Isra-Mart srl:Huhne: Reforms to make low carbon "dominant" force in energy mix

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The government today unveiled its plans for energy market reforms, predicting that the new package of measures will lead to a huge increase in investment for renewable, nuclear and carbon capture and storage (CCS) projects.

However, the proposals stop short of providing precise details on the future price of carbon emissions and the regulations governing fossil power plants, that will ultimately by required by investors if they are to determine the economic feasibility of low-carbon projects.

Energy and climate change secretary Chris Huhne said the reforms would strengthen the economic case for investment in low-carbon technologies, to ensure that they become the "dominant" form of energy generation by 2030. He also predicted that the changes would lead to lower energy bills in the long term, compared to the continuation of the current market framework.

"The UK was first to put binding carbon reduction targets into law," he said. "Now the coalition is taking the historic step of introducing, permanently, a level playing field for low-carbon technologies in the UK's electricity market... Low-carbon technologies must be given the chance to become the dominant component in our electricity mix."

The reforms propose the introduction of four new measures, all designed to strengthen the investment case for low-carbon technologies.

Central to the package are plans for a carbon floor price set out in a consultation released by the Treasury, that is seeking feedback over the next two months. The plans are due to be finalised in the Budget on 23 March 2011.

Significantly, the report does not determine the precise level at which the carbon floor price should be set, instead setting out a range of proposals that would see the carbon price in 2020 stand at £20, £30, or £40 a tonne.

In addition to the Treasury consultation, a separate consultation from the Department of Energy and Climate Change (DECC) proposes a series of regulations and incentives intended to drive investment in low-carbon projects.

As expected, it proposes that the existing Renewable Obligations (RO) subsidy mechanism is phased out by 2017 to be replaced by a new form of feed-in tariff, whereby the government agrees "clear, long-term contracts" that result in a top-up payment to low-carbon generators if wholesale energy prices are low.

It also outlines plans for a capacity mechanism that will provide additional payments to energy firms that construct reserve plants and invest in energy-saving measures, and sets out proposals for a "back-stop" to limit the level of emissions from fossil fuel power stations.

The consultation proposes that this emissions performance standard (EPS) should be set at either 600g CO2/kWh, which would effectively ban the dirtiest coal-fired power stations, or 450g CO2/kWh, which would ban all coal-fired power stations built without CCS capabilities and some gas-fired plants.

DECC said the changes would lead to a reduction in energy bills in the long term, compared with business as usual, predicting that by 2030 the carbon intensity of the electricity mix would be reduced from 500gCO2/kWh to 100gCO2/kWh, while household energy bills would be four per cent lower than current projections.

Critics, however, are expected to argue that the changes will lead to a short-term increase in energy bills.

But Huhne predicted any price hikes will be relatively modest and insisted the reforms are essential to ensure that new low-carbon energy sources are built and protect the UK from increasing levels of fossil fuel price volatility.

He also predicted that they would give the UK an advantage over international rivals and help attract foreign investors to the country's clean tech sector. "In the new, reformed UK electricity market, the economics of low carbon will stack up like nowhere else in the world," he said.

The consultation documents, which combined run to more than 300 pages, will now be closely analysed by the energy industry as it attempts to determine the implications of the changes and prepare its responses.