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U.K. Redraws Thatcher’s Energy Market to Cut Carbon

Secretary of State for Energy and Climate Change Chris Huhne
Secretary of State for Energy and Climate Change Chris Huhne said, “We have a once-in-a-generation chance to rebuild our fragmented market, rebuild investor confidence, and rebuild our power stations.” Photographer: Jeff J Mitchell/Getty Images

Dec. 15 (Bloomberg) -- The U.K. will propose the biggest changes to energy policy in two decades tomorrow when the coalition government lays out plans to ensure aging power plants are replaced and climate targets met.

David Cameron’s government is likely to reassert state control over the market-based system introduced by his predecessor Margaret Thatcher when proposals are made to parliament. The regulator has suggested a “carbon floor” price to force up the cost of emitting greenhouse gases, encouraging investment in nuclear reactors and offshore wind farms.

The cost of replacing existing plants and building renewable projects will be around 200 billion pounds ($316 billion), according to an Ernst & Young LLP report. The government says existing arrangements don’t provide the certainty needed for utilities to finance new plants. Electricite de France SA and Centrica Plc, which own nuclear projects and plan more, may benefit from policies that drive up the cost of burning coal or gas.

“There is just enough time if companies start building and investing now,” Bill Easton, director on U.K. power and utilities at Ernst & Young, said in an interview. “Within the next 12 months the industry can’t be looking over its shoulder wondering if the market is going to change.”

The U.K. has pledged to get 15 percent of its energy from renewable sources by the end of the decade and reduce carbon-dioxide emissions by 80 percent by 2050 from 1990 levels. Achieving this will require as much as 40,000 megawatts of low-carbon energy projects, according to a Dec. 7 report from the Committee on Climate Change.

‘Fragmented Market’

“We have a once-in-a-generation chance to rebuild our fragmented market, rebuild investor confidence, and rebuild our power stations,” Chris Huhne, secretary of state for energy and climate change, said in a Nov. 17 speech. “This will be a seismic shift.”

Britain is trying to reduce emissions linked to global warming while replacing as much as a quarter of its existing generation by 2020 as older plants are shut down, Huhne said.

Britain’s power network was built in the 20th century to move coal-fired power from northern England to power consumers concentrated in the south, according to Robert Gross, director at Imperial College London’s Centre for Energy Policy and Technology. Existing transmission prices were set in 1990 under Thatcher to cut power costs by promoting generation as close as possible to consumers.

Government Guarantees

Thatcher created Europe’s most competitive electricity and gas markets, privatizing state-owned businesses including British Gas, British Energy, National Power and PowerGen. By 1997, the change had driven down consumer prices by as much as 20 percent, compared with pre-privatization costs, according to former British Energy Plc Chief Executive Officer Robert Hawley.

While privatization has kept down energy prices, the scale of investment needed to meet climate change targets and replace aging plants is so large it won’t happen without government guarantees, according to regulator Ofgem. The global financial crisis, tougher carbon targets and increasing gas dependency, have weighed on industry funding, the regulator said.

Tomorrow’s proposals may include so-called capacity payments, levying a pool of funds from consumers that would make pay-outs to low-carbon generators, including nuclear reactors and offshore windfarms, Easton said.

The government may also introduce so-called contracts for difference to deal with the volatility of future power prices and prevent windfall profits, Easton said. These contracts would compensate utilities for lower-than-expected energy prices or charge them if prices are higher, in this way locking in a price and allaying concerns that costly projects won’t get paid off.

Carbon Floor

The Committee on Climate Change suggested replacing the climate-change levy to introduce a carbon floor that rises to 27 pounds a ton by 2020. European Union carbon permits closed yesterday at 14.46 euros a ton on ICE Futures Europe in London.

A carbon floor would benefit nuclear and renewable energy assets-owners by raising the cost of other forms of generation, according to analysts at Matrix Corporate Capital LLP. Such a policy is likely to hurt companies such as Drax Plc, owner of western Europe’s largest coal-fired power plant, they said.

“The U.K. government is considering a lot of the changes,” said John Segrich, who manages the Rye, New York-based Gabelli SRI Green Fund. Feed-in tariffs for low carbon generation, which are already in use in the U.K. and likely to continue in some form after the government’s overhaul, have driven unsustainable growth in other countries he said. “What may be good for a consumer or the country, may not be good for an investor.”

Nuclear Renaissance

Drax is down 9.1 percent this year to 376.9 pence in London trading, valuing the company at 1.4 billion pounds. Centrica has risen 18 percent this year to 330.3 pence in London, making it one of the top-tier performers in the Bloomberg World Europe Utility Index, down 16 percent this year. E.ON AG and RWE AG, German utilities that operate coal and gas-fired generation in the U.K., are lagging behind the index.

Britain’s 19 operating nuclear reactors account for 18 percent of the country’s power generation. The government approved eight sites for new plants in October. EDF, Centrica, Scottish & Southern Energy Plc, Spain-based Iberdrola SA and France’s GDF Suez SA, RWE and E.ON have announced plans for about 19,000 megawatts of new reactors through 2050. Utilities may need to spend as much as 6 billion pounds on each reactor in Britain, according to Energy Minister Charles Hendry.

The U.K. generates about half its electricity from gas and is forced to import increasing amounts as its reserves dwindle. The U.K.’s gas market makes it possible to track wholesale costs at any time. That transparency can allow other nations to bid higher for gas deliveries, leaving Britain vulnerable to shortfalls.

To contact the reporter on this story: Kari Lundgren in London at

To contact the editor responsible for this story: Will Kennedy at

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