• The UK Electricity Market: Time for US Investors to Take Another Look?
  • July 21, 2011
  • Law Firm: SNR Denton - Chicago Office
  • US investors first entered, and then when Enron collapsed, exited, the England and Wales electricity market en masse.

    On July 12, 2011, the UK government announced perhaps the most fundamental electricity market reforms seen for a generation, and certainly since the "New Electricity Trading Arrangements" were implemented in 2001. These reforms represent a reversal of the previous policies of allowing the market to determine what new capacity should be built and when, without government intervention. Previous recent intervention has been confined to encouraging the generation of electricity from renewable sources. The latest reforms represent significant intervention to drive major investment in generation, including significant electricity and carbon price stabilization.

    They follow major reform to the planning and permitting processes for new energy facilities and the publication of national policy statements, all designed to reduce the barriers to project development.

    The legislative process is very unlikely to give rise to material changes and so, with the reforms, the market now offers investors a somewhat different proposition. The reforms, coupled with the huge scale of investment required, make it timely for US investors to reconsider their perceptions. At the same time that the reforms were announced, RWE was reported as having appointed advisers with a view to assessing a potential sale of its Great Britain energy supply and generation business, npower, for up to £5bn ($8bn). This may represent a significant opportunity for market entry (or re-entry).

    Roughly a quarter of the UK’s generating capacity is to retire by 2022. Many coal plants are required to close by environmental legislation. First-generation nuclear power stations (19 percent of UK capacity) have reached the end of their operable lives. The government estimates that more than £110bn in investment is needed to build the equivalent of 20 large power stations and upgrade the transmission system.

    Planning our electric future: a White Paper for secure, affordable and low-carbon electricity, published on July 12, sets out the new policy and is designed to "create a secure mix of electricity sources including new nuclear, renewables and carbon capture and storage." The UK Renewables Roadmap, published alongside the white paper, outlines a plan to accelerate renewable energy deployment—to meet the target of 15 percent of all generation by 2020. This would be more than a four-fold increase in the UK’s level of renewable energy consumption by the end of the decade.

    British Secretary of State for Energy and Climate Change Chris Huhne said:

    "We have a Herculean task ahead of us. The scale of investment needed in our electricity system in order to keep the lights on is more than twice the rate of the last decade. The fact is that the current electricity market is not be able to meet that challenge. Without action, there is a risk of uncomfortably low capacity margins from around the end of the decade and a far higher chance of costly blackouts.

    "This package will keep the lights on and bills down. It will insure us against shocks from volatile parts of the world like Libya, and end the dithering about our need for new plants.

    "We have consulted widely and we believe our reforms represent the best deal for Britain. They will get us off the hook of relying so heavily on imported fossil fuels by creating a greener, cleaner and ultimately cheaper mix of electricity sources right here in the UK.

    "A new generation of power sources including renewables, new nuclear, and carbon capture and storage, along with new gas plants to provide flexibility and back-up capacity, will secure our electricity supply as well as bring new jobs and new expertise to the UK economy."

    Key elements of the reform package include the introduction of:

    • A Carbon Price Floor (announced in the government’s 2011 budget), which provides a transparent and predictable price for the cost of carbon and as a result will help drive investment in low-carbon generatio

    • New long-term contracts for generators (in the form of feed-in tariffs (for projects of all sizes, including nuclear) with contracts for difference) to provide a clear, stable and predictable revenue streams for investors in all forms of low-carbon electricity generation

    • An Emissions Performance Standard (EPS) set at 450g CO2/kWh to reinforce the requirement than no new coal-fired power stations are built without CCS, but also to ensure that necessary short-term investment in gas can take place

    • A Capacity Mechanism to guarantee future security of the electricity supply, which will include demand response as well as generation capacity.

    The UK government says it intends to legislate for the key elements of this package mid-2012, so that the first low-carbon projects can be supported under its provisions in about 2014.

    Electricity Market Reform will be underpinned by a series of measures to improve energy efficiency, including the flagship Green Deal programme, which will provide households and businesses with the opportunity to make energy efficiency improvements at no up-front cost. An innovative financing mechanism will mean that consumers will pay for the improvements through installments on their energy bills at prices that do not exceed the expected savings the consumer will make from such energy efficiency improvements.

    There will also be a strategy for future electricity networks and work led by energy regulator Ofgem to improve competition, designed "to move away from the current position where around 99 percent of UK customers are supplied by only six energy companies."

    The Roadmap also identifies eight technologies that the government has concluded have either the greatest potential to help the UK meet the 2020 target in a cost-effective and sustainable way or offer great potential for the decades that follow. Energy from wind, biomass and heat pumps are the leading contributors, including offshore wind—where the UK has abundant natural resources and already has the world’s largest market.

    The final report of the Ofgem Review has also been published. This sets out further planned reforms to "strengthen the regulatory framework, bringing greater clarity and coherence to the distinct roles of government and the energy regulator."