Electricity Market Reform
20 November 2012
By Belinda Littleton
Dr Michael Pollitt of the Electricity Policy Research Group provided a critical if not controversial view of Electricity Market Reform (EMR) from the perspective of pure economic theory to mark the end of the 2012 Beesley Lectures.
Pollitt reminded the audience of the key principles associated with EMR: a Contract for Difference Feed in Tariff, carbon price support, a capacity mechanism and an emissions performance standard. He then conducted a ‘back of the envelope’ impact analysis, and questioned whether EMR was a model for other countries to follow, and if not, what we (and they) should use instead.
The Energy and Climate Change Committee’s report earlier in the year commented that the draft Energy Bill had no clear goals, not enough focus on energy efficiency, a negative effect on independent producers, a pointless EPS, a dash for gas warning, and uncertainty in policy timing and nuclear pricing.
Rather than rehash the above points, Pollitt drew attention to the nature and purpose of the EMR policy. He considered that investment in the energy sector is not the objective of policy such as EMR: low cost achievement of renewable targets is the objective. These are currently costly at around £1.5bn/year, yet the 2030 requirement of 90% decarbonisation in electricity looks challenging.
Pollitt considered that EMR is a variation on the single buyer model for low carbon generation. His fundamental issues with this approach were that it removes the following:
- An ability to quickly react to new information (market, pricing)
- Long term price risk management
- Decentralised portfolio management
- Competition in planning
- Reduction in technology-based lobbying
- Responsibility for long term planning failures
Further, Pollitt considered EMR would lead to domestic energy bills 32% higher than 2011 levels by 2030. Given that 14% of a domestic bill is currently policy-related, it is possible that there could be a negative welfare impact as a result of EMR.
In understanding what sort of market would be required to deliver the three objectives of secure power, renewables and carbon reduction simultaneously, Pollitt considered that it would require the following factors:
- Complete power markets
- Supplier non-delivery penalties for residential customers
- A comprehensive EU carbon market
- An EU green certificate market
- Nodal pricing of network access
- Merchant transmission links
He recognised that there would be distributional issues, but that they are likely solvable. His preference is that the EU Emissions Trading Scheme be at the heart of UK decarbonisation strategy, only taking on country-specific measures if that system were to collapse.
We consider that while the EMR may have a number of issues to overcome, it is, in the context of past measures such as the Renewables Obligation, beyond the point at which significant changes can be made. Tim Tutton in his response to Pollitt commented that current policies have largely been introduced as a result of the underlying objective of DECC, namely to respond to decarbonisation and security of supply targets in volume terms. Partly as a result of this objective, and as a result of the influence of politics and practicality on the economic options available, the EMR path has been chosen. However, we recognise the need to keep such policies under review, as they may not deliver the expected policy outcomes within the required timeframe or at an appropriate cost.
Email: Belinda Littleton
Tel: +44 (0)20 721 38289