COLUMN-Britain ends liberalised power prices: Gerard Wynn

Tue May 22, 2012 11:45am EDT

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By Gerard Wynn

LONDON May 22 (Reuters) - Britain has ended liberalised power market pricing, in a broad strategy announcement that poses questions over how qualified government ministers are to choose between energy technologies and to set prices.

Wholesale power and carbon markets have failed to find a clearing price for low-carbon power generation, recalling a comment by British economist Nick Stern in 2006 that climate change was the "greatest and widest-ranging market failure ever seen".

Power markets are too volatile and carbon prices too low to drive investment in expensive, capital-intensive renewables, nuclear power and carbon capture and storage, and help Britain meet binding national CO2 targets.

The return to central price-setting is unavoidable for now, and evokes the UK state-owned Central Electricity Generating Board (CEGB), privatised in the 1990s.

This time power will be met by a commercial generation market where the government, until around 2020, will set the required amount and price for low-carbon power according to technology and leave delivery to the market.(The CEGB in addition owned the power plants, in a fully nationalised model).

A high-level draft published on Tuesday left out details of precise price support, however, and these are to be announced in the second half of 2013.

In the meantime, there's a danger the shift is not only a step back in market delivery but in technology.

Tuesday's focus is on writing big cheques for centralised power-generation including carbon capture and storage (CCS) and nuclear, which may be necessary in the short-term, but there was scant detail on how to exploit advances in grid connectivity, flexibility and energy efficiency.

For now the focus is supply, but a sharper focus is needed on demand curbs and the grid.

PROPOSALS

Britain will shut a quarter to a fifth of its ageing generating capacity over the next eight years, posing a problem faced by many industrialised countries as they replace capacity including nuclear power plants built in the 1960s and 1970s.

The coalition government on Tuesday confirmed that it would set minimum prices for nuclear, CCS and renewable power plants, and for gas-fired power to ensure that the country has enough generating capacity, to "keep the lights on" - an expression which also harks back to CEGB days.

The ideal would be for government to auction technology-neutral, low-carbon electricity contracts, and let developers compete for least-cost delivery.

The trouble is that nuclear, renewables and CCS are all at different levels of maturity, requiring a more hands-on approach.

That means that until 2020 or beyond the government will itself set the market price by technology.

In the case of nuclear and CCS, especially close government intervention will be called for, initially.

That is because there are so few potential bidders, forcing the government into bilateral negotiations which will leave officials vulnerable to information asymmetry, where they cannot know as much as their private sector counterparts about the true level of cost.

The government confirmed on Tuesday it had already started negotiations with a consortium involving EDF and Centrica over a new nuclear power plant at Hinkley Point, in southwest England.

JOBS

In addition, the more involved ministers are, the greater the danger they are swayed by alternative objectives, such as driving inward investment or job creation rather than achieving least-cost power generation.

As Tuesday's draft bill said:

"As we all focus on the UK's wider economy, this investment challenge for energy infrastructure ... is a historic growth opportunity."

A desire for announcements of huge inward investments by definition favours large, centralised options such as nuclear, CCS and offshore wind.

It may sacrifice a more general technology shift to micro-generation and smart grids, which are not single, huge chunks of investment but arguably are the future of power generation, just as mobile, wireless networks revolutionised centralised operators in telephony.

"Electricity market reform is indeed a key part of this Government's growth strategy, as it offers the prospect of investment and jobs," energy and climate minister Edward Davey wrote in his foreword to the draft bill.

"The United Kingdom is already ... attracting investment from around the globe into our world beating offshore wind industry. We are leading the way for a new UK Carbon Capture and Storage Industry. With our challenge to the nuclear industry to build a new generation of reactors without public subsidy, there is a prospect of significant jobs in the supply chain."

The government's proposals are a necessary response to the failure of power markets to match political goals to achieve a diversified energy mix and cut carbon emissions.

However, the meagre reference to demand reduction contrasts sharply with Germany's goal to cut power demand by a tenth by 2020.

"Demand for electricity is likely to rise" the British bill said.

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