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Reforming UK electricity market

A consultation to be released later today, suggests ways of reforming the UK electricity market to include more renewable and low-carbon energy.

UK Energy and Climate Change Secretary Chris Huhne, says in an article in The Telegraph that the UK’s demand for electricity could double by 2050 when vehicles and home heating moves from fossil fuels to electricity.

Britain also faces the challenge of having an ageing power generating capacity with a quarter of this expected to be shut down within 10 years. This replacement cycle, which is projected to cost around £110 billion, must be in low-carbon and renewable energy sources if the country is to meet its climate change targets.

“Left alone, the current market will not deliver these objectives at the lowest cost. All low-carbon electricity generation needs support to capture its benefits to our climate and to ensure security of supply,” Huhne warns.

Gas is often seen as a tempting option because of its low upfront cost, but Huhne says a dash for gas could leave the UK exposed to global fossil fuel shocks and dependent on imports.

The issue with nuclear and most renewable energy is that they have high upfront costs, but low running costs – something investors do not appreciate when faced with uncertainty.

Unlocking investment

“By forging a comprehensive response, we can unlock investment in a broader range of low-carbon electricity generation. By providing greater certainty, we can encourage new market entrants and financial investors, reduce the cost of capital, and provide low-carbon electricity at lower cost than under present policies,” Huhne says.

“Our mix of four inter-locking policy instruments should provide greater assurance of decarbonisation at the same time as lower bills in the long run.”

Among the measures suggested, are:

  1. A feed-in tariff with long-term contracts to give low-carbon investors a guaranteed price;
  2. Capacity payment designed to ensure necessary back up availability to handle demand surges and intermittent supply;
  3. Carbon price support where fossil fuels are taxed; and
  4. An emissions performance standard.

Industry comments

Redpoint Energy, which provided analysis for the Department of Energy and Climate Change ahead of the consultation, says investor confidence is a key consideration.

Director Duncan Sinclair, says: “The key issue is investor confidence. There is a worry that carbon prices will not rise to levels assumed by Government, hindering development of the low-carbon generation – particularly nuclear and CCS – needed in addition to renewables to ensure environmental targets are met. Our analysis also highlighted potential risks to security of supply towards the end of this decade and raised concerns about how the sector will cope with more renewable plants.

“The policy response to these challenges must be to strengthen incentives to invest in low-carbon generation and counter concerns over the long term robustness of the carbon market. At the same time, the risk to security needs to be addressed by encouraging flexible and back-up capacity on both the supply and demand side.”

He adds: “We found that Fixed Payments or CDSs, in conjunction with targeted EPSs, could deliver the best value for consumers, and are the most robust option in terms of long-term market uncertainties.

“However, this option depends on the Government setting prices and target volumes appropriately. This approach would imply a fundamental change for the energy market in the longer term with 70% of generation falling under administered tariffs by 2030. This will dramatically alter the way we consider energy consumption, generation and investment in the future.

“Such a significant change risks an investment hiatus in the near term which could make achieving decarbonisation objectives more difficult initially. The inclusion of Carbon Price Support within the preferred policy package could increase investor confidence in this respect.”

Professor Jim Skea, Research Director of the UK Energy Research Centre (UKREC), says: “The Government appears to have grasped the nettle and proposed radical reform that takes on the challenges of low-carbon, adequacy of investment, reliability and affordability.

“Getting the energy market right is one of the most critical elements of our new energy future, but the details will need to be carefully examined.”

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