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Investors ‘disappointed’ by UK stance on electricity CfDs - MP

26 Jun 2012 15:28:52 | edem

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The UK government's refusal to stand behind its proposed support model for low-carbon power generation as contractual counterparty could dampen the flow of investment into the country's electricity sector, it emerged on Tuesday.

"What has disappointed investors is the initial simple model," said Liberal Democrat member of parliament (MP) Robert Smith.

"They thought they had a contract with the government, underpinned by the credit of the state."

Smith, who sits on the parliamentary energy and climate change committee, made his comments as the committee took evidence regarding the government's draft energy bill from senior executives at grid operator National Grid.

The feed-in tariff (FiT) with contracts for difference (CfD) is the centrepiece of the energy bill. Under the plan, generators would receive a payment from a contractual counterparty if wholesale electricity prices fall below a predetermined strike price, and would refund the difference if wholesale prices moved higher (see EDEM 22 May 2012).

The initial white paper contained few details over which body would act as the counterparty, effectively standing behind the durability of the CfD. This led to industry-wide calls for central government to perform this role in some capacity.

'Very uncomfortable'

But publication of the bill, along with a draft operational framework for the CfD, revealed the Department of Energy and Climate Change's (DECC) preferred model: all licensed suppliers would collectively act as the counterparty by having statutory payment obligations imposed upon them.

Now, to further muddy the waters, documents published by DECC on Monday spelt out an alternative model, whereby a new body would be created - most likely comprising a UK private limited company.

Whichever option it takes, the government will have distanced itself from the counterparty role, which lawmakers said had damaged the standing of the FiT CfD as a bankable instrument in the eyes of investors.

"The investors we have spoken to are very uncomfortable about legislation coming before the house," Labour Party MP John Robertson said.

The bill will be enacted at a time when the UK can ill afford investment to run dry in its power generation sector. In total, 19GW of generation capacity is set to be removed from the country's system by 2020. By comparison, in the past decade, just 6GW has come off the grid (see EDEM 29 February 2012).

The FiT CfD will cover investment in renewables, nuclear and carbon-capture-and-storage-equipped fossil-fuel-fired power generation.

National Grid regulatory frameworks manager Mark Ripley told the committee that "the effectiveness of the arrangements relies on their enduring reliability and predictability". JS

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