Documents

At the final Beesley lecture of this year’s series, on reducing the costs of lowering carbon emissions, an old chestnut of an economic argument was raised, to the effect that UK shale gas production, even if it starts to happen in the relatively near future, “will not affect UK prices for many years to come because it will not be marginal supply for a long time yet.”
The context here is an interesting one: the main thesis of the lecture was that current policies of providing subsidies to favoured technologies had foreclosing or excluding effect on alternative approaches to decarbonisation, and that part of the exclusionary effect occurred by way of attempts to prevent the development of lines of analysis and reasoning that threatened the privileged policy narratives.

The Energy Bill, currently on its passage through Parliament following its inclusion in the Queen’s Speech, proposes a number of important changes to the UK energy market. Although the Bill contains several elements, its focus, notwithstanding its title, is on electricity rather than on other parts of the energy market. Within this narrower purview, electricity market reform (EMR) takes centre stage. In its introduction to this part of the Bill the Department of Energy and Climate Change (DECC) explains that the reforms are being put in place to attract £110 billion of investment which it claims is needed to replace generating capacity and upgrade the grid. Two key elements of EMR are the introduction of a system of contracts to support new nuclear and other lower carbon generation (the so-called contracts for differences, CfDs) and the development of a ‘Capacity Market’.2 It is with this latter element, the Capacity Market, that this paper is concerned.

This year’s (2011) series of Beesley lectures was opened by Dieter Helm’s wide ranging examination of the UK government’s Electricity Market Reform (EMR) proposals and closed by Paul Dawson’s focused dissection of the carbon price support policy that has been developed alongside the EMR programme.
The opening lecture and the discussion that followed it illustrated the rather unusual state of affairs that exists in energy policymaking at the moment: there appears to be a consensus among leading economists familiar with the energy sector that the EMR proposals are badly flawed, and that they can be expected to fail.