The UK’s ruling coalition government has reached agreement on a number of key aspects of its forthcoming energy bill, including plans for almost eight billion pounds (GBP) (12.7 billion US dollars, 9.8 billion euro) of “market support” for new nuclear and other low carbon energy technologies.
The agreement also allows for the creation of a government-owned company to act as a single counterparty to give investors confidence to enter into new long term contracts for difference (CfDs) for low carbon electricity projects including nuclear plants.
The CfDs would provide certainty for new energy projects such as nuclear plants that need high capital investment and a long lead-time.
A CfD would use a “strike price” and when the market electricity price falls below the strike price the counterparty pays the electricity generator the difference. Conversely, when the market electricity price being earned by the generator is above the strike price, the generator pays the counter-party the difference.
In its announcement today the government said a major part of the agreement was that the amount of market support to be available for low carbon electricity investment under the Levy Control Framework (LCF) up to 2020 will be set at GBP 7.6 billion in 2012 terms, which corresponds to around or GBP 9.8 billion in nominal 2020 prices.
A statement said: “This will help diversify our energy mix to avoid excessive gas import dependency by increasing the amount of electricity coming from renewables from 11 percent today to around 30 percent by 2020, as well as supporting new nuclear power and carbon capture and storage commercialisation.”
The statement said the policy will “provide certainty to investors” in all generation technologies and provide protection to consumers.
A number of the Department of Energy and Climate Change’s (DECC) energy and climate change policies are funded through levy-funded spending, which feed through to energy bills. These fall outside of the standard spending framework.
The LCF forms part of the government’s public spending framework. Its purpose is to make sure that the DECC) achieves its fuel poverty, energy and climate change goals in a way that is “consistent with economic recovery and minimising the impact on consumer bills”.
The LCF’s budget is currently GBP 2.35 billion for low carbon electricity in 2012/13. Under the agreement announced today low carbon electricity spending under the LCF will rise to GBP 7.6 billion in real terms in 2020/21. The final limit will be set based on revised numbers in the New Year. On current figures this could equate to GBP 9.8 billion in 2020/21, the government said.
Energy minister Ed Davey said the “landmark agreement” on energy policy delivers a clear, durable signal to investors and will be part of a new energy bill to be unveiled next week.