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The government has been accused of introducing more uncertainty into energy policy by proposing new measures to reward companies that reduce their electricity consumption through efficiency savings.
The suggested measures were set out in an energy bill introduced in parliament on Thursday that ministers say will bring about the biggest transformation of the UK’s electricity market since privatisation.
But there was criticism that such a change could confuse investors. “Our concern about these new initiatives is that they introduce new risks,” said Richard Slark, director of Pöyry, the management and engineering consultancy.
The bill, two years in the making, is the centrepiece of government efforts to attract £110bn of investment into the energy sector and wean the UK off its addiction to polluting fossil fuels and hasten its transition to a low-carbon economy.
With a fifth of UK electricity generating capacity due to close by the end of the decade, ministers say the kind of fundamental reform set out in the bill is essential if the country is to meet its ambitious climate change targets – and keep the lights on.
“We are on the cusp of a renaissance in UK energy,” said Ed Davey, energy secretary.
The bill sets the level of support for low-carbon electricity at £7.6bn by 2020, more than treble the current budget of £2.3bn for 2012-13.
The measure will add £95 a year to the average household bill by 2020 – an increase of 7 per cent. The current budget adds £20, or 2 per cent, to bills.
Much of the support will be delivered through long-term “contracts for difference”, designed to guarantee stable revenues for investors in low-carbon energy.
These stipulate that if the market price of electricity drops below a “strike price” set by the government, investors in nuclear power and renewables will be compensated.
If prices rise above that level, the generators will pay the difference back to consumers. Energy-intensive industries will be exempted from the costs of the contracts, in a late addition to the bill.
The bill also paves the way for a capacity market, to help ensure the lights stay on even at times of peak demand. The measure will encourage investors to build gas-fired power plants to provide back-up energy when wind farms are not working.
It introduces an emissions-performance standard to curb the most polluting fossil fuel-powered stations and ensure that any new coal-fired power station is fitted with equipment to sequester and store carbon emissions.
But ministers also announced a number of consultations, including one on proposals to promote energy efficiency by reducing demand for electricity.
“For the first time, we are going to place energy efficiency on a par with building new generation assets,” said Greg Barker, the climate change minister.
Under a new proposal set out in the bill, companies will be rewarded for investing in energy efficiency measures to reduce their electricity consumption.
Some of the money to reward these companies is likely to come from the same £7.6bn pot of financial support for low-carbon energy set out in the bill – although others may come from the separate capacity market.
The proposal “whips away some of the certainty about how much money will be available for low-carbon technologies”, added Pöyry’s Richard Slark.
But Mr Barker said that would be a “very regressive way of looking at it”. “The cheapest form of energy is the energy you don’t use,” he told the Financial Times.
One potential way to pay for energy efficiency installation would be a feed-in tariff but Mr Barker said the government was open minded about its options.
Elsewhere, the bill was broadly welcomed by the nuclear and renewables industries. Maf Smith, deputy chief executive of RenewableUK, said it was “crucial” in setting the investment framework for the next 20 years “and ensuring that we can build on our current world lead in offshore wind and marine technologies”.
But there was anger from environmentalists that the bill does not contain a commitment to decarbonise the power sector by 2030.
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