Sunday 15 December 2013

npower’s Wayne Mitchell’s Blog

npower’s Wayne Mitchell’s Blog

What George has in store for Energy Consumers

All eyes were on the Chancellor last week, when he announced the government’s Autumn Statement. Speculation fuelled by whispers of removing green levies, freezing energy prices and so forth had created an expectation among consumers that energy was going to be big news. So perhaps there was a little disappointment when George Osborne finally unveiled his plans.

For starters, calls from many large consumers to scrap the controversial Carbon Price Floor went unanswered. This tax on carbon-emitting generators has been in place since April 2013 and adds approximately £2/MWh to consumer bills this year, doubling to around £4/MWh in 2014. Many in the business community feel this UK-only levy is damaging competition because it makes carbon more expensive compared to our European neighbours. However, no change was announced, so it looks set to stay – at least for the time being. What’s more, for energy intensive users promised Carbon Price Floor exemption, this is still awaiting State Aid clearance from Brussels – a year after the formal submission was made.

The main headline grabber was for domestic customers, whose bills are set to reduce by around £50 a year. This is the result of a) changing the way in which suppliers have to deliver the Energy Companies Obligation (ECO), b) providing a £12 universal rebate to all domestic customers, and c) a voluntary cost reduction by the distribution network companies which is expected to knock around £5 off domestic bills. However, the cost of ECO, which funds household energy efficiency measures especially among those classified as ‘fuel poor’, isn’t applied to business bills, nor will any rebate or network cost reduction be applied – so this news isn’t going to impact business customers.

Boosting UK supplies with shale gas, on the other hand, well might (although the jury’s still out on how much shale can really deliver). To give this fledgling industry a boost, the Chancellor announced tax breaks, with a 30% rate rather than the standard 62% applied to initial production. Osborne is clearly keen to attract investment, saying his proposed tax regime would be "the most competitive in Europe". He also said the move would create an "effective tax rate for shale gas projects lower than in the US". He’s obviously hoping to spur greater action in this area – so it will be interesting to see how things develop.

For now, however, a key requirement among many large consumers is getting more policy and price certainty around the forthcoming measures to be introduced under Electricity Market Reform next year. And while the Autumn Statement was clearly not the place to provide this (as DECC has not yet responded to the recent consultation), the Chancellor did highlight some of the Strike Prices to be offered under the government’s Contracts for Difference (CfD) scheme, which were published the day before in the National Infrastructure Plan.

Contracts for Difference aim to incentivise investment in low-carbon generation by offering a guaranteed Strike Price for each megawatt of energy produced, with different rates to be offered to different technologies initially. The rates released so far haven’t changed much since draft Strike Prices were published, but the media certainly seized on Osborne pointing to the decrease in onshore wind (reducing by £5 every year, from £100 to £95/MWh in 2016/17 then £90/MWh in 2017/18), versus the slight increase in offshore wind by £5/MWh in 2018/19 to £140/MW.

Of course, offshore wind is more expensive to deploy. But it will be interesting to see what impact this change has on borderline onshore projects. Any reduction in deployment of this more cost-effective low-carbon energy source is likely to push up the cost per megawatt hour – and this will be bad news for consumer bills.

For our customers, uncertainty around price is, of course, a major concern – as our recent Roundtable discussion on the forthcoming Contracts for Difference and the Capacity Mechanism revealed. I’ll be presenting a report from this to DECC tomorrow, along with my colleague Dr John McElroy, who heads up the npower Policy and Public Affairs team. I’ll share more detail with you in next week’s blog, where you can also download a copy of this report to see for yourself.

For now, however, there appears to be little action required from business consumers as a result of George’s Autumn Statement. Best to save our energy for all the changes Electricity Market Reform will introduce next year…
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Bruna Pinhoni

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