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UKERC response to the Department of Energy and Climate Change consultation - Electricity Market Reform


Citation Skea. J., Hardy. J., Gross. R., Mitchell. C., Baker. P. and Eyre. N UKERC response to the Department of Energy and Climate Change consultation - Electricity Market Reform. 2011.
Author(s) Skea. J., Hardy. J., Gross. R., Mitchell. C., Baker. P. and Eyre. N
Download UKERC_response_to_DECC_Electricity_Market_Reform_consultation.pdf document type
Abstract

UKERC endorses the principles underlying the proposed package of reforms and supports the broad direction and aspirations of the EMR. However we believe that the package is unnecessarily complex and that some important issues, such as governance arrangements and price transparency in wholesale markets have received insufficient attention, or are absent.

A system of feed-in tariffs differentiated by and tailored to specific technologies, coupled with a capacity mechanism, would be sufficient to deliver the twin goals of promoting investment in low carbon generation and ensuring security of supply.

The feed-in tariff (FiT) is the key element of the EMR package. However, a “one size fits all” approach to FiT design is not appropriate. Low carbon technologies are diverse in terms of technological maturity, cost structure and risk profiles and different technologies may merit different approaches.

We regret that fixed FiTs have been excluded as they are the lowest risk option and they have a proven track record globally in encouraging investment in renewables. Contracts for differences (CfDs) may be appropriate for nuclear, while biomass generation and CCS could be supported by premium FiTs. The Emission Performance Standard (EPS) appears to be the most dispensable part of the EMR packages since other measures, such as carbon price support, will effectively inhibit investment in new unabated coal in the UK.

A capacity mechanism will be needed to give assurance that sufficient capacity will be installed to guarantee security of supply though it may be some time before the mechanism is needed.

We would recommend approaching auctions for FiTs with caution as, for many technologies, the pre-conditions for a successfulauction are not in place. These include the need for established technologies, a vibrant, diversified and competitive market, and a well developed supply chain. Administered prices or “beauty contest” type tenders could be used initially with a move to auctioning at a later date.

The key risk associated with the proposed package is that its complexity and uncertainty surrounding its implementation could lead to an investment hiatus threatening the attainment of both low carbon generation and security of supply goals.