Speech

Electricity Market Reform - Oral statement by The Rt Hon Chris Huhne MP

With permission, Mr Speaker, I would like to make a statement on reform of the electricity market. Since privatisation in 1990, our electricity…

With permission, Mr Speaker, I would like to make a statement on reform of the electricity market.

Since privatisation in 1990, our electricity market has served us well, delivering reliable, affordable electricity.

But in the years ahead, we face unprecedented challenges. The existing market was not designed to meet them.

The Challenge

Over the next decade, around a quarter of our existing power stations will close, threatening the security of our electricity supplies.

Some £110 billion of investment is needed to replace them and to upgrade the grid. That is twice the rate of investment of the last decade, and the equivalent of 20 new power stations.

At the same time, demand for electricity could double over the next forty years, as the population increases, and we increasingly turn to electricity for heat and transport.

We also face ambitious carbon emissions and renewable energy targets, as we seek to build a cleaner energy future for Britain and the world.

To achieve our goals, we need to take decisive action now to increase low-carbon electricity generation - including nuclear, renewable energy, and carbon capture and storage.

None of these challenges can be met for free. We will have to pay to secure reliable, clean electricity for the future. And we cannot ignore the long-term trends in electricity prices.

Increases in wholesale costs and the carbon price are likely to lead to higher bills in the future, even without factoring in the huge investment needed in new infrastructure.

So it is vital that we put in place market arrangements that deliver this investment as cost-effectively as possible. The current electricity market is simply not up to the job. It cannot deliver investment at the scale and the pace we need.

Without reform, our reserve capacity - the power plants we can call on when demand surges - will fall to uncomfortable levels. We would face a much higher risk of blackouts by the end of this decade.

We would also be locked into a worrying reliance on fossil fuel imports, putting us at risk of rising and volatile prices. Consumers could end up paying more.

Mr Speaker, that is why I am putting before the House today a series of measures to reform the electricity market. Diversifying our generation mix, and boosting investment in secure, sustainable and home-grown low-carbon technologies.

The Reforms

There are five key elements to our reforms.

First, the Chancellor announced in the Budget a new Carbon Price Floor, to put a fairer price on carbon. Reducing uncertainty for investors, and providing a stronger incentive to invest in low-carbon generation now.

Second, we will send a clearer message that low-carbon electricity is a key part of our future energy mix.

We will introduce a new system of long-term contracts, to remove uncertainty for both investors and consumers, and make low-carbon energy more attractive.

Contracts for Difference will be introduced for all forms of low-carbon generation. Lowering the cost of capital, and allowing clean technologies with high-up front and low long-run costs to compete fairly against traditional unabated fossil fuels.

This will build on the Carbon Price Floor, providing the additional clarity and certainty that investors need.

Third, we will introduce an Emissions Performance Standard, to send a clear regulatory signal on the amount of carbon new fossil-fuel power stations can emit.

This will reinforce the requirement that no new coal-fired power stations are built without carbon capture and storage, while ensuring that vital investment in gas can take place.

CCS is a key part of our plan to decarbonise electricity generation. It is the only technology that can potentially reduce emissions from fossil fuel-fired power stations by as much as 90%.

Fourth, to ensure security of supply in the future, we will introduce a new contracting framework for capacity, changing the way we secure our back-up electricity.

This Capacity Mechanism could mean centrally procuring capacity which is set aside from the market and used only when it is needed. Or it could mean a market-wide mechanism, in which all providers offering reliable capacity are rewarded.

Under both options, we plan to ensure fair and equivalent treatment between demand response, storage, interconnection with our European partners, and extra generation.

Shifting or cutting demand for electricity is likely to be more cost-effective than simply building more and more power plants. It complements our work to drive down demand through energy efficiency measures such as the Green Deal and Smart Meters.

Fifth, we will put in place transitional arrangements to ensure there is no hiatus in investment while the new system is set up. And we will create new institutional arrangements to deliver the reform package.

The future

Mr Speaker, together these reforms will tackle the immense challenges facing the electricity market.

They will put in place the framework to deliver the capacity and demand side response we need to guarantee future security of supply.

They will encourage investment in proven low-carbon generation technologies such as nuclear power. And they will give investors confidence that there will be a market for electricity generated with commercial carbon capture and storage. Confidence that will drive investment in both demonstration and commercial CCS plants.
Six energy companies supply around 99% of customers in the UK. Alongside action by Ofgem to improve liquidity, these reforms will boost competition within the market.

And they will make the UK a magnet for low-carbon investment, generating jobs and growth. This will help energy intensive industries. However, we are also committed to bringing forward a package of measures to ensure our continued international competitiveness.

Finally, the reforms I have set out today will achieve our aims at least cost to the consumer, with bills for households and businesses likely to be lower and less volatile over the period to 2030 than if we had left the market as it is.

They will enable us to build a flexible, responsive electricity system. One powered by a diverse and secure range of low-carbon sources. En route to a cleaner, greener future.

Insuring us against fossil fuel price shocks. Ending 25 years of policy dithering. Keeping the lights on - and bills down.

The roadmap

Mr Speaker, alongside the electricity market reforms, I am also publishing today the Renewables Roadmap.

For too long, discussion about renewable energy has focused on barriers. Now, for the first time, we have set out a detailed step-by-step plan to overcome those obstacles.

The Roadmap sets out a comprehensive action plan to accelerate the UK’s deployment and use of renewable energy. It puts us on the path to increase our renewable energy consumption fourfold by 2020 while driving down the cost over time.

Growth on that kind of scale will be challenging, but necessary. The Roadmap identifies 8 technologies that have the greatest potential for the UK - such as offshore wind, where we have abundant natural resource and already have the world’s largest market.

Subject to further value for money assessment, DECC is setting aside up to £30million over the next 4 years to support technology development programmes to improve the efficiency and reduce the costs of offshore wind.

With industry, we are setting up a Task Force to drive the work to achieve cost-competitive offshore wind. The recently published Microgeneration Strategy also outlines the actions that the Government is taking to tackle the non-financial barriers which could prevent microgeneration from realising its full potential.

Together, the Renewables Roadmap and the Microgeneration Strategy will reduce costs for consumers, and enable mature renewables to compete against other low-carbon technologies in the longer term.

Ofgem Review

I am also publishing today the final report of the Ofgem Review.

The Review reaffirms the Government’s commitment to a strong, independent regulator able to give confidence to investors, protect consumers and help meet our energy and climate targets.

The Summary of Conclusions was published in May; this final report provides further detail on how the Government will seek to strengthen the regulatory framework.

Conclusion

Mr Speaker, the package of reforms I have announced today will yield the biggest transformation of the market since privatisation.

They will create an enduring framework for future investment, and will secure our electricity supplies for the future.

Providing our consumers with the best deal possible. Helping us meet our ambitious carbon targets.

And putting us at the forefront of low-carbon technological development. Ready to lead the world in the next energy revolution.

I commend this statement to the House.

Help us improve GOV.UK

Please don't include any personal or financial information, for example your National Insurance or credit card numbers.