UK Electricity Market Reform - What Does It Mean For Future Generation Projects?

The UK Government has said that its commitment is to "transform the UK's electricity system to ensure that our future electricity supply is secure, low carbon and affordable". On 12July 2011, the UK Government's Department of Energy & Climate Change (DECC) published a White Paper setting out its proposals to achieve this (White Paper)1.

In Brett Hillis's recent Alert, "UK Electricity Market Reform - FiT for energy traders?"2, he considers the likely impact of the proposals on wholesale energy and emissions trading. This paper considers the potential impact of the proposals on the energy structure in the UK and, in particular, the likely effects upon future generation projects.

The publication of the White Paper has coincided with the DECC's publication of its Renewable Energy Roadmap3, which signals support for, in particular, offshore wind and relatively modest ambitions in respect of onshore wind.

Overview of the proposals

The White Paper states that the UK faces threats to security of supply from future plant closures, as well as the need to decarbonise power generation to meet the Government's carbon reduction targets, and an expected rise in electricity demand. To meet these threats, the DECC wants to create conditions encouraging greater long-term investment in renewable and nuclear electricity generation. The White Paper sets out the Government's policies to encourage this investment. The main new policies are:

long-term contracts for low-carbon energy called Feed-In Tariffs with Contracts for Difference (FiT CfDs) to provide predictable revenue streams for investors in low-carbon generation; a carbon price floor to further incentivise low-carbon generation; a framework for contracting for capacity (Capacity Mechanism) to ensure there is enough electricity to meet peak demand; and measures to improve wholesale market liquidity. DECC's White Paper describes the FiT CfD and Capacity Mechanism in detail. The carbon price floor will operate as part of the UK tax code and was announced in the 2011 Budget.

What does this mean for the direction of generation?

Nuclear

The White Paper is clearly intended to enable and encourage the construction of new-build nuclear power plant in the UK. The two measures that it brings in, the carbon price floor and the FiT CfDs, both serve this purpose. Depending upon the strike price set by the FiT CfDs, these should establish a predictable basis upon which investment in nuclear plant is facilitated.

Wind

Unlike the current Renewable Obligation Certificate (ROC) system, the new FiT CfD...