Electricity Market Reform - Energy and Climate Change Contents

Friends of the Earth additional memorandum


The current EMR proposals are more likely to entrench existing UK energy market weaknesses rather than remove them. They will take parliament (and the public) for an expensive and inelegant ride. Friends of the Earth believes the proposals would:

—  Leave the UK with a more closed electricity market than it has at present.

—  Maintain a complex and inefficient system of market subsidies, (directed mainly towards big energy companies), and requiring long-term, rather than transitional, taxpayer/bill-payer support.

—  Fail to deliver the UK's 2020 renewable energy commitments (or the Climate Change Committee's 2030 decarbonisation targets).

—  Leave the UK with the wrong type of gas infrastructure, post 2020.

—  Inhibit radical decentralisation, advocated elsewhere in government policies.

—  Provide expensive and regressive subsidies to nuclear energy, and

—  Fail to deliver enhanced UK energy security or employment growth.

Friends of the Earth believes that parliament is in danger of missing the opportunity to deliver a dynamic energy market transformation, capable of sustainably meeting the UK's energy needs in the decades ahead. Our contention is that different principles should underpin energy market reform:

1)  Objectives

—  Competition. There are considerable barriers to entry to the current UK energy market. Reform measures must enhance competition and diversity of supply, in a market that is currently closed.

—  Public Subsidies should be transitional rather than permanent. Essentially, this means devising subsidies that:

—  Are targeted towards new technologies rather than old industries.

—  Give priority to renewable rather than non-renewable energy systems.

—  Require energy systems to meet their own environmental impact and insurance costs.

—  Offer reducing levels of financial support (degression rates) over a defined time period: pushing technologies towards market viability rather than permanent public subsidy.

—  Promote decentralised energy systems, as a more effective approach to delivering energy security and capacity management.

2)  Demand reduction

This is barely recognised in the current EMR proposals, but is central to the UK's ability to reach its 2050 carbon reduction targets. An Energy Savings Trust study calculated that almost two thirds of the UK's 2050 carbon targets will have to come from energy saving. Grid decarbonisation would have to make up the remainder. Nowhere is this balance reflected in the EMR proposals.

3)  Missing Measures

EMR proposals leave the UK woefully adrift from the more exciting international initiatives addressing sustainable energy solutions:

—  By focussing on electricity, rather than energy as a whole, EMR risks inviting the wrong sort of investment in gas (CCGT rather than combined heat and power systems). Gas has to be included in the Emissions Performance Standards framework if a low carbon/renewable gas infrastructure is to emerge in the UK. (NB. The UK recently opened its first "biomethane from waste" gas power station. By 2020, we would need 200 such plants to meet 50% of the UK's domestic energy needs. China currently has 3,000 city-scale biodigestor plants and will have 6,000 by 2020).

—  Grid access. The UK is at the back of the international "renewable energy" league, partly by choosing not to apply the "priority access to system" clauses of the EU Renewable Energy Directive. This simply boosted the profits (and power) of the UK's existing energy cartel. If the government wants to promote diversity and competition, Grid access must be radically opened up.

—  Emerging technologies. The current DECC consultation offers no vision about turning the UK into a world leader in tomorrow's technologies:

—  Deep-geothermal energy offers huge possibilities in the promotion of decentralised energy systems. European cities such as Munich and Paris already have substantial geothermal energy systems. DECC estimates that this could deliver 10% of UK energy needs. Other sources suggest that the real scope could substantially exceed total UK energy needs.

—  Tidal stream. The UK has 60% of Europe's potential tidal stream energy. The central challenge is to get generators safely anchored to the seabed and then connected into the mainland grid.

—  Decentralised energy. Berlin already meets 40% of its own energy needs, and from renewable sources. Hamburg's "Lichtblik" project plans to construct an "energy swarm" rather than two new power stations; installing 100,000 CHP boilers (in homes, schools, offices, factories, hospitals, etc) and connecting them to a citywide control centre to balance out citywide energy needs. Households/schools etc are paid for the role they play as energy suppliers.

These offer fundamentally different concepts of sustainable energy systems for the 21st century. They carry the advantages of avoiding the commissioning/decommissioning costs of power stations, create substantial employment and deliver a greater sense of energy security. No such vision can be found within the EMR.

4)  Markets and auctions

In its approach to capacity payments and auctions, the government should adopt whichever system best creates a genuinely open and competitive energy market. This probably argues against auctions, which tend to favour the big players and disfavour new/smaller entrants. A wider examination is needed of other market balancing mechanisms.

Moreover, the government must rethink its position on carbon pricing, carbon taxes and carbon budgets. A UK floor price for carbon is simply a new subsidy for existing nuclear power. It would be an expensive addition to taxpayer or bill-payer costs and deliver no new energy output.

The Prime Minister took a different approach to carbon savings on the government estate; instructing departments to deliver a 10% reduction in their carbon emissions this year. It mirrors FoE's work on "local carbon budgets". As a market change mechanism, we would urge the government to consider this (and other alternatives) in preference to an artificial market for carbon.

Finally, the Committee may wish to look at the failure of the George Bush's "nuclear renaissance" programme in the USA, before pinning too much hope about it being any better in the UK. In particular, North Carolina's 2010 comparison of price trends in nuclear power and photovoltaics—where prices are now equal—offers a different perspective on what sustainable energy markets of the future might look like.

The UK deserves a bolder and more sustainable vision of EMR than the one currently on offer.

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© Parliamentary copyright 2011
Prepared 16 May 2011