29th November 2012
NO GUARANTEES THAT ENERGY BILL WILL DELIVER INVESTMENT IN NEW GAS GENERATION
Commenting on the Government’s Energy Bill published today, George Grant, Chairman of Stag Energy said: “The Government’s current proposals on the Capacity Mechanism (CM), and the absence of specific proposals to support greater security of gas supply, means that there remains insufficient revenue certainty to finance and build gas-fired power projects in this country.
Independent companies such as Stag Energy have a critical role to play in bringing new investment, greater competition and security of supply to the UK energy market. We and other independents will continue to impress upon Government these important issues as the Bill progresses through Parliament. Investment in new gas-fired generation is vital to deliver secure, affordable, low carbon energy and bring much-needed investment to the country’s energy infrastructure.”
The key issues that need to be addressed urgently to support investor confidence are summarized below:
Remove Ambivalence on Capacity Mechanism
The Government has accepted the need to support new investment in gas generation and that a Capacity Mechanism (CM) will be introduced BUT only “if needed”. The current market does not work to provide the signals needed to trigger new investment. As DECC has indicated1, some 30GW of new gas generation will be needed by 2030. The CM is essential to underpin new investment and the Government needs to confirm urgently that the first auction under the CM will take place as planned in Q3 2014.
Encourage Independent New Investment in Gas Generation
There are THREE critical aspects of the Government’s current CM proposals which will make it difficult if not impossible for “independents” to raise the equity and debt required to fund new long term investment:
(a) CONTRACTS – maximum contract lengths of between 7-10 years have been suggested. Contracts of at least 15 years should be allowed for new build to ensure effective competition between new and existing capacity and minimize costs to consumers.
(b) PRICES – existing and new plant should be subject to separate categories within an auction to remove unnecessary windfall gains to old existing plant and ensure new more efficient plant (with lower carbon emissions) is not discriminated against in favour of older less efficient plant.
(c) PENALTIES –should be based on variations between actual and declared real time availability of capacity and not solely on energy output at times of stress. The latter approach places an undue burden on independent generators faced with unpredictable system outages and would increase costs to consumers.
1:DECC Energy & Emissions Projections – October 2012
Support Greater UK Gas Storage and Energy Security
While shale gas production may slow the pace of domestic gas production decline, it will not materially change the UK consumer’s vulnerability to variations in price and supply disruption. Only by increasing the level of domestic gas storage will generators and consumers secure the necessary protection against gas price volatility. The current market does not provide the signals required to fund major new investment in gas storage. Equally as important as the electricity sector, the Government must determine a minimum standard for gas security incorporating a minimum level of domestic gas storage, facilitated by gas supplier licence conditions.
Adopt a Balanced Approach to Decarbonisation
The Government is providing revenue certainty for investors in renewable energy in two ways: a direct subsidy via FITs/Cfds and a doubling in the carbon support price (CSP) between 2013 and 2020. In addition, there is still the possibility of quantitative limits on CO2 emissions in 2016. All of this increases costs and revenue uncertainty for investors in new gas generation which is needed to compensate for intermittent wind and to provide security of electricity supplies. We believe the CSP mechanism alone, without the added burden of quantitative emissions restrictions, is more likely to work with the grain of the market and provide a cost-effective structure to encourage investment in low carbon generation.
Notes to Editors
Stag Energy (www.stagenergy.com) has a long history of power station and related energy infrastructure project developments in the UK and overseas. The team has been involved in the creation and delivery of more than 10,000MW of power generation projects, including the Rocksavage gas-fired power station in Cheshire, the Coryton gas-fired power station in Essex and the Spalding gas-fired power station in Lincolnshire. Stag Energy has also led the Gateway Gas Storage project which was consented by the UK Government and the local authority (Barrow-in-Furness, Cumbria) in 2008.
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