Recent mention of UK electricity market reform (EMR) may make it sound fairly innocuous, but beware: within it lurks the potential to make or break the nation’s future energy fortunes, says Peter Rolton of Rolton Group.
The EMR deals with the fundamental shift away from the old model of large, centralised power stations located around the UK towards a broader, more indigenous supply chain, including incentives for generation at the point of use and development of discrete, small scale units within a generation mix comprised of fossil fuels, zero-carbon energy, and renewable technology.
The forthcoming transition to a low-carbon grid infrastructure is a vital move to protect the future of UK plc., and it will only be achieved through integrated policies that provide security for the investors being asked to contribute the necessary £110 billion over the coming decade.
With OFGEM predicting that spare capacity will shrink to just 2% in the next two years as a result of old power stations closing with no replacement, the urgent need for reform is evident.
The EMR represents a one-shot opportunity to create a level playing field for developers and investors of all the diverse generation technologies to compete on a fair basis for the first time.
It seems a logical step given that the alternative to this, as promoted by the severely blinkered UKIP, would be to depend on fossil fuel generation until it runs out. This strategy would see the UK rely upon increasingly expensive and potentially unreliable imports to satisfy energy demand, effectively committing economic suicide in the medium to long term.
Guaranteeing strike prices
So the EMR looks like a good idea, and given the right structure it has the potential to be Britain’s saving grace. Of course, the big concern is that the strike prices guaranteed for each of the different technologies are effectively another form of feed in tariff, and UK Government’s track record with investors in this area is nothing short of appalling.
As an example of this, take the massive debacle caused by incentivising solar and then withdrawing the support almost as soon as it arrived; companies were left insolvent, creating redundancies and resulting in legal action against the Government for alleged breaches in procedure.
A clear distinction between failed schemes such as the above and this new legislation has to be made to ensure investor confidence, and the EMR must therefore show itself to work first time around with no bungling or embarrassment.
Of course there are many potential pitfalls, not least of which is the need to balance more expensive technologies against the cheaper ones to ensure that the mix across the grid is correct, and to compensate correctly for intermittent sources such as wind and tidal such that there is always sufficient capacity when these technologies are not able to supply energy.
Chance for reform
These issues aside, the most important thing for the EMR to address is an issue upon which all parties have been noticeably silent: the UK’s manufacturing industry needs reliable, affordable and zero or low carbon electricity and heat in order to remain competitive, and the EMR as it currently stands seems entirely focused simply around the production of assets eligible for direct connection to the National Grid.
Therefore, there remains an opportunity for the reform to encourage integrated deployment within legislation and thus allow the UK manufacturing industry to take advantage of it as part of a wider transition to low carbon grid infrastructure.
Manufacturing industry needs two things from the EMR:
- If a manufacturer or developer builds an energy asset to supply zero or low-carbon energy to a manufacturing process, they need to be given the benefit of the carbon saved. These savings should be counted against their statutory reporting and CSR agenda, as this will encourage wider utilisation of sustainable power and reduce the embedded carbon in products being manufactured.
- Funders for these types of project will incur additional integration and interface costs; they must be allowed to recover a fair cost for this in order to incentivise efficient, embedded energy generation.
Failure to address these issues will inevitably mean that all generation capacity will be built only for direct grid connection. As a result, the manufacturing industry will lose the potential to have electricity delivered directly at wholesale price as opposed to relying on power at a higher, potentially volatile retail value.
We have seen time and again that badly or inconclusively executed policy simply leads to further loss of investor confidence, starting the tired chain reaction that leads to lack of investment and a continuing infrastructural landscape dominated by only a few players with large balancing sheets and financial stability.
There is an opportunity here to stimulate the economy and meet the needs of the manufacturing industry through a whole new generation of local or distributed energy generation assets. The EMR has to incentivise this type of opportunity to ensure that it is not missed, but before that can happen the Government has to acknowledge its existence.
Read more from Peter at www.rolton.com.
