Radical reforms for a

13th July 2011

In the energy white paper, Mr Huhne said the aim was to "build a cleaner energy future" while also replacing "a quarter of our existing power stations" – and fixing a price for low carbon power. Mr Huhne warned of the scale of the "Herculean task ahead", but added there was the potential for "costly blackouts" if nothing is done.

Three central policies were outlined in the paper alter the UK's energy mix in favour of renewables and nuclear power, adds the Financial Times (paywall). First, a new tariff system will offer nuclear power stations and renewable energy sources a fixed price for their electricity -a "contract for difference" – giving investors more certainty. Second, a "capacity mechanism", designed to ensure that power stations are kept on standby to cope with demand surges and the unreliability of wind power. A decision on how to do this has been deferred. Finally, the white paper raises environmental standards for UK power stations.

Seb Beloe, head of SRI research at Henderon and Mindful Money Blogger, says: "On balance we are reassured by the proposals. It is critical that the government provide a framework that reduces risk for investors while offering reasonable levels of return and at the same time enables the electricity generating sector to decarbonise. We think that feed in tariffs with contracts for differences is a sensible way of structuring the electricity market helping to provide reliable returns to generators while ensuring the price increases are kept in check.

"We are also very pleased to see a strong emissions performance standard of 450g/kWh. While the original energy bill in 2008 contained wording that suggested an emissions performance standard of 400g CO2/kWh, 450g/kWh is still quite demanding with Drax's emissions in 2009 at 700g/kWh and ‘average' overall grid figures in 2008/09 of around 520g/kWh. In essence it means no new unabated coal in the UK – something that we have been advocating since 2008 when we wrote to the then business secretary John Hutton to oppose the redevelopment of Kingsnorth power station in Kent.

"There are still clearly a lot of details to work through in the new regime, but the plans announced yesterday give us some confidence that we are on the right track"

The carbon price floor, introduced in the last Budget and coming into effect in 2013, will make it more costly to run coal and gas plants while also handing a windfall to operators of nuclear power stations such as EDF.

Damian Reece comments in the Daily Telegraph: "Huhne proclaimed his energy White Paper as the biggest set of reforms to the electricity market since privatisation more than 20 years ago. He's probably right. Yesterday was the day Britain officially went nuclear, just 37 years after France.

"…because of the disarray that energy policy has been allowed to fall into over the past 15 years, yesterday's proposals may be about the best set of policies we can hope for."

ryck comments on the Daily Telegraph report: "There are several choices for energy and they come at vastly different prices. Nuclear is the cheapest in the long run. Solar is the most expensive and worse in the UK due to the clouds. To convert to more expensive forms of the same level of electrical energy is a poor idea. It can only make exports more expensive due to higher internal costs."

A report in the Independent adds that the electricity market reforms are a tall order: designed to simultaneously keep Britain's lights on, keep consumers' bills down, and encourage investors to bankroll expensive low-carbon power generation.

The report says: "There is no dispute that Britain's electricity sector needs attention. A quarter of its capacity will be turned off over the coming decade as obsolete power stations shut down and European regulations bite. Taken together with testing green targets requiring 30% of electricity to come from renewables by 2020, Ofgem has estimated the UK needs £200bn-worth of investment. And with electricity demand set to double by 2050, any changes also need to be able to meet the long-term challenge."

That is where the EMR comes in, says the Independent. Historically, Britain's electricity market has been designed to deliver power at the lowest possible cost. But with the advent of climate change concerns, such a structure is no longer appropriate.

For example, new technologies such as offshore wind farms are too expensive for the private sector to fund out of purely commercial motives.

However, the changes have also prompted criticism.

Mike O'Connor, director of Consumer Focus, said in the Financial Times (paywall) that the cost of new investment would inevitably impose higher bills on households. "Hard-pressed consumers can't be expected to write a blank cheque to decarbonise electricity generation. Keeping the lights on and cutting carbon emissions comes with a huge price tag."

The Financial Times (paywall) adds: "By guaranteeing a fixed price for low carbon electricity, he (Huhne) is moving away from market mechanisms and towards state planning. Nuclear power and offshore wind will be the winners, but the latter is an expensive way of providing electricity at the mercy of the weather. A market based approach, less in thrall to wind power, would have been preferable."

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