It is interesting to note that
Tory MP Philip Lee went on record last month to say
that his own party have no specific energy manifesto to
fight the election on, effectively saying that Labour is
setting its energy policy stall out much more
effectively. There is no doubt that Labour are winning
the Public Relations war in this area. The key document
to read is of course Labour’s Green Paper entitled
Powering Britain: One Nation Labour’s plans to reset the
energy market which was launched back in September 2013.
This document
grabbed headlines at the time and continues to do so
because it promises a consumer energy price freeze for
two years until May 2017 if they win the election while
its 10 key reforms are pushed through.
The big 10
actions to ‘reset the market’ are:
1. Ring-fence
supply and generation businesses within
vertically-integrated companies
2. Improve
competition and transparency in the wholesale
electricity market through an open pool
3. Increase
transparency in the wholesale gas and electricity
markets by formalising uncleared over the counter (OTC)
trading
4. Simplify tariffs so consumers can compare
prices and engage with the market
5. Abolish Ofgem
and create a tough new energy watchdog
6. Deliver
value for money on policy costs that impact on bills
7. Take forward the system of contracts for difference
to encourage investment
8. Set a 2030 power sector
decarbonisation target to boost investor confidence
9. Create an Energy Security Board to plan for and
deliver on our energy needs
10. Give the Green
Investment Bank the power to leverage new investment
As regards the wholesale energy trading market
itself they want to:
• Improve Competition and
transparency in the wholesale electricity market through
an open pool
• Increase transparency in wholesale gas
and electricity markets by formalising uncleared OTC
trading
• Take forward the system of contracts for
difference to encourage investment
The Labour
Party document says that wholesale costs are the largest
component of the energy bill and are not operating
efficiently. Ofgem’s most recent Wholesale Market
Liquidity report is quoted as saying the whole market,
particularly for electricity “inhibits competition and
imposes costs on consumers”. The Labour Party document
writes: “Poor liquidity, the prevalence of bi-lateral
over the counter trades and the lack of transparency on
pricing have resulted in a poorly functioning wholesale
market.”
Much has been made of the delay between
any fall in
wholesale prices and the speed and extent that these
prices are passed on to consumers.
The Tories
have implemented the
Electricity Market Reform (EMR) detailed in
Department of Energy & Climate Change’s Electricity
Market Reform: policy overview which has three key foci
- energy security, decarbonisation and affordability.
The policy document details the scale of the
challenge which includes:
• £75bn needed for new
electricity power generation capacity
• OFGEM
estimates that a further £35bn is needed for electricity
transmission and distribution
• 80% carbon emissions
reduction by 2050 which means by 2020 we need 15% of
energy from renewable sources
The EMR is designed “to
secure the investment needed to deliver a reliable,
diverse low carbon technology mix.”
As we all
know the first step on the EMR road was establishing
contracts for difference (CFDs) with prices set
administratively and then supplementing this move with
Capacity Auctions. The auctions were designed to
stimulate investment in building new generators but the
prices settled too low and arguably the result has been
a stifling of further investment. That said 36% of
awarded capacity were linked to refurbishing CMU,
Pre-refurbishment CMU and New Build Generating CMU, so
it is not a lost cause. Some players including InterGen
pulled out of bidding for new stations at Spalding and
Coryton but did secure capacity for existing plants
including the Rocksavage plant. Price weakness appears
to be instrumental in players like
Centrica taking some gas plants off the market.
So if the Capacity Auctions’ raison d’etre was to
improve security of supply then to date this has yet to
be proven. Furthermore it looks like investment in
renewable plants has also been going consistently
backwards for five years. Offshore wind offers strong
potential to help UK hit its decarbonisation targets
while simultaneously providing capacity that is bound to
be lost as ageing plants are decommissioned over the
next few years.
Yet there are very real economic
constraints on investment as players need considerable
government subsidies to make the numbers add up. Some of
the generators, including most notably
SSE, are not getting access to these subsidies and
threatening to shelve planned investments as a result.
The outlook for new investment is further muddied by the
current
Competition & Markets Authority investigation into
the energy market.
So the best that can be said
for EMR to date is that it is a work in progress and a
whole lot more work still needs to be done before the
Government - of whichever hue post-May 7th - can say
that decarbonisation, energy affordability and energy
safety targets are on track. Let’s hope the new
Government does not take its eye off the ball.
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