A draft Energy Bill designed to attract the £110bn required to build new low-carbon energy capacity has been published today by the government.
In a statement, Edward Davey, secretary of state for energy and climate change, said the reforms are required in order to protect consumers and mitigate climate change.
Over the next decade, around a fifth of existing power-generating capacity will come off-line.
The government claims that without the reforms the country could witness blackouts and become more reliant on importing oil and gas from overseas.
Reform of the energy market through the new legislation is expected to provide investors with transparency, longevity and certainty needed to attract investment in low-carbon infrastructure.
In doing so, the government expects to see the creation of a portfolio of renewables, new nuclear and carbon capture and storage (CCS) that can compete fairly in the marketplace.
‘The reforms will… be better for the economy, leaving us less vulnerable to rising global energy prices and supporting as many as 250,000 jobs in the energy sector,’ said Davey.
‘By reforming the market, we can ensure security of supply for the long term, reduce the volatility of energy bills by reducing our reliance on imported gas and oil, and meet our climate-change goals by largely decarbonising the power sector during the 2030s.’
National Grid is to be appointed as an independent system operator to provide analytical basis for government decisions and to administer two new market mechanisms, namely a new system of low-carbon generation revenue support and a capacity market.
The former involves a feed-in tariff with contracts for difference (CfDs). According to the Department of Energy and Climate Change, these CfDs will make investment in clean energy more attractive by removing long-term exposure to electricity price volatility. They will stabilise returns for generators at a fixed level known as a strike price. It will also insulate consumers by taking back money from generators if the market price is higher than the strike price. The first strike prices will be published within the Delivery Plan in 2013.
The capacity market will be established to reduce the likelihood of future blackouts by ensuring there is sufficient reliable capacity to meet demand, ensuring that consumers continue to benefit from reliable electricity supplies.
Both mechanisms will be supported by an emissions performance standard (preventing construction of new coal plants that emit more than 450g/kWh) and a carbon price floor.
Commenting on the Energy Bill, Steve Radley, director of policy at EEF, said: ‘Today’s bill lays the foundations for a radical shake-up of the electricity market and can help to shape a new approach to climate change. We need to strike a better balance between encouraging investment in low-carbon energy and keeping a lid on rising subsidies for renewable energy.
‘However, with government estimates showing that its policies are already adding 22 per cent to electricity prices for business and forecasting this to rise to 34 per cent by 2020, the focus must be on developing the most cost-effective mix of low-carbon energy.’
Alistair Smith, chairman of the Power Division of IMechE added in a statement: ‘The Energy Bill is not just welcome but essential if the UK is to maintain a secure energy supply, while at the same time cutting carbon emissions at an affordable cost to the consumer.
‘Although this Bill effectively kills off the idea of a truly open UK electricity market, this legislation is necessary in order to encourage companies to build a balanced electricity generating mix, with the correct proportion of baseload nuclear power along with the right balance of intermittent forms of renewable energy.
‘If these reforms are rejected by the power industry because they don’t like certain elements, it may be time for the government to consider re-taking control of this essential element of our national infrastructure. The UK needs certainty now if we are to avoid jeopardising our security of supply in the relatively near future.’