The Price of Power: Electricity markets in the Energy White Paper

16 Dec 2020

On Monday the UK government published a long-awaited Energy White Paper. Originally planned for publication in 2019 but delayed because of Brexit and the General Election the White Paper makes a range of provisions and commitments that span many dimensions of the energy system, each of which is relevant to the research we undertake at UKERC.

Net Zero focus

Many commitments focus on the net zero target and several had already been outlined in the Prime Minister’s 10 Point Plan. They include the pledge to deliver 40 GW of offshore wind, develop carbon capture and storage (CCUS) in industrial clusters, create a new UK Emissions Trading Scheme (ETS) for when we leave the EU-wide ETS, bring forward at least one additional nuclear power station, ramp up the installation of heat pumps, and develop 5GW of hydrogen production. There are also a range of provisions aimed at protecting consumers, encouraging the development of innovative tariffs, digitalisation and energy efficiency. In future blogs, UKERC researchers will discuss these topics in detail. We also discuss many of the relevant issues in our annual Review of Energy Policy and have commented on the White Paper in a range of newspapers and online media outlets.

Future of the electricity market

One topic which has been a particular focus for UKERC interaction with analysts in government and industry is the future of the electricity market. The White Paper does not come to a decision on this but instead announces further consultation during 2021. A key issue is the future of the long term contracts for renewable energy generators, Contracts for Difference or CfDs. The White Paper does not propose to scrap the CfDs, which have prices set by auction and have proved to be immensely successful in reducing the costs of leading renewable energy technologies. CfD contracts for offshore wind have fallen from well over £100/MWh to below £40/MWh – effectively a zero subsidy contract. This is important because back in 2018 a review commissioned from then Secretary of State Greg Clark from Oxford Professor Dieter Helm advocated for the replacement of the CfD scheme with a new and quite different mechanism. Clearly the government has recognised the attractiveness of the CfDs to investors and does not want to take precipitous action when also trying to quadruple the capacity of offshore wind in British waters. Gradual change is the order of the day.

Encourage investment while adding flexibility

The challenge for the power market is that as well as satisfying investors with stable prices under the CfD scheme we also need to encourage the development of the additional flexibility we will need as the share of wind and solar increases. Some commentators also worry about the extent to which the government now determines what sources of electricity the industry should build, as well as how to ensure the power system is reliable. Since electricity in Great Britain was taken out of state ownership around 30 years ago this level of state intervention is troubling to proponents of free market solutions. Others argue that net zero is such a big challenge it is inconceivable that it can be achieved without a lot of state coordination. Is it possible to re-imagine the power market though? Could the CfDs be adapted and refined or should they be replaced, perhaps with an obligation on suppliers to deliver new zero, leaving the choice of how to do so to the market? These questions lead quickly into a complex and technical debate, but are hugely important to cost effective delivery of a decarbonised electricity sector – something that is central to the recent advice to government from the Climate Change Committee .

Developments in nuclear

The future of support for renewable energy is one thing. Nuclear power is different again. Whilst the CfD schemes have been great at bringing forward wind and solar projects only one new nuclear power station is under development and the contracted price (set for 35 years) now looks high compared to the falling prices for renewables. The White Paper sets out a commitment to bring forward at least one more nuclear station and suggests that even more complex arrangements could be in place to reduce the costs of doing so. Nuclear developments could be given a ‘regulated asset base’ arrangement through which some of the risks and costs in construction are underwritten in a government contract. Government could also take a direct stake in a new nuclear development. For nuclear at least, the journey away from a private sector only power system appears to be well advanced. Next year UKERC research and policy engagement on the future of the power market will continue. This will be a hot topic for 2021.