On 12 July 2011, the UK Government published a white paper (the White Paper) setting out a raft of proposals to "transform the UK's electricity system to ensure that our future electricity supply is secure, low carbon and affordable". The White Paper follows the announcement in the Budget 2011 of a floor price for carbon in the electricity sector and sits alongside Ofgem's proposals to increase wholesale market liquidity.
The Government's aim is to encourage greater long-term investment in renewable and nuclear electricity generation. While many agree with this objective, the policies to achieve it are controversial. The policies most relevant to energy traders are:
- long-term contracts for low-carbon energy called Feed-In Tariffs with Contracts for Difference (FiT CfDs) to provide predictable revenue streams for investors in low-carbon generation;
- a carbon price floor to further incentivise low-carbon generation;
- a capacity mechanism to ensure there is enough electricity to meet peak demand; and
- mandatory auctions and mandatory market-making to improve wholesale market liquidity.
These measures are complex and ambitious. They will change the UK power market. However, much work still needs to be done on the detail of the proposals, and their complexity raises concerns about how they will interact in practice. For a more detailed discussion of the proposals and their impact on energy trading please download the .PDF below.
Client Alert 2011-187