Electricity Market Reform and Nuclear Subsidies

On Thursday, November 29th 2012, the Secretary of State for Energy and Climate Change confirmed the Introduction of the Energy Bill to the House of Commons. The Bill included provisions for:

  • Contracts for Difference (CFD): long-term contracts to provide stable and predictable incentives for companies to invest in low-carbon  generation; and
  • Capacity Market: to ensure the security of electricity supply.

The Energy Act received Royal Assent on 13th December 2013. The government at the time said the Act put in place measures to attract the £110 billion investment which is needed to replace current generating capacity and upgrade the grid by 2020, and to cope with a rising demand for electricity.

Former Labour MP, Alan Simpson, called the Energy Bill “a shambles from start to finish, Britain’s equivalent of the Maginot Line – a hulking great monster of a Bill that will do nothing for Britain’s energy security, will cost the public a (not so) small fortune, and will be completely unsuited for the energy future the world is already moving into. It looks as though new nuclear will need a price guarantee of twice (three times?) today’s wholesale price of electricity… For less than the cost of a single new nuclear power station, Britain could take seven million households out of fuel poverty. For less than the cost of the bribes that we will pay for reopening mothballed gas power stations we could have a renewable energy programme that would deliver sustainability, and a decentralised system of generation, and distribution that would turn a cartel into an energy democracy.”

A Contract for Difference (CFD) is a contract between a low carbon electricity generator and the Low Carbon Contracts Company (LCCC), a government-owned company. The generator is paid the difference between an agreed ‘strike price’ – a price for electricity reflecting the cost of investing in a particular low carbon technology – and the ‘reference price’– a measure of the average market price for electricity in the GB market. It gives greater certainty and stability of revenues to electricity generators by reducing their exposure to volatile wholesale prices, whilst protecting consumers from paying for higher support costs when electricity prices are high.

In June 2015 the Conservative Government set out proposals to end new subsidies for onshore wind. Amber Rudd, the Secretary of State for Energy and Climate Change at the time said she would close the Renewable Obligation (RO) scheme to new onshore wind from 1st April 2016 – a year earlier than planned. She also said there would be no further allocations of Contracts for Difference to onshore wind.

Rudd argued that the Electricity Market Reform Delivery Plan projected a requirement of between 11-13 GW of electricity to be provided by onshore wind by 2020 to meet the 2020 renewable electricity generation objective. After taking account of the early closure of the RO scheme and the capacity of onshore wind projects that had already received support through the new Contracts for Difference, she expected around 12.3GW of onshore wind to be operating in the UK by 2020 supported by the Levy Control Framework providing around 10% of electricity generation.

But the European Commission has warned that the UK was set to miss its key EU renewable energy target for 2020, and told the government it should review its policies to get back on track.

Ministers could let onshore wind bid in a new contracts for difference (CfD) round one, without contradicting its previous pledges to end all new subsidies, according to Scottish Renewables. A Baringa Partners’ report for Scottish Renewables says 1GW of extra onshore wind capacity could be delivered at a highly competitive price of £49.40 per MWh. Baringa Partners’ said “dramatic reductions” in cost around the world in renewables and storage technology were a “game changer.” In April 2016, the Conservative thinktank bright blue published a survey, which claimed the majority of Tory voters backed onshore wind. Bright Blue said “an unsubsidised fixed-price contract could now be offered to new onshore wind projects, which would be set at the current wholesale price. This would enable us to meet our carbon budgets in the most cost-effective way.”

The Conservative Government policy to “halt the spread” of new onshore wind farms, even though this is now one of the cheapest forms of electricity, isn’t backed by the latest opinion polls. A Government survey found support from the public for onshore wind has hit a record level, with 73 per cent in favour and just 9 per cent against.

The Capacity Market is designed to ensure security of electricity supply by providing a payment for reliable sources of capacity, alongside their electricity revenues, to ensure they deliver energy when needed. This was supposed to encourage the investment we need to replace older power stations and provide backup for more intermittent and inflexible low carbon generation sources. The Capacity Market should also support the development of more active demand management in the electricity market.

The country’s energy supply currently faces two challenges. Firstly, our existing fleet of coal, gas and nuclear generators are coming to the end of their life cycle. Secondly, the rise of renewable energy generation presents challenges in balancing supply and demand. The government introduced the capacity market in 2014 to try and combat these twin challenges. But so far it has failed to secure the innovative new capacity the country needs. Under the capacity market, the government awards payments to capacity providers in return for an assurance that they will deliver energy at times of system stress. Contracts are awarded through annual auctions. By 2017 there had been three main auctions where participants bid to provide capacity for four years in the future (a fourth auction was held at the start of 2017 but was only open to bidders able to provide capacity one year ahead, thereby making it unviable for new build to bid). These three auctions have cost consumers around £4bn. However the vast majority of these payments have gone to existing conventional generation, including heavily polluting coal and diesel. Indeed, in the most recent auction a mere 4GW of the 52.4GW awarded went to new build capacity The main reason for this market failure is that the capacity market is a blunt instrument. It is technology-neutral and fails to take into account external factors such as emissions or the embedded benefits associated with new build and innovative technology. In an auction based entirely on price, new build has no chance of competing with decades old generating stations which recovered their construction cost years ago.

According to the IGov project at Exeter University nuclear power and the capacity market are trying to maintain pockets of the ‘old’ centralised system. What we should be doing is moving towards a smart flexible energy system based on wind, solar, energy efficiency, demand side response, storage, interconnection – and probably, to a small extent, gas and a few other RE technologies.

The UK Coalition Agreement allows the Government to promote the construction of new nuclear reactors provided they receive “no public subsidy”. The Secretary of State for Energy at the time, Liberal Democrat MP Chris Huhne, told The Today Programme just after the May 2010 General Election, that, despite previously being anti-nuclear, he might oversee new reactor construction if power companies can do it without government subsidy. The key point, Huhne stressed, on which there was agreement within the coalition Government, is the principle there will be no public subsidy.

But it was clear to almost everyone by December 2010 when the Government launched its plans for Electricity Market Reform (EMR) that it was planning to break its promises and subsidise new reactors. (See Broken Promises: Subsidising the Nuclear Industry, Spinwatch 8th May 2012)

The Tory Government finally confirmed in October 2015 that it was dropping the ‘no public subsidy policy’ [for nuclear power] of the previous administration.

Just the day before, energy minister Andrea Leadsom said: “It is vital that industries over time stand on their own two feet. I don’t think anyone here would advocate an industry that only survives because of a subsidy paid by the billpayer.” She was justifying 87% cuts to subsidies for solar power, just as they are on the verge of becoming cheaper than gas. The contradiction does not need spelling out. Nuclear power has had 60 years to stand on its own two feet.

See also Nuclear Costs and Finances.

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Published: 5 December 2012
Last updated: 8 May 2017