“Once in a generation” Energy Bill falls short of expectations, EY finds

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  • Energy price hike poses questions over support for investment in renewables
  • Delay in setting 2030 decarbonisation target until 2016 casts doubts over UK’s carbon emissions commitment
  • Businesses sceptical of Government’s tax breaks for shale gas exploration
  • Lack of pricing clarity around Contracts for Difference (CFDs) frustrates developers

Three months after its publication, the Government’s Energy Bill has not managed to meet the investor community’s high expectations, according to EY’s latest quarterly global Renewable Energy Country Attractiveness Indices (CAI) published today.

The indices score 40 countries on the attractiveness of their renewable energy markets, energy infrastructure and suitability for individual technologies. During Q4 2012, China remained at the top of the All Renewables Index (ARI) and Japan moved up one place because of its current strong support for renewables, putting the country ahead of Canada and only one place behind the UK.

Commenting on the UK’s position Ben Warren, EY’s Environmental Finance Leader said:

“A series of delays, some very public political squabbling and the over-hyped “once in a generation chance” to reform the UK’s energy market has failed to meet the sector’s expectations.  Although the Bill is still welcomed, it is now seen as a framework with long term commitments, rather than a transformative piece of legislation.

“The risk of voter backlash has forced the Government to be candid about the hiking annual cost of renewable energy investment that comes through consumers’ electricity bills, which is to be applauded. However, the Government will need to tread carefully to ensure that rising electricity bills do not pose a threat to consumers’ support for renewables, given the sector’s critical role in securing the country’s future energy supply and ensuring that it does not fall into “an energy dark age”, as Ofgem recently warned.

“The main source of disappointment for investors was confirmation that a decarbonisation target will not be set until 2016. This delay cast doubts over the UK’s commitment to cut carbon emissions 50% by 2027 and left investors with a sense of uncertainty.

“In addition, the Chancellor’s planned tax breaks for shale gas exploration and his new Gas Strategy have caused widespread concern. While the promise of low cost gas cannot be ignored, environmental groups and businesses are sceptical that a gas boom similar to the one witnessed in the US can be replicated in the UK. Instead, the technology should be used as an interim measure to sustain energy supply levels while the cost of renewables continues to fall.

 “One of the few new proposals has been to exempt energy-intensive industries from the levies imposed on suppliers, and subsequently consumers, to fund the cost of CFDs. However, failure to publish details of the actual 2013-18 guaranteed CFD strike prices for each technology until later in the year, has continued to frustrate developers and dampen investor enthusiasm.”

Solar consultation gives ray of hope

While debates over the merits of the Energy Bill dominated headlines for much of Q4 2012, there were clearer signs of support for the solar sector. Following a consultation, the Department of Energy and Climate Change (DECC) confirmed that building mounted solar installations will receive 1.7ROCs/MWh from 1 April 2013, while ground arrays will receive 1.6ROCs/MWh, both higher than the 1.5ROCs originally proposed.

Therefore, despite experiencing the wettest summer in 100 years, it seems the sun could still be shining for the sector, with DECC estimating that solar capacity in the UK could reach as much as 20GW by 2020, if technology costs continue to fall. Supporting this, Lark Energy has recently been granted planning permission to develop a 32MW solar park on a former World War II airfield in Leicestershire, the UK’s largest PV plant.

“Wait and see” cap puts biomass back on track

In response to another consultation concerning biomass schemes, the Government has introduced a cap of 400MW that will trigger the option to hold a consultation on further biomass deployment.

The sector has welcomed this “wait and see” approach, as a mandatory cap could otherwise stop investment in its tracks should it be breached. It was also confirmed that the new build dedicated biomass projects subject to this trigger cap will receive 1.5ROCs/MWh in 2013–16, falling to 1.4ROCs in 2016. DECC expects the announcements to unlock investment decisions worth at least £600m (€731m).

To download issue 36 of the Renewable energy CAI and previous issues, visit www.ey.com/CAI