The government has unveiled its proposed reforms of the electricity market.
Key to the reforms revealed by Energy Secretary Chris Huhne yesterday were “four pillars” of action.
Firstly, greater long-term certainty around the additional cost of running polluting plant through a carbon price floor. Proposals from the Treasury to provide greater support and certainty to the carbon price will increase investment in low carbon generation by providing a clearer long term price for carbon in the power sector.
Secondly, long-term contracts for low carbon generation will make clean energy investment “more attractive still”.Through a proposed ‘contract for difference’ Feed-In-Tariff, the government will agree clear, long term contracts, resulting in a top-up payment to low carbon generators if wholesale prices are low but clawing back money for consumers if prices become higher than the cost of low carbon generation.An alternative ‘premium’ Feed-In-Tariff is also set out in the consultation document.
Thirdly, additional payments to encourage the construction of reserve plants or demand reduction measures “to ensure the lights stay on”.A capacity mechanism will ensure there remains an adequate safety cushion of capacity as the amount of intermittent and inflexible low carbon generation increases.
And fourthly, a “back-stop” to limit how much carbon the most dirty power stations – namely coal – can emit.An emissions performance standard will reinforce the existing requirement that no new coal is built without carbon capture and storage.
Mr Huhne told the House of Commons: “These reforms lay the foundations for a sustainable economy, bringing billions in investment in the UK through greater certainty, safeguarding jobs up and down the supply chain, and giving the UK real competitive advantage in advanced energy technologies.
“More than £110 billion of investment is needed in new power stations and grid upgrades over the next decade, that’s double the rate of the last ten years.Put simply, the current market is not fit to deliver this.”
He said the coalition was “taking the historic step of introducing, permanently, a level playing field for low carbon technologies in the UK’s electricity market”.
“Without investment in renewables, new nuclear and carbon capture and storage, emissions will remain too high, we will become dependent on energy imports, and increasingly vulnerable to fossil fuel price volatility,” he said.
He added that low carbon technologies “must be given the chance to become the dominant component in our electricity mix” and said that “in the new, reformed UK electricity market, the economics of low carbon will stack up like nowhere else in the world”.
He predicted that by 2030, three quarters of UK electricity could be low carbon.
Mr Huhne said that more than £110bn investment is needed in power stations and grid upgrades by 2020, “and much more beyond that”.
He added thatOfgem’s review into the liquidity of the wholesale electricity market will be an “essential complement” to the reforms.
Economic Secretary to the Treasury Justine Greening said: “I want this to be a green light for industry, giving them the overdue confidence and assurance they need to investment in low-carbon power generation.
“This is the first step towards getting the investment we need in low carbon technology and more energy efficient homes and businesses. Responses to this consultation will help ensure that these measures are well-designed and cost-effective.”
Shadow Energy minster Huw Irranca-Davies told ELN he welcomed the policy and Labour would offer cross party support provided all the detail was thought through: “If we get it right we give certainty for the long term for investors and consumers if we get it wrong we’ll revisit it in five to ten years.”
It is anticipated that reforms will be in place by 2013, but that renewables investors would be able to build under the Renewables Obligation until 2017.
A White Paper on the reforms is expected to be published in late Spring on next year.
Responses to the proposals on a carbon floor price should be made to the Treasury by February 11, with final decisions expected in the Budget on March 23.
The deadline for responses on the other three components of the reforms is March 10.