Rt Hon Chris Huhne MP, Secretary of State for Energy and Climate Change 2010-12

COALITION ANNOUNCES TRANSFORMATION OF POWER MARKET

Reforms aimed at moving the UK to the front of the global race for electricity investment, driving the growth of clean-energy industries in the UK and ensuring the best possible deal for consumers were proposed by coalition ministers on16 December 2010.

The Department of Energy and Climate Change and HM Treasury have together launched consultations on fundamental reforms to the electricity market to ensure the UK can meet its climate goals and have a secure, affordable supply of electricity in the long term.

Energy and Climate Change Secretary Chris Huhne said, “These reforms lay the foundations for a sustainable economy, bringing billions in investment in the UK through greater certainty, safeguarding jobs up and down the supply chain and giving the UK real competitive advantage in advanced energy technologies.

“More than £110bn of investment is needed in new power stations and grid upgrades over the next decade — that’s double the rate of the last 10 years. Put simply, the current market is not fit to deliver this.

“The UK was first to put binding carbon-reduction targets into law. Now the coalition is taking the historic step of introducing, permanently, a level playing field for low-carbon technologies in the UK’s electricity market.

“Without investment in renewables, new nuclear and carbon capture and storage, emissions will remain too high; we will become dependent on energy imports and increasingly vulnerable to fossil-fuel price volatility.

“Low-carbon technologies must be given the chance to become the dominant component in our electricity mix.

“In the new, reformed UK electricity market, the economics of low carbon will stack up like nowhere else in the world. By 2030, three-quarters of our electricity could be low carbon.

“Crucially, our reforms will also make sure there is enough spare supply to keep the lights on reliably. They will protect the rules for existing investments. And, over the long term, they will achieve more while resulting in bills lower than they would otherwise be.”

Economic Secretary to the Treasury Justine Greening said, "The launch of this consultation demonstrates our continued commitment to being the greenest government ever — providing secure, affordable and low-carbon energy. I want this to be a green light for industry, giving them the overdue confidence and assurance they need to invest in low-carbon power generation.

"This is the first step towards getting the investment we need in low-carbon technology and more energy-efficient homes and businesses. Responses to this consultation will help ensure that these measures are well-designed and cost-effective."

There is widespread consensus that reform of the electricity market is needed. The scale of the investment challenge is huge:

• A quarter of the UK’s existing generation capacity will need replacing by 2020 as many nuclear and coal plants reach the end of their lives — that is 19GW or about 20 large power stations. Some new gas-fired power stations will be needed to complement renewables and the first new nuclear power station.
• About 30 per cent of our electricity must come from renewables by 2020, up from 7 per cent today, to meet our contribution to Europe’s target on renewable energy.
• The power sector needs to lead the decarbonisation of our economy. It must be largely decarbonised during the 2030s to keep us on track for meeting our climate-change goals.
• Our 2050 Pathways show that electricity demand may double by 2050 as more heating and transport is shifted onto the grid to decarbonise the wider economy.

Some measures have already delivered investment in new low-carbon generation — the Renewables Obligation and the EU Emissions Trading System, for example. But the bias towards fossil-fuel generation remains. In the current market this is a lower cost and lower risk investment than low-carbon technologies, all of which have relatively high upfront capital costs.

In addition, the reserve margin of spare generating capacity will fall during the next decade, and the government is not confident the current market will guarantee adequate electricity at peak periods.
Under the reforms outlined today, the competitive market will remain intact, but four inter-locking policy instruments are proposed to change the returns generators can expect for the power stations they build and the electricity they generate:

1. Greater long-term certainty around the additional cost of running polluting plant through a carbon price floor. Proposals from the Treasury to provide greater support and certainty to the carbon price will increase investment in low carbon generation by providing a clearer long term price for carbon in the power sector.

2. Long term contracts for low-carbon generation will make clean-energy investment more attractive still. Through a proposed ‘contract for difference’ Feed-in Tariff (FIT), the government will agree clear, long-term contracts, resulting in a top-up payment to low-carbon generators if wholesale prices are low but clawing back money for consumers if prices become higher than the cost of low-carbon generation. An alternative ‘premium’ feed-in tariff is also set out in the consultation document.

3. Additional payments to encourage the construction of reserve plants or demand reduction measures (so-called ‘negawatts’) to ensure the lights stay on. A capacity mechanism will ensure there remains an adequate safety cushion of capacity as the amount of intermittent and inflexible low-carbon generation increases.

4. A back-stop to limit how much carbon the most ‘dirty’ power stations — coal — can emit. An Emissions Performance Standard will reinforce the existing requirement that no new coal power stations are built without carbon capture and storage.

More than £110bn investment is needed in power stations and grid upgrades by 2020, and much more beyond that. The reforms are aimed at giving existing players and new entrants in the energy sector the certainty they need to raise this level of investment. Ofgem’s review into the liquidity of the wholesale electricity market will be an essential complement to the reforms.

The government’s preferred package of reform offers a better deal for consumers over time. By 2030, the new market could deliver an electricity mix far more clean and secure and bills lower than they would otherwise be. Reducing carbon intensity of the electricity mix from 500gCO2/kWh today to 100gCO2/kWh in 2030 can be achieved at the same time as annual household electricity bills being around 4 per cent or £30 lower on average in the five-year period 2025–30 than they would otherwise be if we left the current policy framework in place. This is despite a higher level of ambition — our current market arrangements will only deliver carbon intensity of 200gCO2/kWh. Beyond 2030, as a result of our reforms, household bills will remain lower and more stable than they would otherwise have been, as the electricity mix will be less exposed to gas price fluctuations and high-carbon permit prices.

The four proposed reforms build on the recommendations of the Committee on Climate Change; they make good on specific commitments in the coalition’s programme for government, including that there will be no subsidy for new nuclear, and they live up to the prime minister’s promise that this would be the greenest government ever.

Next steps and transition
Change will be gradual and managed carefully. As well as giving certainty for the longer term, ministers are providing reassurance to the industry that the rules for existing investments will be protected. By consulting on a process and principles for the transition to new market arrangements, the government aims to minimise any uncertainty.
The government is interested in views on whether the preferred package of reforms is the right one. It is anticipated that reforms will be in place by 2013 but that renewables investors would be able to build under the RO until 2017.

Electricity Market Reform — oral statement to Parliament by the Secretary of State for Energy Rt Hon Chris Huhne (16 December 2010)

Mr Speaker, today we begin consulting on the reform of the electricity market. This programme sits at the heart of my department’s mission: to deliver secure, affordable and low-carbon energy.

The case for reform is clear. We need significant investment in our energy infrastructure. As old coal and nuclear plants shut down — and demand for electricity grows — we must build the next generation of power stations. The electricity they deliver must be both affordable and sustainable, helping us to meet our emissions reduction targets — and keep the lights on.

The current energy market has served us well. But it cannot deliver long-term investment on the scale we need, nor can it give consumers the best deal. Left untouched, it could lock carbon emissions into the system for decades to come.

Investors and boardrooms around the world want to know whether the UK is a good place to do energy business. Today, we are setting out our plans to make it one of the best places to do energy business.
The challenges — and the opportunities — are huge. Put simply, we face growing demand, shrinking supply and ambitious emissions reductions targets.

Demand for electricity could double by 2050 as we decarbonise the economy.

Thirty per cent of our electricity must come from renewables by 2020, up from 7 per cent today, to meet our contribution to the EU renewable energy target.
In the next 10 years, a quarter of our existing power plants will need to be replaced as nuclear and coal plants reach the end of their lives.

Without action, we will face a real and growing threat to the security of our supply. The reserve margin of spare generating capacity will fall over the next decade and the risk of interruptions to our energy supplies will rise.

So we must build the next generation of power stations and act to ensure there will be enough reserve capacity to meet our needs. Together with renewables, we will need new gas-fired power stations and new nuclear plant. We must attract more than £100bn of investment in new power stations and grid connections by 2020 — double the investment rate of the last decade. And we must rebalance our market framework to attract investment in the right technologies. At the moment, there is a bias toward low-cost, low-risk fossil-fuel generation. Renewables, nuclear and carbon capture and storage all have relatively high upfront capital costs. But a more diverse, lower carbon energy mix is better for our energy security, better for our economy and better for our planet.

Some measures have already delivered investment in new low-carbon generation — the Renewables Obligation and the EU Emissions Trading System. But we must go further, and faster.

To secure reliable, affordable low-carbon electricity, we must change the market structure. We must create the right framework to ramp-up power generation and secure our supply. And we must deliver cleaner, greener electricity for the 2020s and beyond.

Today, we are proposing new incentives to drive investment while protecting the rules for investments already made. The focus will shift permanently from conventional fossil-fuel fired electricity to low-carbon technologies — renewables, nuclear and cleaner fossil fuels.

Our preferred package of reforms is designed to strike a balance between the best possible deal for consumers and giving existing players and new entrants in the energy sector the certainty they need to raise investment.
Reform will be gradual. We want to reassure industry that the rules for existing investments will be protected. By consulting on a process and principles for the transition to new market arrangements, we aim to minimise uncertainty.

The competitive market will remain at the centre of our energy policy. But the four elements of the reform package announced today will change incentives in the market and ensure both the security and decarbonisation of our power-supply system whilst minimising costs to consumers.

First, greater long-term certainty around the additional cost of running polluting plant to make lower carbon investment more attractive. Proposals set out in the HM Treasury consultation to support the carbon price directly tackle the core problem — putting a better price on emissions, increasing the cost of fossil-fuel-based generation, and strengthening the carbon price for UK electricity generators.

Second, greater revenue certainty for low-carbon generation will make clean-energy investment more attractive still. Through the proposed contract for difference feed-in tariff, the government will guarantee greater revenue certainty for low carbon in the form of a top-up payment if the wholesale price is below the feed-in tariff and a potential claw back for consumers if wholesale prices are above the contracted tariff.

Third, additional payments to encourage the construction of reserve plants or demand reduction measures to ensure the lights stay on. Capacity payments will create an adequate safety cushion of capacity as the amount of intermittent and inflexible low-carbon generation increases.

And fourth, a back-stop to limit how much carbon any new coal-fired power stations emit. An Emissions Performance Standard will reinforce the existing requirement that no new coal power stations are built without carbon capture and storage.

Together, these four reforms make good on our commitments in the coalition’s programme for government. They will make the UK a prime location for low-carbon energy investment. They will ensure our energy supply is cleaner and more secure. They will protect the consumer. (While prices will rise in the medium term, the additional impact of the reform packages will be small but, by 2030, consumer bills will be lower than if we did not reform the market.) And they will lay the foundations for the sustainable economy of the future, bringing jobs up and down the supply chain.

The consultation that opens today invites everyone to tell us whether they think the preferred package of reforms is the right one and to provide the evidence to support their views. Final recommendations will be published in a White Paper in late spring 2011 and the reforms introduced before the end of this Parliament. We are also reviewing the role of Ofgem and the energy regulatory framework, and today we are publishing the government’s response to the call for evidence on the terms of the review.

We have a once-in-a-generation chance to rebuild our electricity market, rebuild investor confidence and rebuild our power stations. Like privatisation before it, this will be a seismic shift — securing investment in cleaner, greener power and delivering secure, affordable and low-carbon energy for decades to come.

Biography of Rt Hon Chris Huhne MP, Secretary of State for Energy and Climate Change 2010-12.
Chris Huhne has been Member of Parliament for the Eastleigh constituency in Hampshire since 2005, having been member of the European Parliament for the same area for six years (1999–2005). On entering Parliament, Chris Huhne served as Shadow Chief Secretary to the Treasury until 2006, when he became Shadow Secretary of State for the Environment, Food and Rural Affairs and then, most recently, Shadow Home Secretary.
Before entering politics, Chris was a financial and economic journalist for 19 years at The Guardian, The Independent and The Economist. He also founded one of the City’s largest teams of economists, advising pension funds on overseas investments.