Electricity Market Reform: what was missing?

The UK government's draft Energy Bill was introduced into the House of Commons on November 29 to a predictably mixed reception. Included as expected are CfDs, carbon price support, an emissions performance standard (EPS), and a capacity mechanism. The single, government owned counterparty to pay out the CfDs, along with the announcement of an increase in the Levy Control Framework (LCF) funding will in particular be considered in a positive light by low carbon investors.

But what was missing?

Apart from demand-side reduction measures, which the government has decided it needs to (at last) consult on, there is no de-carbonization target. This is the most noticeable omission in the bill, and has raised the most reaction. On one hand, the absence of a target is likely to have a negative impact on investor confidence, and on the other hand, confidence will be buoyed by the explicit increase of the LCF cap.

A large portion of the trebled levy cap could go to renewable generation as opposed to new nuclear, which is already facing final investment decision delays in Somerset.  This is the crux of the problem, which should be of vital concern to electricity consumers. The increase in bills is highly uncertain and will depend on the amount of gas in the energy mix and how much energy efficiency can be realized. 

2016 will indeed be a crucial time for low carbon power. The main question that secondary legislation and debate should clear up is how much of the funding will be allocated to wind projects that will operate well beyond 2030, and how much will go to nuclear projects that will not be online before 2020.

In the absence of a de-carbonization target, the debate and secondary legislation must reassure low-carbon investors that funding and support will continue past 2020 through to 2030, avoiding any fears of asset stranding should renewables targets be met before 2020.  

The thirst for precise details will remain during the course of 2013, and will be critical to complete the picture so that the goal of low carbon, cost effective, and secure electricity remains plausible.  At present, only the last goal will be met effectively. 

Further analysis is provided on the EMR on Datamonitor’s Knowledge Centre. 

http://www.datamonitor.com/kc/utilities/

Written by Yasmin Valji

Analyst in Datamonitor's Energy Team

Follow Yasmin on Twitter: @YasminV_DMEN 

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