The electricity market is not operating as effectively as it could but there are ways to improve it. ACE’s policy manager Peter Campbell and senior economist Graham Pontin outline the solutions and economics in ACE’s seminal Electricity Market Reform report launched this month.

In policy terms, the UK’s energy market currently sits on the horns of a trilemma between the need to secure future supply through replacement of aging, and additional, generation capacity, the desire to ensure consumer costs are kept competitive through a competitive market, and the sustainability obligations that the government has set itself. 

The data presented in the accompanying piece, which appears in ACE’s report, Electricity Market Reform: Generating Results, suggests that current arrangements might not be providing the best environment and certainty that investors require to come forward. With the 2013 National Infrastructure Plan estimating that £100bn is required to finance new generation, the supply chain to win contracts to provide work, and the electricity companies keen to re-establish a trusting relationship, the right environment is in everyone’s interest.

Our research proposes a solution comprising two parts.

Firstly, the government should create five Generation Investment Vehicles (GIVs) to complement its Electricity Market Reforms, aiming to raise £8bn in total. These GIVs would ensure the spread of risk that investors need to bring forward much needed capital to secure the UK’s energy supply.

As an example, the £8bn of GIVs outlined in the research could be used to finance a combination of projects such as: 

Six Combined Cycle Gas Turbine plants at an approximate cost of £3bn (providing approx. 7,500MW);

Eight ‘waste-to-energy’ plants at an approximate cost of £4bn (providing approx. 575MW);

A £1bn fund for community projects, where money would be raised via crowd sourced funding.

Secondly, electricity generated by these GIVs would be sold through a two-stage Priority Auction Mechanism (PAM), at least 12 months in advance. This would provide the much needed transparency and benchmark price within the market to encourage stability and further long term trading, as well as stimulate further competition in the electricity generation market. Additionally, the PAM would ensure an attractive and steady revenue stream that would give investors good returns on their investment.

These are the two missing pieces of the jigsaw that will ensure the government’s Electricity Market Reforms will be a success. They would also satisfy the current suggestion by the Labour party that some form of pooling of energy generation will be undertaken by a future government.

Over the coming months, ACE will be feeding the findings of this report into political parties of all colours, officials, and other organisations in the hope of building some momentum behind the proposals. We hope they will see that through the GIVs and PAM we propose, investment will come forward, consumers will see the real benefits of competition, generators and suppliers will see their standing improve, and the construction sector will be able to get on and build. Without them, more drastic measures might be needed in the future to prevent the lights from going off. PC