An ambitious plan by the UK government to replace aging power stations with low-carbon generation could be a model for other countries that are also searching for ways of hitting tough emissions targets while satisfying higher future demand for electricity.
On May 22, the government introduced its latest proposal for attracting the 110 billion pounds (roughly $171 billion) that it says is needed to build new generation including nuclear, offshore wind and carbon capture technology to take the place of the 20% of current capacity that will go off line over the next decade.
To shield clean-energy investors from electricity-price volatility, the government set up a feed-in tariff with so-called contracts for difference – in which sellers pay buyers the difference between the current value of an asset and the contract value, assuming there is a positive number – and established a fixed “strike price,” to be specified next year, designed to stabilize returns for generators.
It also set up a capacity market to reduce the likelihood of future power outages and ensure consumers receive reliable electric supplies at a reasonable cost.
To encourage low-carbon generation, the plan includes an emissions performance standard to prevent construction of new coal plants that emit more than 450g/kWh of carbon. It also establishes a carbon price floor which sets an initial price in 2013, and almost doubles it by 2020.
The reforms are designed to increase national energy security by making the UK less dependent on imported fossil fuels and less vulnerable to oil-market volatility. The country aims to generate 15% of its power from renewable sources by 2020, more than double the current level.
The program won’t prevent consumers paying more for electricity in coming years. Rates will go up whether or not the reforms are implemented but the increases will be 4% lower over the next two decades than they would have been without the new plans, the government said.
The reforms will be closely watched in the US because both countries have an ageing stock of nuclear plants whose high cost has largely deterred new construction in recent years, said Andrew Holland, senior fellow for energy and climate change at the American Security Project, a Washington think tank.
Amid some criticism that the reforms represent “reregulation” after more than two decades of market-led policy that cut electricity rates for many UK consumers, Holland argued that governments have a legitimate role to play in creating the conditions for a well-functioning energy market.
The trillion-dollar power-infrastructure spending gap identified by several recent U.S. studies reflects deregulation that provides low prices to consumers while depriving the industry of needed investment funds, Holland said.
Read more about the shortfall in spending here.
“If you do everything to keep prices low in the short term, you end up with less investment in the long term,” he said.
The International Energy Agency also said the program is likely to be watched by other countries with similar challenges.
“The proposed electricity market reform is a pioneering effort that will be closely observed by other countries in their efforts to ensure continuing reliability of electricity systems while promoting timely decarbonization of electricity supplies,” said IEA Executive Director Maria van der Hoeven, in a statement on May 30.
The IEA predicted the UK reform will actually eventually lead to a more liberalized energy market place where low-carbon fuels including renewables, nuclear and carbon capture compete with each other.
Meanwhile, the IEA urged the U.K. to “maximize” its potential for oil and gas production during the transition to a low-carbon economy.
