The UK Government finally disclosed its delayed Energy Bill this week and within it is details on the gamble the government wants to take on our behalf to guarantee the lights stay on.
The Bill is an important piece of legislation – the government has to provide direction and support to an energy industry that is in many respects faltering. People face ever-escalating energy bills and energy suppliers lack the market conditions and incentives needed to build the low carbon power plants we need.
It’s no surprise things are a bit of a mess. There have been four energy bills passed in the last eight years, in 2004, 2008, 2010 and 2011. Not to mention Climate Change Acts in 2006 and 2008. These UK bills are set against the societal need to reduce carbon emissions, reinforced by the EU’s binding carbon reduction target of 20% by 2020.
Most mainstream media, such as the Telegraph, have led with the angle that the changes will cause energy bills to increase. In the Telegraph’s case confusing the numbers to obtain the headline “Wind farms to increase energy bills by £178 a year”. But almost all coverage of the Bill fails to point out the real risk, which could see considerably more than £178 a year being added to the average bill.
Electricity market reform isn’t a subject to set the pulse racing, but as is ever the case with legislation, the devil is in the detail. Key is the introduction of government-backed Contracts for Difference (CFDs). The CFD is a financial “instrument” borrowed from the City – traders and hedge fund managers trade in CFDs, speculating that share prices will go up or down without ever buying or selling the shares. If that sounds like betting to you, that’s because it virtually is.
Translated to the UK’s electricity market, this means the government plans to guarantee the price of electricity by setting a “strike price” for each new low carbon plant. If the price of electricity in the UK goes below the strike price, the generator will receive “top-up” payments from the government to make up the difference. If the price of electricity goes above the agreed strike price, the difference above will be paid to the government.
In the same way that financial CFD trading is effectively betting, this equates to a bit of a punt on the government’s behalf. In addition, since the government is ultimately funded by the tax payer, it’s a punt the Great British public are taking without really knowing it. This CFD risk is on top of the explicit increases energy suppliers can already put on bills for building low carbon power stations.
The CFD mechanism isn’t being presented to the public like this, despite the element of risk involved. The government’s press release emphasises that profits that would have been pocketed by the energy companies will instead go to the government. The alternative scenario, that the government is exposing taxpayers to the risk of endlessly subsidising new nuclear and renewable energy resources isn’t mentioned.
It’s like being charged for walking into a Ladbrokes and then betting on a horse without knowing the odds. Fancy a flutter anyone?