1 Introduction
1. On 16 December 2010, Rt Hon Chris Huhne MP, Secretary
of State for Energy and Climate Change, announced a consultation
on Electricity Market Reform (EMR), saying that it sat "at
the heart" of his department's mission to "deliver secure,
affordable and low-carbon energy".[1]
The Department of Energy and Climate Change (DECC) consultation
ran for twelve weeks, until 10 March 2011. The Department is now
in the process of responding to the consultation and has suggested
that legislative proposals to implement the new electricity market
arrangements would be launched in "late Spring 2011".[2]
2. The design of the electricity market has crucial
implications for DECC's delivery of sustainability, energy security
and affordability for consumers. Reform of this magnitude will
have implications across the economy now and for years to come.
We launched our inquiry on 24 December 2010, in time to contribute
to the Government's deliberations and to take an active part in
the debate and we will scrutinise the Government's proposals as
they progress through Parliament. In this Report we consider the
Government's initial proposals for electricity market reform and
make recommendations for how they must be improved when the White
Paper is published.
Carbon Price Support Consultation
3. On 16 December, HM Treasury and HM Revenue and
Customs announced a consultation on Carbon Price Support (CPS).
A CPS, in this case, is a tax designed to create a minimum price
for greenhouse gas pollution, or "carbon" emissions,
in the UK electricity generation sector. Since this is an integral
part of the EMR proposal, we considered both consultations together.
In this consultation, the Government proposed changes to the climate
change levy and fuel duty to help increase incentives for investment
in low-carbon electricity generation. The consultation invited
comments by 11 February 2011, in order to allow Ministers to make
final decisions in time for the Budget and to introduce legislation
in the 2011 Finance Bill.[3]
4. We are disappointed that the Government chose
to implement its Carbon Price Support before completing its consultation
on EMR, since it forms an essential part of that process and will
interact with other elements of EMR. According to the 2011 Budget,
a carbon price floor for electricity generation will be introduced
from 1 April 2013. The carbon price floor will start at around
£16 per tonne of carbon dioxide in 2009 prices (which is
equivalent to £19.16 in 2013-14 estimated prices) and follow
a linear path to £30 per tonne in 2020 (in 2009 prices).
This is intended to drive investment in the low-carbon power sector.
The Government calculated that the carbon price support rates
for 2013-14 would be equivalent to £4.94 per tonne of carbon
dioxide (2013-14 prices).[4]
Acknowledgments
5. We received 43 submissions of written evidence,
for which we are grateful.[5]
Professor Catherine Mitchell (Exeter University), Dr David Reiner
(University of Cambridge), Professor David Newbery (University
of Cambridge) and Dr Robert Gross (Imperial College) gave a very
helpful introductory briefing at the beginning of our inquiry
and we thank them for their input. The National Audit Office contributed
a valuable briefing for the inquiry, for which we are grateful.
We held eight oral evidence sessions during our inquiry. A full
list of witnesses can be found at the end of this Report.[6]
We also visited National Grid's Control Centre and GE's Smart
Grid Demonstration Centre as part of our work on this inquiry.
We appreciated both informative visits.
6. We would like to express our thanks to all those
who contributed to our evidence-gathering. We particularly thank
Professor David Newbery (University of Cambridge) and Dr Robert
Gross (Imperial College) who contributed much to the inquiry as
Specialist Advisers.
7. This report continues with an analysis of the
Government's objectives for EMR. Chapter 3 looks at DECC's high-level
objectives. Chapter 4 goes on to consider the missing objective:
reform of the wholesale market. Chapters 5-8 turn to the detail
of the Government's proposals, the four "pillars" of
EMR. From there, we look at the requirements for investment, which
will be vital for the success of the project. In Chapter 10, we
look at the effects of these proposals on consumers and Chapter
11 looks at how demand-side measures can mitigate those effects
and contribute to our objectives. Finally, in Chapter 12, we consider
the transitional arrangements for EMR and the Government's programme
of implementation.
1 HC Deb, 16 December 2010, cols 1064-1066 Back
2
DECC, Consultation on Electricity Market Reform, Cm 7983,
December 2010 Back
3
HM Treasury and HM Revenue & Customs, Carbon price floor:
support and certainty for low-carbon investment, December
2010 Back
4
HM Treasury, Budget 2011, HC 836, March 2011, p 32. The
Chancellor of the Exchequer announced in his budget speech that
"the price will start at around £16 per tonne in 2013".
This price was clarified by HM Treasury as being referenced on
2009 prices. Back
5
List of written evidence, p 87-88 Back
6
Witnesses, p 85-86 Back
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