The British government proposed an overhaul of the country’s electricity market in a bid to lure the 110 billion pounds ($174 billion) of investment needed to replace aging power plants and expand renewable energy.
The draft law, published today, lays out plans to guarantee prices for low-carbon electricity and pay producers for providing back-up supply when wind power falls short, according to the Department of Energy and Climate Change. It’s aimed at securing commitments from utilities to fund new atomic reactors and clean-power projects, curbing reliance on gas-fed plants.
Power companies stepped up calls for long-term industry support after EON AG (EOAN), RWE AG (RWE) and SSE Plc (SSE) withdrew U.K. nuclear plans in the past year and Energy Secretary Chris Huhne quit in February. Utilities need to spend as much as 110 billion pounds to replace a fifth of Britain’s power plants, add renewables projects and upgrade grids by 2020, according to the government.
“Measures contained in this energy bill will enable us to keep the lights on, bills down and the air clean,” Huhne’s successor Ed Davey said today in a statement. “By reforming the market, we can ensure security of supply for the long-term.”
The price guarantees were first outlined last July, with the government proposing a so-called contract for difference, designed to shield producers from swings in the market and spur investors to build new capacity. The U.K. can get as much as 50 percent of its power by burning gas, which has almost doubled in price in three years, boosting calls for nuclear expansion.
“We have created the most attractive environment for new nuclear of anywhere in the world,” Energy Minister Charles Hendry said last week. “We can’t do this without international investment and we recognize we have to create the right framework to allow that to come forward.”
Germany’s RWE, which with EON backtracked on plans to build U.K. reactors in March, said today’s proposals may not be sufficient to secure the required investments.
“For Britain to remain an attractive market for investors, energy policy must be given adequate priority and resource,” RWE Npower Chief Executive Officer Volker Beckers said in a statement. “I remain concerned by the amount of change being implemented in the energy sector and the time it is taking.”
Power prices may need to be 166 pounds a megawatt-hour, more than three times the current level, to justify the expense of building a new nuclear plant, Citigroup Inc. said in a May 8 note, assuming an estimated cost of 7 billion pounds a reactor.
The U.K. gets about 20 percent of its power from nine atomic plants, five of which are due to shut in the next decade. The cost of building new reactors may dissuade utilities from committing funds, leading to power blackouts within five years, former government scientific adviser David King said in March.
“The risk of the lights going off is very serious,” said King, who advised Tony Blair and Gordon Brown’s administrations through 2007. “At the moment the industry sees an amber light on nuclear new-build.”
SSE, the U.K.’s second-biggest energy supplier, said in September it would sell out of a British nuclear venture with GDF Suez SA and Iberdrola SA (IBE) to focus on renewables.
Electricite de France SA, the largest reactor operator, said today it will decide whether to prolong the lives of its U.K. Hunterston B and Hinkley B plants by 2013, adding that an extension makes “absolute sense in terms of filling a short-term energy need.”
Hinkley Point, Sizewell
Former Energy Secretary Huhne championed the expansion of nuclear, pushed the development of offshore wind farms and backed subsidies for renewables. He resigned after being charged with lying about a driving offense, leaving the power-market reform to his successor.
The proposals are likely to be included in a bill to be introduced to parliament in late 2012, with a final law approved at the end of 2013, the energy department said.
The draft recommends a so-called capacity market to reward utilities for running back-up plants when renewable power is insufficient, and a nationwide emissions-performance standard. The U.K. also has a fleet of coal-fired plants, about half of which are scheduled to close by 2016.
“We are still some way from having a detailed picture of how the electricity market will look in the future, on which the success of these reforms depends,” said Neil Bentley, director- general of the Confederation of British Industry. “With major investors waiting in the wings, these details are needed.”
As well as industry concerns, Davey faces public criticism that his energy plans will drive up bills. U.K. households may pay as much as 65 billion pounds a year in total on energy by 2020, more than quadruple the figure in 2000, according to Deutsche Bank AG.