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COLUMN-UK's uncertain funds for low-carbon energy: Wynn

LONDON, Oct 30 (Reuters) - Britain is edging closer to its vision of low-carbon energy based on large-scale nuclear power and fossil fuels with carbon capture, which contrasts with small-scale renewable energy which many of its European neighbours favour.

But it has yet to square investor demands for returns with the massive capital outlay of large-scale plants, untested in the case of carbon capture and storage (CCS), which implies large subsidies through guaranteed higher power prices.

On Tuesday, the government announced that four proposed CCS plants had passed the first stage in a competition for public funding before a final decision expected next year.

And Hitachi announced that it had acquired a joint venture from German utilities RWE and E.ON, with plans to build up to six nuclear power plants in the 2020s, adding to plans from France's EDF.

Britain's plans for new nuclear contrast with plans in Germany, Switzerland and Belgium to phase out nuclear, and in Italy, rejecting a new build programme, and France to downsize its fleet.

And no other European country matches Britain's plans on carbon capture.

The country accounted for half the initial shortlist of eight CCS projects competing for European Union funding, published in July, and is all but certain to account for at least one of the final two to three successful projects.

To make these investments possible the government will have to be more transparent over the total annual cost to be levied from energy consumers, and invest more in efficiency to stretch more expensive electricity further.

FUNDING?

Britain will announce its plans to overhaul its ageing energy infrastructure in an energy bill next week.

It will propose to guarantee to pay the difference between the variable wholesale power price and an agreed, fixed strike price, under a contract for difference (CfD) scheme which effectively sets a minimum power price for nuclear, CCS and renewables.

The CfDs will be set administratively (renewable energy) or through direct negotiation with individual project developers (nuclear and CCS).

At present, Britain's finance ministry already limits how much money the Department of Energy and Climate Change (DECC) can raise from energy consumers to pay for new electricity generating capacity, under its levy control framework.

As DECC said in May, in an annex to its electricity market reform overview:

``The Government is minded to instruct the System Operator to only issue CfDs for low-carbon generation up to the value of the amount set out in the Levy Control Framework.''

The spending limit under the levy control framework rises from 2.6 billion pounds in 2012/13 to 3.9 billion pounds in 2014/15, with no visibility thereafter.

Nuclear power and CCS plants currently seeking funding will not be operational until the end of the decade at the earliest.

That raises several questions.

First, what will the spending limits be after 2015; second, how will the government carve that subsidy between the various energy technologies; and third, what rates of return will it allow for investors, when calculating CfDs.

Without knowing these answers there is the danger either that one technology or other will be favoured unfairly over another, earning higher rates of return or gobbling up too much of the available subsidy, or that energy consumers or the taxpayer are eventually lumbered with much higher than expected costs.

ENERGY BILL

Under the process of agreeing subsidy rates, nuclear and CCS will get a headstart before other technologies as the government negotiates with these now, to speed up investment decisions.

That has led to concerns that they will grab the majority of available funds, and over a lack of transparency over private negotiations.

EDF is planning to take a final investment decision on building twin Areva nuclear reactors at Hinkley Point in southwest England by the end of the year, at which point its agreed CfD will be announced.

There is no set timeline for publication of CCS CfDs.

Renewable energy CfDs will be announced by the end of 2013, according to DECC.

There is no transparency over allowed rates of return as a basis for negotiating these rates, in the draft, 307-page energy bill published in May, which only says that these should be ``stable'' and ``reasonable''.

The government may announce with its energy bill next week its preferred mechanism for allocating subsidies between energy technologies, for example by cost or capacity, but is unlikely to flesh out details given uncertainty over the allowed budget.

BUDGET

Both coal CCS and new nuclear are massive projects whose capital cost exceeds 3,000 pounds per kilowatt.

Private sector operators have published plans for up to 16 gigawatts of new nuclear power and about 4 GW of CCS in the 2020s.

Assuming a 90 pounds strike price for all these (a very conservative estimate) and a 60 pounds wholesale power price (as reflected in 2015 UK forward prices), that would imply a 30 pounds subsidy per megawatt hour.

Applying such a rate to 20 GW of baseload power implies up to 5.3 billion pounds levied annually (assuming constant power plant operation) from energy consumers.

That is exactly double the allowed budget under the levy control framework this year, and before accounting for renewable energy and home efficiency which is projected to cost consumers 2.6 billion pounds this year.

Even after allowing for cost decreases over time, the implication is that Britain is heading towards a large increase in household spend on energy to meet binding UK and EU targets for carbon emissions (in 2050) and renewable energy (2020).

That will require more transparency from government, given the other calls on limited household budgets, and more demand-side investment to ensure electricity generation goes further.