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Energy policy “in turmoil” as Chancellor rejects contract guarantees

The energy select committee today branded the government’s draft Energy Bill “unworkable”, warning that it will entrench dominance by the Big Six energy providers.

The committee said the Treasury’s refusal to back new investment contracts and a lack of clear goals risked giving investors cold feet.

It urged the government to “rethink its plans urgently so that the investment that is needed to replace the UK’s ageing power stations, cut carbon emissions and maintain energy security can be delivered”.

The committee calls on the government to stick to the expected plan, using its AAA-rating to guarantee contracts and low-carbon electricity prices, reducing risk for investors in the construction of capital-intensive projects like nuclear reactors and wind farms.

But the Treasury has intervened to say the state will not make the guarantees, instead spreading the risk across a mix of energy companies. The committee said such a move would be complex, possibly not legally enforceable, and would cause an “unacceptable” level of risks for construction firms.

It would also ration the number of available contracts – squeezing out smaller generators and community-owned projects - and create uncertainty about which will receive support, the committee said.

Labour sought to capitalise on the divisions, with shadow energy secretary Caroline Flint saying the “turmoil” was “harming the UK’s ability to secure investment for low carbon energy and jobs, fairer prices and more competition”.

“Labour has been warning for the last year that we need an Energy Bill to challenge the dominance of the Big Six, secure low carbon investment, fairer bills and support for energy efficiency. The draft bill does not meet this test.”

UK Green Building Council chief executive Paul King said: “As we are poised to celebrate the triumph of delivering what are arguably the ‘greenest Games ever’, Mr Osborne should take heed. One of the key lessons learned from London 2012 has been that by setting clear, ambitious low-carbon and sustainability targets, even with excruciatingly tight timetables, budgets and media scrutiny, the UK’s construction industry has delivered a gold medal winning performance. 

“However, this government’s ability to live up to its own ‘greenest government ever’ claims has been undermined yet again by the draft Energy Bill and the Treasury’s apparent attempt to horse-trade on green policies. Hardly a medal-winning performance here.”

Tim Yeo, Conservative MP and chair of the committee, said the government risked “botching its plans to boost clean energy, because the Treasury is refusing to back new contracts to deliver investment in nuclear, wind, wave and carbon capture and storage”.

“Nobody wants to see a blank cheque written out for green energy, but the Government must provide investors with more certainty about exactly how much money will be available.”

The scathing indictment comes as the Financial Times reports that George Osborne has written to the Department of Energy and Climate Change to call for new powers to shut down the Feed-in Tariff scheme if necessary.

The FT also claims that Mr. Osborne is ready to accept a 10 per cent reduction in wind farm subsidies, as opposed to the 25 per cent previously demanded, in exchange for scrapping an “inflexible” 2030 carbon target and boosting the role of gas. The subsidy cut has been a major sticking point between the two departments.

Government dithering over Feed-in Tariffs has already been blamed for leading to insolvencies and market insecurity. And last week DECC’s permanent secretary, Moira Wallace, quit amid confusion over the policy.

Speaking on Sky News’ Sunrise programme this morning, Mr. Yeo called for “a stable framework so that the huge amounts of investment, that literally hundreds of billions of pounds are needed in new capacity over the next ten years, that those investments are made in a framework where the returns are predictable and stable and not subject to too many changes”.

The calls were echoed by industry. CBI director-general John Cridland warned that “major energy investments are hanging on critical decisions the Government must make in the coming weeks and months”.

“If they are to plan long-term investments, businesses need to know what the electricity market will look like in years to come.”

“Companies are also eager to get on with investing now, and the decision on the renewable obligation support rates cannot wait any longer.”

Engineering consultancy WSP UK energy and industry sector director Scot Parkhurst said: “Any further delays to the introduction of an appropriate incentive mechanism will affect the energy market’s ability to deliver the levels of investment needed by 2020.”

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