Electricity Market Reform - Energy and Climate Change Contents

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]


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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Prepared 16 May 2011