Isra-Mart srl:Energy market reforms promise surge in low-carbon investment

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The government will today unveil its long-awaited proposals for reform of the electricity market, detailing plans that are already being hailed as the biggest shake-up of the energy sector since privatisation in the 1980s.

Energy and climate change secretary Chris Huhne will present the proposals to parliament early this afternoon, before releasing them for consultation.

The proposed reforms are intended to drive investment in low-carbon energy sources and infrastructure, while also enhancing the UK's energy security by replacing the network of ageing coal and nuclear power stations.

They are likely to prove highly controversial with critics claiming they will lead to a significant increase in energy prices. However, prime minister David Cameron recently defended the upcoming reforms to a Commons select committee, insisting energy prices would rise regardless over the next decade, and arguing that a more "planned approach" to the energy market was necessary to ensure the UK delivers its pledged cuts in carbon emissions.

Central to the reforms will be the introduction of a carbon floor price, which the Department of Energy and Climate Change (DECC) has said will "ensure that energy prices reflect their carbon content and encourage investment in low-carbon generation".

However, the precise level of the floor price remains unknown with observers arguing that it is critical that it is set at a level that drives investment in genuine low-carbon energy technologies, and does not simply lead to a new generation of gas-fired power plants.

It is also unclear how the floor price will be enforced without disrupting the existing carbon pricing mechanism, delivered through the EU emissions trading scheme.

The reforms are also expected to include an Emissions Performance Standard (EPS) that commentators believe could effectively ban the construction of new coal-fired power stations that do not include carbon capture and storage (CCS) technology. However, the question remains as to whether the government will adhere to recommendations from the Committee on Climate Change and set the standard at a level that will eventually also ban gas-fired power stations that fail to use CCS.

Meanwhile, the renewable industry will be keeping a close eye on whether the reforms make good on the government's promise to encourage increased investment in badly needed grid infrastructure and introduce a new support mechanism for low-carbon energy projects.

According to industry sources, the DECC has been investigating phasing out the existing renewable obligation scheme and replacing it with a new "contract for difference" mechanism that works similar to a feed-in tariff and effectively provides a guaranteed price for the energy generated by renewable energy projects.

Nick Molho, head of energy policy at WWF-UK, said the proposals offered a "once-in-a-generation opportunity to fundamentally change the electricity industry, in a way that could take the UK economy on a path towards a low-carbon future and make the UK an industrial leader in marine renewables".

"In the future we will not only want to charge up our phones and computers, but power our cars, and heat our homes, through the plug socket," he added. "Successful reform of the market could protect consumers against steep energy price increases, and support the progression of our digital age, with least cost to the environment and great benefit to our economy."

His comments were echoed by Friends of the Earth's senior climate change campaigner Tony Bosworth, who similarly warned that the government had one shot to get its energy policy right if it wanted to meet its 2020 emissions targets.

"It's crucial the government makes the right decisions to ensure renewable power thrives instead of locking us into a dangerous high-carbon world," he said. "The future is electric – and harnessing the UK's massive potential to produce much more green electricity will create jobs, reduce our reliance on overseas oil and help us slash climate-changing emissions."