The potential scale of investment, growth and job opportunities available in the energy economy was made clear as Cabinet Ministers announced new details of reforms vital to keeping the lights on and emissions and bills down.
With around a fifth of Great Britain’s ageing power plants due to close over the coming decade, and further closures in the 2020s, we need huge investment in our energy infrastructure. The Energy Bill currently before Parliament introduces vital market reforms to bring this about.
Chief Secretary to the Treasury Danny Alexander and Energy and Climate Change Secretary Edward Davey announced more details about the reforms, ahead of schedule, to give developers and investors the confidence to progress with new projects.
Secretary of State Edward Davey said:
“No other sector is equal in scale to the British power market, in terms of the opportunity that it offers to investors, and the scale of the infrastructure challenge. “Our reforms will renew our electricity supply, attracting up to £110 billion investment in a mix of clean, secure power and demand reduction, and will support up to 250,000 jobs up and down the supply-chain.
“The Energy Bill is already progressing well through Parliament and received overwhelming cross-party backing at Commons Third Reading.
“Developers and investors have been crying out for more details, sooner, and that is what we are giving them today.
“The Capacity Market will incentivise investment in new gas plant and other flexible capacity to maintain an adequate supply margin – the safety blanket over and above expected demand – for 2018 onwards.
“Ofgem and National Grid will consult on possible steps they could take to ensure that mothballed power plant or demand response is available if needed in the middle of the decade. This will mean the public can continue to enjoy a reliable supply of electricity.
“The Strike Prices for renewable technologies announced today aim to make the UK market one of the most attractive for developers of wind, wave, tidal, solar and other renewables technologies, whilst minimising the costs to consumers.
“This will help boost home-grown sources of clean secure energy, and enable us to decarbonise the power sector, with renewables contributing more than 30% to our mix by the end of this decade.
“Our reforms will keep the lights on and emissions down, and will save consumers money on their bills. The result – low-carbon, affordable and reliable power for the long-term”
Capacity Market
The Government will run the first Capacity Market in 2014. This will ensure sufficient electricity supplies from winter 2018 by attracting necessary investment in new and existing generation, as well as other forms of capacity such as demand response.
Capacity agreements, alongside long-term Contracts for Difference (CfDs) for low-carbon power, will boost supplies into the next decade and protect consumers against volatility in market price.
Similar capacity markets already operate in the USA and a number of EU countries, and one is being introduced in France.
Details confirmed:
• A Capacity Market (CM) will be initiated with the first auctions taking place subject to State Aid approval in 2014, for the delivery of electricity capacity from the winter of 2018-19, as previously proposed. This confirmation, alongside further detail on the design of the CM, will enable industry to prepare for implementation.
• Participants in the CM (who could include existing generators and investors in new plant such as gas or demand-side response), will bid to provide the total amount of electricity capacity that is forecast to be required through an auction, and if successful would receive a steady payment in the year they agree to make capacity available.
• In exchange they will be obliged to deliver electricity in periods of system stress or face financial penalties.
• The costs of capacity agreements will be met by suppliers. But the impact on bills will be partially offset by reduced wholesale prices, and consumers will be protected against volatility in market prices and costly blackouts.
Ofgem updated their assessment of supply margins in the middle of this decade, anticipating that the buffer between peak demand and supply could be lower than previously expected.
This is in part due to the low price of coal that has led coal-fired power stations in the UK to operate more often, whilst gas has become uncompetitive, leading plants to close. This surge in the use of coal has also brought forward the point at which the dirtiest plants are required to close in compliance with environmental standards.
In response, Ofgem and National Grid will each consult on extending existing arrangements they use to balance supply and demand in the short term, and to ensure enough power is available when needed. This could include contracting for additional reserve in the form of currently mothballed plant or incentivising flexible demand response.
As a result of the prudent action set out today by DECC, Ofgem and National Grid, customers will continue to enjoy security of electricity supply throughout the rest of this decade, and into the next.
Renewable Strike Prices
Also announced today are details, earlier than expected, of the proposed strike prices that will be available from 2014 – 2019 for renewable electricity including onshore and offshore wind, tidal, wave, biomass conversion and large solar projects. This support comes from within the £7.6 billion Levy Control Framework, as previously announced.
Strike Prices effectively remove price volatility risk for electricity generated from low-carbon sources, under new long-term CfDs being established by the Energy Bill. This ensures greater certainty to generators and therefore a better deal to consumers.
They form a core component of the Government’s strategy to bring forward investment in affordable low-carbon electricity generation – including renewables, Carbon Capture and Storage and new nuclear.
