Date: 26-Nov-12
Country: United Kingdom
Author: Oleg Vukmanovic and Karolin Schaps

British government support for low-carbon electricity generation will triple by 2020 after the energy and finance ministries on Friday reached a deal over costly reforms.

The agreement is expected to boost the share of renewables in Britain's energy mix to 30 percent by 2020, outpacing European Union targets of 20 percent, and create thousands of new jobs.

"Today we've reached a landmark agreement on energy policy that's going to deliver a clear, durable signal to investors," British Prime Minister David Cameron's spokeswoman said.

Under the agreed Levy Control Framework, spending on renewable power generation will increase to 7.6 billion pounds ($12.12 billion) a year in real terms by 2020, from the current 2.35 billion pounds, to reduce dependence on gas.

The renewable spending plans will be funded through further rises in household energy bills, which are increasingly unaffordable for many consumers.

Responding to a welter of criticism from the British media, Cameron's spokeswoman said the shift toward renewable energy was not the main contributor to higher energy bills, which she said was due to high gas prices and infrastructure investment.

"While the proportion of people's bills will slightly increase in terms of the green aspects, actually when it comes to 2020, the net impact will be that people's bills will fall," she added.

Others were less convinced.

"The proposals are very negative for consumers," Liberium Capital, a London-based investment bank said.

"At face value a 7.5 billion pounds nominal rise in low carbon support could equate to an 80 pounds (20 percent) per household bill increase," it said.

Renewable spending will be focused on rewarding low-carbon power producers like renewables, nuclear and fossil fuel plants fitted with carbon capture and storage technology, a Department of Energy and Climate Change (DECC) spokesman said.

Divisions over spending plans between energy minister Ed Davey and finance minister George Osborne have delayed key agreements over energy policy at a time of painful austerity measures introduced by the government.

NEW JOBS, INVESTMENT

The new agreement paves the way for the introduction of the Electricity Market Reform (EMR) Bill next week.

Industry group RenewableUK said the plans would create tens of thousands of jobs, bring forward at least 40 billion pounds of private sector investment and allow for a massive expansion of the UK's renewable energy sector.

"The government needs to maintain this momentum in the forthcoming Energy Bill (or EMR)," Renewable UK's Chief Executive Maria McCaffrey said.

"Those investors put 2.5 billion pounds into the industry this year - this will now increase exponentially," she added.

The extra investment announced on Friday will see renewables' share of the energy mix rise from 11 percent now, driven primarily by the 31 gigawatts of wind energy to be installed by 2020.

The spending increase will also help to support new nuclear power and the commercial use of untested carbon capture and storage technologies, the government said.

"This is a durable agreement across the coalition (government), against which companies can invest and support jobs and our economic recovery," Davey said in a statement.

However, the government also said on Friday it would delay setting a decarbonisation target till 2016. The target is the extent to which carbon emissions are to be reduced by 2030.

Environmental group WWF said the postponement represented a failure of leadership.

"Having a 2030 decarbonisation target is nothing that Mr Cameron's government should be afraid of given that it is a key requirement to deliver the legally binding Climate Change Act commitments, which Mr Cameron played such a key part in delivering," WWF's David Nussbaum said.

Nussbaum added that engineering companies such as Spain's Gamesa and Germany's Siemens, who want to invest in the UK's renewable supply chain, need clear long-term government commitments before entering the market.

GAS OPPORTUNITIES

Reforms are required to attract the 110 billion pounds of low-carbon energy investment that the government says is needed to replace ageing electricity plants fuelled by gas, coal and nuclear, up to a fifth of which face retirement this decade.

However, the EMR bill could be a boon for the gas industry.

"EMR is obviously focused on low carbon, but today's announcements give as much to gas-fired generation as to renewables and nuclear," said Ben Stansfield, senior associate specialising in energy at law firm Clifford Chance.

The government on Friday committed to establishing a system whereby backup power plants, mainly gas-fired, are paid to be ready to fill supply gaps created when the wind does not blow or demand rises during peak time.

Auctions for backup power plant operators will start in 2014 to provide backup capacity in 2018/19, the government said. ($1 = 0.6271 British pounds)

(Additional reporting by Mohammed Abbas; editing by David Goodman and Keiron Henderson)

© Thomson Reuters 2012 All rights reserved