Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government
Issue link: https://fhpublishing.uberflip.com/i/192720
Policy & Regulation Analysis Market view What will Europe think? Knocks on wood From nuclear subsidy to capacity payments, energy policy iniatives may fall foul of European rules, says Megan Darby. A nuclear deal between the government and EDF Energy is "extremely close", energy secretary Ed Davey says at the time of writing. Is anyone else getting a sense of déjà vu? The latest reports claim that the two sides have agreed a strike price of between £90 and £93/MWh for the proposed Hinkley Point C power station. Let us suppose this is true and that the years of wrangling between the two sides will soon be concluded. Perhaps the long-anticipated agreement has even been announced by the time you read this. That milestone is only the end of the beginning. The British government must then convince the European Commission to accept the package – a process that threatens to be every bit as protracted and obscure. It emerged last week that the Commission has rejected moves to set out criteria for nuclear in updated state aid guidelines due out for consultation next month. That does not make it illegal for member states to offer financial incentives for new nuclear. It does, however, place the onus firmly on the UK government to justify its plans. Rather than set a policy for the UK to follow, the Commission has set up Hinkley Point C as a test case for the rest of Europe. This politically charged decision will be taken by commissioners, appointed (not elected) by member states, on the basis of technical analysis by officials at the D irectorate-General for Competition. The toing and fro-ing over guidelines has exposed t ensions within the Commission over nuclear power. National governments have also made their feelings known, with countries such as Germany and Austria taking a hostile line. Nick Mabey, chief executive of Europebased sustainable development think-tank E3G, says: "It would really surprise me if we got nuclear through state aid [rules]. It would take an enormous political push from [prime minister David] Cameron and there would be a price for that. The result will be delay, even if they [government] can agree something with EDF." Nuclear power is just one of several ele- 14 | 18th - 24th October 2013 | UTILITY WEEK ments of the government's Electricity Market Reform (EMR) package that will be subject to state aid scrutiny. The interlinked nature of the reforms would make it hard to approve one part without the others, says Peter Willis, a competition law expert at Bird & Bird. "I am not sure whether you could split out the support for renewable generation from the support for nuclear. It would be quite difficult to disentangle the two," he says. The UK may not start implementing any part of the policy until it gets clearance from the Commission. Any controversy surrounding nuclear power therefore risks holding up the entire programme. The capacity market part of EMR could also raise issues. The UK is one of a dozen countries proposing some form of capacity mechanism to ensure security of supply. Again, a Europe-wide policy has yet to be established and there could be pushback on the grounds that such mechanisms promote fossil fuel generation, counter to the bloc's drive to decarbonise. The Department of Energy and Climate Change aims to get state aid approval before late spring 2014, so it can lay final regulations before Parliament. That allows six months at most from Royal Assent of the Energy Bill, expected at the end of 2013. E3G's Mabey notes that it took six months to clear the Green Investment Bank and he thinks Electricity Market Reform could take twice as long. Gordon Downie, EU competition lawyer at Shepherd and Wedderburn, is more optimistic. "The UK will be working hard to engage the services of the Directorate-General for Competition… The Commission can act very quickly when it needs to." Willis says the lack of clear guidance on nuclear power is "an inconvenience" to the government but "unlikely to be a significant obstacle". He adds: "It just means they have got to do more work and it exposes it [the package of reforms] to more scrutiny". To the utilities and developers waiting for a firm policy framework to invest against, it will be more than an inconvenience if that scrutiny means more delays. Life is hard and getting harder for biomass, says Jeremy Bowden. O ver the summer the government introduced stricter sustainability criteria for biomass plants, and firmed up plans to cap support for new plants at 400MW, unless they incorporate combined heat and power (CHP). Experts say neither of these policies will significantly reduce the volume of imported biomass feedstock from the US – a concern for some environmental non-governmental organisations (NGOs). The 400MW cap is, however, expected to cut the amount of new-build biomass coming on stream by at least 500MW in the near term, according to the Renewable Energy Association (REA) – and by considerably more than that if the government excludes new biomass from its contract for difference (CfD) scheme beginning in 2017, a move the REA strongly opposes. According to a recent report by Frost & Sullivan, up to 2.5GW of new biomass plant was expected online in the UK by 2017. But the report's author, Ashay Abbhi, now says that will be "significantly less". A spokesperson for the REA said that with a yawning supply gap fast approaching and with renewable targets to be met, it is capacity the government cannot afford to let go. "This is capacity that is ready to be built, whereas any energy security benefits which may arise from shale gas will not accrue until at least the mid-2020s," says the REA. Justifying the decision, the Department of Energy and Climate Change (Decc) says that burning biomass in dedicated power stations offers poor value carbon savings compared with wind power or even gas, unless added CHP improves the picture. The cap does not affect the much larger coal to biomass conversions, about 6GW, according to Frost & Sullivan's Abbhi, of which about 1GW has already been converted (see table). A spokesperson for Drax, which is converting half its boilers, says the company welcomes the sustainability rules introduced in August because it has already been adhering to strict guidelines voluntarily. From 2015, all biomass generators above 1MW must produce an annual sustainability report, along with an independent sustaina-