A proposed amendment to the U.K. Electricity Market Reform bill, with support from across the political spectrum; highlights a battle that is underway for the future of the British energy sector. At its heart is whether Britain will be a clean tech leader to challenge Germany, stimulating growth and high tech jobs, or whether legacy technologies and energy companies are given preference. The one thing that is set, consumer’s bills will rise either way.
The U.K. Electricity Market Reform seeks to secure investment in low carbon electricity generation, by providing greater certainty to investors of the incentives and lessen risks over the necessary investment time horizon. With the bill the government hopes to incentivise a significant scale and pace of low-carbon investment, thereby decarbonizing, whilst providing sufficient capacity to “keep the lights on” and keep costs to consumers at a minimum. Many of the provisions of the bill seek to do this effectively, by modernising the incentives for renewable generation to be more market orientated, taking direct action in controlling emissions and providing adequate incentives to allow for seasonal peaks and volatility in electricity demand to be met despite a percentage of intermittent generation. (Further details here: https://www.gov.uk/government/policies/maintaining-uk-energy-security–2/supporting-pages/electricity-market-reform )
The issues associated with the bill from a clean tech perspective are manifold, in that a number of provisions have been specifically structured to entice the development of new nuclear plants; however the support and interest from key stakeholders in new nuclear is waning fast. Add to this that the capacity mechanism will support significant investment in gas fired peak demand power generation, but does not directly support or address demand side measures such as Demand Side Management and Demand Side Response at all. Given the importance that D.S.M. and D.S.R. can play in maximising the returns from intermittent renewable generation investments, this is disappointing indeed. The implication of this is likely to be investment in more capacity than is necessary to back intermittent renewables such as wind and solar. These costs will be passed on to consumers, who may incorrectly interpret these costs to be due to the high cost of renewables.
The government has estimated that the increased costs to consumers as a result of the bill are likely to be £95 ($149.5) per annum to the average household by 2020. This is likely to occur whether or not renewables hit their planned share of the generation mix nor whether decarbonisation targets are met. Furthermore it appears that the government appears to be moderating its support for the binding carbon targets set by the Committee on Climate Change, despite David Cameron’s promise to be the greenest government ever, and the conservative coalition partners being strongly pro-renewable. A wait and see approach seems to be being played out, with the government leaving its options open up to 2016 (and after the election); this is despite the potential negative impact this could have on the clean tech sector.
This is perhaps not surprising given that the new energy minister; John Hayes has a reputation for being somewhat negative on wind renewables and more importantly the Chancellor George Osborne’s strong support for shale gas in the U.K. based on its promise to be an abundant and cheap energy source it forms the cornerstone of the gas generation strategy produced by the government. This is despite the uncertainties and significant differences between the production potential of U.K. resources versus the U.S. and the significant resistance being mounted by environmental groups and the public. There are however strong opponents to the Chancellors “gas at any cost” future, with the chair of the Energy and Climate Change Select committee Tim Yeo saying that he “…will not stand by and watch the wrong decisions being made on energy policy”. Tim Yeo has proposed an amendment to the bill supported by MPs from across the political spectrum that is calling for stronger provisions to ensure the decarbonisation of electricity generation.
The criticality of the battle being waged is highlighted by two recently published Organisation for Economic Cooperation and Development reports on fossil fuels. The first report looks at fossil fuel subsidies (coal, oil and natural gas) provided by developed world governments, which after dipping due to the recent financial crisis returned in 2011 to the pre-crisis levels to be in excess of $80 billion. This is despite the majority of these governments making claims to be changing their behaviour, and is exacerbated by the second report which shows that the taxes on end consumers for transport fuel (excluding aviation) makes up a remarkable 85% of energy related tax revenue.
This is not to say that there is not an important role for gas (and other fuels) in a diversified and secure energy mix, and in particular in combination with distributed and micro gas generating assets acting as a bridging technology to a low carbon energy system. However it is necessary that such decisions look at the impact across the economy and the energy sector as well as the associated risk factors. Doing so should make it clear that increasing the U.K.’s reliance on gas at the cost of stifling a vibrant emerging local-low-carbon and clean tech sector is not the right answer.
Ofgem(the British gas and electricity regulator) has been clearly supportive of D.S.M. and D.S.R. schemes, and this support has seen the slow emergence of a number of bilateral efforts to institute D.S.M. projects. This is largely supported by £500 million in innovation funding through the Low Carbon Networks Fund, as well as other initiatives. The perceived plan being to develop sufficient bilateral arrangements for D.S.M. and D.S.R. to justify the establishment of a U.K. wide flexibility market, which could deal in removal of demand (“negawatts”) from the energy system in a similar way to the way in which the wholesale electricity market deals in the provision of capacity (“megawatts”) to the energy system. The E.M.R. need not codify the details of such a market, nor put a definitive timeline on it. What it must however do is ensure that there are at least equal incentives in place to the production of negawatts as there are to the production of peaking plant megawatts. If this is not made clear, not only has this got the potential to stifle innovation, investment and growth in the clean tech sector as a result limiting job creation; it is also going to result in higher bills for the end consumers. The decisions and direction taken on this bill and over the next few years will have a long lasting impact on the British energy and technology sector. In many respects the U.K. has the most advanced socio-technical energy system in the world, this positions it extremely well to take advantage of the emerging boom in clean tech, unless of course it stumbles at this key hurdle.