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UK aims to avoid nuclear subsidy in electricity market reform - minister

14 Jun 2011 17:14:10 | edem

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The UK government will "almost certainly" vary its planned low-carbon generation incentives according to technology, energy minister Charles Hendry told ICIS Heren, challenging claims that the new measure could be used to subsidise nuclear electricity generation.

The UK's primary low-carbon power generation incentive measure will be unveiled as part of the government's electricity market reform package. The financial instrument, known as a feed-in tariff (FiT) with contracts for difference (CfD) is the government's preferred means of incentivising investment in low-carbon power generation, by providing long-term electricity price security.

Speaking at a Confederation of British Industries conference, Hendry confirmed to ICIS Heren: "The contracts for difference is a way of giving support to all low-carbon technologies. It will be set at different levels for different technologies - it will almost certainly be set at a higher level for renewable technologies than it will be for nuclear."

But it was not known until Tuesday whether the level of support under the FiT would be flat for all low-carbon technologies, or vary according to technology type.

The FiT model has come under intense criticism in recent weeks, most notably from the parliamentary energy and climate change committee, which said that the Department of Energy and Climate Change (DECC) had distorted its plans to "save political face" over implicit subsidies for nuclear power (see EDEM 16 May 2011).

But Hendry, whose department has long refuted claims of nuclear subsidies, again denied the accusations on Tuesday. "It's a driver for investment right across the portfolio. I don't think in any way it is simply a way of subsidising nuclear," he said.

Range of designs

The government explored a range of FiT designs in its market reform consultation, which closed in March. These included premium FiTs (a static payment in addition to wholesale market revenues); fixed FiTs (a static payment in place of wholesale market revenues); and FiTs with CfDs.

The CfD model that DECC has opted for, differentiated by technology, was favoured by some sections of the industry.

EDF Energy said "a single flat payment is unlikely to provide sufficient returns to deliver all of these technologies" and "some renewable technologies in particular will require higher payments until they become mature".

Committee on Climate Change chief executive David Kennedy also argued that "there has to be some kind of banding mechanism".

The government must now decide whether it wishes to set the levels of subsidy for each technology via auction or through a centrally appointed body - the latter of which would effectively mean an increased role for the state at the expense of free market forces.

The Renewable Energy Association has previously warned that a government-set approach would expose developers to uncertainty about how long support would last at a certain level. But Hendry gave no indication of which way DECC was leaning on Tuesday.

The electricity market reform white paper is due to be presented to parliament before its summer recess begins on 27 July. The white paper pushed back from a highly anticipated May release date (see EDEM 26 May 2011). JS

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