UK electricity reform slammed by House of Lords report

The UK government’s plans for reforming its electricity market have come under further fire from within its own Parliament, this time from the House of Lords.

An eight-page report from a House of Lords’ working group acknowledges that the reforms are a “Herculean task”, yet it raises “serious doubts” that the government’s long term aim of a competitive electricity market can be realised by the mechanisms proposed in the draft Energy Bill.

The government proposes to stimulate investment and competition in power generation ” in particular low-carbon energy ” by creating a new payment system, known as contracts for difference, for various means of generating electricity. These long-term contracts would give power companies a guaranteed price for the electricity they produce and are intended to reduce the risk of investment in projects with high up-front capital costs, such as nuclear reactors and offshore wind farms.

However the Lords’ report states that there is a “lack of information on how these contracts would work in detail. Much appears to be left to secondary legislation, not all of which will be subject to parliamentary scrutiny.”

“This lack of clarity makes parts of the proposal difficult both for us and for potential investors to evaluate.”

The Lords state that “if these proposals are implemented, the process for awarding contracts will, for much of the time between now and the end of the decade, be largely at ministerial discretion”, and add that “we do not see how the government can do this in any credible way”.

The report particularly struggles to understand how ministers would be able to set prices, given that they would have “few market benchmarks and would need to judge the balance between different generation methods, and this depends on estimating the long term future price of fossil fuels and what new technologies might become available”.

The Lords’ reportà‚ also fear that getting the reforms wrong now will have a damaging long-term effect: “We are concerned that, given the very long lead times and the need to bring in significant amounts of new low carbon generating capacity before 2020, the shape of the generating system in the UK could well be set for several decades under a system that was both opaque and devoid of any serious external scrutiny.”

Last month, a report from the government’s Energy Select Committee concluded that the Energy Bill could impose unnecessary costs on consumers, lead to less competition and deter investment.

Committee chairman Tim Yeo said “the government is in danger of botching its plans to boost clean energy”.

He added: “Electricity market reform is essential, but the new contracts proposed by the government will not work for the benefit of consumers in their present form. Nobody wants to see a blank cheque written for green energy, but the government must provide investors with more certainty about exactly how much money will be available.”

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