The U.K. is to publish proposals in the next few days for a major overhaul of its electricity market, designed to encourage big investments in low-carbon energy.
But power companies say they lack the financial incentives to switch from fossil fuels to renewables and nuclear, and are demanding more certainty that they can recoup what are likely to be massive investments in expensive low-carbon technologies.
Britain has one of the most liberalized energy markets in the world, with many competing suppliers and few controls on electricity prices.
But a consensus has emerged that the market must be reformed if the U.K. is to raise the £200 billion ($316 billion) of investment required over the next 10 years to replace aging infrastructure and meet the country’s climate change targets.
The issue of incentives is to be addressed in the government’s consultation on electricity market reform, which begins later this month. Ministers say the proposals it will contain could lead to the most fundamental reform of Britain’s electricity sector since it was privatized 30 years ago.
Yet there are worries about the price. “Inevitably these changes will come at the cost of rising bills for consumers,” says Roger Reynolds, utilities and renewables specialist at Nomura. “Managing the potential consumer backlash is a huge political challenge.”
The consultation, which will last till next spring, is expected to include a plan to create a floor under the carbon price. The current price of allowances to emit CO2 under the European Union’s emissions trading program is widely seen as too low to encourage green investment. Ministers want to introduce a top-up tax on fossil-fuel power generators that kicks in when the carbon price drops below a certain level. It’s expected to be part of the next U.K. budget, to be unveiled in the spring.
The government also favors capacity payments for low-carbon electricity generation. These would reward companies for making their generation capacity available to the grid when supply is tight—even if much of the time it plants stands idle.
That idea is backed by Electricité de France SA, the French power company, which is spearheading the U.K.’s nuclear revival. EDF plans to build four new reactors in Britain by 2025, with the first unit starting up in 2018. But it has made it clear it won’t go ahead until Britain’s electricity market is overhauled.
Other ideas being mooted include a low-carbon obligation, which requires energy suppliers to provide a certain proportion of power from low-carbon sources such as nuclear energy; and an emissions performance standard, which would limit the amount of carbon dioxide a new power station can emit.
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