Energy market reform: blowing a fuse

Alex Salmond supports a proposal that effective subsidy for onshore windfarms should be cut by 10%

A bill for £200bn ought to concentrate minds.

But that rough estimated cost of the renewal of Britain's electricity generating system, while making it much greener, seems to be leading instead to confusion.

That, and quite a lot of politics.

The issue is how the market works to ensure private power utilities are adequately rewarded to provide enough power.

The economics is horribly complicated, but the results of getting it wrong, when a strategy for energy is already long overdue, will be felt widely and deeply.

Today, we have the Commons Select Committee on Energy and Climate Change tearing into that department's plans to reform the electricity market.

The best they can say about it is that the task is essential.

The worst they can say about it is that the statement of intent it vacuous, and the policy, as it stands, is "fundamentally flawed|", it could increase customers' bills, reduce competition and reduce investment. And the policy seems to be subject to Whitehall departmental in-fighting.

They're saying the proposed new regime for securing stable supply of electricity doesn't look workable and a draft bill due for introduction in autumn doesn't seem fit for purpose.

The lack of consideration to reducing demand for power is "completely unsatisfactory".

There's nothing on offer to support community-owned renewable energy schemes, despite that being a specific coalition commitment.

They're also saying that decisions on a new generation of nuclear power plants appear to be getting made behind closed doors and set apart from discussion about the renewable alternatives.

So the MPs are saying the nuclear decisions need independent scrutiny to ensure value for money.

The coalition government doesn't need more problems just now, but it's hard to get round just how damning this report is.

It comes from a committee with a built-in government backbencher majority, but its Tory chairman, Tim Yeo, is not pulling his punches.

Brakes on investment

Behind this is an attempt to find a way of ensuring electricity generators have some certainty about the price they'll be paid per unit, at least for capacity being plugged in to the grid after 2017.

Without that, the uncertainty about financial returns makes it hard to justify the commitment of all those billions. And without that commitment, Britain risks having insufficient generating capacity within only a few years.

The proposed solution - called a Contract for Difference - is seen by MPs who have looked at the plan as impossibly complex and possibly not legally enforceable. That is, the contracts will be with no-one in particular, which makes them of dubious value.

For the renewable industry in particular, this matters, because they need support mechanisms that allow them to compete with cheaper but more polluting generating options.

That means a transfer of resourcing between the polluters and the green generators.

And with the Treasury refusing to under-write the contracts, the risk and cost of funding rises substantially, meaning a lot of nuclear, wind, wave and carbon capture ceases to add up financially.

The Treasury accepts there should be a levy applied to ensure funding is available to support the renewable power as part of the commitment to meeting emission reduction targets.

But it says it will be capped - not to save the Treasury money, but to ensure a limit to the impact on consumers' bills, because it is consumers who have to pay for the higher costs of developing renewables.

However, Keith Anderson, chief corporate officer of Scottish Power was among those to tell MPs on the select committee that a cap leaves the green energy industry unclear about who and which technologies would qualify before a cap is applied to that levy. Result: lots of planning applications for wind farms, but a brake on actual commitment.

At present, and until the Contracts for Difference are introduced to the energy market, the transfer to green generators takes place using a system of Renewable Obligation Certificates, or ROCs. You get them from Ofgem, the regulator, depending how much you generate and by what means.

And you can sell them to those emitting greenhouse gas, who are required to pay for the privilege by purchasing said certificates.

Blowing on-shore

That's where there's a more immediate headache for the government, in that it can't decide what the level of support should be.

Alex Salmond is weighing in to the disagreement this morning.

The First Minister's agreeing with a proposal that effective subsidy for onshore windfarms, through the ROC system, should be cut by 10%, saying there is evidence to support that, as wind farms get closer to being commercially viable.

But onshore windfarms have a lot of critics, not least among Tory backbenchers whose constituents don't like the way the turbines look or sound.

There's pressure for a 25% cut in the value of the ROCs they generate as a means of discouraging further investment in them, and it seems George Osborne at the Treasury is giving that view a sympathetic hearing.

Greener colleagues, including Liberal Democrats, don't see the case for such a sharp cut.

So Whitehall's reached deadlock. It's twice postponed a decision.

And Alex Salmond is among those warning that the delay is putting off investors.