Electricity market reform unlikely to deliver 2020 goals, says new survey

by Search Gate staff. Published Tue 27 Nov 2015 11:14, Last updated: 2015-11-27
Further clarity needed to make electricity market reform work

A survey of the top executives and main investors within the UK electricity industry found they don’t believe that the Government’s Electricity Market Reform proposals (EMR) are going to enable the UK to meet its 2020 decarbonisation and private sector investment targets, according to the results of a new survey by international law firm Freshfields Bruckhaus Deringer.

And analysts say the energy generators cannot deliver on the so-called “three-dimensional chess” objectives of secured supply, low energy bills and low-carbon.

The survey’s key findings, outlined in the report Electricity Market Reform: call for clarity, include:

• 77% of respondents don’t feel EMR will enable the 2020 decarbonisation targets to be met. Only 18% felt it would. Many see the targets as over-ambitious even at the point at which they were set.

• 64% don’t believe the UK will reach its 2020 private sector investment target with just one in five seeing it as achievable. Effectively doubling investment rates (to meet 2020 targets) to the latest government estimate of £110bn is seen ‘as out of reach’, with some even questioning whether it would even be possible to spend so much money by then.

• Overall, respondents were mostly (72%) neutral-to-positive towards EMR but a significant minority (26%) viewed it negatively.

• Despite respondents being at the centre of reforming the UK’s electricity market, worryingly, only 10% claimed to have a thorough knowledge of the government’s EMR proposals with 41% claiming only little knowledge of what is planned

• The lack of guaranteed financial compensation in the event of future legislative changes was seen, by most, as weakening the investment case. The research revealed a market sensitive to future policy switches, a lack of faith in the stability of plans and demands for cross-party agreement on EMR, over two parliaments

• Offshore wind generation was seen as the sector most likely to be helped by EMR in appealing to investors. 77% see its investment case boosted by the proposals compared to 54% for gas fired generation (many regarding this form of power as the most promising strategic choice for emissions reduction) and 41% for nuclear.

Commenting on the findings, Alan Rae Smith, head of Energy Projects at Freshfields said: “This is a once in a generation chance to reform a market that literally feeds the UK economy, yet analysts seem to be struggling to make the EMR investment case understandable, let alone attractive to their clients.

“Power companies face a double bind: they are expected to lead the reforms and draw investment towards low-carbon technology, but simultaneously keep electricity prices in check and supply secured. This makes high-risk and costly investment decisions unappealing.

“Almost eight in ten see EMR as improving the investment case for wind generation, and 41% believe nuclear will benefit. But plenty are unconvinced – with some prepared to say that only gas-fired generation makes real sense right now.

“The markets see the targets, both financial and time related as too ambitious, and investors are simply unsure as to what will happen to their money. Unless clear incentives for renewables are introduced in the UK together with consistent policy, long-term commitments and the prospect of cross-party agreement, investments are likely to flow to other countries”

Just last week the government provided some clarity around some of the detail relating to its Electricity Market Reform, yet it raised more questions than it answered according to Rae Smith.

“Being given more detail is clearly a step in the right direction, but the industry still sees too many unanswered questions and is raising many more,” said Rae Smith.

“For example, what financial backing will the government owned CfD counterparty receive? If none, how will generators get satisfied with the CfD counterparty credit risk? How will the government-owned counterparty CfD levies be calculated and funded and who will take the decision on the decarbonisation target, which has been pushed down to secondary legislation and out to the next Parliament in 2017?

“The answers may, or may not come in the revised draft of the Energy Bill, the publication of which is expected imminently. The market is holding its breath until it sees what comes next.

“The sector simply cannot square the competing objectives of secured supply, low energy bills and low carbon – so-called three-dimensional chess – and does not believe the 2020 goals, nor the timeline, are realistic. 2020 investment decisions, given the time taken to achieve planning approvals and then to construct assets, have on the whole already been made and what’s already in the pipeline is going to fall way short of the targets.’

“Given the extended timescales involved, intra-governmental and cross-party agreement and collaboration are essential. Further, incentives should be understandable and long-lived – and built to neatly dovetail with international carbon markets, the EU framework and global climate agreements.

“Without them entrepreneurial players will be squeezed out and low-carbon investors scared off – damaging the long-term health of the industry, and undermining the 2020 and the 2050 goals,” he concluded.

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