Return of the P-word: the Government’s Electricity White Paper
The P-word is back – the Government’s latest White Paper on electricity market reform (published on 12 July) is entitled Planning our electric future. For many decades, planning seemed to have been dropped from the electricity policy maker’s tool kit, indeed to have become something of a dirty word, but it has now returned, and apparently without shame.
In a way, this is not a surprise – successive OIES publications, Comment pieces and presentations over the past few years have described the previous Government’s attempts to reconcile its belief in competitive markets with its commitment to environmental targets. These attempts were never convincing – an earlier Comment piece concluded that the 2006 Energy Review “fails to address the fundamental question of how energy policy objectives can be implemented in a liberalised market” and in 2009 a presentation warned that “the end is nigh” for electricity market liberalisation. So the fact that the Government now regards itself as responsible for planning our future electricity system may just be the inevitable conclusion of a painful journey.
The Government is facing two big problems in this area; the first is decarbonising electricity. It has accepted the advice of the Climate Change Committee that the system must be low carbon by the 2030s (with some wiggle room around whether this means emissions of less than 100 or less than 50g/kWh and whether the target has to be achieved by 2030 or at some stage during the following decade). But it also faces a potential security issue – a large number of current plants are due to retire from the middle of this decade either because of environmental regulation (as will be the case with many coal plants, under the Large Combustion Plants and Industrial Emissions Directives) or because they will reach the end of their permitted lives (most nuclear plants). This will lead to the closure of around one third (according to most commentators) or one quarter (according to the Government) of our generating plant over the next decade. The two problems coalesce in the challenge of providing incentives for the necessary new investment, the scale of which is enormous – around £110 billion. The Government has concluded, along with most commentators, that “current electricity market arrangements are not likely to deliver the required scale or pace of investment” and that reform is therefore required.
The market reform proposals on which the Government has been consulting since last December have four main elements:
• Long term contracts for investors in low carbon electricity generation
• A Carbon Price Floor to improve incentives for such generation.
• An Emissions Performance Standard to regulate the performance of new fossil plant.
• A Capacity Mechanism to remunerate providers of generating capacity and ensure system adequacy.
The dominant theme underlying these measures is the need to reduce investment risks, especially for low carbon investment; it is hoped that this will both help ensure the necessary investment is brought forward and reduce the costs of meeting the Government’s environmental targets by lowering the cost of capital.
To read the full paper, click here.