UK electricity market reforms are a good move, but more detail is needed

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18 July 2011, Gas, Electricity, Nuclear, Solar, Wind

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In what has been announced as the biggest transformation of the energy market since privatization, the UK government's long-awaited publication of its Electricity Market Reform (EMR) white paper broadly confirmed the proposals set out by the Department for Energy and Climate Change (DECC) in its consultation document last December.

A combination of carbon price support, contract for difference feed-in tariffs, a capacity mechanism, and an emissions performance standard (EPS) are designed to attract the investment levels required to supply the UK with increasingly low-carbon generated electricity while keeping energy price rises to a minimum.

In many ways, the EMR white paper and the DECC's UK Renewable Energy Roadmap signify a large break with tradition as the government reasserts its influence over what has been a largely liberalized energy market for the past two decades. However, given the scale and urgency of the energy challenges, even the big six energy suppliers (British Gas, EDF Energy, E.ON, RWE npower, SSE, and ScottishPower) have recently demanded reform and broadly welcome the latest proposals, although they have also requested more clarity on the details.

The biggest problem with the reform is that the government is hoping to achieve a large number of goals at the same time. The length of the documents illustrates the complexities involved at a time when consumers cannot help but suffer from recurring energy price rises.

Immediate responses from the big six suggest that particularly EDF Energy and SSE, as the major producers of low-carbon electricity, are pleased with the latest proposals. Both are likely to benefit from predictable, stable, and increased energy prices, which will underpin their ambitions for the development of renewable and nuclear energy. By contrast, generators with large fossil fuel power plant portfolios such as E.ON and RWE npower remain concerned about the ramifications of higher carbon prices and the EPS.

Industry representatives of carbon capture and storage (CCS) technology are also largely satisfied with the outlined proposals, not least because plants fitted with CCS may be temporarily exempt from the EPS where these capacities are required in order to secure energy supply. Together with a considerably lower EPS level than that required by the EU or the UK government for demonstration project funding, this will give investors some incentive to pursue this technology.

Question marks remain, however, over whether there will be progressive tightening of EPS levels in the future, and whether gas-fired plants may one day also be covered by the EPS and thus require CCS retro-fitting. These uncertainties represent an ongoing regulatory risk for investors.

Simultaneously, the government has also published a Renewable Energy Roadmap assessing and detailing the opportunities and barriers for eight types of renewable energy in the UK. These energy types comprise onshore and offshore wind, marine energy, biomass electricity and heat, ground source and air source heat pumps, and renewable energy in transport. While these choices reflect the availability of renewable energy sources in the UK, the solar industry was quick to question the government's decision to exclude it from the roadmap. Instead, the DECC believes that solar power will predominantly play a role in the form of microgeneration in the residential sector rather than on a commercial scale.

The key for the government, the regulator, and energy suppliers is now to deliver a policy framework that is coherent and stable in all its details and that will spur the deployment of the necessary types and levels of private capital over the long term. While there has been some progress on the provision of details of the market reform, many questions remain with regards to how both the capacity mechanism and the contract for difference feed-in tariffs will work.

These are crucial areas of the energy market as they will influence and determine the level of energy security in the UK for decades to come. Neither the government nor the industry can afford to get this wrong, because energy security will affect the competitiveness of the UK economy and the livelihood of its citizens. The sooner the details come and the clearer they are, the better for everyone involved.

Source: Datamonitor

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