What happens when the global market leader decides to micro-manage the market?
This is a sample article from the July 2012 issue of EEnergy Informer.
UK is generally credited to be among the earliest countries to successfully implement a functional competitive electricity market to replace a vertically-integrated industry with a strong and centralized planning bureaucracy. While there have been numerous hiccups along the way, requiring multiple modifications of the original market design, the grand experiment is generally considered a success. Among the main indicators of the UK’s market success is that private investors, by and large, decide what kind of plants to build, how to operate them, and how to bid their generation into the market. The lights have stayed on for quite some time under this regime with relatively little interference from government.
There are, however, two problems with the UK market, which have become more pronounced in time. First, private investors do not appear to be building sufficient capacity to replace the current aging and inefficient fleet. And they do not seem sufficiently keen on moving towards a low carbon energy future by investing in renewables and/or nuclear energy. There are some similarities to the ERCOT market, but not many.
By most estimates, at least a fifth of the UK’s existing capacity is expected to retire by 2020, either because they are uneconomic to operate or because they do not meet EU’s emission standards. The entire existing nuclear fleet is projected to retire before mid 2020s due to old age. Like the US, the UK government has not been able to persuade the private sector to invest in replacing the existing reactors on anything resembling a sustainable level despite all sorts of inducements. In the US, only 4 new reactors are projected to be built, far short of what is needed merely to maintain the existing size of the nuclear generation in the generation mix.
Frustrated by lack of progress on both fronts, in late May 2012, the Department of Energy & Climate Change (DECC) released a draft Energy Bill that, at least on the surface, appears to abandon many critical elements of the free market. The Electricity Market Reform (EMR), details of which may be found at DECC’s website, is amazing in its level of detail and specificity. Interested readers can spend hours, days or longer examining the various documents that are simply too voluminous to mention, let alone describe, at the DECC website.
Briefly, each element of the EMR is designed to address a particular problem or shortcoming of the current market. For example:
- An emission performance standard of 450 kg of CO2 per MWh is designed to discourage coal and/or encourage investment in carbon capture and sequestration (CCS);
- An assortment of feed-in-tariffs are designed to encourage more renewable investment and provide incentives for nuclear energy;
- A new proposed scheme to pay for capacity — in addition to energy — is designed to encourage more investment in new capacity; and
- Since carbon prices under the European Trading Scheme (ETS) have been volatile and unreasonably low, a floor on carbon price is being proposed with the intention to signal a minimum price for carbon to investors should all else fail.
And if one scheme does not work as intended, then another scheme will be introduced, and so on. It is a complicated and convoluted plan. And it is micro-managing or second-guessing the working of the market. At least that is the view of market purists.
Among the most controversial is the introduction of a capacity market. DECC says, “The introduction of a capacity market will provide an insurance policy against the possibility of future blackouts – for example, during periods of low wind and high demand – with the aim of ensuring that consumers continue to benefit from reliable electricity supplies at an affordable cost.” Not everyone is convinced that returning back to a government-mandated scheme will work, and even if it does, will be the best way to go.