In its effort to curb revenue, the government introduces new ‘Energy Prices Bill’ that is likely to impact the AD industry
This week government revealed plans to introduce revenue caps on energy generation across GB and Northern Ireland in an effort to combat rising energy costs across the electricity and gas markets. The plans could have a serious impact on many AD plant revenues.
Presenting the Energy Prices Bill at the House of Commons on Wednesday, BEIS set forth plans to introduce energy price reduction schemes for wholesale energy markets in Great Britain and Northern Ireland, essentially capping revenues of all energy suppliers through a Cost-Plus revenue limit – a measure which it seems will extend to low-carbon, renewable generators.
The Bill includes measures to introduce a Cost-Plus revenue limit on low-carbon electricity in an attempt to address rising electricity costs to households and consumers experience due to the high gas prices. The move takes steps towards decoupling nuclear and renewable electricity prices from gas prices to ensure that electricity generators are not making what the Government views as excessive profits from the current energy crisis.
How did this bill come to be?
As a result of the energy crisis created due to the Russian invasion of Ukraine, gas supplies to Europe have been curtailed sharply and gas prices have reached multiples of their historic levels. This affects consumers’ gas and electricity bills, as the current swing (or marginal) production in the electricity market is gas generation. Consumers are therefore left to pay abnormally high prices for electricity whether generated from high-cost gas or from low-carbon resources that are now comparatively much cheaper to produce and whose costs have not risen as much. The government has now decided to tackle this.
Businesses and consumers across the UK should pay a fair price for energy. With prices spiralling as a result of Putin’s abhorrent invasion of Ukraine, the government is taking swift and decisive action.
We have been working with low-carbon generators to find a solution that will ensure consumers are not paying significantly more for electricity generated from renewables and nuclear.
Business and Energy Secretary, Jacob Rees-Mogg
What is the government proposing?
The Energy Prices bill proposes giving a wide range of powers to ministers to make policy through statutory instruments (regulations) or secondary legislation. The full details are only likely to emerge when these regulations are tabled for consultation, but there are broad proposals in the Energy Prices Bill that are significant for the AD industry:
Cost-Plus Revenue Limit
The proposed Cost-Plus Revenue limit will cap the revenue of renewable and nuclear generators from the start of 2023 to ensure consumers pay a fair price for their electricity and that energy generators are not unduly profiting in the Government’s view from the current energy crisis.
This principle leaves a lot open for debate, particularly when there is mounting evidence of substantial cost pressures in the AD industry. In addition, it is so far not clear how the Government proposes to tackle gas producers or generators which have sold their output forwards at a lower price than the spot market price. While the finer details will only appear in secondary legislation – for which the bill makes abundant provision -the final version of the bill is expected in Parliament in two weeks’ time, with a subsequent consultation The government has been working with the industry to lay out the details of the proposal, aiming to ensure that the consumers pay a fair price for low carbon energy, while allowing generators to cover their costs and create an appropriate revenue as well.
Contracts for Difference
The government intends to consider running a voluntary CFD process for existing generators to take place in 2023. This would grant generators which like longer-term revenue certainty to opt for a CFD, locking in a strike price, to replace existing support schemes. There may be some operators who would find that attractive, but much will depend on the proposed strike prices and the length of the term of the contract. As low-carbon energy generators, existing AD generators may benefit from this move and it could set a precedent for CFDs for new AD developments, which would provide certainty about future prices that should boost investment and accelerate expansion.
What does this mean for the AD industry?
While we wait for details, ADBA is engaging with BEIS to understand the impact of the intended measures on the industry and ensure that any changes in regulation are reasonable and that our members’ concerns are heard. At present, the scheme looks to exclude accredited FIT and CfD installations which may give some relief to operators (at least on the FIT side). However, the bill will apparently impact any AD plant that is reliant on other support schemes such as the Renewable Heat Incentive.
Many members have already reached out to express concerns with the government’s approach, and that BEIS must take into account the different costs associated with technologies such as AD, and indeed the impact that rising energy costs have had on the industry’s own supply chains. ADBA will continue to update members as and when developments occur and will be collating feedback that we receive in order to directly raise it with BEIS.
More information on the government’s announcement can be found here. If you have any comments, please email Wasundara.email@example.com.