UK's £200bn electricity bill could be worth wholesale market access

£200bn is a lot of money for any country, even in good economic times. But £200bn is the electricity bill currently facing politicians, utilities, power generation companies and consumers just to keep the lights on. But as Europe's debt crisis demonstrates, this kind of money is not going to be easy to come by and the UK this week rejected calls to boost eurozone coffers with €30bn.

In July, the UK's Department for Energy and Climate Change released its much-anticipated white paper on Electricity Market Reform. Planning our electric future: a White Paper for secure, affordable and low-carbon electricity sets out the UK's particular problem: 19GW (a fifth) of existing capacity is expected to come off the system between now and 2020 (compared to around 6 GW of capacity coming off in the last decade), principally due to EU environmental regulation and ageing plants closing.

The UK is also the only country in the world to have legally binding targets on carbon reduction - even though the government has never been clear about what penalties it would impose against itself. Britain's target of an 80% carbon reduction by 2050 requires large-scale decarbonisation of the power sector. The UK's Coalition government is still committed to these targets - the Climate Change Act 2008 was Tory legislation, after all. 

Despite strained British political relations with France and Germany, relations between the UK and the European power companies is stronger than ever, with EDF Energy, RWE npower, E.ON and Centrica expected to find a way to bridge the capacity gap.

But that is the consequence of "liberalising" the power industry in the UK, beginning with Margaret Thatcher's programme of privatisation in the 1980s. The mere thought of foreign-owned utilities would have bureaucrats and Congressmen reaching for their metaphorical rifles in the US where the energy industry often bears the characteristics of a monopoly.

Instead of merely an investment opportunity in which UK consumers line the pockets of private German utilities or French state-owned companies, Coalition politicians must surely have thought through the benefits to the UK economy which faces long-term slow growth.

DECC claims that the cumulative benefits to the economy of Electricity Market Reform are expected to be over £9 billion higher than without policies over the period 2010-30.

And for those who have to pony up the real costs, DECC says that the average domestic consumer bills are expected to be 15% lower in the five-year period up to 2030 than they would be under current policies.

The white paper puts forward four key proposals to increase investor and consumer confidence: 

• a carbon price floor [which given its low price will be welcome and should boost investment in low carbon technologies];

• new long-term contracts (Feed-in Tariff with Contracts for Difference) to provide stable financial incentives to invest in all forms of low-carbon electricity generation. A contract for difference approach has been chosen over a less cost-effective premium feed-in tariff; [to be decided in 2013]

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

• a Capacity Mechanism, including demand response as well as generation, which is needed to ensure future security of electricity supply.

Earlier this month, Charles Hendry, DECC energy minister, told delegates at the Countdown to 2020 conference in London:

"Securing the £200bn necessary is integral to keeping prices affordable. There is a price for energy security, but it's nothing like the price of energy insecurity. It is no longer a case of do we have energy security or low carbon? We can't have energy security without low carbon technologies and without a full role being played by renewables in that mix.

"The starting point for the changes that we've made over the last 18 months is admitting that business as usual is not an option if we're going to get investment in our energy infrastructure at two times the rate this decade as was achieved in the last decade. There has to be a fundamental change to the market structure to incentivise that."

The challenge in the UK was greater than in other European countries, he said.

"That £200bn over the next decade compares to about €1trn in all 27 member states. Over 1/5th of the energy investment in the EU needs to be here in the UK.

"As we try to make up for lost time, we do need to have additional measures such as the carbon floor price introducing it at a predictable level from 2013 - 2020. That will bring £30-£40bn of new investment to the low carbon sector."

Hinting at the importance of reductions in corporate tax from 28% to 25%, Hendry said: 

"The companies looking to invest in the UK are global companies looking at international opportunities and if they don't see something which is better in the UK - an easier way of doing business here - then they will look and invest elsewhere. We need to look at other issues which threaten or encourage investment."

Hendry focused on the importance of the development of the offshore wind industry in the UK, claiming that the country could kick start the global industry. The UK already has the most installed capacity for offshore, which could rise from 1.3 GW to 18 GW by 2020.

He said: "Between September 2011 - October 2011 we saw £940m of new investment decisions in the renewable energy sector coming forward in the UK and the promise of 1,300 jobs. There are some incredibly important investment decisions which will be coming forward in the next few months in terms of the supply chain opportunities. Any company which is serious about wanting to play in this area on a global basis must look at the UK if they want to be in the offshore wind sector. We want to be the best market for developing it we will have the biggest market in the world and we've also got tremendous enthusiasm to make it happen."

He said that the world's first Green Investment Bank would play an important role, but when it opens its doors to renewable financing, it will start with £3bn in 2013. But it is hoped that this relatively modest sum will leverage private investment "to get companies through the valley of death through the difficult period where they often struggle to get investment and where we can ensure that we can create a real vitality in this country".

But the road to 13GW offshore is not going to be cheap, he acknowledged. Republicans talk about "affordable power" when they mean cheap fossil fuel generated electricity. The difference is that Conservatives are not afraid to include the other costs associated with polluting sources of power in their calculations - check out the excellent 2050 Pathways calculator here.

But in language that would be difficult to imagine from many US right-wing mouths, Hendry explained his reasoning behind the recent reductions in feed in tariffs.

He said: "I found it impossible to justify why people on low incomes would be paying a surcharge on their electricity bills for people with 10-15,000 to invest to get a guaranteed rate of return for 12% tax free for 25 years. That is not the right way to create a sustainable industry. We're taking this back to the [original] principles … and that was an expected rate of return of 5% and as the cost of installations has gone down, the expectations has always been that the cost of the support would come down at the same time. 5% is still better than most investors can find anywhere else especially guaranteed and tax free."

But the FIT proposals have caused much disruption in the UK's solar industry which has managed to take its challenge to the high court, which resulted in the energy secretary Chris Huhne, being likened to Macbeth. The government now faces a judicial review after the high court ruled that slashing the small-scale feed in tariff rate from 43.3p to 21p per kWh was "legally flawed".

This is just one of many emerging signs that the Coalition government is placing more focus on wind at the expense of solar as it believes the potential is greater than say small-scale PV.

But without any wind turbine or supply chain manufacturing industry, where is the UK's economic gain? One thing the DECC white paper doesn't mention, nor does its subsequent technical update, is the Internal EU Electricity Market which is expected to be up and running by 2014. From March next year, member states must unbundle transmission systems and transmission system operators. This will of course massively expand wholesale electricity markets, but also gives greater credence to the UK's ambitious offshore targets.

The UK already has 3.5GW of interconnection with mainland Europe, around 5% of peak UK demand. Most of that electricity comes onto the UK grid from France's nuclear power stations. But there is scope for that to change and examples of trading excess electricity to other EU countries are growing, particularly in Spain. 

Designing policy and gearing renewable capacity for Europe's wholesale market could be the main driver behind the Coalition's commitment to offshore wind and part of its strategy for economic growth.  Although Huhne or Hendry wouldn't necessarily admit that.

But turning the UK from a net importer of energy to a net exporter might comes with a high price tag - a price possibly worth paying as the benefits of selling electricity to Europe will be worth more than £200bn.