The reforms outlined below would be in place by 2013, but renewable energy investors will be able to build under the Renewables Obligation until 2017. Rules for existing investments will, furthermore, be protected.

With increasing energy demand and an ageing electricity generation park, the UK will have to invest heavily over the next decade to keep a reliable power supply, and to meet the Government’s climate change targets.

DECC says a quarter of the UK’s generation capacity will need replacing by 2020 representing 19 GW. Some new gas-fired power stations will be needed to complement renewable energy and the first new nuclear power station.

According to targets, almost a third of the UK’s electricity must come from renewable energy sources by 2020 and the energy sector needs to be largely decarbonised during the 2030 to meet climate change goals.

On top of this, electricity demand could double by 2050 as vehicles and heating will increasingly be electric.

To achieve its goals, the UK Government says it will ensure the competitive market will remain intact, but that it is proposing four inter-locking policy instruments:

• A carbon price floor with the Treasury providing greater support and certainty to the carbon price, which could lead to increased investment in low-carbon and renewable energy by providing clearer long-term prices for carbon in the power sector;
• Long term contracts for low-carbon and renewable energy generation to attract more investment. Through a proposed ‘contract for difference’ feed-in tariff, the UK Government will agree clear, long-term contracts for top-up payment to low-carbon generators if wholesale prices are low, but also clawing back money for consumers if prices become higher than the cost of low-carbon generation. An alternative ‘premium’ feed-in tariff is also set out in the consultation;
• Payments for the construction of reserve plants or demand reduction measures to keep supply secure. A capacity mechanism would ensure an adequate safety cushion at peak demand and intermittent periods; and
• An emissions performance standard to ensure no new coal is built without carbon capture and storage (CCS).

Energy and Climate Change Secretary Chris Huhne, says: “These reforms lay the foundations for a sustainable economy, bringing billions in investment in the UK through greater certainty, safeguarding jobs up and down the supply chain, and giving the UK real competitive advantage in advanced energy technologies.

“More than £110 billion of investment is needed in new power stations and grid upgrades over the next decade, that’s double the rate of the last 10 years. Put simply, the current market is not fit to deliver this.”

He adds: “Without investment in renewables, new nuclear and carbon capture and storage, emissions will remain too high, we will become dependent on energy imports, and increasingly vulnerable to fossil fuel price volatility.

“Low-carbon technologies must be given the chance to become the dominant component in our electricity mix.

“In the new, reformed UK electricity market, the economics of low-carbon will stack up like nowhere else in the world. By 2030, three quarters of our electricity could be low-carbon.

“Crucially, our reforms will also make sure there is enough spare supply to keep the lights on reliably. They will protect the rules for existing investments. And, over the long term, they will achieve more, while resulting in bills lower than they would otherwise be.”

DECC says that reducing carbon intensity of the electricity mix from 500 g CO₂/kWh today to 100 g Co₂/kWh in 2030 “can be achieved at the same time as annual household electricity bills being around 4% or £30 lower on average in the five year period 2025-2030 then they would otherwise be if we left the current policy framework in place.”

Beyond 2030, household bills would remain lower and more stable than with today’s market structure.

Responses to the proposals on a carbon floor price should be made to the Treasury by 11 February, with final decisions expected in the Budget on 23 March 2011.

Responses to the other three components are invited by 10 March with final proposals expected in a White Paper later in the spring 2011.

Industry comments

Juliet Davenport, CEO of Good Energy, says: "Good Energy welcomes the Government’s commitment to review the electricity market, which is in desperate need of reform if we are to meet our renewable energy targets by 2020.

“We need this Government’s Electricity Market Reform to be radical but enduring. Encouraging low-carbon solutions is not enough. It needs to be aiming for a zero carbon energy market with a transparent support mechanism for all low-carbon technologies through the feed-in tariff. It also needs to ensure storage and demand side solutions are included in any capacity support mechanism. And this must be underpinned by a long-term, secure carbon price.”

James Cameron, Vice Chairman of Climate Change Capital, comments: "The electricity market reform proposals, in particular the long-term fixed price contracts for low-carbon electricity, could provide much needed certainty for investors over the right time-horizons. Together with effective carbon pricing, this package could finally make clean, green technologies permanently more attractive to investors than conventional polluting ones.

"Huge amounts of private capital are required to deliver Britain's transition to a low-carbon economy and this package can help provide confidence for investors. As always, though, the devil will be in the detail and the Government must ensure they push this through at speed and not get derailed."

Ian Marchant, Chief Executive of SSE, adds: "The first test of EMR is that the value of existing investments is protected as the market is reformed and it is therefore very welcome - and critically important - that the government is proposing robust provisions here.

"In the next two decades, substantial investment is needed to decarbonise the power sector and maintain security of supply whilst ensuring electricity remains affordable. Fundamentally, therefore, the EMR process needs to deliver a framework which encourages delivery of all of the key generation technologies needed over the next two decades - renewables, thermally-efficient gas-fired power stations, nuclear and carbon capture and storage (CCS) - and ensure an appropriate risk/reward balance for investment in these technologies.

"This requires an evolved market structure, which the EMR process is appropriately timed to deliver with a White Paper expected next summer and reforms set to be implemented by around 2013.

"Reforms should also reflect Scotland's leading role in deployment of low carbon generation, with already half of renewables generation located in Scotland and attractive sites for development of CCS.

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