Electricity Market Reform, herein ?EMR' If I had to define this reform simply (which is a hard task) I would say:
"It?s about making the UK a place where (1) we produce our energy in the right ways (which we now define as being low carbon so not coal for instance! I.e. it?s sustainable) (2) where we can still afford to survive & live comfortable lives (so we are not put in to fuel poverty by rising energy prices and/or we always have access to power- so the lights always stay on! I e. we have security) and (3) where we can compete in a worldwide market place (because we are not as easily influenced by shocks globally that have in the past dramatically increased our energy prices I e. it?s affordable).? Essentially, we are saying that we are not currently achieving these 3 objectives (the energy trilema) so we need to make some major changes to achieve them.
If you take a moment to consider the dynamic between (1), (2), and (3) you?ll notice that it?s a bit like having a '2-legged race' where you need to get to 3 finish lines. Now, I?m not saying it?s not possible just that you will never achieve all 3 in the same go (we will have to stomach a rise in energy prices- which goes against (2) and (3) before these prices start to settle over time and allow us to reach all 3 goals. So short-term pain for long-term gain..
Its very difficult to achieve all 3 objectives of this trilema because it costs a lot to replace our existing gas-fired and coal-fired generation equipment with cleaner more efficient ways of generating energy. Not many people have £140bn lying around to advance this ?scrappage scheme?.
I mean think about it? You may have realised by now, following slashes in the subsidies on solar panels, that this 'low carbon' technology (without any subsidies) has a pretty slow payback (slow enough that you, as an investor, wouldn?t install it; you?ll get better returns elsewhere right? ). Similarly off-shore wind, biomass, and tidal are all really really expensive. Left purely to the private sector mechanism (so no subsidy) it would be hugely speculative for any company to be investing into this technology without some sort of guarantee from UK plc that they would get a financial ?tap on the back? each year.
So if we are in agreement that we need to guarantee some sort of incentive to anyone considering the idea of supporting our legally binding objectives, by installing the types of energy generation equipment (we require), then we need to open the purse (or the cookie jar) at ?No 10?. However, on inspection, this is empty (in fact we have quite a few ?I OWE YOU?s? in there, so the only way to do this is to act (a bit) like Robin Hood 'taking from the energy users to give to the (poor) energy generators?.
So what comes next? (what is the order of our 3 legged race?)?well it starts by confirming to those generators (the one?s who wouldn?t generate, because the payback would be too slow or unprofitable) that we will guarantee to pay them a price that makes it worth their while. This of course, is another ?I OWE YOU? and now legally binds us to paying them when they generate (we call these agreements contracts for difference (CFd?s)).
Now we?ve got some of our low carbon generators signed up to produce we also need to cover the ?demand issue?; essentially what we do when everyone pops to make a cup of tea in between ?change of ends? in Andy Murray?s Wimbledon final?.we don?t want to be spending more of the (non existent) government funds on back-up/spare capacity if, in fact, it already exists around the country!? We just need a way to manage the private generators and a way to ensure that they turn up their generators when Andy Murray goes into a fifth set (as everyone arrives home from work and the floodlights go on). For this to work the UK government offer a carrot and a stick; they place a fine on those that fail to come online when requested but pay those generators for having their capacity available, even if they don?t use it (this is dubbed the capacity mechanism- and it?s a system that allows these generators to put in their ?bids? to prop up the national grid when it?s struggling). When you consider that in the past (in these scenarios) we?ve often ended up relying on imports or seeing the price get a little mad, this mechanism should in fact reduce energy prices (which is helping us get to that 3rd finish line!?).
Well, this good news is fairly short-lived I?m afraid & despite bearish movements in wholesale energy prices recently; as the % of the total energy price that wholesale energy prices reduces it has less of an impact??you would have to trade your energy with a fairly large amount of (value at) risk to beat the expected price rises?.. Through to 2017 a well managed strategy will see ?10 to +5% changes to budgets (depending on what year, in the last 3 years, you purchased). But in 2018/19 this looks more like a 20-30% increase compared to 2014 levels.
So when this new acronym, EMR, meaning a commitment to change, starts it?s work in 2015 we are not expecting to see much of an initial change in pricing? EMR will take a little while to mobilise (so expect some politicians using terminology around the capacity mechanism to try and ?rose tint? the reform). Of course, by 2018/19, when this reform feels like ?old fish & chips paper? you will see a 2 to 2.5pence a kWH rise in energy prices just due to EMR; so my suggestion is to start looking at energy efficiency if you want to avoid budget increases, year on year, of 20-30%.