercialisation. It is broadly consistent with the Committee on Climate Change's recommendation. It will provide certainty to investors in all generation technologies and provide protection to consumers.

Electricity Market Reform (EMR) will bring about the biggest transformation of the UK's electricity sector since privatisation. The reforms introduce two key mechanisms: Contracts for Difference and the powers to implement a Capacity Market that will help to attract the £110 billion of private sector investment we need to replace ageing energy infrastructure with a more diverse and low-carbon energy mix.

Contracts for Difference (CfDs)

A new mechanism that will be introduced via the Energy Bill. CfDs are long term contracts that provide stable revenues for investors in low carbon energy projects at a fixed level known as a strike price. These contracts will help developers secure the large upfront amounts of capital investment required for low carbon infrastructure such as nuclear powers stations, offshore wind farms or carbon capture and storage plants. By providing a fixed price they will help lower the cost of capital. They will protect consumers from high bills by clawing back money from generators if the market price of electricity rises above the strike price.

Government will establish a new body to act as a single counterparty to the CfDs with eligible generators. The counterparty will have levy-raising powers to enable it to raise funds from suppliers to meet its costs, including payments to generators. This was a key recommendation of the Energy and Climate Change Select Committee.

A Capacity Market will provide an insurance policy for Government against future supply shortages, helping to ensure that consumers continue to receive reliable electricity supplies at an affordable cost. There is an increased risk to security of electricity supplies towards the end of the decade as a fifth of our existing capacity is set to close and more intermittent (wind) and inflexible (nuclear) generation will be built over time to replace it. Ofgem and National Grid will forecast where there could be shortages in supply and, if needed, auction for capacity in advance to ensure we have enough energy backup to meet consumer demand.

The Government is committed to meeting the legally binding decarbonisation targets as set out in the Climate Change Act 2008, and economy-wide carbon budgets. The Government will take a power in the forthcoming Energy Bill to set a decarbonisation range in secondary legislation. The power will provide for flexibility in the setting or reviewing of the range by consideration of wider economic factors. The decision on whether to set a range for carbon emissions in 2030 will be taken when the Committee on Climate Change has provided advice in 2016 on the 5th Carbon Budget which will cover the corresponding period (2028 "“ 2033), and once the Government has set that budget.

The Levy Control Framework (LCF) forms part of the Government's public spending framework, which the Treasury has responsibility for. Its purpose is to make sure that DECC achieves its fuel poverty, energy and climate change goals in a way that is consistent with economic recovery and minimising the impact on consumer bills. The LCF budget is currently £2.35 billion for low carbon electricity in 2012/13. Under the agreement announced today low carbon electricity spending under the LCF will rise to £7.6bn in real terms in 2020/21. The final limit will be set in nominal terms on revised ONS and OBR numbers in the New Year. On current figures this would equate to £9.8bn in 2020/21. The spending settlement announced today does not cover the ECO or Warm Homes Discount, which have separate spending limits to 2015.