UK Loses Grip on Energy Policy as Brussels Gets to Grips with Carbon

“Omnishambles” was last week named word of the year by the Oxford English Dictionary. It could also be the word of the year so far for UK energy policy.

Last week, energy minister John Hayes again contradicted his boss, secretary of state for energy and climate change Ed Davey, by casting a doubt on the future of onshore wind in the UK. This was perhaps unsurprising given that a senior Tory was recorded saying privately that Hayes was “prepared to duff him up”. The revelations reported in the national press also suggest that Conservatives, apparently including Chancellor George Osborne, are trying to undermine the UK’s binding carbon reduction targets.

However, Tim Yeo, the senior Conservative who chairs the UK’s energy committee, warned that while government bickering looks “laughable”, it was having serious repercussions for investment. “The problem is, the pension funds and investors we need to build new energy infrastructure in the UK are not finding it very funny.”

Prime Minister David Cameron has kept quiet so far. Charles Hendry, who Cameron replaced with Hayes in September’s reshuffle, said his leadership was needed. “The Prime Minister needs to take control of energy policy,” he told the Financial Times, noting that a “major investor” had added a percentage point to its cost of capital to reflect political risk in the UK. “Investors want us to take energy policy out of politics. They are making investments which will last for decades, and they need to see long-term policy stability,” he said.

It is not just the renewables sector feeling the lack of policy stability in the UK at the moment. Last week, UK utility SSE said it would delay an investment decision on a new gas-fired power plant at Abernedd in Wales due to uncertainty over the government’s electricity market reforms. A new generation of gas plants could be backed by a proposed new capacity market but details remain thin. A new Energy Bill laying out the reforms is due imminently.

Capacity markets are much talked about in Europe as a way to ensure there are back-up options for the growing incursion of more intermittent renewables into power markets. However, the European Commission last week fired a warning shot at them, saying in a communication that they could create problems for further regional integration, and launched its own review.

It was a busy week in Brussels. The Commission published its “backloading” proposal to boost carbon prices by delaying the sale of 900m allowances from 2013-15 until later in this decade. It also published options for a longer-term carbon market fix, including a more ambitious climate goal and the cancellation of permits.

The EU also froze auctions of carbon allowances for airlines, after deciding to postpone their inclusion in its emissions trading system until next year. EU climate commissioner Connie Hedegaard said this was in order to “create a positive atmosphere” for negotiations at the International Civil Aviation Organization. The UN body aims to agree on a market-based mechanism to cut aviation emissions at its next general assembly in October 2013, and last week composed a group to provide recommendations on such a proposal.

Despite the EU’s change of tack, the US Congress sent its bill barring US airlines from complying with the ETS to President Barack Obama, as the lower house passed the Senate’s draft. The issue has united Republicans and Democrats over what they see as an incursion into US sovereignty. “We’ve got to hold people’s feet to the fire” about it, representative John Mica, chair of the House Transportation and Infrastructure Committee, commented.

Also in Washington DC, the Environmental Protection Agency rejected a request from eight US states to waive the Renewable Fuels Standard, which requires fuel to be blended with corn-based ethanol, saying such a measure would only reduce corn prices by about 1%.

Elsewhere in the US, Enviva raised USD 120m debt to complete two wood pellet plants to supply biomass power plants, as well as to boost storage at its port in Chesapeake, Virginia. Google bought a USD 75m stake in a 50MW wind farm in Iowa, bringing its committed investments in renewable energy just shy of USD 1bn. Meanwhile, AES Solar, a joint venture between power developer AES and private equity group Riverstone, secured loans of USD 636m for its Mount Signal project in California, and USD 90m for projects in France.

France’s energy minister, Delphine Batho, said the country will start its EUR 4.3bn (USD 5.5bn) smart meter roll-out by the end of 2014, as the first working group meeting took place last week to resume the plan. The previous government gave the go-ahead in September 2011 for a full deployment of smart meters to 35m homes by 2018, but the plan stalled over financing. Also in France, EDF completed the 115MW Toul-Rosieres solar plant, Europe’s largest. However, French energy giant Areva scrapped its proposed USD 1bn Solar Dawn project in Australia after a government agency said it would not fund the 250MW plant.

Australia’s Infigen and China’s Suntech also scaled back their ambitions for a new solar project Down Under. They will reduce the planned plant next to Infigen’s 140MW Capital Wind Farm from 150MW to 35MW after missing out on a grant under the government’s Solar Flagships programme. There was equally bearish news for projects in India, where a government official said last week that half the USD 1.4bn of solar thermal projects will be delayed, and some scrapped, due to supply chain difficulties.

The WilderHill New Energy Global Innovation Index, or NEX, dropped 5% last week, performing twice as badly as broader market indices. The week’s biggest loser was Trina, after it cut sales estimates by 20%. It fell to a record low as 36% was shaved off its value.

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