Huhne unveils electricity market reform

14th July 2011


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The carbon floor price and long-term feed-in tariff contracts for difference (CfD) are to play a key role in ensuring secure, low-carbon energy for the UK, Chris Huhne has announced in publishing the white paper on electricity market reform (EMR).

In a statement to the House of Commons, the energy secretary outlined the government’s plans to aid the £200 billion of investment needed in electricity generation to ensure the country can cope with the future challenges of closing power stations, increased electricity demand and carbon reduction targets.

The White Paper outlines a five-pronged approach, with CfDs and the carbon floor price central to reducing risk and stabilise revenues in the low-carbon energy sectors to encourage and support investors.

The introduction of an emissions performance standard limiting carbon dioxide production to 450g CO2/kWh for coal-fired power stations, confirms the government’s commitment to decarbonisation, said Huhne.

However, while the Paper states that the new regulation will mean all new coal-stations will have to be built with carbon capture and storage (CCS) and that new gas plants are required to be carbon capture ready, it makes clear that gas-powered stations without CCS will “continue to have a key role to play in the coming years”.

While the Carbon Capture and Storage Association called the White Paper “a tremendous step forward”, Labour’s shadow energy secretary, Meg Hillier argued that the measure in the White Paper, could cause a “dash for gas”.

To ensure the security of electricity supply the government plans to change the way the country secures its back-up electricity, through the introduction of a “capacity mechanism”, which changes the contracting framework for energy producers. The government’s is yet to commit to a specific scheme, but aims to report further at the end of the year and has launched a consultation into the best approach.

Reaction to the paper has been mixed with most welcoming the pledges to support investment and cut carbon emissions, but others worried about increased energy bills.

During the White Paper’s consultation period a survey by npower found that 55% of businesses were concerned the EMR will lead to an increase in energy bills and 47% thought it would be complex and unwieldy

“The EMR White Paper shows progress on climate change and security of supply, but we must have more focus on affordability,” said Volker Beckers, CEO of RWE npower.

John Cridland, director general of the CBI, agreed, arguing that businesses and investors need more information on proposed tariffs and a capacity mechanism as soon as possible.

“Everyone wants to make our energy infrastructure more secure and sustainable for the future, but businesses cannot be expected to write a blank cheque. The government still needs to spell out what it thinks the final bill for all of its electricity market reforms will be,” he said

“Some energy intensive industries are already on a knife edge, and without help to shield them from new measures like the carbon floor price, they could struggle to stay in the UK.”

Meanwhile some environmentalists have argued that the government has missed an opportunity to drive greater energy efficiency.

"Reducing demand reduces carbon emissions and the amount and cost of electricity generation infrastructure which the UK needs to build. Energy efficiency and support for renewable energy should be the two joint priorities of our energy policy,” said Nick Molho, WWF-UK’s head of energy policy.

Alongside the EMR White Paper, the energy secretary also announced the publication of the government’s renewable energy roadmap, naming the eight most important renewable technologies for the UK and how the government plans to support them.

The report outlines substantial support for the offshore wind sector, with a pledge of £30 million over the next four years for research into lowering the cost of offshore wind and the creation of an industry task force.

Maria McCaffery, chief executive of wind and marine energy trade association RenewableUK, said the plans were a huge boost to the wind industry, bolstering investor confidence and enabling the sector to expand more rapidly.

“This announcement will allay several industry concerns and provide a basis for continued engagement between industry and government,” she said.

However, the solar sector was not as pleased with the announcements, warning that the government was failing to take into account the benefits of the technology, particularly solar thermal installations, which was not mentioned at all in the 107-page roadmap.

“Solar, delivered locally and at source, is a technology that can transform electricity market competition, a crucial issue to address when the government is looking to create radical reform of electricity markets and address the need to increase competition. This, together with the fact that solar competes with retail (not wholesale) prices, still not recognised in EMR, is deeply disappointing,” said Howard Johns, chair of the Solar Trade Association.

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