The Government risks distorting its planned reform of the electricity market merely to save political face over implicit subsidies for nuclear power, MPs on the Energy and Climate Change Committee warn in a report out today.
The Coalition Agreement pledged to allow new nuclear power stations to be built 'provided that they receive no public subsidy'. But MPs believe that Government proposals will effectively provide subsidies to nuclear generators through new long term contracts and a carbon price floor that could hand them windfall profits.
Tim Yeo MP, Chair of the Energy and Climate Change Committee, said:
"Ministers believe that new nuclear could play a key role in keep the lights on and meeting our climate change targets—but they don’t want to own up to supporting it.
This is understandable given the promise they made not to subsidise nuclear, but it would be deeply irresponsible to skew the whole process of electricity market reform simply to save face.
The Government must be up front about the support it is giving to nuclear and not hide subsidies in a one-size-fits-all design for long-term energy contracts."
Over one hundred billion pounds of investment is needed by 2020 to replace the UK's aging power stations, cut carbon emissions and maintain energy security. Government proposals for Electricity Market Reform (EMR) are supposed to encourage power companies to deliver clean affordable energy, even when there are more inflexible and intermittent sources of electricity in the mix.
The committee's findings
The committee is concerned that the current EMR proposals are over-complex and could fail to attract the £110 billion investment needed in the electricity generation alone by 2020. It is calling on the Government to simplify its package of reforms to provide a more certain framework for investors. The starting point for EMR should be a clearly defined objective to reduce the carbon intensity of electricity generation in the UK to 50g of CO2 per kilowatt hour (KWh) by 2030.
- The wholesale market should be fundamentally reformed to break up the dominance of the Big Six energy companies, in order to allow new entrants to invest in the UK and improve the liquidity of the market.
- The long term contracts designed to encourage low carbon energy sources—known as Feed-in-Tariffs with Contracts for Difference—will work for nuclear, but different types of contract are needed for renewables and other clean technologies.
- It is too early for the Government to design a capacity mechanism given the rapid development of smart meters, interconnectors and storage systems that could remove the need for "peaking plant".
- The Carbon Price Support is a necessary short term solution to weaknesses in the EU Emission Trading System, but will increase costs for consumers and could provide a windfall for nuclear and renewables generators.
The Chair of the committee, Tim Yeo MP, said:
"The Government must go back to the drawing board and come up with a more straightforward and coherent set of plans to reform the electricity market.
Radical reform of the wholesale energy market is needed to stop the Big Six from stitching it up, but at the moment Ministers are only tinkering at the margins."
The MPs also call on the Government to be up front about the effect that reforms will have on energy bills. Tim Yeo MP added:
"Cleaning up our power sector will cost money, but the long term benefits for the UK of having a secure, reliable and low-carbon electricity system are clear.
In the short to medium term bills will rise, but in the long term people will see savings—Ministers should be open about that."