EU approval for UK CfDs could be delayed by lack of transparency
Experts believe the UK's contracts for difference (CfD) scheme could be delayed by EU state aid rules, as the government has confirmed that it will have the power to change the terms of subsidy agreements without public disclosure.
The UK's Department of Energy and Climate Change (DECC) has revealed to ICIS that it will have the powers to change the terms of subsidy agreements brokered with low carbon energy generators without public disclosure through its electricity market reform bill (see EDEM 29 November 2012).
In response to questions from ICIS about specific sections of the draft electricity market reform bill, a DECC spokeswoman said: "We have committed to laying before Parliament and publishing the terms of any contract including the strike price and reference price. Some limited terms, however, may not be made public for reasons of confidentiality or commercial sensitivity."
She added that one of the circumstances this would include is "commercially sensitive information, which may be redacted from the varied contract laid before Parliament."
But the provision has caused industry experts to question whether any lack of disclosure will delay or even prevent the European Commission approving the CfD scheme - a necessary stage, since the scheme constitutes state aid.
"There does seem to be something going on here, and the stakes are so high that it is important to cover all bases," Joseph Rowntree Charitable Trust energy policy research fellow Paul Dorfman told ICIS.
"It could take the Commission several years to approve," said Alan Whitehead, member of the House of Commons select committee for energy and climate change.
A delay would mean that CfDs would not be available to energy generators by the mid-2014 target (see EDEM 20 March 2013). The government has already stepped up efforts to make sure investment continues ahead of the electricity market reform act being signed into law (see EDEM 14 March 2013).
But industry sources are concerned at the possibility of delay. "There is very little confidence that investment contracts will do anything to bring forward the necessary clarity about the risks and returns, not least because they'll be subject to state aid approval - not something for which DECC can promise a timeline," said SSE's policy and research director Keith MacLean.
In response to ICIS' request to provide an estimated timeline for the negotiations with the Commission, DECC stated: "State Aid issues are however a bilateral matter between the Government and the European Commission and in order to maintain effective working relationships with the Commission we are unable to provide a running commentary of where we are or how long the process is estimated to take."
Nuclear strike price
Any delay in approval could also impact the ongoing negotiations over an investment contract with EDF to construct the planned new nuclear plant Hinkley Point C, which had been expected for the end of March (see EDEM 14 February 2013).
DECC may also be able to change the terms of the contract to shift liability should the project run overbudget, without public disclosure. Negotiations have already been controversial, given EDF's status as the sole negotiator on electricity strike prices (see EDEM 6 November 2012).
"If there are provisions for renegotiations of the agreement with EDF should circumstances change, we need to know the triggers for these. There is a lack of transparency for cost overruns," Dorfman added.
"This is big money that we are talking about. Should the whole of the 16GW of new nuclear anticipated by the energy minister be financed on similar terms, a 40-year agreement with EDF would cost householders and businesses £150bn [€176bn] by 2050."
There has been speculation for some time over a paragraph in the draft electricity market reform bill that seems to give DECC the power to change the terms of an investment contract with energy generators. Until now, DECC had not clarified the paragraph's intentions.
Section 3 sub-paragraph 3 of the bill states that information can be kept confidential if "the disclosure of which, in the opinion of the Secretary of State at that time, would or would be likely to prejudice the commercial interests of any person."
Industry experts have told ICIS this clause could sanction the government to increase subsidies to EDF should the project run over budget. Analysts believe a cost-overrun of the Hinkley Point C plant is likely (see EDEM 19 March 2013).
Dorfman, Whitehead and several other members of parliament wrote to the UK's national audit office in March, requesting investigation of the transparency and regulatory accountability of the government's negotiations with EDF.
"There is one sentence in Schedule 3 of the draft EMR bill that seems to be written with deliberate obscurity," said Dorfman. "It may be interpreted in a number of ways. And it seems to give the secretary of state [for energy and climate change] powers to vary the prices set in the contract, and withhold the details of this. This seems to be an overarching power with no obvious rationale."
"And there is an issue of precedence here, since the terms of the agreement could be replicated elsewhere." Katie McQue
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