enews July 2011

EMR white paper: Step 1 of 3

There has been one big question asked about electricity market reform over the past few weeks. Whether the government's much-anticipated white paper will enable business to invest in the technologies we need to restrain spiralling fossil fuel prices, or whether it would leave crucial decisions open. The white paper yesterday makes it clear that big questions remain unanswered.

First, the good news. The flagship measure, Contracts for Difference (CfDs), is a potential boon for green investors. Make no mistake, the legal enforceability of contracts should significantly reduce the cost of capital, which forms a large part of the costs of low carbon technology like wind turbines.

The announcement that demand response - cutting demand at peak times - will be able to compete with new power stations is a real positive as well. Using conservative estimates, 2GW of demand response could be available by 2020. This could prevent the need to build - and pay for - two large power stations alone. But the potential for demand response is much greater, at around 11GW, or a sixth of our current power demand.

On the generation side, following advocacy by Green Alliance and its partners, carbon capture and storage (CCS) has now received equal billing as a low carbon option. In view of the continuing role coal and gas may play in UK and international energy consumption, this is a welcome change.

The government's view that 18GW of offshore wind is possible by 2020 is also an encouragement to an industry which could make green growth and jobs a reality for the UK.

Finally, and perhaps most significantly, the white paper sets a clear direction of travel for the electricity market: it needs to provide the lion's share of decarbonisation which the government committed to in the fourth carbon budget in May.

This white paper gives government big policy levers to pull to decarbonise the economy.

Now for the not-so-good news. One thing which could be lost in moving from the current subsidy regime to CfDs is a volume target. Put simply, despite its flaws, the existing system sends a crystal-clear signal to investors about the size of the green energy market, justifying private sector investment in the technology and supply chain needed to make green growth and lower costs a reality. The white paper leaves out the crucial question of how many CfDs the institution which will administer these will give out. This is to be decided by the end of the year. Getting it wrong would be the undoing of the whole market reform process.

Because this is about the funding level, the whole programme is at risk from a Treasury criticised last week for seeing the "green economy is an 'add-on' rather than an integral part of the government's sustainable development plans."

Another issue which remains to be resolved is absolute demand reduction. The white paper includes encouraging language on demand response, but these aren't the negawatts we're looking for. Where demand response moves demand around to avoid peaks, absolute demand reduction pits companies which can demonstrate real, long-term energy savings against companies seeking to build our way out of increasing energy demand. Government should put as much effort and money into cutting demand as it does to support electricity generation. This isn't some green dream. It's been done in the US for decades because it reduces the cost of providing power, which cuts consumer bills.

Overall then, the white paper is step one in a three step process of market reform, which must culminate in next year's Energy Bill. It's a step in the right direction, but the next step needs to give demand reduction an equal footing with generation, clarify the amount of carbon the electricity sector can emit over the next two decades to be compatible with our carbon budgets, and set volume targets for renewables to ensure that the private sector invests in the supply chain we need to get green growth and cut the cost of decarbonisation.

Dustin Benton, senior policy adviser
dbenton@green-alliance.org.uk

A version of this article first appeared on 12 July 2011 on BusinessGreen

related links

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