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Labour vs Tories Presentation & Substance to two key parties’ energy policies 1st April 2015

Dunstan Thomas Energy Limited, has decided to start producing a twice monthly blog post on issues affecting electricity generators and the energy market as a whole

So what better place to start just one month from the General Election than to look at the implications for a possible change of government from Conservative-Liberal Democrat coalition to a Labour-dominated government come 8th May 2015?

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.