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UK electricity market reform

World Coal,

Coalition measures to keep the UK’s lights on and consumer bills down and shift the economy away from a high risk, high carbon future have been unveiled.

With a quarter of the UK’s generating capacity shutting down over the next ten years as old coal and nuclear power plants close, more than £110 billion in investment is needed to build the equivalent of 20 large power plants and upgrade the grid. In the longer term, by 2050, electricity demand is set to double, as the UK shifts more transport and heating onto the electricity grid. Business as usual is not therefore an option.

The Electricity Market Reform White Paper sets out key measures to attract investment, reduce the impact on consumer bills, and create a secure mix of electricity sources including gas, new nuclear, renewables and carbon capture and storage (CCS). The Renewables Roadmap, published alongside this, outlines a plan of action to accelerate renewable energy deployment – to meet the target of 15% of all energy by 2020 – while driving down costs.

Chris Huhne, Secretary of State for Energy and Climate Change, said: “We have a Herculean task ahead of us. The scale of investment needed in our electricity system in order to keep the lights on is more than twice the rate of the last decade. The fact is that the current electricity market is not able to meet that challenge. Without action, there is a risk of uncomfortably low capacity margins from around the end of the decade and a far higher chance of costly blackouts.

“This package will keep the lights on and bills down. It will insure us against shocks from volatile parts of the world like Libya, and end the dithering about our need for new plants. We have consulted widely and we believe our reforms represent the best deal for Britain. They will get us off the hook of relying so heavily on imported fossil fuels by creating a greener, cleaner and potentially cheaper mix of electricity sources right here in the UK.

“A new generation of power sources including renewables, new nuclear, and carbon capture and storage, along with new gas plants to provide flexibility and back-up capacity, will secure our electricity supply as well as bringing new jobs and new expertise to the UK economy.”

Key elements of the reform package include:

  • The announcement in Budget 2011 that the Government would put in place a Carbon Price Floor to reduce investor uncertainty, putting a fair price on carbon and providing a stronger incentive to invest in low carbon generation now.
  • The introduction of new long-term contracts (Feed-in Tariff with Contracts for Difference) to provide stable financial incentives to invest in all forms of low-carbon electricity generation. A contract for difference approach has been chosen over a less cost-effective premium feed-in-tariff.
  • An Emissions Performance Standard (EPS) set at 450 g CO2/kWh to reinforce the requirement that no new coal-fired power stations are built without CCS, but also ensure that necessary investment in gas can take place.
  • A Capacity Mechanism, including demand response as well as generation, is needed to ensure future security of electricity supply. The Government is seeking further views on the type of mechanism required and will report on this around the turn of the year.

Publication of the White Paper marks the first stage of the reform process. The Government intends to legislate for the key elements of this package in the second session of this Parliament, which starts in May 2012, and for legislation to reach the statute book by the end of the next session (by spring 2013) so that the first low-carbon projects can be supported under its provisions around 2014. The Government will put in place effective transitional arrangements to ensure there is no hiatus in investment while the new system is established. Once established, the white paper sets out how the efficiency and effectiveness of the reforms will continue to be evaluated.

The electricity market reform package will minimise the impact on bills by insulating the UK from volatile fossil fuel prices and providing investors with the certainty they need to raise capital more cheaply. Estimates are that with the market left as it is now, domestic electricity bills will be around £200 higher in 2030 compared with today’s average annual household bill (about £500). The market reform packages published today limit this increase to £160, £40 lower than it would otherwise be.

Electricity market reform will be underpinned by a series of measures to improve energy efficiency, including the flagship Green Deal programme, the first scheme of its kind in the world, aimed at cutting carbon and bills in millions of homes across the UK. Market reform will also be supported by a strategy for future electricity networks and work led by Ofgem to improve competition, to move away from the current position where around 99% of UK customers are supplied by only energy six companies. DECC has today published the final report of the Ofgem Review, following publication of the Summary of Conclusions in May. This final report provides further detail on how the Government will seek to strengthen the regulatory framework, bringing greater clarity and coherence to the distinct roles of Government and the energy regulator.

The Government and Devolved Administrations have also published the Renewable Energy Roadmap. The Roadmap sets out a comprehensive programme of targeted, practical actions to tackle the barriers to renewables deployment, enabling the level of renewable energy consumed in the UK to grow in line with the Government’s ambitions for 2020 and beyond. This will mean over a four-fold increase in the UK’s level of renewable energy consumption by the end of the decade.

Huhne said, “Growth on that kind of scale will be challenging, but will be necessary if we are to make the UK more energy secure, help protect consumers from fossil fuel price fluctuations, drive investment in new jobs and businesses, and keep us on track to meet our carbon reduction objectives for the coming decades. It will require industry to carry on making the case for renewables and Government and the Devolved Administrations to break through the barriers that are stopping new schemes being built.”

The Roadmap also indicates that the UK should play to its strengths, identifying eight technologies that have either the greatest potential to help the UK meet the 2020 target in a cost-effective and sustainable way, or offer great potential for the decades that follow. Energy from wind, biomass and heat pumps are the leading contributors, including offshore wind – where the UK has abundant natural resource and already has the world’s largest market. The Government’s intention is to maintain this position, ensuring that the full economic and energy security benefits of offshore wind resources comes to the UK rather than its competitors. Government will also take the power to trade with its European partners where this will reduce costs further or where the UK has the potential to export.

That is why the Government is announcing up to £30 million, subject to value-for-money assessment, to support innovation in the production of components over the next four years. This builds on the recent announcement from the Energy Technology Institute to provide £25 million for a new drive train test facility at the National Renewable Energy Centre.

The Government has also asked a new industry-led Task Force to reduce the costs of offshore wind to £100/MWh by 2020. That level of cost reduction will unlock the full potential of the UK’s offshore resources, making it possible to deliver up to 18 GW by 2020 and open up the 30 – 40 GW of low carbon generation that will be necessary in the 2020s to keep the UK on track to deliver the 4th Carbon Budget.

Alongside these actions the Government is also announcing the signing of a new Memorandum of Understanding between Government departments, aviation organisations and industry to mitigate the potential impacts of wind power on radar infrastructure that it is estimated could impact up to 5 GW of onshore and 7 GW of offshore wind capacity.

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