By Ed King
An influential body of UK MPs has released a critical report into UK government plans to reform the electricity market.
Like most countries worldwide, the UK is facing the challenge of meeting increased levels of electricity demand while also having to cut carbon emissions. A fifth of the UK’s fleet of fossil-fuelled and Nuclear power stations are likely to come out of service by 2020.
The current economic crisis is also putting intense pressure on state finances, leading to conflict between the UK’s Department of Energy and Climate Change (DECC) and the Treasury, who control the purse strings.
The Treasury appear unwilling to ramp up investment in ‘green electricity’, and have been accused of blocking renewable energy initiatives by Energy and Climate Change Select Committee chairman Tim Yeo.
The 2008 Climate Change Act established a legally-binding target to reduce the UK’s greenhouse gas emissions by at least 80% below 1990 levels by 2050. In June 2011 the government adopted a new carbon budget, agreeing a 50% reduction in emissions by 2025 relative to 1990 levels.
Below I have picked out the key criticisms from the Energy and Climate Change Select Committee report – these are their own words – I have not paraphrased or edited the copy, bar adding explanations which are marked in brackets.
No clear goals:
The Department of Energy And Climate Change (DECC) stated objectives for reforming the electricity market (to move to a secure, more efficient, low-carbon energy system in a cost-effective way) are uncontentious but vacuous; very few people would seriously object to these aims. However, the lack of specific outcomes means that there is still uncertainty about what exactly the government is hoping to achieve through these reforms.
Not enough focus on energy efficiency:
As with many aspects of energy policy, the Government has fallen into the trap of focusing far too closely on the supply side of the energy system, while neglecting to consider the contribution that demand-side activities could make to security and climate change objectives. Thinking about the demand-side needs to be given a much higher priority in the Bill, not least because it is likely to deliver much more cost effective solutions than building ever greater levels of generating capacity.
It is completely unsatisfactory that DECC’s work was not completed in time to be published alongside the draft Bill. This suggests that DECC is still failing to give enough priority to ensuring that demand-side measures contribute to our energy policy goals.
(DECC released a report on how it could reduce consumer demand for electricity this month. UK electricity demand in 2010 was 328 TWh – in 2030 it is projected to rise to 411 TWh. 155TWh of demand reduction potential (40%) has already been identified)
Negative effect on independent producers:
Witnesses told us that the EMR (Electricity Market Reform) proposals as they stand will in fact deliver the exact opposite of this ambition; they are likely to lead to greater levels of vertical integration and fewer independent players in the market. It will become a “big boys’ game” that will not work for “little people”.
The Coalition Agreement states that “We will encourage community-owned renewable energy schemes where local people benefit from the power produced”. However, the Renewable Obligation has not delivered community-owned schemes and the proposed CfDs are also unlikely to work for community schemes. A simple Fixed Feed-in Tariff would be a more appropriate form of support.
(The Renewable Obligation was introduced in 2002. It places an obligation on UK electricity suppliers to source an increasing proportion of electricity they supply to customers from renewable sources.)
Emissions Performance Standard:
The Emissions Performance Standard (a specified emissions threshold for new power stations) as currently proposed would be at best pointless. At worst, the decision to grandfather (once a plant receives planning permission it will not be affected by subsequent changes to emissions rules for a certain period) the initial level until 2045 may undermine our ability to meet long-term carbon targets and so the length of the grandfathering period should be reduced.
(Simon Skillings from E3G warned that if the EPS was grandfathered until 2045, the only lever available to future governments to regulate emissions from unabated gas-fired plant would be the carbon price: “it will need to be very, very high”)
Dash for gas warning
The Government’s intention to review the EPS in 2015 is another source of uncertainty for investors. It may even cause a “dash for gas” itself, if investors rush to build gas plant before the review. We are concerned that DECC’s decision to grandfather the EPS until 2045 is not compatible with our long-term decarbonisation objectives.
If too much new unabated gas-fired plant comes forward under these arrangements, future governments could be faced with a tough decision either to miss the carbon budgets or to set an extremely high carbon price.
Time for policy certainty:
It is right to prioritise the decarbonisation of the electricity system because this is likely to deliver the most cost effective route to meeting our 2050 climate change targets. Although statutory carbon reduction targets are set out in the Climate Change Act 2008, these are economy wide, rather than sector specific.
We conclude that providing greater clarity about the contribution that the power sector is expected to make towards meeting these targets would help to provide certainty to investors. The Government should set a 2030 carbon intensity target for the electricity sector in secondary legislation based on the recommendation of the Committee on Climate Change.
What price Nuclear?
Since there is little competitive pressure or prospect of moving to auctions for new nuclear, we are concerned that the strike price for nuclear could be driven upwards. We hope that industry claims that the cost of nuclear is competitive with other forms of low-carbon energy will be reflected in the offers they put forward during strike price negotiations.
We do not believe that a nuclear strike price higher than that given to offshore wind would represent good value for money to the consumer. The Secretary of State should not agree to contracts of this nature.
Lack of cooperation from Treasury:
The perceived conflict between DECC and HM Treasury on some aspects of EMR is also contributing to uncertainty among the investor community. We sincerely hope that these two departments can in future develop a better working relationship than they have demonstrated to us during the course of our inquiry. We hope that all departments will present a clear, consistent and united message as the Bill passes through the House.