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UK warned against unilateral electricity market reform

25 May 2011 17:15:00 | edem

The UK government has come under fire from experts for its bid to take unilateral action to reform its electricity market and decarbonise its power generation sector.

"From a European perspective, individual decarbonisation of the UK is nonsense as a strategy," Michael Pollitt, assistant director of the University of Cambridge's Electricity Policy Research Group, told ICIS Heren's Electricity Market UK conference on Tuesday.

"Unless we can persuade European countries to act together and have a coordinated policy, the thing is going to unravel very quickly," he warned.

Through its market reform programme, the UK's Department of Energy and Climate Change (DECC) is hoping to open the floodgates for global investment in low-carbon power generation infrastructure.

The proposals include a carbon price floor for the power generation sector and measures to encourage the building of low-carbon but capital-intensive electricity production assets such as offshore wind farms and nuclear reactors - with accompanying short- to medium-term rises in wholesale power prices inevitable.

According to Pollitt, however, the reform proposals risk a range of negative outcomes. Among the most severe, Pollitt said, is the issue of carbon leakage within energy-intensive industry, should wholesale power prices climb to unsustainable levels.

Indefensible

"We are going to see industry shift literally down the road to the Netherlands, and people won't wear that - it's clearly indefensible as a strategy," Pollitt argued.

Energy-intensive industries have been hit hard of late by market conditions. Tata Steel, one of Britain's biggest single consumers of power, said at the start of this week that it was cutting 8% of its UK workforce as a result of a decline in the steel market.

If the proposals look like piling additional economic woe on such industries, they are likely to have a rocky ride through parliament after energy secretary Chris Huhne presents his White Paper detailing the reforms, due before the end of this month (see EDEM 16 December 2010).

Pollitt also hit out at what he sees as one "fundamental issue" that power market reform is failing to address - planning.

The installation of renewable electricity generation assets in the UK has failed to keep up with government targets in recent years. Pollitt said that last year, the country had only reached 71% of the total capacity it had planned to have installed under EU renewables targets.

But Pollitt said that subsidy levels, often cited as a barrier to development of renewable generation infrastructure, were not the source of the shortfall.

"The issue is not the generosity of the subsidy; the issue is something to do with the planning process, and it's not clear that electricity market reform is going to be addressing that fundamental issue," he said.

The UK's previous ruling Labour government installed the Infrastructure Planning Commission (IPC), mandated with fast-tracking nationally significant projects including some gas-fired power plants, nuclear reactors and wind farms.

But the current Conservative-Liberal Democrat coalition government plans to disband the IPC, replacing it with a unit that places decision-making powers back in the hands of ministers. However, the Confederation of British Industry warned last year that this could lead to further planning system delays (see EDEM 16 August 2010). JS

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