Volker Beckers looks at the governments proposals for electricity market
reform By Volker Beckers, CEO, RWE Npower
“The Government should be applauded for the pace of change they have maintained since coming into office last year, but their proposals to reform the electricity market risk trying to fix everything at once – increasing uncertainty for long-term investments rather than minimising it during this critical time.
The Government want to pull a lot of levers all at the same time. I would say pull only one at a time. That way, you remain in control.
I believe that the overriding concern must be to create the right investment conditions to support the delivery of large scale low carbon generation, such as round three offshore wind farms and the first wave of new nuclear power. This is what the UK will need to meet its energy challenges.
Britain pioneered the original revolution in energy markets, and though at times this has been a painful journey, Britain is rightly regarded globally as a leader in organising an efficient and effective energy market. Now Britain again stands on the precipice of another energy revolution, but evolution not revolution is the most effective way forward.
As more power stations than ever before come to the end of their planned lives, the need for the UK to tackle climate change and maintain security of supply during a time of immense technological change becomes increasingly urgent. The current energy market – designed for fossil fuelled generation – must change. However, it is essential that change does not come at a price that is unacceptable to customers.
For every £1 of profit we have received in the UK over the past few years, RWE companies have invested £3 back into new energy infrastructure that will serve this country for many years to come: over £1 Billion in each of the last three years.
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However, estimates of the investment challenge that face the energy industry make these impressive sums pale into insignificance. One thing is certain: the energy industry cannot face this challenge alone. We will need investment from third parties not used to investing in energy projects, and it is what they make of the Government’s proposals that will really matter.
The contractual incentive arrangements for large-scale, low carbon generation proposed by the Government, either as a ‘Contract for Difference’ (CfD) or a ‘Premium Feed-in Tariff‘ (PFiT) should therefore be the principal focus of the EMR. Other concerns should not interfere with this focus and risk delay in implementation.
In summary, the Government’s EMR proposals consist of four main pillars: 1. Low Carbon Generation Incentives: Any low carbon support mechanism should be targeted at getting round three wind, first wave nuclear and CCS retrofit to demonstration projects delivered. A contractual revenue support mechanism is best suited to satisfying the requirement of investors to have stable predictable and transparent returns commensurate with project risk, independent of the exact mechanism (CfD or PFiT) chosen. Both a CfD and a contractual PFiT could be designed to deliver investment in large-scale low carbon generation.
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