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Britain has one of the most liberalised electricity markets in the world. Since it was privatised 20 years ago, the market has fulfilled its objectives of delivering a reliable supply of affordable electricity to industrial, commercial and domestic customers.

But, the policy ambitions for the electricity market look very different today than they did when the industry was privatised. At that time, the climate change agenda, for example, was hardly on the political radar. Today, not only do we face the closure of a quarter of our power stations in the next 10 – 15 years - because of EU legislation on air quality emissions and sheer old age - but, Britain is also legally committed to the European Union target for renewable energy, which means that 30 per cent of our electricity will have to come from renewable sources of energy by 2020. At the moment, the figure is about six per cent, so there is a steep hill to climb. On top of this, looking to set a good example on climate change issues, the UK government has set itself a demanding, legally-binding target for reducing carbon emissions, which means that the power industry has to be virtually ‘de-carbonised’ by 2030.

So, we need to build quite a lot of new power stations. The energy industry regulator Ofgem has estimated that this will cost about £200 billion over the next decade, a sum which includes other areas of energy such as power and gas networks and energy efficiency measures. The power industry is a major investor in the UK but this is two or three times the level of investment that we are used to. Looked at another way, it is roughly the equivalent of building two channel tunnels a year over the next nine years – way beyond the finances of even the biggest energy companies. So, our electricity companies must attract investors and they will be looking for credible and stable public policy and eventually a reasonable return on their investment.

The problem is that not only are power stations expensive, but, they are also long-term investments and some, such as new nuclear stations take a long time to build, too. So, it is vital that the government should give confidence to investors that the policy for a low carbon power industry is stable and lasting.
With this in mind, the government has constructed a package of measures in the electricity market reform (EMR) consultation which would, in its opinion, provide certainty to investors over the long term whilst encouraging investment in low carbon technologies, which might otherwise prove uncompetitive.

There are four main proposals in the EMR consultation. One of the suggestions, a carbon price floor is being consulted on separately by HM Treasury as it involves the taxation of fuels, but DECC views it as part of the overall package of reforms. The other mechanisms include a Feed-in Tariff with a Contract for Difference for renewables, nuclear and carbon capture and storage technologies, an Emissions Performance Standard which would prevent new coal-fired power stations from being built unless they had carbon capture facilities fitted and a capacity mechanism which would aim to ensure that there was always plenty of generating capacity, especially at times when the weather-dependent production from wind power is not available.

Inevitably there is a wide range of opinions about the EMR consultation document. The proposals are a departure from the competitive market that has worked well for 20 years or so. As always with energy policy, there is a balancing act to be achieved.

Politicians want the industry to provide security of supply, competitive prices and low carbon emissions and they are probably concerned that, without intervention, the UK’s competitive electricity market would turn increasingly to the use of gas for power stations – with a growing import dependency as North Sea gas declines. But, the technologies currently in favour – new nuclear power and renewable energy – tend to be more expensive. If they had not been, the government would not have needed to speak up on their behalf. Large users of electricity, in ‘energy intensive’ industries are already voicing concerns about the impact of these proposals on their already significant energy bills and this is not an ideal time to be talking about bigger bills for domestic customers, either. Some question whether the UK should be trying to lead the way to lower carbon emissions quite as boldly.

But, with the legally-binding renewable energy and low carbon commitments, it is probably safe to say that something needs to be done to encourage the construction programme that needs to take place in the next decade and beyond. To achieve a transition to low-carbon electricity production whilst avoiding power shortages and making sure electricity is competitively-priced is a huge challenge - the electricity industry will take it very seriously.

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Written by David Porter   
Thursday, 24 March 2011 00:00
Last Updated on Sunday, 17 April 2011 18:01


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