Draft Electricity Market Reform just the start of a big debate

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31 May 2012, Electricity

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In light of forecast threats to future energy security and insufficient investment in generation capacity over the next decade, the UK government has proposed a radical change to energy policy. It intends to replace the current system of renewable obligation certificates, instead using a feed-in tariff with contracts for difference (FiT-CfD) for all low-carbon generation, not just renewable energy. In addition, it will introduce a carbon price floor, an emissions performance standard, and a capacity mechanism based on a market-wide auction.

The exact rate of, and process for, deciding the FiT and the CfD price is still under consideration. Therefore, while the mechanism is positive, in that it could provide low-carbon developers with much-needed certainty as to their future returns, doubt persists as to what the exact numbers will be. The first set of CfD strike prices (fixed levels) are due in 2013 after further consultation.

The transition to the FiT-CfD system is planned to take place from April 2014 to March 2017, during which generators may choose between the two schemes. Before 2014, to avoid an investment hiatus, the reform provides for an early CfD support mechanism available to project developers under application to the UK Department of Energy and Climate Change.

The four main parts of the reform imply an enormous interventionary role for the government, which must decide on the most economically efficient carbon price tax, FiT prices and CfD price risk, the desired amounts of capacity in the future, and the mix of low-carbon technology the UK will have in the future. The scale of this policy change will be a major challenge for the UK government and it cannot afford to get it wrong. The consequences of getting it wrong will fall on electricity consumers. In any event the bill will create clear winners - nuclear, renewables, and carbon capture and storage providers - at the expense of coal generators.

In summary, the government is trying to cover all its bases, but in doing so it is running the risk of discouraging investors through the current lack of clarity and detail in the reform package. Datamonitor believes that the bill provides those with gas, nuclear, and renewable generation interests ample opportunity to lobby to change the details of the bill to their advantage.

Source: Datamonitor

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