The sight of a British minister opening a new power station crammed with fossil fuel should become a rarity in future – at least if government policy succeeds.
Charles Hendry, energy minister, helped commission a gas-fired plant in Nottinghamshire this week, while in London his department prepared the most radical reform of the electricity market since privatisation 20 years ago, with the aim of making these ceremonies appear relics of the past.
The goal is to tip the balance against coal and gas-fired power stations, therefore reducing carbon dioxide emissions, while replacing the 25 per cent of national generating capacity that will shut down over the next decade.
The government outlined its plans in a consultation paper last December, promising a white paper in “late spring”. However, this has yet to appear, while legislation to implement the reform is not expected to be passed until next year.
Renewing energy infrastructure will cost £200bn over the next decade but utility companies will decide whether to provide this level of investment only when they know the full detail of the reform. Meanwhile, a third of Britain’s coal-fired generation will close in 2015 to comply with European Union directives. Privately, executives say that ministers do not grasp the urgency.
Mr Hendry told the Financial Times he recognised the “scale of the challenge”, adding: “We have to secure a level of investment in this decade which is twice as high as in the last decade. That would simply not come if the electricity market was left to the traditional structure.”
The answer was for Britain to acquire a “balanced portfolio” of assets, able to produce electricity in affordable and environmentally friendly ways.
Under present conditions, gas-fired power stations are sufficiently cheap, efficient and low risk to be the market’s favoured solution. The government aims to change this by giving utility companies new incentives to build renewable energy and nuclear power plants.
“This is the most fundamental change to the electricity market in 25 years. But I think it will deliver the new investment we need in a low-carbon way at the best price to consumers,” said Mr Hendry.
The devil, however, will lurk in the detail – and this will not be known at least until a white paper appears.
The government proposes a new tariff system designed to give guaranteed rates of return to providers of low-carbon electricity. But will it choose “premium feed-in tariffs”, offering an additional payment above the wholesale price of electricity, or a “contract for difference”, providing a fixed price? Vital investments will rest on this decision.
Volker Beckers, chief executive of RWE Npower, the UK subsidiary of the German utility RWE, pointed out that his company had invested £3bn in Britain since 2008. “For us, it’s very important, given that we are already investing, that we get more certainty,” he said.
While the companies want certainty, critics fear the government’s entire policy is misconceived. A central aim is to expand offshore wind farms in order to generate 30 per cent of the UK’s electricity from renewable sources by 2020.
But that level of offshore wind carries a price tag of £100bn, almost twice as much as the expected construction cost of the UK’s new nuclear power stations.
Dieter Helm, professor of energy policy at Oxford university, said the government had staked too much on offshore wind. “The fundamental mistake early on was to put all the energy policy eggs in one particular technology basket.”
“Nobody in their right mind” believed that offshore wind would really expand fast enough to meet the renewable target, added Prof Helm. If so, more fossil fuel plants would have to be kept running, regardless of the consequences for carbon emissions.
But Mr Hendry said: “Around our shores, we have perhaps 40 per cent of Europe’s wind resources and therefore we ought to be looking at how we can harness that most effectively.”
Power investors see stability in UK
Jürgen Grossmann, chief executive of the German utility RWE, acknowledges that investing in Britain does not always win the market’s applause.
While opening a power station in Nottinghamshire this week, he said: “Great Britain is our most important investment outside of Germany. But the capital markets haven’t given us credit for that.”
Earlier, he spoke to the Financial Times and praised the country’s investment climate, saying: “Britain may at first glance seem a mature market, but it’s a market in a transition period. You are abandoning many traditional means of power generation, so there is opportunity for the company that introduces new technology, efficient technology – and does that quickly.”
He added: “In today’s globally uncertain times, Britain is a haven of legal stability, of predictable public opinion.”
But Mr Grossmann’s speech at the commissioning of RWE’s Staythorpe power station was a reminder that big utility companies have other options as they await the UK’s electricity market reforms.
If the UK’s reforms do not offer sufficient returns, RWE will have the option of selling its British assets and taking its capital elsewhere.
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