Comment - Shock tactics could spell instability

UK: With over 1GW of new wind capacity completed in the UK last year, the country's renewables obligation (RO) is delivering through its system of benchmarks and green certificate trade, despite constrained financial times. And after the government's tweaks to the RO, outlined in last year's renewable energy strategy, there is more certainty for investors in the UK renewables market than ever before. Or is there?

by Janice Massy 1 March 2010

Suddenly, energy regulator Ofgem has opened up a debate on a possible return to competitive bidding for renewable energy contracts (see page 34), similar to the discredited Non-Fossil Fuel Obligation that operated in the UK until the last decade. This system awarded contracts to the lowest bids to reduce the cost of renewables, but it neither sparked the construction of significant volumes of capacity nor helped create a substantial domestic manufacturing industry. Now Ofgem raises the prospect of a single energy purchaser who would contract for electricity from generators and sell it to retailers, which risks upsetting the current competitive market.

Is the market regulator seriously suggesting that two decades of market liberalisation be reversed? Of course not. But these suggestions in its Project Discovery discussion document are designed to shock the government and electricity sector into swallowing the medicine, unpalatable to some, that is needed to keep the lights on beyond 2015.

Project Discovery is the regulator's year-long study to find out whether the current market is able to continue delivering secure energy supplies over the next 10-15 years. Ofgem is nervous. It says that a staggering £200 billion of investment is needed in UK electricity and gas to avert the prospect of power cuts. This will cause customers' electricity bills to rise by 20%. One thing is clear: the current market rules which it imposed on the sector ten years ago to reward predictable generation and drive down prices are inadequate. They will not deliver that level of investment - and they have certainly never done variable sources of power, such as wind, any favours. That Ofgem now admits state intervention is needed to support the UK's green agenda and maintain security of supply is akin to a Road to Damascus conversion - albeit one that is long overdue. A significant sign of a change of heart towards renewables came in October's first Project Discovery consultation, which found that without hefty investment in renewables, electricity prices could rise by up to 60%. Given the regulator's dire warnings over the years of the cost implications of renewables deployment, it is a welcome about turn.

Another change is the UK regulator's apparent willingness to learn from its European neighbours, who have already designed markets to integrate large quantities of variable renewables. One example is Spain, whose system of centralised dispatch of renewables was set up to deal with the country's high penetration of wind - which, at times, supplies over 40% of total electricity. Spain shows that wind can participate fully in wholesale markets - and what can be achieved if the system operator is allowed to control and monitor wind generation on the system.

Whatever market is fashioned in the UK, the object is to provide a stable framework for investment. The change is expected to be significant. Yet the last time the UK introduced wholesale change of the electricity market - in 2001 - the trading arrangements took more than three years to plan and execute. With £200 billion of investors' money needed, will the prospect of a stable market to come compensate for another three-plus years of uncertainty?

Janice Massy is �u�X��ʘ��'s UK & Ireland correspondent.