23rd May 2012
The UK government's proposals for Electricity Market Reform (EMR), published earlier this week, have been broadly welcomed but a number of concerns have been raised about the details or, in some cases, the lack of them.
The main elements of the Bill are:
1. A new system of low-carbon generation revenue support – a feed-in tariff with Contracts for Difference (CfDs). These CfDs will make investment in clean energy more attractive by removing long term exposure to electricity price volatility. They will stabilise returns for generators at a fixed level known as a strike price. It will also insulate consumers by clawing back money from generators if the market price is higher than the strike price. As the FT explains, "if the market fails to deliver the agreed price, generators receive a top-up, but if it is lower, money can be clawed back".
2. A Capacity Market will be established to reduce the likelihood of future blackouts by ensuring there is sufficient reliable capacity to meet demand.
These mechanisms will be supported by:
The point of the bill is "keeping the lights on, consumers energy bills down and creating cleaner electricity to help tackle climate change," said energy secretary Ed Davey. "The reforms are designed to provide investors with transparency, longevity and certainty in order to attract £110 billion of investment to bring forward new low-carbon power generation for the 21st century, he added.
An energy gap that needs to be filled
With around a fifth of existing power generating capacity set to come off-line over the next decade, demand for electricity set to grow as it plays a bigger role in transport and heating, and a fall in UK oil and gas reserves, there will be an energy gap that needs to be filled.
The bill is "designed to encourage a balanced portfolio of renewables, new nuclear and Carbon Capture and Storage (CCS), and to ensure that these technologies can compete fairly in the market-place," Davey says, although many observers believe the aim is to support nuclear power without breaching a commitment not to subsidise it.
"As it is, it looks like the process has been rigged for nuclear," said Nick Molho, head of energy policy at WWF-UK. "Given the increasing concerns around the economic viability of new nuclear and the repeated delays to the CCS demonstration programme, renewable energy and energy efficiency are our best bets to deliver a secure, cost-effective and low-carbon power sector by 2030.
"But renewable energy investors need clear, unequivocal, long-term support from ministers, who must face down sniping from the backbenches and certain sections of the media," he added.
Davey says that electricity bills are going to be higher in future whatever happens, because of higher fossil fuel prices, but that EMR will mean that the additional costs are on average 4% lower over the next two decades than if no changes are made.
There were few surprises in the announcement as much of it had been previously announced – although given the government's recent record, "from an investor perspective, this consistency in policy is important," said Ronan O'Regan, director, energy at PwC. "Today's draft Energy Bill, overall is a step in the right direction," he said, but he warned that "on its own it's unlikely to deliver the £110bn of required investment. It needs to be seen as key part of a wider set of initiatives, such as industry delivering cost reductions in low carbon technologies, better management of risks and project delivery in delivering big capital projects and additional initiatives to attract institutional investment."
However, others fear that the government is not moving fast enough, with strike prices not due to be published until late next year and other details also yet to be clarified.
"The great enemy of investment is uncertainty, and there remains much of that in the Bill," said Matt Bonass, a climate change and corporate finance lawyer at Bird & Bird.
A missed opportunity
Meanwhile, the Institution of Engineering & Technology says the government has missed an opportunity to include demand reduction in its capacity market. The IET's Robert Sansom said: "Price increases can be offset by improvements in energy efficiency, thereby reducing energy consumption, which is also better for the environment. In addition demand has a crucial role to play in reducing the amount of capacity required. The reforms to the electricity market must recognise this role and ensure incentives are available to reward customers accordingly."
There was also a warning that the carbon floor price will simply transfer money from the UK to heavy emitters in Europe. Will Straw, Associate Director of the Institute for Public Policy Research, said: "The Carbon Price Floor will do nothing to reduce carbon emissions while piling more cost on to the shoulders of already hard-pressed consumers in the UK.
"Because a floor price for carbon in the UK will depress the carbon price elsewhere in Europe, the UK will effectively hand over billions to European polluters. At a time of austerity and efficiency, wasting £1 billion is inexcusable. Instead, we should be pushing for an EU-wide carbon price floor."
The EMR is, as you'd expect from such a wide-ranging and ambitious policy, far
from perfect, but as James Murray, editor of Business Green, explains, "it remains a genuinely historic package of proposals that should lay the foundations for over £110bn of investment in low carbon infrastructure … and those sniping about the reforms' focus on nuclear or their lack of support for their preferred renewable technology should ask if they could imagine such an ambitious package of legislation being put before parliament just a few short years ago".
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