Electricity market reforms to encourage low carbon power generation

Out-Law News | 14 Jul 2011 | 5:19 pm | 2 min. read

Anticipated reforms to the electricity market in the UK will include a guaranteed price for power generated from low-carbon sources, the Government has announced.

The Government White Paper on Energy Market Reform (142-page / 1.8MB PDF) will also raise environmental standards for UK power stations and introduce a 'capacity mechanism' designed to ensure that power stations are kept on standby to cope with demand in emergencies.

However key administrative issues have been deferred for further consultation later in the year.

Energy Secretary Chris Huhne described the proposals in the White Paper as "the most significant reform of our electricity market for 30 years".

More than £110bn in investment is needed to build the equivalent of 20 large power stations and upgrade the grid, according to government figures.

A new tariff system will be introduced which will offer nuclear power stations and renewable energy sources a fixed price for their electricity, the White Paper says.

Feed in Tariffs with Contracts for Difference (FiT CfD) will be set up between energy providers and a central counterparty which will be established when the plans are implemented. Payments will be made by reference to a technology-dependent 'strike price' specified in the contract and a market reference price.

When the market reference price is below the strike price, a payment is made to the energy provider. When the reference price is above the strike price, the energy provider will make a payment to the counterparty.

The White Paper also introduces a 'capacity mechanism' designed to ensure that power stations are kept on standby to cope with emergency demand surges and the unreliability of some renewable electricity generation methods, such as wind power. A decision on how to do this will be subject to further consultation.

An Emissions Performance Standard will also be introduced to cap the amount of carbon dioxide which new fossil fuel power stations can emit.

A carbon floor price, introduced in the last Budget and coming into effect in 2013, will make it more costly to run coal and gas-powered stations.

"This is a major intervention in the electricity market and anything which sets out to create confidence in immediate investment in new low carbon energy generation must be viewed as a positive step. The obvious question is therefore whether the white paper gives that confidence," said Nick Shenken, an energy expert at Pinsent Masons, the law firm behind Out-Law.com.

"While a step in the right direction, a good deal more information from Government around the actual approach to implementation is going to be required before the right level of confidence will be generated to trigger investment decisions from any sector. Key issues like identification of the counterparty to the proposed Contract for Difference based Feed-in Tariff and related administrative arrangements have been put off until late 2011. Momentum needs to be retained so that the detail is resolved as soon as possible - otherwise it simply won't have the right impact quickly enough to assist delivery of the most pressing energy targets faced by the country in 2020."

The amount of support under the FiT CfD will be viewed as fiscal expenditure and therefore subject to spending reviews and Budgets, Shenken said.

Alongside the White Paper Huhne also published a 'renewable energy roadmap' setting a target of building 18GW of offshore wind-generating capacity by 2020 instead of the 13GW recommended by the Committee on Climate Change.