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Industry reactions to UK electricity market reform

Following yesterday’s UK electricity market reform announcement, the renewable energy industry has largely given positive responses, but there are also one or two warnings about the cost for end-customers and potential disruptions.

Renewable Energy Focus has gathered some of the initial reactions below.

RenewableUK – cautious welcome

Dr Gordon Edge, Director of Policy at RenewableUK, says: “In the long-term, the cost of doing nothing to the country and to consumes will be much greater than the cost of low-carbon measures.

“However, we must also bear in mind that the Renewables Obligation has turned the UK into an offshore wind powerhouse, and brought forward 20,000 MW of applications onshore. We shouldn’t be looking to solve a problem that doesn’t exist, or take a leap in the dark which might undermine investment.”

RenewableUK CEO, Maria McCaffery, adds: “There is no doubt that in terms of cost to the consumer, reform is the best option. Various studies have shown that continuing our use of fossil fuels will eventually cost far more than building a low-carbon economy, even at a projected cost of £200 billion.

“While our preference would be to retain the current successful support mechanism, we need now to consider the details of the proposals to see if they are workable, and if so make sure that any transition to a new model is completed with a minimum of distruption.”

DONG Energy and GE Energy – positive

DONG Energy CEO Anders Eldrup, says: “We believe the package of measures in the publication of the Energy Market Reform consultation on 16th December will support continued investments in renewable generation.

“We are also pleased the Government acknowledges that market liquidity in the UK wholesale power market is a prerequisite to ensure effective market based build-out of renewable generation. DONG Energy support the intent to pursue the further actions proposed on this issue as they will contribute to establishing a clear route to market for green electricity.

“DONG Energy are pleased that the Government is seeking to create a stable, long-term framework in which investment can take place with confidence.”

GE Energy UK’s Managing Director, Magued Eldaief, adds: “The Electricity Market Reform gives the UK a tremendous opportunity to build a world leading supply chain in low-carbon technologies. The low-carbon technologies that can support the transition to a decarbonised market are available today however ambitious reform is needed to guarantee their timely deployment.

“The UK has often led European thinking in electricity market design, from privatisation to liberalisation, and the current reform process will be keenly observed in other member states.”

Committee on Climate Change – a strong welcome

David Kenney, CEO of the Committee on Climate Change, comments: “We strongly welcome [the] announcement. The four reforms proposed by the Government should bring forward required investments in clean power generation technologies over the next two decades, and limit price impacts for consumers.

“Within the package, the key reform is the introduction of long-term contracts for low-carbon capacity; these would provide confidence to investors and reduce financing costs. There are questions of detail around contract and market design which will need to be resolved over the next months.

“But the basic model proposed is in our view the right one to transform the electricity sector in a way consistent with meeting carbon budgets, enhancing security of supply, and maintaining affordability.”

Green Energy Parks – giving the right instruments

Green Energy Parks’ Managing Director, Chris Williams, responds to the proposals: “For some time now we have, as a nation, talked of the need for transition to a low-carbon economy, however we have not had adequate incentives or support in place to achieve this.”

He adds: “Green Energy Parks particularly supports the introduction of a carbon price floor and ‘contract for difference’ feed-in tariffs, which will give industry the confidence and guaranteed stability it needs to drive forward development in the renewables sector.

“We do face insecurity of supply in the future and that is exactly why these measures cannot come soon enough for all of us. This is the ‘seismic shift’ we have been waiting for.

“We need to embrace these reforms and start to build a renewable energy base in this country that is sustainable and diverse, encompassing wind, wave, biomass and combined heat and power.”

Datamonitor – need to avoid high costs

Frederik Dahlmann, Analyst at Datamonitor, comments: “Both environmental organisations and utilities have cautiously welcomed this opportunity [to influence the policy framework]. Much will depend on all industry participants (including consumer representatives who are ultimately going to pay for this) to review the Government’s plans to avoid overly expensive and counter-productive consequences. As ever, the devil will be in the detail.”

He adds: “Datamonitor believes that the EMR will be a crucial step in the right direction to achieve the Government’s goals. However, it is up to the energy industry and investors to ensure that the proposals will achieve that.”

Deloitte – theory: good, practice: difficult

Deloitte’s Energy Team member Neil Cornelius, says: “[The] consultation paper represents another staging post in the Government’s long march back towards setting up a central co-ordinating body for our electricity markets. It hasn’t got there yet. But it appears ever more likely.

“The Government appears to be committing to buying low-carbon electricity and flexible capacity under centrally determined long-term contracts. But there is little in the paper on the institutional framework that will ensure it does so at least at cost and with least unintended consequences. This remains a significant gap to close between now and the white paper.

“Contracts for difference (CfDs) in principle can preserve good incentives but experience in many parts of the world, including in the UK in the 1990s shows that getting them to work in practice is difficult. The challenge is compounded by the need for the Government to set up a whole programme of massive low-carbon purchasing. This is a further reason why an appropriate institutional framework is required.”

M&C Energy Group – consumers to foot the bill

Energy consultancy M&C Energy Group’s Energy Analyst David Hunter, comments: “The reality is that consumers will have to foot the bill for replacing Britain’s energy infrastructure, including replacing a quarter of our power stations over the next 10 years.

“The balance the Government must strike is to provide a healthy incentive for private organisations to invest without writing a blank cheque that business and hard-pressed householders can ill afford, so we look forward to seeing the detail behind the announcement.

“M&C has been calling for many of these measures for some time and we are heartened that the Government hasn’t discounted nuclear which we believe is an essential part of the UK’s energy mix.

“In an environment where energy costs are going to rise for the long-term, the Government must deliver a dynamic market where barriers to competition in generation and supply are broken down. There isn’t any room for excess profits on the back of a major investment which will be funded, in the main, by UK homes and businesses.”

Utilyx – danger of more complexity

Andrew Horstead, Risk Analyst at energy and carbon management company Utilyx, says: “[The] consultation has the power to undo the last 15 years of free market principles and is a bold move from a Government that is trying to be the greenest Government ever. The Government must guarantee prices for electricity if it is to persuade the private sector to invest in low-carbon and renewable forms of generation.

Without this, it will be impossible to hit our 2020 and longer-term 2050 targets. This consultation is a step in the right direction in terms of providing more certainty for investors but it just adds another level of complexity and hug cost uncertainty to end-users. The Government has a responsibility to ensure that its proposals deliver a simple long-term framework that allows for innovation and flexibility; the risks of getting it wrong are too great.

“The UK currently faces an energy ‘trilemma’, trying to balance security of supply, affordability and sustainability and something has to give. With so much traditional power going offline, security of supply has to be the Government’s priority otherwise we could see the lights go off.”

On the carbon floor price, he adds: “The Government previously indicated in June that a carbon floor price would replace the Climate Change Levy charged on metered electricity. Today [16 December] we learn that not only will the CCL be applied on all fossil fuels used to generate electricity, but will also retain the CCL liabilities of electricity supplied to the final consumer.

“In addition previously exempt Good Quality Combined Heat and Power (CHP) is now liable for CCL on fossil fuel burnt in CHP stations. The cost ramifications are huge and will lead some to question the financial longevity of their CHP plants.”

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