LORDS

Restore competition to fix the electricity market

24 February 2017

The Economic Affairs Committee in its report "The Price of Power: Reforming the Electricity Market" has stated that constant intervention by successive governments in the electricity sector has led to an opaque,complicated, and uncompetitive market that fails to deliver low cost and secure electricity.

Key findings

The Committee examined the impact of the policies of successive governments on the electricity market. In its report, "The Price of Power: Reforming the Electricity Market", published today, the cross-party Economic Affairs Committee identifies two key failures in the current market: the narrow amount of spare capacity, particularly in winter, and the rising cost of electricity to consumers and businesses.

In order to address the failures in the energy market the Committee recommends the Government should:

  • Ensure that security of supply is always the first and most important consideration in energy policy. Affordability and decarbonisation must not be prioritised ahead of security.
  • Ensure that decarbonisation is achieved at the lowest cost to consumers. Decarbonisation policies accounted for around 10% of the average domestic bill in 2013.  This may mean waiting for the development of new technologies which can reduce emissions. The Government should make sure that the pace of reductions is flexible and not a rigid path to be achieved at all costs.
  • Reduce and remove Government interventions in the market. The best way to do this would be to ensure that electricity generating capacity is secured through a single, technology-neutral, competitive auction for electricity supply. This auction would ensure that consumers are paying the lowest prices for low-carbon electricity.
  • Establish an Energy Commission to provide greater scrutiny of energy policy decisions. This independent advisory body would report to the Secretary of State and advise on the best way for all the objectives of energy policy to be delivered.
  • Create a world-class National Energy Research Centre which would search for new methods of producing cheap, clean energy and translate them into commercial applications.
  • Outline its ‘Plan B’ in the event Hinkley Point C is delayed or cannot produce the anticipated power.

Chairman's comments

Commenting on the report, Lord Hollick, Economic Affairs Committee Chairman, said:

“Poorly-designed government interventions, in pursuit of the decarbonisation, have put unnecessary pressure on the electricity supply and left consumers and industry paying too high a price.

“Domestic electricity bills in Britain have gone from being second cheapest in Europe in the mid-2000s to the seventh cheapest today. Britain’s high industrial electricity prices have led some energy-intensive industries to relocate abroad. Low-carbon policies are a factor in these high prices.

“Hinkley Point C is a good example of the way policy has become unbalanced and affordability neglected. It does not provide good value for money for consumers and there are substantial risks associated with the project.

“The Government must make sure that the security of the UK’s energy supply is the priority of its energy policy. Affordability must not be neglected and decarbonisation targets should be managed flexibly.

“We would like to see the Government step back from the market and allow all generating technologies to compete against each other. It should establish an Energy Commission to ensure competitive auctions have independent oversight and are scrutinised carefully.

“Renewables play and will continue to play a crucial part in energy policy. Costs have been reduced and efficiency has improved. New clean technologies must be supported to be commercially viable. A new National Energy Research Centre would also help the UK to catch other countries up in the race to find cost-effective solutions to the challenges the world faces on energy.”

Conclusions

The Committee makes wide-ranging recommendations to address the electricity market, including:

  • Domestic electricity bills in Britain have gone from being second cheapest in Europe in the mid-2000s to the seventh cheapest today. Decarbonisation policies accounted for around 10% of the average domestic bill in 2013.
  • Industrial electricity prices in Britain are amongst the highest in Europe. The Government has taken steps to compensate some energy-intensive industries, but it still estimates 13% electricity costs after compensation relate to decarbonisation.
  • The growth of renewable energy, supported by contracts that guarantee a given price for a fixed period, has left the UK facing a possible shortage of capacity as private investors have not been willing to build new conventional power plants.
  • The UK’s capacity margin is narrow. The Government introduced the Capacity Market in an attempt to reintroduce competition into the electricity sector. However, it is still struggling to procure new power stations.

Further information

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