Tuesday, May 17, 2011

Government's electricity market reforms are 'half baked'

The Government's proposals for reforming the electricity market have come under a hail of attack for being short on detail and plain wrong in other areas, as well as opening a back door for subsidising nuclear power.

According to a committee of MPs, there is a gaping hole in the Government ambitions to reform the electricity market - set out in a consultation which closed on March 10 and which is awaiting Government response - and that is an absence of a plan for the wholesale market.

The wholesale market ″would not be changed by the measures proposed", says the Select Committee on Energy and Climate Change in their review of the Government's proposals.

“The consultation document proposes a number of "bolt on" measures that reform the subsidies and structures around the market, not the market itself", they continue.

The market dominance of the Big Six energy companies must be broken up they say, "in order to allow new entrants to invest in the UK's low-carbon future". Currently, they are almost unchallenged in the sector as they control both generation and supply, therefore there is little room for independent or decentralised generation.

“This lack of liquidity in the market makes it hard for potential investors" and new entrants, says the review.

The MPs also say that "the Government's 'one size fits all' approach will fail to bring forward the low-carbon investment we need".

Some generators such as nuclear and biomass which can provide continuous power will benefit from the kind of contracts proposed, but for intermittent generators such as wind and solar, and technologies like carbon capture and storage and electricity storage itself, the contracts are inappropriate.

Support for nuclear power

It says that the proposed Feed-in Tariff with Contract for Difference is fine to expedite an extremely rapid rollout of nuclear power, "if that is the option the Government wishes to pursue," but MPs suggest other kinds of long term contract should be designed as well for other kinds of low carbon generation.

These contracts give a guaranteed price for generating electricity from nuclear power over the long-term in order to help finance the construction of the plans. However, this effectively amounts to a subsidy which is given to nuclear, whereas the Government is ostensibly opposed to such subsidy.

"Ministers ... don't want to own up to supporting [nuclear power]," said Committee chairman Tim Yeo. "This is understandable given the promise they made not to subsidise nuclear, but it would be deeply irresponsible to skew the whole process of electricity market reform simply to save face."

As a result, the government should immediately put together an independent team of experts to develop alternative financial incentives for all low carbon energy generators.

Juliet Davenport, CEO of Good Energy, a generator and supplier of renewable energy, welcomed this recommendation. "It is important that the Government creates a truly level playing field so that renewable energy doesn't miss out because of hidden subsidies for other technologies," she said.

Energy efficiency is overlooked

The committee has other criticisms of the proposals.

There is not enough focus on energy efficiency in the review. "Demand reduction ought to be a primary focus of the Government's decarbonisation agenda, as the most cost-effective and environmentally effective method of climate change mitigation."

It "should be placed at the heart of EMR and the Government's climate change policy".

DECC proposes a carbon intensity of 100g CO2/kWh for electricity generation by 2030, compared to the present 490g CO2/kWh. But MPs say instead they should accept the recommendations of the Committee on Climate Change and let the electricity market review aim to achieve 40-60gCO2/kWh by 2030.

The level of the Carbon Price Floor is crucial to the success of the reforms. MPs criticise the Treasury for introducing the price in this year's Budget ahead of the review of market reform. The floor will start at around 」16 per tonne of carbon dioxide in 2009 prices (equivalent to 」19.16 in 2013-14 estimated prices) and follow a linear path to 」30 per tonne in 2020 (in 2009 prices).

"We would have preferred the government to establish a nominal Carbon Price Support level until 2018 and then set a long-term trajectory based on advice from the Committee on Climate Change," the report says. "Until then, the Carbon Price Support represents little more than an additional energy tax, which will be passed on to consumers."

Furthermore, proposals for an Emissions Performance Standard (EPS) are ″half baked" say the MPs. "The EPS proposed in the consultation document would have no material impact and is therefore pointless. The prospect that the EPS will be tightened by unannounced amounts later on introduces additional political risk."

The caveat that the EPS could be changed later if it is not working just introduces more uncertainty into an already highly uncertain investment world, they say.

The Government also has a duty to explain to the public what the costs of decarbonisation are and how they will be met. To be sustainable the reforms must have public support.

More detail is also called for in other areas, such as interconnection, carbon price trajectories, the contribution of decentralised generation, technological improvements, the pace of electrification in the domestic heating and transport sectors, and what happens if the price of gas falls.

A target timetable for implementation must be published as soon as possible, once the details are right, to reduce the uncertainty that is deterring investment.

Electricity market reform must also be coordinated with other developments, such as the Energy 2050 strategy in Europe and the transmission pricing review.

This topic is too important to get wrong, they conclude. Without the 」110 million of investment necessary in the electricity sector in less than 10 years, the UK will not meet its decarbonisation and energy security targets.

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