Keeping the lights on, consumers energy bills down and creating cleaner electricity to help tackle climate change, are the three goals of ambitious draft electricity market reform legislation published today.
The reforms are designed to provide investors with transparency, longevity and certainty in order to attract £110 billion of investment to bring forward new low-carbon power generation for the 21st Century.
Over the next decade, around a fifth of existing power generating capacity will come off-line.
Without these reforms, we could in the future see blackouts affecting millions of homes in some years. We would also be more dependent on importing oil and gas from overseas, this could present geopolitical risks and make our energy supply unsecure.
Demand for electricity will grow by 2050 as it is increasingly used to power our transport and domestic heating.
This leaves the UK with an energy gap which needs to be filled.
Secretary of State Edward Davey said:
“Leaving the electricity market as it is would not be in the national interest. If we don’t secure investment in our energy infrastructure, we could see the lights going out, consumers hit by spiralling energy prices and dangerous climate change.
“These reforms will ensure we can keep the lights on, bills down and the air clean.
“The reforms will also be better for the economy, leaving us less vulnerable to rising global energy prices and supporting as many as 250,000 jobs in the energy sector.
“By reforming the market, we can ensure security of supply for the long-term, reduce the volatility of energy bills by reducing our reliance on imported gas and oil, and meet our climate change goals by largely decarbonising the power sector during the 2030s”.
The draft Energy Bill proposes radical reform to the electricity market to attract the £110 billion required to build new low-carbon capacity.
It will be designed to encourage a balanced portfolio of renewables, new nuclear and Carbon Capture and Storage (CCS), and to ensure that these technologies can compete fairly in the market-place.
The main elements of the Bill are:
National Grid is to be appointed as the delivery body for EMR, to provide analytical basis for Government decisions and to administer two new market mechanisms:
- A new system of low-carbon generation revenue support – a feed-in tariff with Contracts for Difference (CfDs). These CfDs will make investment in clean energy more attractive by removing long term exposure to electricity price volatility. They will stabilise returns for generators at a fixed level known as a strike price. It will also insulate consumers by clawing back money from generators if the market price is higher than the strike price. The first strike prices will be published within the Delivery Plan in 2013.
- 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.
These mechanisms will be supported by:
- An Emissions Performance Standard (EPS)that will provide a regulatory backstop to prevent construction of new coal plants which emit more than 450g/kWh i.e. the most polluting form of electricity generation.
- The Carbon Price Floor – this was announced by the Chancellor in the 2011 Budget and was introduced in the Finance Bill. This provides a clear economic signal to move away from high carbon technologies by increasing the price paid for emitting carbon dioxide. It places an initial value on the price of carbon of around £16/tCO2 (2009 prices) in 2013, which will rise to £30/tCO2 (2009 prices) by 2020.
With or without reform, household electricity bills are likely to increase over time, driven primarily by rising fossil fuel prices.
However, electricity market reforms will help to reduce the amount that bills will increase. As a result of these reforms, electricity bills are estimated to be, on average, 4% lower over the next two decades than they would otherwise have been. Average bills for businesses and energy intensive industries will also be lower than without reform.
Gas will continue to play an important role in the transition to a low-carbon economy, to provide flexibility and help maintain security of supply. A separate strategy on the role of gas will be published in autumn 2012.