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Keeping lights on and energy green

The Government has published its proposals for electricity market reform (EMR), with the aims of “keeping the lights on, consumers energy bills down and creating cleaner electricity to help tackle climate change”, according to Energy Secretary Ed Davey.

The reforms, which are crucial to the future of the offshore wind sector, “are designed to provide investors with transparency, longevity and certainty in order to attract £110 billion of investment to bring forward new low-carbon power generation for the 21st century”, he says.

The main elements of the Energy Bill are:

  • A new system of low-carbon generation revenue support – a feed-in tariff with contracts for difference (CfDs). A “strike” price will be set and, if electricity prices fall below this, CfDs will guarantee a minimum return for investors, removing the exposure to electricity price volatility and encouraging them to invest. CfDs will also limit price rises by clawing back support payments if market prices are higher than the strike price. The first strike prices will be published within the Delivery Plan in 2013;
  • A Capacity Market will be established to reduce the likelihood of future blackouts by ensuring there is sufficient reliable capacity to meet demand;
  • An Emissions Performance Standard (EPS) will prevent construction of new coal plants which emit more than 450g/kWh (grams of carbon dioxide per kilowatt-hour) - the most polluting form of electricity generation;
  • A Carbon Price Floor that provides a clear economic signal to move away from high-carbon technologies by increasing the price paid for emitting carbon dioxide. It places an initial value on the price of carbon of around £16/tCO2 (per tonne of carbon dioxide in 2009 prices) in 2013, which will rise to £30/tCO2 (in 2009 prices) by 2020.

Electricity bills are estimated to be, on average, 4 per cent lower over the next two decades than they would otherwise have been

“With or without reform, household electricity bills are likely to increase over time, driven primarily by rising fossil fuel prices,” says Mr Davey. “However, electricity market reforms will help to reduce the amount that bills will increase. As a result of these reforms, electricity bills are estimated to be, on average, 4 per cent lower over the next two decades than they would otherwise have been.”

While the details of EMR were broadly welcomed, there was some concern that investment will be delayed until the Bill has worked its way through Parliament and until strike prices, which will be administered by National Grid, are published in late-2013.

“While it is reassuring to see some progress on the Energy Bill, it’s now important that Parliament not only gets it right, but does so as a matter of urgency,” says Dr Neil Bentley, CBI deputy director-general.

“With over a fifth of the UK’s generating capacity coming off stream before 2020, we face a real risk of electricity shortages in the second half of the decade. The clock is ticking to create the market certainty that will unlock billions of pounds of private-sector investment, generating many new jobs across the UK and securing an affordable supply of energy.”

Dr Gordon Edge, director of policy at RenewableUK, adds: “The timeline the Government has laid out looks very challenging to bring in wholesale change to the electricity market.”

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