Clive Moffatt founded Moffatt Associates in 1988 and has over 30 years experience in international research, marketing and communications.
We now have a Government that says it is committed to “delivering a low carbon economy, at least cost to the consumer, linked to the objective of increasing market competition”. This is easier said than done.
Whether we like or not we now live in an “administered” energy market, where any change in the regulation and rules impacting on investment in one form of power generation has implications for the rest of the generation mix.
With focus across the EU on decarbonisation and supporting renewables, it is gas generation that has been marginalised.
What began as a policy focused primarily on incentivising the decarbonisation of the electricity market has turned into a somewhat schizophrenic mixture of incentives and penalties, designed to try and combine the carbon reduction objective with the desire to reduce costs to consumers and ensure security of supply.
There is no magic wand that can make this “Trilemma” suddenly disappear.
Some headline examples of conflicting political messages and persistent uncertainty include the adoption of legally binding C02 targets across the EU.
These have meant that gas has been marginalised and some 25 GW of existing gas generation plant is likely to be retired in the next two years, with another 100 GW-worth at risk.
In the UK, there is still a lack of clarity on future renewable and new nuclear generation – and this, combined with the uncertainty over the likely contribution of interconnection capacity and demand side reduction, makes forecasting future capacity prices post 2020 and beyond very difficult.
As regards the new nuclear programme, concerns are growing about the technical and economic viability of the Hinkley project.
The Treasury taking a stake in the project could reduce financing costs, but with the overall bill now estimated at £24.5bn the time has probably come to re-consider whether the UK should continue down the nuclear route.
Some significant potential barriers also remain to encouraging the construction of new conventional gas generation.
The scope and terms of long term contracts under the UK Capacity Market are still subject to debate, both in the UK and in Brussels. This uncertainty impacts negatively on the forecast capacity price and investor confidence.
Further regulation and rule changes could seriously undermine the ability of the UK Capacity Market to offer a credible, consistent and market signal for new gas generation investment.
This in turn would jeopardise the delivery of the £20bn of new capacity which the Department for Energy and Climate Change claims is needed before 2030 to keep the lights on and support intermittent renewable generation.
In Brussels, the EU jury has still to make up its mind on whether the proposed new nuclear subsidy to EDF is justified, or whether Demand Side Reduction (DSR) should receive 15 year capacity contracts.
Furthermore the EU (having spent years trying to set a single market) has just launched a review to examine what it fears are highly divergent capacity mechanisms under consideration across the EU
Finally, only a few weeks ago the G7 group declared that there should be no fossil fuel generation after 2050. A bold statement of intent indeed.
However, 2050 is 35 years away and I strongly suspect that the desire to fuel economic growth, and concerns about affordability and security of supply, will result in some watering down of this objective with gas, by necessity, being deemed a low carbon fuel.
So, what can be done to address these shortcomings, underpin the central role of gas in delivering secure and affordable energy, and place greater reliance on market mechanisms? Briefly, my suggestions would be thus.
First, place the focus of energy policy on security of supply and affordability, with less emphasis on decarbonisation.
Decarbonisation should be addressed through a meaningful carbon price mechanism that is agreed across the EU. Revenues from a higher carbon price should be used to fund tax breaks to energy intensive users, new technologies and fuel poverty.
Second, if no EU-wide agreement is possible the UK should opt for “soft” targets for UK decarbonisation linked to a policy to reduce over time all subsidies to renewable and nuclear energy, and seek a steeper trajectory for the price of carbon.
In the short term this would help underpin the capacity market mechanism by accelerating the retirement of old fossil fuel plant, and would underpin investment in renewable generation.
In the longer term it would allow all forms of generation to compete in market without price guarantees and subsidies.
Third, re-consider the case for new nuclear, and confirm the medium term requirement for a significant level of new investment in conventional gas generation to meet base and peak load demand and underpin the role of long term contracts for new plant.
Remove potential barriers to entry for new gas plant, such as Price Duration Curves and stricter CO2 emissions targets, for example by requiring no CCS on new plant built after 2030.
Fourth, take steps to underpin the efficient and reliable operation of the wholesale electricity market via the re-introduction of the Electricity Pool.
This would create a reliable and transparent spot price with market exchanges facilitating forward trading, and could as before be designed to include a capacity payment element.
Finally, re-open the case for intervention to underpin the demand for new UK gas storage to secure short term supplies and minimise the impact of shortages on both gas and electricity price volatility.
The current gas security standard should be extended to embrace industrial users and power generators, and DECC should evaluate the costs and benefits of introducing a form public service obligation on importers.