UK unveils plan to bridge looming energy gap

London - The UK government has published its draft Energy Bill, which sets out how it intends ‘to keep the lights on’ while pulling the plug on 20% of the UK’s power generation capacity.

The proposed reforms, ministers hope, will help attract £110 billion of investment in nuclear and renewable power plants, as well as establishing carbon capture and storage facilities. These will be needed to replace much of the UK coal power fleet and ageing nuclear facilities over the next decade.

Under the Bill, National Grid is to be the delivery body for Electricity Market Reform (EMR): informing Government decisions and administering two new market mechanisms - a feed-in tariff with Contracts for Difference (CfDs) and a Capacity Market.

CfDs are intended to make investment in clean energy more attractive by removing long-term exposure to electricity price volatility. They will stabilise returns for generators at a fixed ‘strike prices’, which will be published in 2013.

The Capacity Market, meanwhile, is designed to reduce the likelihood of power blackouts by ensuring there is sufficient reliable capacity to meet demand at an affordable cost.

These mechanisms will be supported by an Emissions Performance Standard (EPS) to prevent construction of new coal plants which emit more than 450g/kWh and the Carbon Price Floor which will increase the price paid for emitting carbon dioxide.

The Carbon Price Floor is to put an initial value on the price of carbon of around £16/tCO2 (2009 prices) in 2013, which will rise to £30/t CO2 (2009 prices) by 2020.

Gas will continue to play an important role in the transition to a low-carbon economy, said the Government. A separate strategy on the role of gas is to be published in autumn 2012.

“By reforming the market, we can ensure security of supply for the long-term, reduce the volatility of energy bills by reducing our reliance on imported gas and oil, and meet our climate change goals by largely decarbonising the power sector during the 2030s, ” said UK secretary of state Edward Davey.

“Keeping the lights on, consumers energy bills down and creating cleaner electricity to help tackle climate change, are the three goals of ambitious draft electricity market reform legislation published today.

“Without these reforms, we could in the future see blackouts affecting millions of homes in some years. We would also be more dependent on importing oil and gas from overseas, this could present geopolitical risks and make our energy supply unsecure.

“Demand for electricity will grow by 2050 as it is increasingly used to power our transport and domestic heating.
This leaves the UK with an energy gap which needs to be filled.”

Industry reaction:

Steve Radley, director of policy at the EEF:

“The bill lays the foundations for a radical shake-up of the electricity market and can help to shape a new approach to climate change. We need to strike a better balance between encouraging investment in low carbon energy and keeping a lid on rising subsidies for renewable energy. However, with government estimates showing that its policies are already adding 22% to electricity prices for business and forecasting this to rise to 34% by 2020, the focus must be on developing the most cost effective mix of low carbon energy.”

Electricity market reform needs to address a persistent competitiveness gap in electricity prices since the middle of the last decade. Government statistics show that since 2006 UK industrial prices have, on average, been 7-14% higher that the EU/G7 median
The issue is most acute for energy-intensive industries. Since 2006, the UK’s largest industrial consumers have been paying 17-24%[1][2] more than the EU average. Compounding the issue is the fact that, unlike in the UK, in countries such as France, Germany and Sweden these companies receive a significantly greater discount on energy taxes.

However, the impact of green policies is becoming more and more widespread in the sector. Small, non-energy intensive, manufacturers are increasingly feeling the strain.
The cost of green policy measures is a key factor. The government estimates that its policies are already adding 22% to electricity prices for businesses. This is forecast to rise to 34% by 2020 and 45% by 2030. Unlike fossil fuel price increases, which are a global factor, policy costs are difficult for manufacturers competiting in global to pass on to customers.

EEF is concerned that businesses will pick up the tab for government policies. In contrast with domestic consumers, Government has estimated that its policies, including electricity market reforms, will increase the electricity prices paid by businesses by more than quarter (26%) by 2020 even in a high fossil fuel price world.

Steve Elliott, chief executive of the Chemical Industries Association:

“Manufacturing in the UK needs help and support to deliver the green future we all want to see. That help does not have to be free handouts but just a halt to crippling costs would be a start. I am afraid this Bill, which has some attractive parts, will yet again heap more cost on to business.

In a globally competitive market I worry that companies will have further reason to move investment away from the UK. The nuclear industry does need support but if that support comes through heaping the cost onto already hard-pressed customers then that customer base will diminish.

In our sector - where over 70% of companies are foreign headquartered and where we have a unique and underpinning role in making the products and technologies that deliver the green economy- an unaffordable business model will make that harder at the very time when we should be making it easier.

The Bill contains some measures we do support such as to ensure secure UK supplies of electricity under the low carbon transition. However, to ensure growth, it’s also vital that competitiveness impacts on sectors like chemicals are minimised. Today’s proposals for Electricity Market reforms show there is still much work to do.

While the Bill promises to assist power developers to make early investment decisions, it only reaffirms government’s commitment to explore the options to reduce EMR impacts on energy intensive sectors like chemicals.

And there is no proposal on how to re-incentivise our sites’ energy efficient combined heat and power generation which offers more cost effective carbon savings than many of the technologies being pursued under the EMR. We look forward to these issues being addressed promptly as part of a fully fledged strategy for energy.

We agree with the government that Electricity Market Reform measures need to be as cost effective as possible and to complement the market. As part of this it’s important that Contracts for Difference and the Capacity Mechanism work together and that due weighting is given to this Autumn’s gas generation strategy.”

Graham Meeks, director of the CHPA, which represents businesses delivering low-carbon CHP and energy savings measures:

“The Bill announced today may be an important step in securing investments low-carbon power generation in the 2020s and 2030s, but may do little or nothing to address the energy challenges we face in this decade ahead of us.

“Consumers are facing the prospect of rising energy costs as old power stations close, but the reality is that the market is facing an hiatus in investment in new power generation.

“To tackle this problem we need simple measures that will drive investment in proven and reliable carbon-savings technologies - renewables, gas with combined heat and power, and straightforward energy efficiency.

“We welcome the Government’s move to publish the draft Energy Bill and expose it to pre-legislative scrutiny. It is vital that this process results in reform proposals that are workable in practice and which work in the interests of consumers today - delivering truly affordable and reliable low-carbon energy in the coming months and years, not just in the next few decades.”