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Industry welcomes electricity market reform previews ahead of bill

23 Nov 2012 16:12:58 | edem

A new UK government spending cap on renewables and nuclear between 2015 and 2020, revealed ahead of the new energy bill, is "one of the most important news items this year", according to Credit Suisse analyst Mark Freshney.

On Friday, the government said it would extend its levy control framework by £7.6bn in real terms, setting a budget for spending on feed-in tariffs, the renewables obligation (RO) and the warm homes discount between now and 2020 (see separate story).

The details were unveiled by the Department of Energy and Climate Change (DECC) ahead of the second reading of the electricity market reform bill in parliament next week. Further clarity was also given on a proposed 2030 decarbonisation target for the power sector, a capacity mechanism and a counterparty for the contracts-for-difference plan.

"[The levy control extension] effectively allows for around a 150% increase in renewable subsidies in the second half of this decade," Freshney wrote in a note to clients.

Previously, limits on spending had been set only to 2015. According to Credit Suisse numbers, £11.8bn is earmarked in the period 2011-2015.

The Credit Suisse note said that assuming a £50/MWh power price and a contract for difference (CfD) strike price of £100/MWh, the funding "would appear to support the annual £1.1bn subsidy of two new nuclear reactors". That said, on developer EDF's stated timetable, subsidies for the first new nuclear plant would not be required until 2019.

Climate change experts were less enthused about the government's apparent side-stepping of an emissions intensity cap for the electricity sector. The government said it would introduce new powers in the electricity market reform bill for a decarbonisation range, rather than a specific target, but pushed back an actual decision until 2016, one year after the next general election.

"A significant amount of money is committed between now and 2020, but there is a big question mark over what happens beyond 2020," Committee on Climate Change (CCC) chief executive David Kennedy told ICIS. "There is still a high degree of uncertainty, and that is why the carbon intensity target was recommended."

The CCC, the government's independent adviser on climate change, in September called for electricity sector emissions to be brought under 50g CO2/kWh by 2030 (see EDEM 28 September 2012).

However, Climate Change Capital said that, as an investment manager, it was not overly concerned about the lack of a decarbonisation target in the energy bill. In a statement, head of policy Ben Caldecott praised the government's inclusion of a CfD counterparty backed by the government.

French-owned utility EDF also welcomed the additional detail on CfDs, which it said "provided further clarity for investors". Fellow utility ScottishPower commended the government for "sticking to the agreed timetable".

Meanwhile, Barclays Capital carbon analyst Trevor Sikorski said that if a decarbonisation range was agreed on in 2016, it would not affect the UK's emissions cap between now and 2020. As such, it was unlikely to influence the price of EU allowances (EUAs) traded on the EU emissions trading system (ETS).

Sikorski also played down the impact that a UK decarbonisation target might have on utilities' investment decisions. "Even if you had a 2030 [decarbonisation] target, companies wouldn't exactly be rushing out to build gas plants because spark spreads are so low," he said. KB

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