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The outcome of Britain’s biggest electricity market shake-up in two decades may by unclear for some time to come.

Within months of taking office in the UK’s first post-war coalition government, the Liberal Democrats’ then energy secretary, Chris Huhne, announced sweeping reforms hailed as the biggest shake-up of the power market since privatisation more than 20 years ago.

But nearly two years on, the hard realities of coalition politics are testing his vision of an electricity network where old coal-fired power stations – and many of the gas plants at the heart of UK energy supplies – are replaced by fields of tall, white wind turbines and nuclear plants, at an estimated cost of £110bn.

Mr Huhne’s plans are now in the hands of his Lib Dem successor, Ed Davey, who presented a draft electricity market reform bill in May.

The legislation is designed to meet the UK’s ambitious climate change targets by taking advantage of the fact that about one fifth of existing generating capacity – the equivalent of about 20 big power stations – has to be replaced by 2020 as ageing nuclear and coal plants are shut down.

Some analysts argue the fastest and cheapest solution would be more of the gas plants that generated around 40 per cent of the country’s power last year.

But unless those plants could be fitted with still-nascent carbon capturing technology, the UK could miss its climate targets, because although gas is a cleaner fossil fuel than coal, it still produces greenhouse gas emissions when burned.

Those climate goals require an 80 per cent cut in those emissions by 2050 from 1990 levels, and an increase in renewables’ share of generation from nearly 10 per cent last year to 30 per cent by 2020.

That suggests gas’s share of electricity generation should fall from 40 per cent to about 10 per cent by 2030 under scenarios from the Committee on Climate Change, the independent emissions watchdog.

In other words, gas power would shrink from the dominant position it has today to more of a back-up role – balancing the grid when the wind is not blowing hard enough, or when there is a sudden demand for power.

Mr Davey’s reforms would retain existing subsidies for renewables – new levels of which were supposed to be announced earlier this week – and eventually replace them with other incentives that would also apply to nuclear plants.

They also include so-called “capacity payments” that would effectively compensate gas generators for the cost of building a plant required to supply power at short notice in a system using much more intermittent renewable energy.

But some say these payments are not going to be high enough or last long enough to encourage required investments in new plants.

The capacity payments “are short-term, so are inadequate to support gas when everything else – nuclear, renewables and coal – has been fixed”, says Dieter Helm, an Oxford University energy expert. “If you’ve fixed absolutely everything else, then you’ve got to fix gas as well.”

David Odling of the Oil & Gas UK trade body adds: “It is vital that ministers recognise that gas-fired power is the only technology available which can fill the coming electricity generation gap, at the necessary scale in the time available and at a cost which is affordable.”

The prospect of Britain exploiting its reserves of shale gas, the unconventional fuel that has transformed the US energy market, has bolstered the view that UK policy is not paying enough attention to gas.

The chancellor, George Osborne, gave heart to such arguments in the March Budget when he announced the energy secretary would set out a “new gas generation strategy in the autumn to secure investment”.

But the consultation document Mr Davey has sent out as part of that strategy review suggests his existing plans should be enough to secure enough gas investment to see Britain through its low carbon transition.

It concedes current market conditions are making coal more profitable than gas, which may be deterring some companies from building new gas plants, but adds “there are strong reasons to believe this will not be the case indefinitely” – not least the forthcoming retirement of the coal plants that last year accounted for 30 per cent of electricity generation.

And it reaffirms Mr Davey’s sceptical views on shale gas’s role in the UK, by saying: “The extent to which unconventional gas production will develop outside the US is uncertain.”

But such arguments do not appear to have swayed Mr Osborne, meaning the outcome of the biggest electricity market reforms in two decades may by unclear for some time to come.

Financial Times, 20 July 2012