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Keeping the Lights On: A Panel Discussion on Electricity Market Reform
For more information on this event or upcoming Carbon Connect events, please email daniel.walker-nolan@policyconnect.org.uk
On 10th November, Carbon Connect held a panel discussion in the Jubilee Room of Parliament featuring key parliamentarians and industry stakeholders debating current issues and strategies for electricity market reform in the UK.
Dr. Alan Whitehead, MP for Southampton Test, kicked off the event by stressing the importance of the UK’s energy reform programme, highlighting our need to replace approximately a quarter of our energy capacity by 2020. He also emphasised the added difficulty that these upgrades must take place amidst increasing energy demand and rapidly rising prices.
Dr. Whitehead went on to say that Parliament’s 2011 Electricity Market Reform (EMR) White Paper on electricity market reform is ‘in the frame’ of meeting the challenge of keeping consumers’ bills reasonable, generating investment in energy infrastructure and lowering carbon emissions. However, he insisted it is crucial to think about whether current market mechanisms will carry us through the next 15 years and whether there is enough investment or players in the UK energy industry.
Infrastructure & Capacity
Charles Hendry MP, Minister for Energy, followed by highlighting the lack of investment in infrastructure in the UK. He explained that UK gas and electricity suppliers have provided consumers with the cheapest prices in Europe for most of the last 20 years, but this has partly been done by ‘sweating assets.’ As a result, the UK now faces a ‘catching-up process’ of matching levels of investment in most other European countries, which will inevitably result in higher prices.
Hendry predicted that capacity margins for electricity would fall from 20% to 5% by the end of the decade. That situation would mean that on days of high demand, particularly in winter, there will not be enough supply to meet demand. Hendry said this poses a great challenge to policymakers and could lead to a ‘breakdown in public confidence’ if investment is not generated to the level that is needed for secure and constant supply.
Hendry also pointed out the issue of factoring carbon into energy prices, quoting Lord Stern that the ‘failure to factor in the cost of carbon is the greatest market failure of all time.’ He argued that the Feed-in-Tariff with Contracts for Difference (FiT CfD), as outlined in the EMR White Paper, is the most cost-effective way of delivering the low-carbon investment that’s needed.
The FiT CfD delivers a guaranteed price over time, which gives the return on investment some certainty and makes it easier to attract investment from international investors, pension funds and sovereign wealth funds. Under the arrangement, the level of subsidy provided is adjusted with reference to wholesale prices. When wholesale prices are high, there is less support; when wholesale prices are low, there is more support. The government is hoping that this sliding scale will help mitigate the cost of low carbon generation to consumers, and naturally taper subsidies as the price of generating low carbon electricity decreases over time.
The Energy Market
Attendees also heard from Keith Anderson, Chief Corporate Officer at ScottishPower, who emphasised the role of large energy companies in generating substantial amounts of investment in the next decade. He stressed the importance of providing ‘long-term clarity’ to investors to combat political and regulatory risk. ‘We don’t want to commit £100 million and then find that the rules of the game have changed,’ he said.
Anderson also addressed the issue of a lack of competition in the industry, saying that new companies are dissuaded from coming into the market because of low profit margins. Anderson claimed that for ScottishPower and similar companies, the average profit for a customer with a £1000 dual (gas and electricity) fuel bill is £10 - a margin of 1%. This compares with 7 or 8% for a standard retail corporation.
In order to improve competition, Anderson said, it is necessary to alter the economic incentives faced by generators. If the cost to generate is more than the price to buy power on the wholesale market, then the supplier won’t generate.
Anderson concluded by pressing for measures to reduce energy consumption in order to curb rising demand. In particular, he argued that there’s a ‘fundamental problem’ with houses in the UK. Installing loft insulation and cavity wall insulation are positive new initiatives, but Anderson stressed that the UK is still building houses that have ‘substandard’ efficiency compared to other European countries. Finding ways to substantially reduce electricity use will be pivotal in meeting the country’s energy requirements for the future.
Ed Gill also contributed to the discussion. Ed is Head of External Relations at Good Energy - an independent electricity supplier with approximately 30,000 customers. He explained that there has been a shift since the 1990s towards sourcing from smaller-scale, renewable generators, saying it’s ‘very much a reflection of the status quo in the market.’
He went on to address various cost issues posed to consumers in the UK by EMR, especially the impact of £200 billion worth of investment being made in the next decade, which is more than twice the level the UK has been working at in recent years. He proposed examining a range of renewable technologies to compensate for problems such as intermittency with wind and solar power, as well as increasing the number of suppliers to create a robust and competitive market.
Background Information
You can read a blog covering the main aims of Electricity Market Reforms on our website here.
You can download speaker biographies from this event here.
Related Activities
Energy Red Tape Challenge
DECC is currently undertaking its Energy Red Tape Challenge in order to start a discussion on almost 300 different regulations concerning ‘all aspects of UK energy from extraction to generation, safety, supply and consumption’.
The aim of the exercise is to identify where unnecessary administration can be stripped out, whilst promoting market competition and growth in the sector. The challenge will be running until January and you can make a contribution through the Red Tape Challenge website.
Carbon Connect Distributed Energy Conference
In February, Carbon Connect will hold a conference in Portcullis House to bring policy makers and advocates of distributed energy together to discuss how off-grid energy solutions could insulate industry from bill increases as well as contribute to goals on security of supply. More details to follow.
Next Carbon Connect Inquiry
Carbon Connect’s next inquiry will focus on the role of innovative generation and demand side response as a part of the UK’s future energy planning. The project will be complemented by some work from Imperial College London.
Dr. Alan Whitehead, MP for Southampton Test, kicked off the event by stressing the importance of the UK’s energy reform programme, highlighting our need to replace approximately a quarter of our energy capacity by 2020. He also emphasised the added difficulty that these upgrades must take place amidst increasing energy demand and rapidly rising prices.
‘We need to decarbonise our electricity supply arrangements. The Climate Change Committee suggests that by about 2030 we need to be below 100 grams of emissions per kwh of electricity produced. At the moment we’re about 450 getting down to about 400. So consequently, a rather long way to go in a fairly short time in that ambition.’ Dr. Alan Whitehead
Dr. Whitehead went on to say that Parliament’s 2011 Electricity Market Reform (EMR) White Paper on electricity market reform is ‘in the frame’ of meeting the challenge of keeping consumers’ bills reasonable, generating investment in energy infrastructure and lowering carbon emissions. However, he insisted it is crucial to think about whether current market mechanisms will carry us through the next 15 years and whether there is enough investment or players in the UK energy industry.
Infrastructure & Capacity
Charles Hendry MP, Minister for Energy, followed by highlighting the lack of investment in infrastructure in the UK. He explained that UK gas and electricity suppliers have provided consumers with the cheapest prices in Europe for most of the last 20 years, but this has partly been done by ‘sweating assets.’ As a result, the UK now faces a ‘catching-up process’ of matching levels of investment in most other European countries, which will inevitably result in higher prices.
‘We haven’t seen enough investment in new plant coming through. And therefore we now face a mountain which we have to climb if we’re going to deliver the security of supply we need from the end of this decade and beyond.’
Hendry predicted that capacity margins for electricity would fall from 20% to 5% by the end of the decade. That situation would mean that on days of high demand, particularly in winter, there will not be enough supply to meet demand. Hendry said this poses a great challenge to policymakers and could lead to a ‘breakdown in public confidence’ if investment is not generated to the level that is needed for secure and constant supply.
FiT CfD‘The issue of securing this investment is not a luxury or an option. It is an absolutely fundamental tenet of a successful energy policy, because more than anything else, I think a government will be judged on the security of supply in energy.’ Charles Hendry
Hendry also pointed out the issue of factoring carbon into energy prices, quoting Lord Stern that the ‘failure to factor in the cost of carbon is the greatest market failure of all time.’ He argued that the Feed-in-Tariff with Contracts for Difference (FiT CfD), as outlined in the EMR White Paper, is the most cost-effective way of delivering the low-carbon investment that’s needed.
The FiT CfD delivers a guaranteed price over time, which gives the return on investment some certainty and makes it easier to attract investment from international investors, pension funds and sovereign wealth funds. Under the arrangement, the level of subsidy provided is adjusted with reference to wholesale prices. When wholesale prices are high, there is less support; when wholesale prices are low, there is more support. The government is hoping that this sliding scale will help mitigate the cost of low carbon generation to consumers, and naturally taper subsidies as the price of generating low carbon electricity decreases over time.
The Energy Market
Attendees also heard from Keith Anderson, Chief Corporate Officer at ScottishPower, who emphasised the role of large energy companies in generating substantial amounts of investment in the next decade. He stressed the importance of providing ‘long-term clarity’ to investors to combat political and regulatory risk. ‘We don’t want to commit £100 million and then find that the rules of the game have changed,’ he said.
Anderson also addressed the issue of a lack of competition in the industry, saying that new companies are dissuaded from coming into the market because of low profit margins. Anderson claimed that for ScottishPower and similar companies, the average profit for a customer with a £1000 dual (gas and electricity) fuel bill is £10 - a margin of 1%. This compares with 7 or 8% for a standard retail corporation.
In order to improve competition, Anderson said, it is necessary to alter the economic incentives faced by generators. If the cost to generate is more than the price to buy power on the wholesale market, then the supplier won’t generate.
Anderson concluded by pressing for measures to reduce energy consumption in order to curb rising demand. In particular, he argued that there’s a ‘fundamental problem’ with houses in the UK. Installing loft insulation and cavity wall insulation are positive new initiatives, but Anderson stressed that the UK is still building houses that have ‘substandard’ efficiency compared to other European countries. Finding ways to substantially reduce electricity use will be pivotal in meeting the country’s energy requirements for the future.
Increasing Competition and Reducing Bills‘The best solution is don’t use [power]. That’s the greatest solution to energy efficiency and reducing carbon. … The more we can encourage people to stop using as much energy, the better.’ Keith Anderson
Ed Gill also contributed to the discussion. Ed is Head of External Relations at Good Energy - an independent electricity supplier with approximately 30,000 customers. He explained that there has been a shift since the 1990s towards sourcing from smaller-scale, renewable generators, saying it’s ‘very much a reflection of the status quo in the market.’
He went on to address various cost issues posed to consumers in the UK by EMR, especially the impact of £200 billion worth of investment being made in the next decade, which is more than twice the level the UK has been working at in recent years. He proposed examining a range of renewable technologies to compensate for problems such as intermittency with wind and solar power, as well as increasing the number of suppliers to create a robust and competitive market.
‘You need to make sure you match radical reform on the wholesale - the generation - side of the market with real reform on the retail side of the market as well. And you need to make sure you encourage competition, allow small suppliers to grow, not just in terms of getting small suppliers in to the market in the first place, but getting them to the point where they can challenge the larger suppliers.’ Ed Gill
Background Information
You can read a blog covering the main aims of Electricity Market Reforms on our website here.
You can download speaker biographies from this event here.
Related Activities
Energy Red Tape Challenge
DECC is currently undertaking its Energy Red Tape Challenge in order to start a discussion on almost 300 different regulations concerning ‘all aspects of UK energy from extraction to generation, safety, supply and consumption’.
The aim of the exercise is to identify where unnecessary administration can be stripped out, whilst promoting market competition and growth in the sector. The challenge will be running until January and you can make a contribution through the Red Tape Challenge website.
Carbon Connect Distributed Energy Conference
In February, Carbon Connect will hold a conference in Portcullis House to bring policy makers and advocates of distributed energy together to discuss how off-grid energy solutions could insulate industry from bill increases as well as contribute to goals on security of supply. More details to follow.
Next Carbon Connect Inquiry
Carbon Connect’s next inquiry will focus on the role of innovative generation and demand side response as a part of the UK’s future energy planning. The project will be complemented by some work from Imperial College London.
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