LONDON Long-term contracts to reward low-carbon energy were part of proposals unveiled by the UK government on Tuesday as it looks to incentivize a power sector set to shed a quarter of its traditional capacity over the next decade.
The UK will see old coal and nuclear power stations close this decade, requiring more than 110 billion pounds ($176 billion) of investment to build the equivalent of 20 large power stations and upgrade the grid, the government said.
"Without reform, our reserve capacity will fall to uncomfortable levels and there is a much higher risk of blackouts by the end of the decade," UK energy secretary Chris Huhne told Parliament.
The steps are also expected to save the government and investors up to 2.5 billion pounds by 2030.
The proposed introduction of new long-term 'contracts-for-difference' will provide incentives to invest in all forms of low-carbon electricity generation, including nuclear.
Contracts for intermittent power capacity, such as renewables, will be based on day-ahead prices, while baseload capacity contracts will use year-ahead power prices.
"Today's announcement encourages investment in generation which is both low carbon and not dependent on fossil fuel prices.
"This is good news for customers, policy makers and investors," said Vincent de Rivaz, chief executive of EDF Energy which plans to build Britain's first new nuclear power plant at Hinkley Point in Somerset.
The government's electricity market reform white paper, aimed at introducing reforms to take effect by mid-2013, failed to decide on a capacity mechanism which ensures enough back-up power capacity is available at peak demand times.
The government said it would make a decision on that by the end of the year with two alternatives possible.
Either it will opt for centrally procured capacity that is removed from the energy market or a market-wide mechanism in which providers offering peak capacity will be incentivized.
The government said its power market reforms would help trim a rise in consumers' power bills by 2030 to 160 pounds ($256)from a projected 200.
"The government will have to assure itself of the cost effectiveness of its measures and both government and the industry must be open and honest about the cost," said David Porter, chief executive of the Association of Electricity Producers.
The government confirmed it will limit emissions from coal-fired power plants to 450 grams of carbon dioxide per kilowatt hour to ensure that no new coal plant will be built without carbon capture and storage technology.
This level is also high enough to include modern gas-fired power plants, sending a signal to investors in gas infrastructure that the government sees the fuel playing a continuing role in Britain's power market.
Huhne pledged 30 million pounds over the next four years to reduce the cost of developing offshore wind and up to 20 million to support wave, tidal and marine testing facilities.
($1 = 0.624 British Pounds)
(Editing by Jason Neely)