London, 23 July (Argus) — Government proposals to reform the UK's wholesale power market to drive future investment in nuclear and renewable electricity generation are likely to undermine competition and lead to more vertical integration and consolidation in the sector, a cross-party parliamentary committee has concluded.
The House of Commons Energy and Climate Change Committee also said the electricity market reform (EMR) package in its existing form was “unlikely to be workable in practice” and was “fundamentally flawed” because it focussed far too heavily on supply-side measures.
“The EMR provisions as they stand are likely to undermine [UK regulator] Ofgem's efforts to increase competition in the wholesale markets,” the committee said in a pre-legislative scrutiny report on the draft energy bill containing the EMR proposals. “We therefore recommend that the government amend its current proposals to avoid the likelihood that they will lead to more, not less, vertical integration and consolidation in the market.”
The committee recommended that the government should publish draft secondary legislation to increase confidence and ensure there is an opportunity for rigorous parliamentary scrutiny.
The indicative road map for the draft bill showed that the timetable for legal adoption of EMR had already slipped, the committee said. It was likely to be signed into law in next year's fourth quarter, which will require the bill to be carried over from one parliamentary session to the next. The government has said it wants the EMR legislation to be adopted by spring 2013.
The committee highlighted problems with the design of a contract-for-difference (CFD) support mechanism for nuclear and renewables, which forms the key element of the EMR package. Among the issues raised was a perceived lack of transparency in the setting of the CFD strike price. But the main problem identified was the decision to propose the CFD contracts would not be guaranteed by the government, as previously planned. “The government is in danger of botching its plans to boost clean energy, because the treasury is refusing to back new contracts to deliver investment in nuclear, wind, wave and carbon capture and storage,” said committee chairman Tim Yeo.
Uncertainty around the EMR proposals for a capacity mechanism was also highlighted as a major issue, and a threat to investment. “There is a risk that the need for a capacity mechanism may now become a self-fulfilling prophesy, that an investment hiatus caused by policy uncertainty will deliver the precise capacity problem that DECC aims to avoid,” the committee said.
“We are determined to use the pre-legislative scrutiny period to develop a robust and effective bill with the interests of both consumers and investors at the heart,” said the Department of Energy Climate Change (DECC), which is leading the EMR project, in response to today's report. “The committee's input will be extremely valuable as we do this.”
The committee's downbeat assessment of EMR comes amid signs of a rift in the coalition government ruling over subsidies for renewable power and the future role of natural gas in the generation mix.
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