UK government’s reform to electricity market announced amidst utility price hikes
The coalition government has published a Renewables Roadmap and a White Paper to bring about the biggest reforms to the electricity market since privatisation.
Energy and climate change secretary Chris Huhne launched measures to overhaul the electricity market, amidst announcements of rising energy bills and fears that the reforms will prompt a ‘dash-to-gas’.
The Department for Energy and Climate Change (DECC) describe the road map and white paper as: “Measures to keep the UK’s lights on and consumer bills down, and shift the economy away from a high risk, high-carbon future.”
With a quarter of the UK’s generating capacity shutting down over the next ten years as old coal and nuclear power stations close, more than £110bn in investment is needed to build the equivalent of 20 large power stations and upgrade the grid. In the longer term, by 2050, electricity demand is set to double, as we shift more transport and heating onto the electricity grid. Business as usual is not therefore an option.
The Electricity Market Reform White Paper published today sets out key measures to attract investment, reduce the impact on consumer bills, and create a secure mix of electricity sources including gas, new nuclear, renewables and carbon capture and storage. The Renewables Roadmap published alongside this outlines a plan of action to accelerate renewable energy deployment – to meet the target of 15% of all energy by 2020 – while driving down costs.
Chris Huhne said: “We have a Herculean task ahead of us. The scale of investment needed in our electricity system in order to keep the lights on is more than twice the rate of the last decade. The fact is that the current electricity market is not able to meet that challenge. Without action, there is a risk of uncomfortably low capacity margins from around the end of the decade and a far higher chance of costly blackouts.
“This package will keep the lights on and bills down. It will insure us against shocks from volatile parts of the world like Libya, and end the dithering about our need for new plant.
“We have consulted widely and we believe our reforms represent the best deal for Britain. They will get us off the hook of relying so heavily on imported fossil fuels by creating a greener, cleaner and potentially cheaper mix of electricity sources right here in the UK.
“A new generation of power sources including renewables, new nuclear, and carbon capture and storage, along with new gas plants to provide flexibility and back-up capacity, will secure our electricity supply as well as bring new jobs and new expertise to the UK economy.”
Key elements of the reform package include:
- the announcement in Budget 2011 that the Government would put in place a Carbon Price Floor to reduce investor uncertainty, putting a fair price on carbon and providing a stronger incentive to invest in low-carbon generation now;
- the introduction of new long-term contracts (Feed-in Tariff with Contracts for Difference) to provide stable financial incentives to invest in all forms of low-carbon electricity generation. A contract for difference approach has been chosen over a less cost-effective premium feed-in-tariff;
- an Emissions Performance Standard (EPS) set at 450g CO2/kWh to reinforce the requirement that no new coal-fired power stations are built without CCS, but also to ensure necessary investment in gas can take place; and
- a Capacity Mechanism, including demand response as well as generation, which is needed to ensure future security of electricity supply. We are seeking further views on the type of mechanism required and will report on this around the turn of the year.
Publication of the White Paper marks the first stage of the reform process. The Government intends to legislate for the key elements of this package in the second session of this Parliament, which starts in May 2012, and for legislation to reach the statute book by the end of the next session (by spring 2013) so that the first low-carbon projects can be supported under its provisions around 2014. The Government will put in place effective transitional arrangements to ensure there is no hiatus in investment while the new system is established. Once established, the White Paper sets out how the efficiency and effectiveness of the reforms will continue to be evaluated.
The electricity market reform package will minimise the impact on bills by insulating the UK from volatile fossil fuel prices and providing investors with the certainty they need to raise capital more cheaply. Estimates are that with the market left as it is now, domestic electricity bills will be around £200 higher in 2030 compared with today’s average annual household bill (about £500). The market reform packages published today limit this increase to £160 – £40 lower than it would otherwise be.
