There are three key Energy policy objectives in the UK:

  • Keeping the lights on;
  • Meeting our Climate Change objectives;
  • Tackling fuel poverty.

What makes these objectives so demanding is doing all three at the same time. For example, we could meet objective 1 by simply building more energy facilities. Because of the technology limitations of renewable energy sources, the quickest way to do this would be to build more unabated coal and gas fired power stations. This would, of course, damage our ability to meet objective 2.

We could meet objective 2 by having really tight regulation of the energy market. We could, for example, outlaw any energy facility that produced any CO2 emissions. If we did that, we would – in the short term – become very dependent on onshore wind. Not only would this be politically problematic, creating fury in the leafy Tory shires, it also would be very unreliable.

Wind power only produces energy when it is windy so needs to be backed up by other energy sources. At the moment this is provided by gas-fired power stations but they produce CO2 emissions. It will take some years for us to build enough more CO2-friendly nuclear power stations and in the short term we would put our energy security at risk and drive up fuel prices.

Alternatively, we could make CO2-producing electricity really expensive such that Energy companies have financial incentives to switch to clean energy sources. The challenge here would be what level you set such incentives. Set them too high and you drive up fuel prices and risk energy security; set them too low and they will be ineffective in helping us meet our Climate Change objectives.

This is the challenge at the heart of the government’s Electricity Market Reform proposals. These proposals aim to incentivise clean energy and dis-incentivise CO2 intensive facilities. They also provide incentives to ensure there is always sufficient electricity in the grid.

Firstly there will be a feed-in tariff with Contracts for Difference (CfDs). These CfDs will ensure that those investing in clean energy always receive a minimum price for their electricity. The aim is to provide investors with the financial security they require to be encouraged to invest. The problem here is that the government doesn’t want to be a signatory to these CfD’s and this creates uncertainty for investors.

The Committee on Energy and Climate Change has warned that the subsequent spreading of liability across energy companies has left the scheme far too complex and potentially legally unenforceable There are also issues with how the different strike prices are being determined. EDF have raised concerns about the nuclear strike price being arrived at “behind closed doors”.

Through the feed in tariff for CfDs, there will be a mechanism to protect consumers if the market price is higher than the strike price.

Secondly, a Capacity Market will be established to reduce the likelihood of future blackouts by ensuring there is sufficient reliable capacity to meet demand, ensuring that consumers continue to benefit from reliable electricity supplies at an affordable cost. Concern has been expressed that this system needs more clarity.

In addition, an Emission Performance Standard will provide regulation to prevent the construction of new unabated coal fired power stations. The Government has given these standards a very low threshold and proposes to lock them in until 2045 – putting our Climate Change objectives in jeopardy.

There will also be a Carbon Price Floor that is aimed at making CO2 intensive technologies uneconomic, however, the Government hasn’t set a target. The Committee on Energy and Climate Change strongly criticized this describing it as “uncontentious but vacuous” and there has been pressure from the Chancellor to have lower targets to encourage further investment in gas-fired power stations.

One of the most contentious issues has been the amount of subsidies available to support clean technology and this led to a stand-off between officials from Treasury and DECC back in July. Limits have also been placed on the money consumers are expected to contribute to support new clean technology. While this controls energy bills, it doesn’t encourage investors to invest in clean technology.

The stand-off between the Treasury and DECC continues with Ed Davey and George Osborne reportedly at loggerheads over whether the UK’s energy supply should be decarbonised by 2030. Concern is growing in industry over the impact this divergence is having on the certainty that investors require to invest.

Today the UK Corporate Leaders on Climate Change wrote to David Cameron expressing their concerns. Their view is that the UK does no need to choose between economic growth and tackling Climate Change. We hope the Government listens.

Rachel Stalker is a specialist in energy policy and law.

Electricity Market Reform, The Ongoing Challenge
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