Pre-Legislative Scrutiny, Part II

Pre-Legislative Scrutiny, Part II

CategoryArticles Author Stephen Tromans KC Date

This is the third issue of a Blog on the Energy Bill by the 39 Essex Street Energy Group. It continues the discussion in Blog Number 2 of the criticisms made of the consultative draft Energy Bill by the Commons Energy and Climate Change Committee in July 2012 and focuses on the issue of Feed In Tariffs and Contracts for Differences.

If the FiT FiTs ...
Back in 2010, the Government considered three possible types of Feed In Tariff (FiT):
–    Fixed FiT: i.e. a fixed payment to all generators for electricity supplied into the grid
–    Premium FiT: i.e. a fixed premium paid on top of the variable wholesale price
–    FiT with Contract for Difference (CFD): i.e. a long term contract at a fixed level of supply in which the generator gets paid if prices fall below a certain tariff and repays money to consumers if electricity prices rise above that tariff.

The preferred option is FiT with CFD, but two problems worried the Committee. The first is the sheer complexity of the proposed arrangements.  The second is whether (as was clearly envisaged by the 2011 White Paper,  Planning Our Electric Future ) the arrangements would actually place the risk of falling prices with the Government rather than renewable or low carbon generators.  The clear impression given was that the Government would underwrite the necessary payments, hence giving the necessary comfort to generators and investors.  However, at some point the message changed to one whereby the counterparties would be all energy suppliers collectively.  The Committee suspected – probably correctly – the unseen hand of the Treasury behind this shift to a “multiparty counterparty”.  However, the point was that it just would not work: it would present legal problems of enforceability, the counterparty being “synthetic”; it would not be bankable, there being no means of assessing the creditworthiness of said synthetic counterparty; and it would have a negative impact on suppliers’ balance sheets.
It looks inevitable that the Government will have to revert to a clear single counterparty when the Bill is re-published, and that the nature of the counterparty will have to be carefully addressed, as it is factor which will affect the cost of capital for new generators.

If the CAP FiTs …
Returning to those Dark Lords of the Treasury, the draft Bill indicated that the issue of CFDs for low-carbon generation would be subject to the cap on spending imposed by the Levy Control Framework.  Rationing CFDs in this way will pose a new risk to developers, of the possibility of being unable to secure a CFD for a consented project. It is, as explained in evidence to the Committee, hardly an attractive business proposition to spend some £150 million to get a major offshore wind project to the stage of Final Investment Decision, only to find that there are no CFDs left in the pot.  Some projects are “chunky” (e.g. a nuclear power station or very large offshore array) and could potentially gobble up all the available CFDs for the year. The Committee recommended that a two-step or pre-registration process be developed in order to give investors confidence in progressing projects that the necessary CFDs would be available.

Striking the price
A critical factor for CFDs will of course be the price struck which triggers the payments or repayments. The draft Bill at clause 5 allowed this to be set either administratively, competitively, or by a hybrid means.  What appeared to be proposed varied according to the technology, though generally with a move towards being set by the market in the long term – for renewable a sort of banded system, set by the Secretary of State; for carbon capture and storage negotiation between developers and DECC; and for nuclear an administrative process, involving “negotiation with developers on a project by project basis”. It was the idea of the nuclear strike price being set behind closed doors (all be it hopefully not in smoke-filled rooms) which worried the Committee, as being potentially damaging to renewable technologies and as possibly not delivering value to customers.  This would be of particular concern if the support was provided through the bespoke “investment instruments” proposed in clauses 14-19 of the draft Bill, which make no provision for Parliamentary scrutiny. The Committee called for an “independent panel of experts” to oversee the negotiations and report to Parliament.

State Aid … aargh!
State Aid rules are the elephant in the corner of the CFD system.  If in fact the State does act as counterparty then the funds could be viewed as being held, temporarily, by the State and hence waking the sleeping State Aid dragon (to mix a metaphor).  If it was only a matter of renewable without nuclear then Article 23 of the General Block Exemption Regulation would provide that aid for the promotion of renewable would, within certain constraints, be acceptable.  The suspicion, which the Committee found well-founded, is that nuclear and renewable have been bundled together in the CFD scheme in order to give nuclear a fighting chance of clearing State Aid rules, which it might not have on its own.  The Committee goes so far as to suggest that the Government should have contingency measures in place as to how carbon and security objectives could be delivered if no new nuclear was forthcoming.

Coming soon ...
The next issue of the Blog will continue consideration of the Committee’s report.

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