Just as everyone prepared to maximise their electricity usage for Christmas lights and festivities, the Government published its Electricity Market Reform consultation document on 20 December 2010, setting out the future of electricity generation in the UK.
With an ageing fleet of nuclear energy facilities, legally binding EU agreements to significantly cut the amount of carbon produced in the UK in the power sector, as well as targets to produce 30% of our electricity from renewable sources by 2020, the Government is acting to address the huge project in front of us.
The consultation targets four key areas.
- Greater long-term certainty around the additional cost of running polluting industrial plants through a carbon price floor
- Introduce a ‘contract for difference’ feed-in tariff (CFD FIT)
- Additional payments to encourage the construction of reserve plants of demand reduction measures to ensure the lights stay on; a capacity mechanism will ensure there remains an adequate safety cushion
- Implement an emissions performance standard to reinforce the existing requirement that no new coal power station is built without carbon capture and storage.
With the restructure of the electricity market to build cleaner plants comes the need to invest more than £110bn during the next decade to achieve this. So how will this affect the energy-from-waste (EfW) sector?
The announcement that a CFD FIT was to be introduced straight away signalled the phasing out of the current energy facility incentive scheme, the Renewables Obligation (RO), which currently helps many EfW facilities by providing additional revenue. This confirmation that the financial structure underpinning many energy facilities is to be removed is hugely significant for the waste sector, which currently benefits from Government subsidies and is a critical draw for investors.
According to the Government, the FIT system will provide greater certainty on future revenues to investors than the RO. The proposals allow the RO to continue until its original lifetime to 2017, and those already working under the scheme will be eligible to stay under it until 2037. But the CFD FIT, which the Government believes will be more cost-effective than the RO, may come online as early as 2013. Different to the current FIT available for small-scale facilities, the CFD FIT would see companies enter auctions to win the proposed subsidy.
But there is a genuine fear that if the changeover from the RO to the FIT system is not carried out confidently and smoothly, investors may turn off their interest in the UK, particularly if they do not see it as a stable system. “Currently, investors understand the RO, so it is critical that the Government handles transition arrangements very carefully,” stresses New Earth Solutions (NES) energy director Alex Young.
“Using more EfW facilities makes a lot of sense because we have a lot of waste in the UK [that can be used] as a fuel”
So why has the Government broadened its subsidy to include all low-carbon technologies rather than just renewables? Energy specialist Ecotricity founder and managing director Dale Vince says: “There’s no need to replace the RO, unless you wish to include nuclear energy and anything else you might want to label ‘low carbon’ and give a market boost to.
“That is what is behind this move, in my opinion. It is a way to re-write the rules to give nuclear a market boost [but not a subsidy…] and, I believe, at the same time, reduce incentives for the major land-based renewable source of onshore wind, which the Conservatives have ideological problems with.”
Andrew MacLellan, director of gasification specialists Ener-g, agrees that nuclear is a driver in the decision for FITs: “The Government wants to give nuclear the chance for stable electricity contracts, so this is part of the reason why it has changed the RO. In its rush to build more nuclear plants, the Government must not ignore opportunities renewable technologies offer, particularly EfW.”
According to those in the energy industry, plans for the CFD FIT are similar to the Non-Fossil Fuel Obligation, which was used in the 1990s to encourage more energy facilities, particularly nuclear, to come online. Auctions for the obligation were held every two to three years and the bid giving the most value for money won.
Renewable Energy Association chief executive Gaynor Hartnell says: “The job [to build more electricity plants] is so great nowadays that the Government will need to have regular auctions and the facility will have to have a lot of capacity to be awarded the FIT. The idea is that the process saves money across the chain, keeping capital down and electricity prices down for the public.”
But with the CFD FIT covering all low-carbon technologies rather than be specified to renewables, there is a danger that EfW is sidelined. But Hartnell explains: “Using more EfW facilities makes a lot of sense because we have a lot of waste in the UK [that can be used] as a fuel, and the base load can be flexible to a degree, allowing a more flexible approach to generating electricity.”
Indeed, the consultation document emphasises the need for “flexible resources to offset intermittency and meet demand spikes [which] will ensure that overall system resilience is maintained”. This works in favour of EfW and against less reliable renewables such as wind. When announcing the reform, energy secretary Chris Huhne said: “At the moment, there is a bias toward low-cost, low-risk fossil fuel generation. But a more diverse, lower carbon energy mix is better for our energy security, better for our economy and better for our planet.”
The proposed capacity mechanism may add to the attraction of EfW facilities. It would see a central body maintaining a level of spare capacity provided through the energy market. This body would then run tenders for any additional capacity needed to make up the shortfall between the level of capacity provided by the market and the centrally determined margin.
Again, facilities with intermittent electricity generation such as wind farms may be mixed up with more flexible and secure forms of electricity to balance the risk, securing the UK’s supply.
Further recognition of the significance of attracting investment is demonstrated through plans for a carbon price floor. This will be used to support investment in low-carbon generation to meet decarbonisation targets, while making investment in low-carbon technologies more ‘bankable’ to potential investors.
Young says: “It is clear that, at the moment, the carbon price is not big enough for the investment that is required, so the low-carbon technologies are not as valued as they should be. The idea of a single carbon price is a good idea. The Government is trying to see how different low-carbon technologies with different cost bases can be brought forward, so obviously it will want the cheapest ones to surface to protect consumers from high costs.”
The Government plans to introduce the carbon floor price by imposing the fuel duty and the climate change levy (CCL) on all fossil fuels used to generate electricity in the UK. Many fossil fuels are currently exempt from the CCL.
Despite this huge reform of the electricity market, the Government and stakeholders alike recognise that the market is not the only barrier to enabling the UK to meet future targets and securing energy. Indeed, other policy areas such as planning, technology licensing and grid connection regimes are large areas that will need to be tackled too before these plans become a reality, particularly for the waste sector.
But it seems the new year will see the beginnings of a refreshed energy market, hopefully boosted by new interest from investors and energy companies alike.
- The consultation period ends on 10 March. Final reform proposals are expected to be published in a white paper in late spring.
- The reform document can be found at: www.decc.gov.uk/assets/decc/Consultations/emr/1041-electricity-market-reform-condoc.pdf