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EMR White Paper: all change

The White Paper on UK Electricity Market Reforms emerged in July, just after the last minute withdrawl of the new Energy Bill, which contained the proposals for the much-touted Green Deal, offering (commercial) loans for domestic energy improvements. It seems there was Treasury concern about the cost- and no time for parliamentary scrutiny before the recess. It will be back later though. The EMR White paper, like the revised National Policy Statement on energy, evidently had priority- perhaps because of their relevance to the ‘urgent’ nuclear programme. The NPS was duly agreed, confirming the eight new nuclear sites.

The final EMR plans are much as in the initial proposal- a carbon price floor (allegedly giving more certainty to investors in low carbon tech); a capacity support mechanism (though it won’t be firmed up until the end of the year); a long-term ‘contracts for a difference’ (CfD) system, possibly with auctions (replacing the Renewables Obligation, and also covering CCS and nuclear); and new emission performance standards (effectively blocking coal without CCS).

Energy Secretary Chris Huhne said the aim was to get to low carbon in a cost effective way by increasing market competition, but with extra support being available for key new technologies- he announced a special £30m allocation for offshore wind subject to cost effectiveness assessment. He saw the EMR as the biggest change since electricity privatisation.

So what will change? Well, when and if it all rolls through the parliamentary process in 2012/13, from 2014, the CfD would mean that technology choice will be even more driven by the market, with no set capacity obligations, but a claw back mechanism to avoid wind- falls if prices fell. The fixed price Feed-In Tariff system, seen by most people as favouring renewables, was not adopted. So nuclear may well benefit most.

In the Parliamentary debate on the White paper, Huhne was upbeat about offshore wind (so sidelining fears that it was to be cut back- though that may still be the result of the CfD). He backed on-land wind (against objections from a back bencher), saying it was about the same cost as nuclear, but was unrepentant about blocking large PV solar projects- ‘the size of tennis courts’. There was a fixed budget and we had to avoid ‘boom and bust’. Coal had a future via CCS and he thought tidal was promising ‘around the country.’ As for energy efficiency -well he alluded to the Green Deal and the Smart Meter programme.

British Gas, which had posted profits of £742m last year, had just announced gas price rises of 18%. So the mood was very much one of looking at what it would all cost. Huhne said £110bn, but the EMR would reduce uncertainties for investors and protect consumers from the vagaries of the market, though he said that prices would have to rise- but by less than they would have without the EMR. Maybe 1% extra on bills by 2020.

The details

The Carbon Price Floor (CPF) will replace the Climate Change Levy, building on the existing EU Emissions Trading System. It will provide ‘a transparent and predictable carbon price which will make investment in low-carbon generation relatively more attractive, encouraging increasing amounts of investment as the carbon price rises and ensuring that the costs of carbon emissions are reflected fairly’.

The Contract for a Difference (CfD) system (which DECC still labels a Feed-In Tariff, though it’s not a guaranteed-price FiT), will provide ‘low-carbon electricity generators with increased confidence in their revenues through agreement of a long-term contract. If the wholesale electricity price is below the price agreed in the contract, the generator will receive a top-up payment to make up the difference. If the wholesale price is above the contract price, the generator pays the surplus back. This means that, as the CPF gradually increases the wholesale electricity price, the support needed for low-carbon generators is reduced.’ Crucially ‘to reflect the different commercial and operational behaviour among different classes of generation, the Government will tailor the design of the FiT CfD for different generation types’.

On the EMR consultation, DECC says that ‘the majority of respondents were sceptical about the use of auctions to set the level of support for low-carbon generation’ but notes that the government is still keen, though to ease the transition, it is ‘minded to move from administrative price discovery processes for low-carbon technologies to more competitive forms of price discovery such as auctions or tenders when the wider conditions in the market will support their successful deployment. In the medium term, technology-specific auctions or tenders for commercially deployable nuclear and CCS generation should be possible. The Government intends to introduce an auction or tender process for price-setting for specific technologies from 2017. Tariffs for generation that will be commissioned prior to 2020 are most likely to be set through an administrative price setting process’.

There’s a new consultation on the design of the Capacity Mechanism- to protect security of supply by maintaining a plant margin. It could be targeted, with payments ‘to secure only the amount of generation capacity required to make up the expected shortfall in the market’, as a strategic reserve, or via a capacity market, with perhaps CfD interactions. Storage, Demand Side Management and interconnector options might play roles.

Finally there’s the Emission Performance standard, which is seen as the regulatory ‘decarbonisation’ driver for the market, ‘complimenting’ the CPF. Quite a package. [www.decc.gov.uk/en/content/cms/legislation/ whitepapers/emrwp2011/emrwp_2011.aspx]

Routemap

In parallel with the EMR, DECC’s new UK Renewables Roadmap sets out a ‘comprehensive action plan to accelerate the UK’s deployment and use of renewable energy, and put us on the path to achieve our 2020 target, while driving down the cost of renewable energy over time’. It identifies eight technologies that have ‘either the greatest potential to help the UK meet the 2020 target in a cost-effective and sustainable way, or offer great potential for the decades that follow’. These technologies are: • onshore wind • offshore wind • marine energy • biomass electricity • biomass heat • ground source heat pumps • air source heat pumps • renewable transport

DECC says that ‘of particular importance is offshore wind - of which we have abundant natural resource and already the world’s largest market. Our intention is to maintain this position, ensuring the full economic and energy security benefits of our offshore wind resources come to the UK rather than go to our competitors’.

Clearly then, publicly at least, DECC is not taking that much notice of the Committee on Climate Change which recommended a cut back on offshore wind since it was deemed to be expensive. Indeed it says 18GW is possible by 2020, up from 13GW in previous plans.

The Ministerial Preface to the DECC report says ‘The UK Government will respond to this advice by the end of the year; this response, alongside the Annual Energy Statement and policies to meet the 4th Carbon Budget, will place renewables firmly within the energy mix’. In the meantime DECC notes the decision to ‘provide up to £30m of direct Government support for offshore wind cost reduction over the next 4 years’.

While approximately 90% of the generation necessary to meet the 15% 2020 energy target can be delivered from its chosen subset of 8 technologies, it says ‘the remaining renewable energy generation necessary to meet the 2020 target will come from technologies such as hydropower, solar PV, and deep geothermal heat and power. These will generally qualify for renewable financial incentives and will benefit from action to unblock cross-cutting non-financial barriers, including those set out in the recent Microgeneration Strategy for England. Microgeneration technologies will also benefit from the Government’s commitment to Zero Carbon Homes’. Note the lowly position of solar.

The report then reviews the potentials for the eight selected technologies, including cost estimates, and outlines a range of actions designed to help progress their development, e.g. using the Renewables Heat Incentive. DECC will produce an annual updated edition of the Roadmap www.decc.gov.uk/en/content/cms/meetingenergy/renewableener/reroadmap/reroadmap.aspx

I’ll review reactions to the EMR package in next week’s Blog.

Posted by Dave Elliott on July 30, 2011 2:15 PM | Permalink