E L E C T R I C I T Y
UK
Market reform and carbon price support – the EI responds
In mid-December 2010, the UK coalition government outlined four pillars of reform for the electricity market to ensure the required investment in low carbon, secure energy supplies. Gareth Parkes, Energy Institute (EI) Knowledge Manager, summarises the EI responses to the consultations.
T
he EI responses are the outcome of a build-up of engagement with government, with EI members par-
ticipating in scene-setting briefings with key government figures prior to a con- sultation launch. The EI is responding to two consultations – the Treasury’s on carbon price support and the Department of Energy and Climate Change’s (DECC) on electricity market reform (EMR) – whose ‘four pillars’ con- sist of a carbon price supportmechanism, feed-in tariffs (FiTs), capacity payments and an emissions performance standard (EPS). EImemberswere invited to attend a stakeholder workshop to discuss the impacts of proposed measures, consider any unintended consequences and iden- tify opportunities that may have been overlooked. The intentions of the session
were two-fold: To allow DECC and Treasury officials the opportunity to listen to the debate. It is important for the consul- tation team to hear stakeholder opinion directly and before it is diluted, as is often the case due to the volume and diversity ofwritten consul- tation responses.
Secondly, to use the EI member’s con- tributions as the basis for a peer reviewed EIwritten submission. The session was followed up with a
breakfast briefing between EI Fellows and CharlesHendry, theMinister of State for Energy. This provided a platform for discussion for representatives of many EI stakeholder groups affected by the pro- posed reforms. Present were representa- tives
from power generators
(incumbents and new entrants), sup- pliers, carbon capture and storage (CCS) and renewables industries, the oil and gas sector, independent consultancies and academia, as well as consumer groups. EI members were quick to agree that,
at current electricity prices, changes to the existing market arrangements are urgently needed to deliver the required £200bn investment to provide energy security in the UK and meet targets for the decarbonisation of power, whilst simultaneously coping with increased
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electricity demand. The changes must bring with them increased certainty and stability.
The four pillars of reform EI members agree that the introduction of carbon price support is a reasonable and robust measure, providing long- term support for investors. Crucially though, this must be seen by the invest- ment community to be a bankable option. Certainty in the long-term price of carbon plays an important supporting role to the EMR proposals, enabling a lower cost of capital for developers whilst reducing the burden on the con- sumer. There is consensus amongst EI mem-
bers that a low carbon incentive in the formof a FiT is themost importantmea- sure to encourage newinvestment in the energy industry. Whilst there is cautious support for the government’s preferred option, a FiTwith contract-for-difference (CfD), the lack of clarity as to how the mechanism would work in practice and interact with the other reform proposals is a concern. As a result, there is differing opinion amongst EImembers as towhich of the three-tabled FiT proposals (FiT with CfD, premium and fixed rates) would best serve investors, the energy industry and, importantly, the consumer.
In order to explore the practicalities
and increase confidence in the FiT with CfD model, the EI has offered to host a workshop session for DECC economists to work through case studies of CfD scenarios for particular technologies. This would provide stakeholders with a better understanding of the FiT with CfD in action, whilst also acting to probe the model for any unintended consequences. Whilst recognising the benefits of
introducing a capacity mechanism, EI members do not see this as important a measure as the FiT or carbon price sup- port mechanisms. A capacity mechanism that rewards flexibility would foster innovation and be a natural compliment to the intermittent generation joining the grid. However, EI members are cau- tious of supporting a targeted capacity mechanism as there is the potential for this to remove the scarcity rent and reduce the prices for the peak power product, thus disincentivising investment in new capacity and accelerating end-of- life for generation assets not included within it. EImembers recognise that the govern-
ment has attempted to put forward a balanced package and that there is a risk of losing that balance if one ormore legs were to be taken away, given its com- plexities. However, whilst understanding the government’s reasons for intro- ducinganEPS, EImembers are concerned that this measure has the least influence inmeeting the objectives of EMR.
Analysis and implementation To EI members, the issue of sufficient market liquidity is of critical importance, especially for the FiT with CfD model which would need a reference price to allow the market to function properly. The outcomes of the market liquidity review currently underway by Ofgem will be important to the success of this proposed policy. Other key factors raised by EI members as to why market price signals are vital include the need for optimal plant dispatch, the need for demand-side response and the need for continued on p43 ...
PETROLEUMREVIEW APRIL 2011
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