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Electricity reform: devil's in the detail

The government has announced plans to reform the electricity market in an attempt to create certainty for investors building Britain’s low carbon infrastructure.

While many gave the proposals the thumbs up, questions remain over how and whether it will work in practice and in particular over what type of technology investments will be made.

Stimulating investment

EC Harris partner Mark Stewart believes that the reforms will stimulate new investment in the UK – particularly for offshore wind and new nuclear – but offers a word of warning.

“I’m cautiously optimistic, but the devil is in the detail,” he says, alluding to the fact that investors will look at the total price of building a new energy plant against the returns gained from market price of electricity along with government incentives such as carbon price and feed in tariffs (FITs).

Firms will invest in technology which gives the greatest overall returns on their investment. The level at which the carbon price is set will be an important driver in investment choice.

“If it’s £15 per tonne then combined cycle gas turbine plants would be attractive, if it’s £60 per tonne then offshore wind becomes very attractive,” says Stewart. “There’s been discussion at a European-level of EUR 32 (£27) per tonne.”

Until now the UK has lagged behind other nations in renewable energy investment due to volatility of the electricity price.

“The reforms will result in gas-powered stations for the short term.”

Utility firms have been arguing for “contract for differences” feed in tariffs (FITs) because of the certainty it gives over their investment decisions. Nuclear and offshore wind have huge capital costs but low running costs, therefore if the energy price drops, it makes them a much less attractive investment.

The government hopes that this mechanism will safeguard the investment against volatility in the energy market.

Experts suggest that the reforms will result in gas-powered stations for the short term, with unabated coal use likely to end between 2015 and 2018 and nuclear and offshore wind coming online after that. These are very tight timescales and there is a worry that new energy plants will not be ready to pick up the slack left by coal-fired electricity.

There are also signs that the new FIT could divert attention away from gas.

“At the moment the price of electricity is dependent on the price of gas because its most often used to absorb the spikes in demand,” says WSP Environmental and Energy director Chris Stubbs.

Planning risk

In addition, all new energy projects will need to negotiate planning regulations, which may too herald problems. In an attempt to combat the negativity associated with building new plant, new nuclear projects are choosing existing sites, which could help with the planning problem. Meanwhile offshore wind could find it easier to gain planning permission because there are no local residents to register objections.

It is the small and medium sites where there will be most planning risk. The government has launched the Localism Bill is an effort to decentralise power and allow local communities to decide on projects on their doorstep.

Local residents need to be incentivised or are likely to block planning proposals for a project.

“It helps of the local community benefits by receiving some of the business rates or a reduction in their energy bills,” suggest WSP Energy and Environment head of renewable Bev Walker.

“We don’t know what will happen [with small scale] renewable projects. There are 4,000 onshore wind turbines planned to be built in the UK in the next 10 years – it is likely existing wind farms will try adding two-three more rather than start a new one because it will be easier to gain planning permission that way,” says Walker.

There are very tight timescales for the new plant to come on line and there is a worry that new energy plants will not be ready to be up the slack left by coal-fired electricity.

Coal crackdown

The proposed reforms are particularly onerous on coal-powered electricity which at the moment is an essential part of the UK’s energy mix producing 43% of supply during the first three weeks of December.

This is exacerbated by the inclusion of the Emissions Performance Standard, which limits the amount of carbon produced by the plants and effectively rules out building any new coal plant without installing the still untested carbon capture and storage.

Coalpro director general David Brewer says coal electricity firms will now be looking at the viability of their existing fleet.

About £300M investment is already required on coal power stations to meet EU Directives to reduce nitrous oxides. The new EPS tax may make such investments uneconomic and firms may decide to mothball their plants.

“Coal is doing what other fuels are failing to do at this difficult time – helping keep Britain’s households lit and warm,” says Brewer.

If all the hurdles are cleared the new low carbon power mix could mean plenty of work engineers. Engineers are involved in all aspects of the work from planning right through to commissioning. The latest government report put the investment requirement at £110bn but other reports have it as high as £450bn.

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