UK – Coalition announces transformation of power market

Four reforms to provide long-term certainty for electricity investors. New market to have built-in level playing field for low carbon. Rules for existing investments protected. Long term impact on household electricity bills lower than under current market.

Reforms aimed at moving the UK to the front of the global race for electricity investment, driving the growth of clean energy industries in the UK, and ensuring the best possible deal for consumers were proposed by coalition Ministers today.

The Department of Energy and Climate Change and HM Treasury have together launched consultations on fundamental reforms to the electricity market to ensure the UK can meet its climate goals and have a secure, affordable supply of electricity in the long term.

Energy and Climate Change Secretary Chris Huhne said: “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.

“The UK was first to put binding carbon reduction targets into law. Now the coalition is 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.

“Low carbon technologies must be given the chance to become the dominant component in our electricity mix.

“In the new, reformed UK electricity market, the economics of low carbon will stack up like nowhere else in the world. By 2030, three quarters of our electricity could be low carbon.

“Crucially, our reforms will also make sure there is enough spare supply to keep the lights on reliably. They will protect the rules for existing investments. And, over the long term, they will achieve more, while resulting in bills lower than they would otherwise be.”

Economic Secretary to the Treasury Justine Greening said: "The launch of this consultation demonstrates our continued commitment to being the greenest government ever – providing secure, affordable and low-carbon energy. 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."

There is widespread consensus that reform of the electricity market is needed. The scale of the investment challenge is huge:

* A quarter of the UK’s existing generation capacity will need replacing by 2020, as many nuclear and coal plants reach the end of their lives – that’s 19GW or around 20 large power stations. Some new gas-fired power stations will be needed to complement renewables and the first new nuclear power station.

* About 30% of our electricity must come from renewables by 2020, up from 7% today, to meet our contribution to Europe’s target on renewable energy.

* The power sector needs to lead the decarbonisation of our economy. It must be largely decarbonised during the 2030s to keep us on track for meeting our climate change goals.

* Our 2050 Pathways show that electricity demand may double by 2050 as more heating and transport is shifted onto the grid to decarbonise the wider economy.

Some measures have already delivered investment in new low carbon generation – the Renewables Obligation and the EU Emissions Trading System for example. But the bias towards fossil fuel generation remains. In the current market this is a lower cost and lower risk investment than low carbon technologies, all of which have relatively high upfront capital costs.

In addition, the reserve margin of spare generating capacity will fall during the next decade and the Government is not confident the current market will guarantee adequate electricity at peak periods.

Under the reforms outlined today, the competitive market will remain intact but four inter-locking policy instruments are proposed to change the returns generators can expect for the power stations they build and the electricity they generate:

1. 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.

2. 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.

3. Additional payments to encourage the construction of reserve plants or demand reduction measures (so-called ‘negawatts’) 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.

4. A back-stop to limit how much carbon the most dirty power stations – coal – can emit. An Emissions Performance Standard will reinforce the existing requirement that no new coal is built without carbon capture and storage.

More than £110 billion investment is needed in power stations and grid upgrades by 2020, and much more beyond that. The reforms are aimed at giving existing players and new entrants in the energy sector the certainty they need to raise this level of investment. Ofgem’s review into the liquidity of the wholesale electricity market will be an essential complement to the reforms.

The Government’s preferred package of reform offers a better deal for consumers over time. By 2030, the new market could deliver an electricity mix far more clean and secure, and bills lower than they would otherwise be. Reducing carbon intensity of the electricity mix from 500gCO2/kWh today to 100gCO2/kWh in 2030 can be achieved at the same time as annual household electricity bills being around 4% or £30 lower on average in the five year period 2025-2030 than they would otherwise be if we left the current policy framework in place. This is despite a higher level of ambition – our current market arrangements will only deliver carbon intensity of 200gCO2/kWh. Beyond 2030, as a result of our reforms, household bills will remain lower and more stable than they would otherwise have been as the electricity mix will be less exposed to gas price fluctuations and high carbon permit prices.

The four proposed reforms build on the recommendations of the Committee on Climate Change, they make good on specific commitments in the coalition’s programme for government, including that there will be no subsidy for new nuclear, and they live up to the Prime Minister’s promise that this would be the greenest government ever.

Next steps and transition

Change will be gradual and managed carefully. As well as giving certainty for the longer term, Ministers are providing reassurance to the industry that the rules for existing investments will be protected. By consulting on a process and principles for the transition to new market arrangements the Government aims to minimise any uncertainty.

The Government is interested in views on whether the preferred package of reforms is the right one. It is anticipated that reforms will be in place by 2013, but that renewables investors would be able to build under the RO until 2017.
Notes for editors

The Government response to the consultation on changes to the Renewables Obligation is also published today. Government will introduce phased support for offshore wind energy projects (generators will be able to register up to 5 phases of wind turbines over a maximum of 5 years); mandatory reporting against greenhouse gas and land sustainability criteria for solid and gaseous biomass; and mandatory sustainability criteria for bioliquids in accordance with the Renewable Energy Directive. These changes will be made by amending the Renewables Obligation Order and come into effect on 1st April 2011, subject to parliamentary approval.