How £200bn investment needed to guarantee the UK’s electricity and gas security, and greenhouse emissions reductions, breaks down:
Here are the options outlined by Ofgem, as explained by Ed Crooks:
Targeted reforms including a floor under the price of carbon emissions permits, and allowing gas and electricity prices to rise more sharply when supplies are tight. There could also be more incentives for customers to use less electricity at peak times. That would encourage investment in low-carbon technologies and in reserve capacity that will be used only occasionally, but might not be a strong enough guarantee for investors. Support for the carbon price is also a blunt instrument that helps all low-carbon generation indiscriminately, rather than targeting support where it is most needed.
Option BStronger obligations on energy companies to create back-up supply, such as spare generation capacity and gas reserves, that would be needed only in a crisis.
Those obligations could be backed by a new centralised renewable electricity market, mainly for wind power, which would help manage variable generation.
Heavier obligations on suppliers risk deterring investment and keeping entrants out of the industry, damaging competition.
The centralised renewable power market has been used very successfully in Spain but still may not provide the certainty that investors will want.
Option CContracts for generators to supply set quantities of renewable electricity, decided by the government. Companies would bid in tenders for these contracts, based on the additional revenue they would need to be paid to make the investment.
This would resemble Option B, in putting greater obligations on suppliers and creating a new renewable electricity market, but would offer greater certainty to investors in wind and other renewables, by paying a set premium above the value of the electricity that they sell.
However, they would still be exposed to electricity price risk.
Option DContracts for all new generation capacity and other infrastructure such as gas storage. Companies would bid in tenders to invest in a particular technology such as wind power and would be paid a set income on that investment, which could be linked to the electricity price.
This could create strong incentives to invest in reserve capacity and low-carbon energy, at the cost of creating a highly centralised system. A central planner would have to come to regular assessments of the amount of investment needed, and would run the risk of forecast errors that could be costly for consumers. It could also squeeze out innovation.
A central energy buyer. The most radical change suggested by Ofgem, this would completely replace the existing energy market structure, creating a new body that could buy all the electricity generated in the UK and sell it on to customers and suppliers. It could favour particular generation types such as wind or nuclear power in its purchasing. This system could provide great certainty to investors, making investment in energy infrastructure extremely low risk. But the problems and risks of excessive centralisation would be even greater. It would undo two decades of liberalisation under both Conservative and Labour governments.