17 December 2010: More (promised) progress from UK government

UK Energy Secretary, Chris Huhne, has proposed a radical overhaul of the UK’s electricity market. Yesterday, he outlined four new policies:

  1. A carbon floor price through reform of the Climate Change Levy.
  2. Long term contracts for low carbon generation, through a ‘contract for difference’ Feed In Tariff (FiT), under which low carbon generators will get top up payments if  wholesale prices are low, but pay money to government if prices become higher than the cost of low carbon generation.
  3. Additional payments for the construction of reserve plants or demand reduction.
  4. An emissions performance standard to ensure that no new coal is built without carbon capture and storage.

There are the inevitable consultation documents on all these policies, which I have not yet had time to read fully. I will do so and highlight key points on this site.

Announcing the proposed changes in Parliament, Huhne said:

“We must rebalance our market framework to attract investment in the right technologies. At the moment, there is a bias toward low-cost, low-risk fossil fuel generation. Renewables, nuclear and carbon capture and storage all have relatively high upfront capital costs. But a more diverse, lower carbon energy mix is better for our energy security, better for our economy, and better for our planet. Some measures have already delivered investment in new low carbon generation – the Renewables Obligation, and the EU Emissions Trading System. But we must go further, and faster.”

(See DECC: Electricity Market Reform (Oral Statement to Parliament by Rt Hon Chris Huhne).)

Two issues have dominated media coverage:

  • Has the government, and have the Liberal Democrats, broken their promise that there will be no subsidy for nuclear?
  • Does this mark the end of the market-led approach to energy policy?

The low carbon FiT will replace the Renewables Obligation. It is applicable to the three low carbon electricity generation technologies, renewables, CCS and nuclear, so is not technology specific – not ‘picking winners’, to use a frequent criticism of policies. However, certain technologies may get different tariff rates, so this form of attack will definitely be a prominent part of discussion.

The Climate Change Committee has said that there should be no subsidy for nuclear, on the grounds that it is a mature technology, unlike renewables or CCS. However, the committee has welcomed Huhne’s announcement, because  the low carbon FiT may involve power companies paying money to the government (if the wholesale price of electricity rises higher than the cost of low carbon generation) so is not, in the committee’s view, a subsidy.

Huhne had actually prepared the ground on subsidies for nuclear in advance. The coalition agreement states that there should be no subsidy to nuclear. However, in an article in the Daily Telegraph the day before his announcement, Huhne wrote that there should be “no specific subsidy to nuclear”.  So a general subsidy is OK.

The low carbon FiT is a good proposal.  Nuclear and CCS are necessary low carbon bridge technologies to get the UK (and the world) to 100% renewables. And the FiT is a good policy for renewables because it provides certainty about income, unlike the obligation approach.

The Financial Times editorial today criticises the coalition for a “dirigiste” energy policy.  As the use of a French word implies, this is a departure from the purity of an Anglo-Saxon, market-led approach. Well, so be it. Markets are fine as long as they deliver what is needed. The energy market hasn’t.  The energy regulator Ofgem has accepted this, so it’s good that the government has too (see 11 February 2010: UK regulator discovers failings of free market).

Huhne accepted that the proposed policies will mean higher energy bills, although he argued that they would increase by less under his proposals than they would if the situation isn’t changed. It isn’t clear why this is so or how accurate a statement this is (computer models can be made to show most things, depending on what data is used for them). Low carbon electricity is more expensive than high carbon electricity, particularly coal without CCS. Politicians should be up-front about this and take steps to ensure that higher energy tariffs don’t increase the number of people suffering and dying though lack of warmth. In the UK, most homes are heated by gas, so the increase in electricity prices won’t have a direct effect. However, it will have a major effect on properties that are off the gas grid.

The bad news from the government this week was that all of this year’s money for helping those with leaky homes to improve their properties through the Warm Front programme has been allocated (see DECC: Warm Front funds allocated for 2010/11). Of course, the government doesn’t have any spare cash, but more must be found for this. There are still programmes that could be cut back: unnecessary and climate-damaging road widening, for example.

To end on a more positive note, on 14 December 2010, the government did announce that it will spend £43 million giving subsidies to people buying electric vehicles and identified nine eligible vehicles. Up to £5,000 will be available for each vehicle. The vehicles are a lot more expensive than petrol vehicles, so whether £5,000 will be enough remains to be seen.  The subsidy amount will be reviewed in March 2012. It may have to be increased, not lowered.

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