House of Commons - Electricity Market Reform

Electricity Market Reform - Energy and Climate Change Contents

3 DECC's high level objectives

31. The EMR consultation document sets out three high level objectives—decarbonisation of the electricity sector; energy security; and affordability.[24] These are the right objectives, but there must be more detail when the Government produces its White Paper. A second tier of objectives will be required to give direction to the implementation of EMR.

32. Simon Skillings (E3G) suggested that the three objectives were not spelled out in enough detail, which left room for uncertainty and ambiguity.[25] The Combined Heat and Power Association (CHPA) also agreed with the overall objectives, but said that a second level of goals was needed. CHPA said that "there is an absence of a clear in-depth analysis of what issues exist and, vitally, how structural market reforms could address these. By placing these issues as the central point of market reform, the Government would be better placed to develop proposals for new interventions, such as a Feed-In Tariff".[26]

Decarbonisation

33. Under the Climate Change Act 2008, the UK is committed to reducing greenhouse gas emissions by at least 80% by 2050 against a 1990 baseline. This will require a radical increase in near-zero carbon generation, including renewable energy, demand-side reductions and cleaner ways of using conventional fuels.

34. Professor Dieter Helm suggested that a cheap and efficient way to meet our carbon reduction goals would be to build more gas Combined Cycle Gas Turbine (CCGT) generation instead of renewables until 2030, before scrapping those assets and shifting to offshore wind.[27] However, this proposal was strongly contested by other witnesses. Dr Gordon Edge told us "I can't see how anyone would want to invest in a gas-fired power plant on that kind of basis—that at some time in the 2020s they would forcibly shut it. It does seem like a very odd way of going on".[28]

35. Under the EU Renewable Energy Directive 2009 the UK must generate 15% of energy from renewables by 2020.[29] In order to meet legally binding targets, approximately 30% of electricity will need to come from renewable sources by 2020, up from 6.6% in 2009.[30] According to DECC, this target is equivalent to a seven-fold increase in UK renewable energy consumption from 2008 levels: the most challenging of any EU Member State.[31] We recognise that having a renewables target does little to contribute to European carbon reduction goals in the short term, because it will not reduce the cap on emissions established under the EU Emissions Trading System (ETS). Aiming for a certain level of renewable generation is an expensive way of achieving decarbonisation of the electricity sector.

36. However, we acknowledge that the Government is committed to its European targets. We also recognise that the UK should play its part in advancing low-carbon technologies and this means deployment and development at scale. Lord Turner of the Committee on Climate Change told us that the renewables target "is a useful part of the story, but it certainly needs to be combined with an approach to all three of what we see as the key sets of a low-carbon technology, which are: renewables, in the way that that term is used, nuclear, and the application of CCS, particularly [to] gas".[32] He emphasised that it would be important to have enough renewables to make the sector "zero carbon" in 2050 and that it may not be wise to rely solely on one technology, such as nuclear.[33]

37. It is important that the Electricity Market Reform package is geared to deliver our renewables targets as well as our decarbonisation objectives.

38. A number of witnesses to our inquiry were concerned that the decarbonisation objective in the consultation needed to be more robust and more detailed. The consultation states that "the power sector emissions need to be largely decarbonised during the 2030s", but it does not define "largely".[34] In its 4th Carbon Budget Report (2023-2027), the Committee on Climate Change (CCC) recommended an average carbon intensity of 50gCO₂/kWh by 2030 compared with 490gCO₂/kWh currently.[35] This was supported by Friends of the Earth, who pointed out that in the CCC's view this was the minimum effort consistent with the 2050 target for at least 80% emissions reductions set out in the Climate Change Act.[36] Missing this 2030 objective could make the 2050 target very difficult to achieve. It could also mean that cumulative emissions in the period to 2050 will be far greater.

39. However, the policies in the consultation are supported by modelling on the basis of a carbon intensity of 100gCO₂/kWh (in line with earlier CCC recommendations). DECC have told us that they "are currently considering these recommendations in preparation of setting the fourth Carbon Budget in legislation by June this year" and that they will "respond to the CCC advice later in the year".[37]

40. The Electricity Market Reform package must deliver 50gCO₂/kWh carbon intensity by 2030 instead of 100gCO₂/kWh. We recommend that the White Paper sets out an indicative carbon intensity pathway for the power sector to 2030, aiming to deliver a 40-60gCO₂/kWh carbon intensity in the electricity by 2030. DECC should set out its carbon intensity trajectory on the advice of the Committee on Climate Change.

Security of supply

41. There are two major security of supply challenges facing the UK. First, there is a capacity challenge in the 2016-2020 period. According to DECC, in order to ensure security of supply, the UK would need to replace a quarter of our existing capacity by 2020, as many nuclear plants are reaching the end of their lives and current coal plants are ageing and unlikely to meet environmental regulations under the European Large Combustion Plant Directive and the Industrial Emissions Directive.[38] However, it is not clear that the policies introduced in the EMR Consultation would increase the overall capacity margin in the next ten years because of the lead times involved in building new low-carbon plant and the low "de-rated" capacity of wind power.[39]

42. The second security of supply issue is that an increasing proportion of UK capacity will be provided by both inflexible and intermittent plant, such as nuclear and wind energy, in order to meet the decarbonisation objectives. Rather than meeting system peak demand in winter and at particular times of day, flexible capacity will be needed to manage the margin between demand and supply when certain forms of generation are unavailable.[40] Although substantial improvements have been made in design, the output of nuclear plants cannot be increased or decreased easily to meet variations in demand. Similarly, changes in output from wind farms are impossible to predict reliably in advance and variations in the weather will inevitably lead to long periods where they do not contribute to baseload. Therefore, substantial flexible backup capacity is needed to fill the gap.

43. Dorothy Thompson of Drax Power told us that "intermittency is the biggest issue [...] every winter morning our demand goes up by about 50% between 5 am and 9 am [...] add in more wind intermittency and more inflexible plant and we've got another problem".[41] Drax emphasised its capacity to use biomass as a way of reducing the carbon emissions. We heard that the current capacity for biomass co-firing at Drax was "equivalent to the output of around 600 wind turbines".[42] We also heard that biomass is one of the few low-carbon technologies that can respond quickly and flexibly to changes in demand (it is "dispatchable") and can therefore constitute a key part of a low-carbon energy future.[43]

44. Support for low-carbon technologies such as wind and nuclear energy (through the Feed-in Tariff) will skew the system in favour of generation that cannot easily or reliably respond to short-term peaks and troughs in demand.[44] The proposed capacity mechanism is intended to counteract that difficulty by paying plant for being available to generate, because it is likely to generate for much shorter periods during the year and find it hard to recover its fixed costs from energy sales.

45. At the moment, gas and coal provide the bulk of low-cost, flexible generation in the UK, as it is possible to bring extra capacity on to the system in a matter of hours. Gas will continue to play an important balancing role in the short term as the amount of intermittent generation increases in order to balance the system during peaks in demand or low wind energy output.[45]

46. Several witnesses attested to the importance of options such as storage and interconnection and some, such as the Institution of Engineering and Technology (IET), said that the Government had not adequately considered their developing role in the energy system.[46] Although the usefulness of electricity storage is currently limited because it is at an early stage of technological development, we believe that in the future storage will be an essential component of the electricity system, providing short term flexible backup. Swanburton, an electricity storage consultancy, told us that electricity storage technologies could develop in a number of areas based on "electro-mechanical, hydro-electric, thermo-electric and electro-chemical processes".[47] It said that storage would provide "the ability to provide power for peak demand from energy secured from low-carbon sources rather than peaking plant".[48] This could help to balance peaks in demand and troughs in output from wind energy, for example, which could help to smooth out prices (reducing costs for consumers) and to cope with greater amounts of intermittent generation.

47. Rachel Cary (Green Alliance) and Simon Skillings (E3G) also emphasised the importance of "smart" technologies, such as smart grids which utilise real-time pricing and intelligent technologies that respond to peaks in demand to help balance the electricity system at the local level, and demand side measures in helping to cope with increasing intermittent and inflexible generation.[49]

48. We recommend that the White Paper addresses directly the problems associated with greater intermittency. It should plan for electricity storage and interconnection and how that will help to meet demand in the light of increasingly inflexible and intermittent supply. It must show how the development of smart grids and demand side responses can contribute to managing demand.

Affordability

49. The third objective set out by DECC is affordability for electricity consumers. The EMR Consultation said that "the Government is committed to minimising costs to consumers and subsequent impacts on fuel poverty in the transition to a low-carbon energy system".[50] It goes on to state that "the actual level of impact depends on the rate of decarbonisation among other things and since this has not yet been set it is not possible to be more definite at this stage".[51]

50. The Government suggested that reforms "would result in a period of higher investment in the 2020s and household bills would then be 4% (around £29/year) lower in the five year period up to 2030 than continuing with existing policies".[52] EMR has the potential to achieve lower, more stable prices than business as usual, but that this depends on a number of assumptions. Gas price sensitivity is crucial.

51. Many witnesses to this inquiry suggested that there was a strong possibility of much higher prices for consumers. For example, IET said that "affordability will be an issue into the future, whichever forms of generation are built. All forms of power plant, all fuels and also carbon emission will become much more costly".[53] National Grid said that "affordability to consumers should remain at the forefront of all considerations".[54]

52. Some of our witnesses suggested that affordability had not been given as high a priority as the first two objectives. Audrey Gallagher of Consumer Focus told us that "there was not the same degree of emphasis on affordability as there was, for example, on decarbonisation".[55] ESB International was also of this opinion, saying that "Government should further address affordability as the EMR process continues through its various stages".[56] Richard Hall of Consumer Focus said that all the scenarios modelled were predicated on a baseline that forecasts that electricity wholesale prices will approximately double in real terms by 2030. He said that it "seems unrealistic to expect that disposable incomes will increase by a similar fraction, so one would certainly forecast a deterioration in fuel poverty".[57]

53. Rhian Kelly of CBI stressed that affordability was also an issue for businesses and argued that "more needs to be done to look at the impacts in more detail in these [vulnerable] sectors".[58] The consultation stated that "impacts on different sizes and different kinds of businesses will of course be different [from this] average. Further analysis of the impact of this reform package on businesses will be undertaken for the White Paper".[59]

54. "Affordable" electricity in the short term cannot be achieved at the expense of meeting the other objectives of Electricity Market Reform. Lower prices cannot be a primary driver of energy policy, but developing greener and more secure sources of electricity needs to be accompanied by sound social policy to protect vulnerable consumers.

55. The White Paper must set out a range of possible price impacts of the reforms and how these impacts would be mitigated for the fuel poor and vulnerable businesses. Government must also assess the price impacts of other low carbon policies outside of the EMR package.

Extra objectives

56. The Government's decarbonisation goals are extremely stretching and the fastest and most affordable route to achieving them includes a large amount of demand reduction. Reducing demand can also contribute to energy security and affordability. However, Nick Molho (WWF) pointed out that "the one key area that, unfortunately, is not currently addressed by the electricity market reform is the potential for reducing energy demand in the long term".[60] This is especially important since the Government relies heavily on its assumptions about levels of demand reduction (predominantly achieved through the Green Deal and Carbon Emissions Reduction Target (CERT) schemes, but also in response to rises in electricity prices) in its forecasts for consumer bills.[61] We return to the issue of demand side responses later in this Report and examine whether an energy efficiency target should be integral to the Government's Climate Change strategy and emphasised in the forthcoming White Paper.

57. We also heard that there are potential economic opportunities associated with EMR. Nick Molho pointed out that "reductions on the demand side could play a key role not only in reducing costs for consumers by achieving our decarbonisation targets, but also in significantly helping the UK's economic recovery".[62] Dr Doug Parr (Friends of the Earth) said EMR was "an opportunity to explicitly recognise the important role that we can play in certain key renewable technologies" and, without picking winners, it would be an important part of a joined-up strategic view to emphasise the low-carbon sectors where the UK enjoys a comparative advantage.[63] WWF suggested adopting a specific objective that achieving decarbonisation, security and affordability should be done in a way that maximises economic benefit to the UK.[64]

58. The White Paper should include a demand reduction objective.

Conclusion

59. The White Paper must set out a second tier of objectives, following a strategic view of the energy sector in decades to come. This should include a specific pathway for reducing electricity consumption through demand side measures. It should set an explicit decarbonisation goal for 2030, with a trajectory for reaching the target. It should focus on dealing with intermittency and inflexibility on the system as a key energy security challenge. It should also set clear objectives for improving support for vulnerable consumers.

24 DECC, Electricity Market Reform Consultation Document, Cm 7983, December 2010, p 5 Back

25 Q 92 [Mr Skillings] Back

26 Ev w10 (CHPA) Back

27 Q 75 Back

28 Q 137 Back

29 EU Directive 2009/28/EC Back

30 DECC, Electricity Market Reform Consultation Document, Cm 7983, December 2010, p 23 Back

31 DECC, The Renewable Energy Strategy, Cm 7686, July 2009, p 10 Back

32 Q 298 Back

33 Q 298 Back

34 DECC, Electricity Market Reform Consultation Document, Cm 7983, December 2010, p 4 Back

35 Committee on Climate Change, The Fourth Carbon Budget: Reducing emissions through the 2020s, December 2010, p 13 Back