In July, the UK government published its long-awaited Electricity Market Reform White Paper, which has highly laudable aims – encourage investment, establish a secure low-carbon energy mix and keep consumer bills down, but can they be delivered?

••• BY HEATHER JOHNSTONE •••

The unveiling of the UK government’s eagerly awaited Electricity Market Reform (EMR) White Paper by Chris Huhne the secretary of state for Energy and Climate Change, on the afternoon of 12 July 2011 was unexpectedly low-key. Unexpected considering it was anticipated to represent the biggest shake-up of Britain’s power market in more than a quarter of a century, and it is.

In reality, the government had little choice but to make the reforms ambitious, i.e. no opportunity for ‘business as usual’. In the next ten years, more than a quarter or 25 GW of the UK’s generating capacity is due to retire as old coal and nuclear power stations are shutdown. This is compounded in the longer term by estimates that electricity demand will double by 2050 as more transport and heating is shifted onto the grid. All this sounds expensive, and it is. Huhne estimates that an jaw dropping figure of £110 billion ($178 billion) needs to be invested in electricity infrastructure (both generation and grid) by 2020 – this doubles when you include gas infrastructure.

Thus, after a fairly lengthy consultation period, the hope of the Department of Energy and Climate Change DECC, is that the measures laid out in the White Paper will attract the required investment in new capacity, achieve the ambitious targets for reducing the UK’s carbon dioxide (CO2) emissions and maintain secure and affordable supplies to consumers. The cornerstones of the EMR White Paper are outlined below.

  • A Carbon Price Floor, as announcement in the Budget 2011 in March, to reduce investor uncertainty, to put a fair price on carbon and to provide a stronger incentive to invest in low-carbon generation now.
  • The Contracts for Difference (CfD), a new feed-in tariff system of long-term contracts to provide stable financial incentives to invest in all forms of low-carbon electricity generation, including nuclear and carbon capture and storage (CCS), as well as renewables energies.
  • An Emissions Performance Standard (EPS) set at 450g CO2/kWh to ensure that no new coal fired power stations are built without CCS, while also supporting the short-term investment in gas.
  • A Capacity Mechanism, including demand response as well as generation, which will be needed to ensure future security of electricity supply.

The response has been mixed. Volkers Beckers, CEO of RWE npower, remains concerned that the government has been too ambitious. “I am concerned that [the] government is trying to pull too many legislative levers at once, and in doing so, is running the risk of losing focus on what matters for the UK now. RWE npower encourages [the] government to focus on a minimum set of interventions that can be implemented quickly and easily”.

Previously, he has been very scathing about setting a carbon price floor, saying that such support would not provide the certainty to drive investment in new large-scale, low-carbon generation, and with its introduction in 2013 would only “hasten the closure of current fossil fuel plants that are vital for security of supply”. However, Beckers may not need to worry for too much longer since RWE recently put its npower business up for sale.

In contrast, Vincent de Rivaz, EDF Energy’s chief executive, hails the reforms a success. “Today’s White Paper gives Britain more control over its energy future. This will transform the market and ensure customers will benefit from stability, security, affordability and predictability.” For the cynics amongst you, de Rivaz’s positive response may have more to do with the fact that nuclear looks set to be the big winner in the reform process. With EDF Energy’s ambitious nuclear plans in the UK, this is definitely not bad news.

A number of the environmental groups, including RenewablesUK, have also broadly welcomed the White Paper, but would have preferred a Premium feed-in tariff (PFiT) system rather than the CfD because it is closer to the current RO. Some are concerned that the CfD is too complex and will favour big companies over smaller ones investing in low-carbon plants. The government deemed the PFiT to be less cost effective that the CfD.

The EPS is another contentious area, with a number of industry players, including Sarah Vaughan, E.ON’s director of Regulation and Energy Policy, who think it is “unnecessary”.

What about the impact on CCS? According to CCS TLM, a CCS expert, White Paper does provide a greater degree of certainty for CCS, which will be exempt from the carbon floor price mechanism for non-emitted CO2 and demo plants are not liable under the EPS. However, as Judith Shapiro of the CCS Association says “the devil will be in the detail”, and emphasized that more discussion was needed on how the CfD applies to CCS projects and most importantly how demo projects will be funded through this framework.

One aspect of the White Paper that appears to have surprised many observers is incentivising demand response, i.e. paying factories and other high-energy users to reduce power demand at peak times, in the Capacity Mechanism. This is an important development in government thinking because cutting demand is often a lot cheaper than building new generation capacity.

Whether the reforms are too much or not enough will remain to be seen, but the government had better hope they do work since “a government that allows prices to rise is unpopular, but one that allows the lights to go out is unelectable”.

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