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At the beginning of 2011, I wrote for Govtoday about the Electricity Market Reform (EMR) consultation and its implications for the energy industry. In that article I explained the huge investment and construction programme that needs to take place in the UK in the next decade and beyond


As a recap, Britain’s legally-binding renewable energy and low carbon commitments, as well as the massive investment programme needed to replace ageing infrastructure means that the energy sector must attract £200 billion of investment in the next decade. Even in an era when sums like that are in the news every day that is still a huge amount. It is also beyond the resources of our energy businesses, so the UK finds itself competing for funds in the global financial market, which means that the political and regulatory framework must be correct to attract this investment.

Achieving a transition to low-carbon electricity production whilst avoiding power shortages and making sure electricity is competitively-priced is a huge challenge.To begin to address the challenge, the government launched a consultation and subsequent White Paper proposing radical changes to the electricity market. The EMR White Paper was published before the summer Parliamentary recess. It set out four mechanisms that would, in the opinion of the government, deliver sufficient long-term certainty to investors in electricity projects and get the UK on track to meet the country’s renewable energy and low carbon targets.

The feed in tariff (FiT) with contract for difference (CfD) proposal is viewed by government as the best way to incentivise electricity producers to build low carbon electricity projects. CfDs promise generators guaranteed prices for the low-carbon electricity they generate, and generators pay money back to the government if the wholesale electricity price exceeds the agreed contract price. The government intends to auction contracts to different generators in order to ensure the lowest possible prices are agreed. But, there are aspects of risk in this approach. Contracts of this type must be constructed very carefully to avoid unintended consequences and DECC will need to be mindful of this.

Some generators are concerned that the CfD will require a credit rating and repayment structure beyond the financial capacity of small electricity producers. There are also concerns about the effect that imminent EU financial regulation – aimed at banks, but, impinging on the trading of electricity - will have on the mechanism. Government needs to provide details on how the CfD will function as soon as possible, or risk losing the interest of companies that have good ideas to pursue.

The carbon price support mechanism (CPSM) is a levy on carbon intensive fuel. Consulted on by HM Treasury and legislated in the Finance Bill 2011, the CPSM is due to take effect in 2013, which is likely to be before the other EMR mechanisms. This measure has attracted criticism on a number of fronts, not least from firms who find it hard to avoid being ‘carbon-intensive’, concerned that, facing a higher  price of carbon than that imposed through the EU emissions trading scheme, companies will be inclined to move overseas to reduce their costs.

The government has said that DECC is working with HM Treasury and BIS to ensure that the competitiveness of British manufacturers is not unduly affected. Business groups will be keeping a close eye on what these measures will be.The capacity proposals are intended to incentivise energy producers and grid operators to provide enough backup capacity to manage fluctuations in energy supply, particularly those that will arise from greater dependence on wind power. We are used to having power stations that increase or reduce production on command and the reliable supply of electricity that we have enjoyed for so long, has to be maintained whether the wind is blowing or not.

Finding the right answer to this is tough and this part of the White Paper was a consultation, because the government is still far from a decision on how a capacity mechanism might work. An emissions performance standard (EPS) is intended to prevent coal-fired power stations being built unless they are equipped with carbon capture and storage (CCS). But, the EU Emissions Trading Scheme already limits those emissions, so AEP is working with the government to make sure that the EPS mechanism is set up in a way that doesn’t negatively affect UK electricity generating capacity.

But what will this all cost? The massive investment needed in building new power stations, building the wires and pipes that transport the electricity and the development of smart meters and storage will mean that the cost of electricity rises for the customer, both domestic and commercial.
With energy bills high on the agenda for many households, the news media are already questioning the impact of this. Government and the industry must be honest about the impact the EMR proposals will have on electricity prices. The government has said that the impact on bills would be less than doing nothing and that may be true – but forecasting energy prices is hazardous. Finding truly effective ways of helping customers use much less energy will become very important.

We still have not yet seen the extent of the complexity of the new proposals and it goes without saying that they have to be realistic. So, AEP members are working with government to try to ensure that the mechanisms meet long-standing objectives – keep the lights on, maintain competitive prices and reduce carbon emissions. It was always a huge challenge.  

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Written by David Porter   
Monday, 10 October 2011 10:23
Last Updated on Monday, 10 October 2011 10:26

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