Features

In an interview with The Times newspaper, UK Energy and Climate Change Secretary, Ed Miliband, said that Britain’s existing, highly liberalised energy market regime was failing to deliver the investment needed to cut UK carbon emissions by more than a third by 2020.

Reflecting on the findings of Ofgem’s Project Discovery report published earlier this month, Miliband said: “We are going to need a more interventionist energy policy to deliver the low-carbon investment we need.”

The changes being considered by the Government include: reforming energy regulator Ofgem; overhauling Britain’s electricity trading arrangements (NETA); and the introducing “capacity payments” to guarantee returns to developers of low-carbon sources of power.

Ofgem’s Discovery Project undertook a year-long study of whether the current arrangements in the UK are adequate to deliver secure and sustainable energy supplies over the next 10-15 years. It concludes that significant action needs to be taken to deliver both security of supply and environmental objectives at affordable prices in the long term. The regulator also warns that energy bills could become unaffordable, with bills rising by up to 25% by 2020 to fund investment against a potential doubling of electricity demand by 2050.

Market experts endorse the report, demonstrating an increasing consensus that leaving the present system unchanged is not an option.

Ofgem has put forward a range of possible options to unlock the up to £200 billion of investment Britain may need, recognising a demand for massive private-sector investment.

Reform is needed, says the regulator, because of a convergence of measures ranging from the global financial crisis, substantial worldwide demand for investment in energy, tough EU emissions targets, the closure of ageing power stations and an increasing reliance on gas imports.

Ofgem set out five key issues, stating that although each issue is significant in its own right it is the combination of all five which causes the greatest concern. These five issues are:

• A need for unprecedented levels of investment over many years in difficult financial conditions and against a background of increased risk and uncertainty.
• The uncertainty in future carbon prices is likely to delay or deter investment in low carbon technology and lead to greater decarbonisation costs in the future.
• Short-term price signals at times of system stress do not fully reflect the value that customers place on supply security which may mean that the incentives to make additional peak energy supplies available and to invest in peaking capacity are not strong enough.
• Interdependence with international markets exposes Britain to a range of additional risks that may undermine the country's security of supply.
• The higher cost of gas and electricity may mean that increasing numbers of consumers are not able to afford adequate levels of energy to meet their requirements and that the competitiveness of industry and business is affected.

The Electricity Pool, which operated from 1 April 1990 to 26 March 2001, dictated the way in which electricity was distributed in England and Wales. The Pool involved bids from only the generators who set the price for wholesale electricity via the System Marginal Price. The system was criticised for being too inflexible. New electricity trading arrangements (NETA), put in place on 27 March 2001, involve both generators and suppliers trading in the wholesale electricity market. The arrangements favour those generators that are able to accurately predict the likely generation and/or supply, and also have the ability to respond to sudden changes (by increasing or reducing generation and increasing or reducing demand).

Miliband is also considering a the return to “capacity payments” in which power station operators would be paid for the electricity they generate and also for capacity made available, giving greater certainty to investors in renewable and nuclear energy. Capacity payments would help to bolster the reliability of a grid that was more heavily reliant on power generation from wind farms.

The UK Government will publish details of the reforms it is proposing April 2010 in the Roadmap to 2050, which will come out at the same time as the 2010 Budget.

Deborah Mills
Partner – Head of Projects
Howard Kennedy