The UK has an energy problem; our power stations are old and belch out far too much carbon dioxide and we are exposed to volatile gas prices, leaving households at the whim of global commodity markets. The government's new energy policy claims to be seeking to solve this problem for generations to come by shifting the balance towards renewable power, but the energy bill lacks crucial detail and, in the short term, we will see a huge shift in favour of gas power.
The bill has taken two years and thousands of hours of consultation to reach parliament, but is still some way from unlocking the £110bn of investment required in the sector. In the two decades following the privatisation of the energy sector little significant new generating capacity has been constructed and there is disagreement over who should now pick up the bill to keep the lights on.
The government estimates that a fifth of UK electricity generating capacity will be mothballed by the end of the decade, but analysts at Liberum think that number is closer to half. The government wants to encourage energy companies to generate low-carbon electricity by supporting investment through long-term contracts for difference. Under this scheme, if the price of electricity falls below a strike price, renewable and nuclear generators will be compensated, and if the price rises above the strike price the difference will be returned to consumers.
Setting the strike price is key to any long-term investment decisions, but that is currently the missing piece of the puzzle. The government says we will have to wait until the end of next year before any decisions are reached. Centrica said: "Investors require clarity and stability before committing capital and there remains much detailed work to be done in order to achieve this." Analysts at Liberum think the lack of clarity will limit new build.
With old capacity being withdrawn and the carbon floor price coming in from next April, generating power is forecast to become increasingly expensive and bills are set to rise. The government is expected to turn to gas in the short term, with plans for 30 new plants by 2030 as nuclear costs spiral. EDF recently said costs to build France's first new reactor for 15 years had spiralled from an initial estimate of €3.5bn (£2.8bn), to €8.5bn. This comes at a time when EDF is negotiating support for a new nuclear plant in the UK at Hinkley Point, with Centrica due to make a decision on its 20 per cent interest in the project.
