Innovative Energy Consultancy Ltd
Innovative Energy Consultancy Ltd

Key announcements on future power mix

The government has announced plans to “upgrade” the UK’s energy infrastructure and incentivise the investment needed to support the nation’s low-carbon transition.

Coal closure confirmed

A consultation, issued on 9 November, sought views on the best approach to ensuring that coal-fired electricity generation is phased out of the electricity mix by the middle of the next decade.
Coal’s share of the UK’s generation mix has declined significantly over recent years; however, government forecasts show that, without intervention, coal-fired power stations could still be generating into the 2030s. This would, it is argued, undermine the UK’s climate objectives and discourage investment in new, cleaner power stations.

The government’s consultation is therefore intended to provide confidence to businesses that the UK is open to investment in low-carbon capacity, and that it is building a system based on more diverse generation sources.

Two potential approaches are proposed. The first would be to apply the requirements for new coal power stations for existing plant from 2025 – including requiring plants to implement carbon capture and storage (CCS) technology.

The second option would be to apply a concentration-based limit on emissions per unit of generated electricity at any point in time – rather than setting an annual limit on emissions – taking effect from 2025. This would prevent coal generating units from operating without investment to reduce emissions, but would not specifically mandate CCS technology.

The consultation is open until 1 February 2017.

Renewables receive fresh support

On the same day, the government also confirmed the amount of subsidies that it intended to make available to renewables developers in the next contracts for difference (CfD) auction.
Implemented by the previous coalition government, CfDs are the mechanism through which large-scale low-carbon electricity projects are now subsidised in the UK – replacing the Renewables Obligation programme. A generator that wins a CfD through a competitive auction is paid the difference between the “strike price” – a price for electricity reflecting the cost of investing in a particular low-carbon technology – and the “reference price”– a measure of the average market price for electricity in the GB market.

CfDs are intended to give greater certainty and stability of revenues to electricity generators by reducing their exposure to volatile wholesale prices, whilst protecting consumers from paying higher support costs when electricity prices are high.

In the first allocation round, held in early 2015, the government awarded £315mn-worth of contracts to 27 renewables projects.

The next auction will award £290mn of annual subsidies, but – unlike the first round – it will be focused specifically on “less established” technologies; this includes offshore wind, Anaerobic Digestion, marine and geothermal projects. The application process for the allocation round will begin in April 2017.

The government issued draft strike prices (see Figure 2) indicating the maximum level of support that it is willing to provide for each technology in a given delivery year. As can be seen, in most cases these decrease from one year to the next, based on the expectation that the cost of deploying renewables will steadily fall.

These strike prices had, the government said, been modelled so as to incentivise only the projects that would offer the best value for money to compete in the allocation round.

Key decisions deferred

The plans were broadly welcomed within the industry, with stakeholders emphasising the importance of providing investors with long-term confidence about the government’s commitment to the low-carbon transition.

By contrast, the Autumn Statement – delivered by new chancellor Philip Hammond on 23 November – was labelled by one analyst as a “damp squib” after failing to deliver a number of significant energy announcements that had been expected.

In particular, it had been anticipated that Hammond would confirm the fate of the UK’s unilateral carbon tax, known as Carbon Price Support (CPS). This was implemented by previous chancellor George Osborne in order to incentivise low-carbon investment in the UK; however, Osborne himself froze the CPS rate in 2014 at £18/tonne through to the end of the decade, as energy-intensive users said that further increases risked undermining the competitiveness of UK industry. In the Budget statement earlier this year, Osborne had said that this year’s Autumn Statement would confirm the long-term future of the mechanism.

Instead, Hammond simply re-affirmed the freeze on the CPS through to the end of the decade. He said, moreover, that the government would continue to evaluate the appropriate mechanism for pricing carbon into the 2020s.

Similarly, the chancellor deferred a decision on the future of the government’s spending envelope for low-carbon electricity projects. Introduced in 2012, the Levy Control Framework (LCF) places a cap on the subsidies available to these projects through policy schemes: the Renewables Obligation, the CfD, the Final Investment Decision Enabling programme, and the small-scale feed-in tariff scheme.

The cap is set so that spending on these schemes should not exceed £7.6bn in 2020-21 (in 2012 prices). However, over the past 18 months the government has faced repeated calls – including from its own climate adviser, the Committee on Climate Change – to provide an indication of the level at which the budget will be set into the 2020s. It said earlier this year that the Autumn Statement would be used to provide this clarity.

Instead, Hammond said that the government would outline the future of the LCF at next year’s Spring Budget. It is understood that ministers are concerned about the current design of the mechanism, as the level of expected spending on the schemes covered is dependent on factors beyond the government’s control, such as the wholesale price of power.

In the meantime, the government will continue to engage with stakeholders on a new Emissions Plan, set to be published in the new year.

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