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UK Energy Market Reform Too Good To Be True? Probably.

Ann-Danylkiw | Wednesday December 22nd, 2010 | 0 Comments

The UK’s Department for Energy and Climate Change Secretary Chris Huhne announced the biggest energy reform “in decades” on Friday.

DECC Secretary Rt Hon Chris Huhne, MP

The reform package includes:

  • a carbon price floor “increasing the cost of fossil fuel based generation, and strengthening the carbon price for UK electricity generators.”
  • two Feed in Tarrifs: standard and premium contracts under which “the Government will agree to clear, long term contracts” which essentially places a certainty on the price of renewable energy (and thus the benefit to consumers and energy generators) which therefore makes investment (theoretically) less risky.
  • an Emissions Performance Standard that ensures no new coal power plants are built without carbon capture and storage technology in place
  • incentives for energy grid demand reduction measures and building spare renewable generation capacity, dubbed ‘negawatt’ capacity by the government. Negawatt capacity will be monitored by a Capacity Mechanism.

Sounds too good to be true, right?

Whether or not this policy turns out to be too good to be true will depend on the consultation process and the willingness of the conservative majority-minority coalition government to regulate the market. That’s the warning from the UK’s panacea Renewable Energy Association.

Now that the government has announced its policy, in the UK, the next step is a consultation process which generally lasts around 3 months (this is like the process of writing a bill to submit to congress).  Organizations, business, even individuals can contribute to the consultation (there’s a clever little video here that explains it). Afterwards DECC will right a summary paper which forms the policy.

The REA is a bit weary that the government is scrapping the previous government’s Renewables Obligation (RO), a certificate issued to electricity suppliers when they met renewable energy generation requirements. Instead the contracts will be auctioned.

Dr. Gordon Edge, Director of RenewableUK says that under the RO the “has turned the UK into an offshore wind powerhouse, and brought forward 20,000 megawatts of applications onshore. We shouldn’t be looking to solve a problem that doesn’t exist, or take a leap in the dark which might undermine investment.”

In a press release, REA’s Chief Exec Gaynor Hartnell explains that “Auctions would have to be frequent, with a timetable stretching out years in advance…  If all consents have to be in place prior to bidding, developers will only engage if they are very confident of winning a contract.”

Edge calls the process “untested.”

The REA recommends that contracts be auctioned “decades” ahead of time and say that those who are already ahead in renewable generation will benefit more from market incentives to promote spare capacity which could also distort energy prices and keep new entrants out of the market.

They also say that it’s important that the mechanism is constructed in such a way as to keep speculators out of the market in order to make sure that there is price stability in the market and the market price of energy isn’t driven too high. If it does go high, it will completely undermine the purpose of a carbon floor price.

The organization worries that auctions need to be constructed in a way so as to meet the investment needs of all renewable technologies.  Renewables like wind and solar for example, are in a fairly advanced state of technological development compared to wave or marine power where the dominant technological model hasn’t yet emerged.  Investment in wave is higher risk, with lower short-run returns as more R&D is needed by companies to develop technologies.

The UK government quite rightly believes that investment in all renewable and low-carbon energy technologies will be the only way that the UK achieves its carbon reduction commitments.  However, the market incentives for investors differ across technologies.  What the REA is arguing, in sum, is that general auctioning could lead to exclusion of vital technologies, technologies that the UK is well suited for (like wave power) out of the market.

While the Climate Change Committee, the body that regulates the Carbon Reduction Commitment for businesses (CRC; requires businesses of a certain size to track and reduce their carbon emissions) says that the 2030 carbon reduction targets need to be adjusted downwards in order to make certain the national 2050 target of 80% carbon reduction is met.

Given conservative governments (anywhere) are always reluctant to regulate markets, it’s unlikely that the market regulation the REA says is needed will actually emerge.  A well-regulated market requires oversight and with the UK government operating under austerity budgets for the foreseeable future, it’s unlikely the government will have the staff to oversee such regulation.

The upshot for business is the risk that the market stays confused, innovators and clean tech startups don’t get funded like they should. Long-term contracts with auctions “decades” out should instill some confidence though, and that is positive. While a carbon price floor will also absolutely help to lock-in confidence in the market, how big a difference it makes will depend on the price of carbon being set high enough.

[image Crown Copyright, DECC flickr stream]


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