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UK energy majors on market reform collision course

02 Feb 2011 19:05:35 | edem

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Two of the UK's largest energy suppliers are on a collision course over the government's electricity market reform proposals due to a disagreement over the impact of contracted feed-in tariffs.

The proposed tariffs, which would work on a Contract for Difference (CfD) basis, are designed to encourage investment in new low-carbon generation to assist in hitting EU climate change targets.

But Scottish and Southern Energy (SSE) chief executive Ian Marchant hit out at the proposals on Wednesday. He said it would create a flawed system, whereby the state would assume a position in the "driving seat", which would not deliver the desired outcome.

"The CfD principle will fundamentally undermine the importance and nature of the market, and the UK will live to regret that," Marchant said. "The liberalised market has been a major driver of innovation and investment, and the package of electricity market reform significantly undermines that."

Marchant said that CfDs would allow the state to decide "what is built, by whom, where and when". He concluded that the UK would "look back, and we will end up putting the market back in the driving seat".

However, EDF Energy chief executive Vincent de Rivaz expressed fundamental support for the proposals. "The CfD will address what has for many years been a real problem - [price] volatility and uncertainty," he said.

De Rivaz added that, taken as part of the reform package which also includes proposals for a carbon floor price and capacity payments, CfDs would keep a lid on wholesale prices and "ensure that consumers do not have to pay any more than is necessary" for electricity, while boosting investment in low carbon generation.

The scheme

The polarised views reflect the existing UK generation portfolio of each company. SSE has a comparatively large installed renewables capacity of around 2.4GW, alongside approximately 8.9GW of fossil-fuel fired capacity in its portfolio.

EDF, through its ownership of British Energy, presides over 9.3GW of nuclear capacity - which would be covered by the proposed CfDs because of its low carbon emissions - and 6.8GW of fossil-fuel fired generation, as well as a minor amount of renewable generation.

The France-based company therefore would see a larger proportion of its existing portfolio covered by CfDs than its Scotland-based counterpart.

The opposing positions were revealed as senior representatives of the six largest energy suppliers gave oral evidence to the parliamentary committee of Energy and Climate Change in central London.

The proposed CfDs would be settled against a reliable power price set by the wholesale power market. But concern has already been expressed that liquidity on the UK power market may be insufficient to guarantee such a price (see EDEM 18 January 2011). JS

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