Conclusions and recommendations
Background
1. The
Government must reverse the downward trend in "clean"
investment. It must create more attractive returns and reduce
the risks of investment in order to reduce the cost of capital
in the electricity sector. (Paragraph 20)
DECC's high level objectives
2. It
is important that the Electricity Market Reform package is geared
to deliver our renewables targets as well as our decarbonisation
objectives. (Paragraph 37)
3. 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. (Paragraph
40)
4. 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. (Paragraph 48)
5. "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. (Paragraph 54)
6. 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. (Paragraph
55)
7. The White Paper
should include a demand reduction objective. (Paragraph 58)
8. 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. (Paragraph 59)
The electricity wholesale market
9. The
current market arrangements do not facilitate a fully functioning
wholesale electricity market which transmits the price information
necessary to attract investment. We recommend that the Government
incorporate a review of the present trading arrangements and liquidity
in the forthcoming White Paper. (Paragraph 70)
10. DECC must consider
the future evolution of the electricity wholesale market as part
of the Electricity Market Reform process. The review of Ofgem
is an opportunity to ensure that it delivers decarbonisation and
security of supply alongside affordability for consumers. (Paragraph
80)
11. DECC should investigate
the full range of options for improving liquidity in the wholesale
market. DECC must also consider its options for making the wholesale
market fit for a low-carbon future. We would recommend an evolution
of the System Operator's role and a reform of the "balancing
mechanism". (Paragraph 81)
12. The Government
must acknowledge the direction of travel of the electricity market
in future, which may well include increasing interconnection with
other European markets. The Government should explore how this
will affect the Electricity Market Reform package in its White
Paper. Electricity Market Reform needs to be accompanied by a
strategic vision of the shape of the market in coming decades,
including the European dimension. (Paragraph 85)
Long term contracts
13. The
Committee recognises that different levels of Feed-in Tariff ("banding")
are required to support technologies at different levels of maturity
and with different financing needs. In the short term, levels
should based on technological and economic considerations. This
process must be transparent and levels must be set for a defined
period, with clear triggers that would activate a review if levels
need to be reassessed. (Paragraph 108)
14. In its White Paper,
the Government should acknowledge the problems of relying on auctions
to set Feed-in Tariffs for most technologies in the short term,
but it should set out conditions under which it would shift to
an auction-based process in the future. (Paragraph 109)
15. The main argument
for the Contract for Difference is the Government's desire to
achieve the investment certainty offered by fixed prices while
maintaining the efficiency of a competitive market. However, this
approach is not appropriate for all kinds of low-carbon generation.
Different kinds of low-carbon generation are at very different
stages of technological maturity, with very different operational
and financing requirements. Feed-In Tariffs should recognise the
unique characteristics of different low-carbon technologies. Proper
discussion of these possibilities is a serious omission from the
consultation. (Paragraph 121)
16. The Government
must recognise more clearly the different financing requirements
of low-carbon technologies and investigate the possibility of
different kinds of long-term contract for different kinds of low-carbon
technology. The Government should consider Contract for Difference
for nuclear, but it should recognise that some technologies such
as wind generation cannot easily respond to market signals under
a Contract for Difference and may be exposed to lower than average
prices. We also believe that Carbon Capture and Storage and electricity
storage should benefit from Feed-in Tariff support, but that a
Contract for Difference may not be the best model. These technologies
are likely to require bespoke contracts. The White Paper should
offer a flexible solution to meet these different objectives.
(Paragraph 122)
17. If it is the Government's
policy objective to develop large amounts of new nuclear generation,
then it is almost certain that it will require policy or financial
support that will amount to forms of subsidy. While a Contract
for Difference Feed-in Tariff may be the best option for nuclear
generation, it may not be the best for all low-carbon generation.
The Government must not go down the route of Contracts for Difference
for all low-carbon generation just because it does not feel able
to differentiate between nuclear energy and other low-carbon technologies.
The White Paper should address the advantages, risks and challenges
of promoting new nuclear generation head-on and honestly; it should
not distort the market merely to save political face about the
precise meaning of the Coalition Agreement for Government. (Paragraph
132)
18. The White Paper
should identify which institution will be given power to create
appropriate contracts and set this up as quickly as possible.
If this role is not taken on by Ofgem, a shadow body should be
set up in advance of legislation. Government should concentrate
on the powers of this institution rather than the detail of the
contracts and clarify its role, objectives, composition and funding
as soon as possible. The agency must be totally independent and
not susceptible to political influence. (Paragraph 135)
Carbon Price Support (CPS)
19. We
have heard no justification for the departure of the final proposals
on Carbon Floor Price from those modelled in the consultation.
We would welcome such a justification from HM Treasury. (Paragraph
139)
20. The Carbon Price
Support was introduced as one of the four "pillars"
of Electricity Market Reform and will interact significantly with
other measures. We are disappointed that the Government chose
to introduce the Carbon Price Support before the Electricity Market
Reform process is complete. (Paragraph 142)
21. A UK Carbon Price
Support is a necessary compromise to support low-carbon electricity
generation in this country. The Government must continue to push
for a European greenhouse gas emissions reduction target of 30%
by 2020 in order to strengthen the effectiveness and credibility
of the EU Emissions Trading System. The White Paper must include
a persuasive strategy for achieving this aim. (Paragraph 148)
22. We acknowledge
the contribution to decarbonisation that a high and reliable carbon
price could make in the long-term. We also recognise the good
intentions of the Government in attempting to underpin the carbon
price. However, we are aware that when it comes to low-carbon
investment, the effect of the Carbon Price Support will depend
on the confidence of investors in the long-term reliability of
the Carbon Price Support. (Paragraph 160)
23. We recommend the
Government explains how it plans to deal with the problem of potential
windfall profits arising from the introduction of a Carbon Price
Support in its White Paper. The White Paper should set out under
what circumstances the Government would take action to address
windfall profits resulting from the introduction of the Carbon
Price Support. If such measures involved a tax, then any revenues
should be matched by an increase in the budget of the Green Investment
Bank. (Paragraph 167)
24. Reporting carbon
consumption figures alongside production figures would help provide
greater transparency about the UK's impact on climate change.
We recommend that the Government should consider this option.
(Paragraph 173)
25. We believe that
the Carbon Price Support will not influence investment decisions
until 2018 at the earliest. We would have preferred the Government
to establish a nominal Carbon Price Support level until 2018 and
then set a long term trajectory based on advice from the Committee
on Climate Change. Until then, the Carbon Price Support represents
little more than an additional energy tax, which will be passed
on to consumers. (Paragraph 175)
26. We suggest that
Carbon Price Support tax revenues should be matched by increased
budget for the Green Investment Bank. (Paragraph 176)
27. The Carbon Price
Support must not systematically distort electricity prices between
the UK and other countries. In an increasingly interconnected
market, this could mean significant transfers of capital abroad
and the "offshoring" of UK generation. (Paragraph 177)
28. Carbon Price Support
is a short-term solution to the failure of the EU Emissions Trading
System to deliver a meaningful carbon price. It poses risks to
UK energy security and the UK economy more widely. The White Paper
needs to justify its costs and benefits and provide a persuasive
plan for its integration with the EU Emissions Trading System.
(Paragraph 178)
Capacity mechanism
29. It
is too early for the Government to specify what capacity mechanisms
might look like. Legislating for capacity mechanisms now may restrict
the scope to take account of future technological developments
and the success or otherwise of interventions such as long-term
contracts. (Paragraph 191)
30. The Government
needs to analyse more fully the nature of the problems of increased
intermittency, and in particular, the potential need for flexible
capacity and demand side measures at all times, not just at times
of peak demand. Capacity mechanisms would need to be able to
deal with this wider problem, rather than focusing solely on meeting
demand at times of peak usage. (Paragraph 192)
31. It is clear that
designing effective capacity mechanisms is complex and cannot
be rushed. The White Paper must set out plans to avoid the "slippery
slope" problem. While it is too early to legislate for the
detail of future capacity mechanisms, it is not too early to prepare
for the design of capacity mechanisms which are accurately calibrated
to meet the future need at minimum cost. The White Paper should
pave the way for the creation of a new independent agency that
would have responsibility for designing and administering both
long-term contracts and capacity mechanisms. (Paragraph 202)
Emissions Performance Standard (EPS)
32. We
conclude that neither of the Emissions Performance Standard options
proposed in the Electricity Market Reform consultation would promote
decarbonisation of the power sector and that introducing regulation
in the form proposed would not only be pointless but could even
create uncertainty among investors. (Paragraph 210)
33. We recommend that
if the Government is to introduce an Emissions Performance Standard,
it should be used to provide an early indication of the desired
emissions intensity trajectory for the power sector, in line with
recommendations from the Committee on Climate Change. (Paragraph
215)
34. The Government's
proposals to grandfather an Emissions Performance Standard at
the low levels set out in the Consultation Document risk encouraging
a "dash for gas" which could lock the UK into high carbon
emissions for years to come. If the Government is concerned about
investor certainty, a better way to achieve this would be to signal
Emissions Performance Standard levels in advance by setting out
a clear long-term Emissions Performance Standard trajectory. (Paragraph
216)
35. We recommend that
the government produces argued proposals on the use of biomass
in future power stations and their effect on Emissions Performance
Standard targets at an early date. (Paragraph 218)
Investment: risks and returns
36. We
have concluded that Feed-in Tariffs are an effective way of creating
adequate returns for investors in new low-carbon generating capacity
especially when combined, in the long term, with a realistic and
stable carbon price. (Paragraph 222)
37. It is vital that
the Government creates a market structure that inspires confidence
in investors. In order to bring forward the huge sums of capital
that are needed, the market must be certain that risks and returns
will remain stable in the long run. In the White Paper, the Government
must set out its long-term intentions for each of the four pillars
of Electricity Market Reform: long-term contracts; Carbon Price
Support; Emissions Performance Standard and a capacity mechanism.
It must explain how these instruments may evolve in the run up
to 2030 and under what conditions revisions will be made to the
levels set for each instrument. It should also guarantee that
revisions will be signalled and consulted on with sufficient warning
periods and guarantee that any changes will not be made restrospectively.
(Paragraph 225)
38. Potential investors
were concerned that the current Electricity Market Reform proposal
will not win their confidence. The inclusion of four "pillars",
while trying to address real and different problems, may in fact
create an overly-complicated bundle of measures with considerable
overlaps between instruments. Each extra measure creates new political
risk that the terms of the incentives for low-carbon generation
will change in response to future short-term political pressures.
(Paragraph 237)
39. The consultation
has been an opportunity for the Government to test out a number
of ideas. In the White Paper, however, the Government should aim
for greater simplicity and clarity. The Government should create
a framework for Feed-in Tariffs and for a capacity mechanism,
but leave the details to an implementing, independent and expert
agency. It should either abandon its half-baked Emissions Performance
Standard proposals or replace them with a much tighter option,
with a long-term trajectory for tightening the standard progressively
over time. (Paragraph 238)
Energy consumers
40. The
potential negative impacts of the Electricity Market Reform on
fuel poverty and on those on low incomes must be acknowledged.
However, tackling fuel poverty cannot be the driver of energy
policy and therefore should not be the preserve of DECC alone.
Departments across Whitehall should work together, particularly
including the Department of Work and Pensions and the Department
for Communities and Local Government. (Paragraph 244)
41. The Electricity
Market Reform proposals are unlikely to have a major impact on
UK competitiveness except in the case of electricity intensive
industries that are exposed to international competition. (Paragraph
249)
42. The aim of the
Electricity Market Reform is to remove barriers to investment
in new energy infrastructure. It is therefore extremely worrying
that some investors find the Government's commitment to managing
the cost impact of the proposals insufficiently credible. A lack
of awareness among consumers that bills are likely to increase
over the next decade may hamper take up of domestic energy efficiency
schemes such as the Green Deal. The Government should explain
clearly the likely impacts of Electricity Market Reform on energy
bills and the ways in which consumers can mitigate this through
energy efficiency. The roll out of smart meters could trigger
consumer engagement and be one means of communicating this message.
(Paragraph 252)
Demand side measures
43. The
Government should undertake more thorough analysis of the role
that demand side measures could play as part of the UK's electricity
system in future. More thorough modelling and cost benefit analysis
of the scope for demand side measures is required and the White
Paper should clarify how such measures can cut demand and provide
flexibility to the system. (Paragraph 260)
44. There is a risk
that a capacity mechanism that provides support for backup generation
could undermine incentives for demand side measures. The White
Paper should outline how this effect would be mitigated. (Paragraph
264)
45. The White Paper
must also specify for which demand side measures the capacity
mechanism will be available and clarify whether it is intended
to support demand reduction, demand-side flexibility, or both.
(Paragraph 265)
46. The proposed Contract
for Difference mechanism should be expanded to include rewards
for guaranteed demand side measures. The White Paper should examine
this possibility. (Paragraph 270)
47. Demand side measures
do not receive sufficient consideration in the Electricity Market
Reform proposals. Demand reduction is the cheapest way to meet
decarbonisation, security of supply and affordability objectives.
The White Paper must explain the expected impact of the reform
package on the three different types of demand side measures:
demand reduction, demand side response and decentralised energy.
(Paragraph 271)
Transition period and implementation of the new
regime
48. We
recognise the risk of making poor policy decisions if analysis
of potential Electricity Market Reform packages is conducted too
hastily. However, we are also mindful of the Government's legal
obligation to achieve 15% of energy from renewable resources by
2020 and the significant role renewable electricity will play
in meeting this objective. We therefore believe the Government's
proposed timetable of producing a White Paper in "late Spring"
must not slip and we recommend that it introduces an Electricity
Market Reform Bill before the end of this Parliamentary session.
(Paragraph 276)
49. Government needs
to explain fully how the transition from the Renewables Obligation
to a Feed-in Tariff will work in practice. In particular, greater
clarity is needed how DECC plans to ensure that existing investments
are not undermined by the Electricity Market Reform. The White
Paper should set out proposals for an effective transitional regime.
(Paragraph 281)
50. We recommend that
the Government publishes a proposed Electricity Market Reform
implementation plan as part of or alongside the White Paper. (Paragraph
284)
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