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And you thought the electricity market was already complicated

By Andrew Whitehead on Jul 20, 11 08:03 AM in Law

So there we have it - the biggest reform of our power market for 30 years. Last week (12 July) saw the publication of the much awaited Electricity Market Reform White Paper from DECC - following an intensive consultation begun before Christmas.

What's it all about, I hear you ask? In a nutshell, it's about persuading investors to put their money (about £110 billion please) into low-carbon energy infrastructure to help the UK fulfil its commitments on carbon emissions and renewable energy. And at the same time trying to pull a rabbit out of the hat by keeping power affordable to the UK consumer and, critically, ensuring security of supply.

All set against the backdrop of ever rising fuel bills, and a quarter of the UK's existing generating capacity (mainly coal and nuclear) set to close in the next decade.

To deliver all of the above, there are 4 big reforms - all widely predicted since December and so no great surprises.

Firstly, a carbon floor price. Put simply, this puts some extra cost on fossil fuel electricity generating plant, in the form of removal of valuable exemptions to the Climate Change Levy. The measure was introduced in the spring budget after a Treasury consultation, and commences in April 2013. Who are the big winners here? The renewable industry clearly, but crucially also the operators of new nuclear plant.

Secondly, the main subsidy scheme for renewables, the Renewables Obligation, is set to be replaced from 2017 by a complex feed in tariff scheme based around contract for differences, known as the FIT CfD. Essentially, non-fossil fuel generators will be able to apply for these contracts, which will make a 'top up' payment to the generator if the wholesale power price drops below a set price, and which will require the generator to make a payment if the power price exceeds that price. The aim is to provide more revenue certainty for low carbon generation, to encourage investors. The big winners? Well, renewables obviously, and again nuclear. And also the embryonic carbon capture and storage (CCS) industry, because gas plant fitted with CCS technology will be eligible for the contracts.

Thirdly, a so-called emissions performance standard (EPS) will set an absolute annual limit on carbon emissions from new fossil fuelled power stations. The effect of this will be that no new coal-fired power stations will now be built without CCS capability; another big boost for the CCS industry. But recognising the technology isn't quite ready, the EPS limit will be set at a level which will allow, in the short term, the construction of new gas plant; so expect a mini dash for gas.

Finally, a new capacity mechanism will provide a financial incentive to encourage the construction of new, flexible, reserve plant, including demand reduction measures. Government's mind is not made up here, and views are being sought on two options outlined in the White Paper.

Sometimes, things move slowly in the power sector, so don't expect these changes to come into force quickly. In fact, it will likely be as late as spring 2013 when the proposals reach the statute books, with implementation of certain aspects some time later.

Nonetheless, these reforms will be watched with interest across Europe, where similar issues are raising concerns. Indeed, earlier this month Germany approved its very own energy reform package, which apart from significant renewable energy incentives, includes a phase-out of nuclear power by 2022. Germany is one of the world's largest energy markets, and is aiming to attract the same international investors as we are.

However, one thing is clear - the package of measures is not just about building new renewable energy plant and associated infrastructure. Public enthusiasm for onshore wind farms seems less than wholehearted these days, and the solar industry - still smarting from the unexpected culling of tariffs for larger schemes under the feed in tariff fast track review - has a new reason to feel unloved by its omission from the so-called renewable energy road map. This document, which accompanied the White Paper, tips the 8 top technologies that have the greatest potential to help meet the UK's 2020 renewables targets - and surprisingly makes no mention of solar PV.

On the other hand, scare stories about power cuts always whip up public angst. And so it's perhaps no surprise then that security of supply appears to be at the forefront of policymakers' minds, with the CCS and nuclear industries - and it seems also the gas industry - emerging as big winners from this reform package. Nuclear is highly controversial, of course, with concerns raised by Parliament's Energy and Climate Change Committee that the White Paper is actually a stealth nuclear energy subsidy.

Indeed, of the so-called energy trilemma - low carbon, security of supply and affordability - the last of these appears to have taken a back seat in these reforms. The long-term forecast for consumers, who will be funding these reforms, is ever-increasing fuel bills - although Government is adamant that any increase in bills will be lower than the increases we should expect without these changes.

Aside from the Government's fuel poverty targets, which lie in tatters, this is fast becoming a business critical issue for energy intensive manufacturers in the UK. The fear is that the UK is moving too quickly with its decarbonisation plans and no-one is following; and that makes us uncompetitive on the global stage and puts jobs at risk.

Recent increases in prices by energy suppliers are primarily due to rising wholesale fuel costs, and not because of new investment in infrastructure. Many will worry, therefore, that we've seen nothing yet. £110bn of investment is a lot of money, and the returns investors will expect, have to come from somewhere.

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