?(BN) U.K. Will Roll Back Thatcher’s Energy Market to Cut

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U.K. Will Roll Back Thatcher's Energy Market to Cut Emissions
2010-12-15 10:34:18.731 GMT

By Kari Lundgren
Dec. 15 (Bloomberg) -- The U.K. will propose the biggest
changes to energy policy in two decades tomorrow when the
coalition government lays out plans to ensure aging power plants
are replaced and climate targets met.
David Cameron's government is likely to reassert state
control over the market-based system introduced by his
predecessor Margaret Thatcher when proposals are made to
parliament. The regulator has suggested a "carbon floor" price
to force up the cost of emitting greenhouse gases, encouraging
investment in nuclear reactors and offshore wind farms.
The cost of replacing existing plants and building
renewable projects will be around 200 billion pounds ($316
billion), according to an Ernst & Young LLP report. The
government says existing arrangements don't provide the
certainty needed for utilities including Electricite de France
SA and Centrica Plc to finance new plants.
"There is just enough time if companies start building and
investing now," Bill Easton, head of European utilities at
Ernst & Young, said in an interview. "Within the next 12 months
the industry can't be looking over its shoulder wondering if the
market is going to change."
The U.K. has pledged to get 15 percent of its energy from
renewable sources by the end of the decade and reduce carbon-
dioxide emissions by 80 percent from 1990 levels by 2050.
Achieving this will require as much as 40,000 megawatts of low-
carbon energy projects, according to a Dec. 7 report from the
Committee on Climate Change.

'Fragmented Market'

"We have a once-in-a-generation chance to rebuild our
fragmented market, rebuild investor confidence, and rebuild our
power stations," Secretary of State Chris Huhne for Energy and
Climate Change said in a Nov. 17 speech. "This will be a
seismic shift."
Britain is trying to reduce emissions linked to global
warming while replacing as much as a quarter of its existing
generation by 2020 as older plants are shut down, Huhne said.
Britain's power network was built in the 20th century to
move coal-fired power from northern England to power consumers
in concentrated in the south, according to Robert Gross,
director at Imperial College London's Centre for Energy Policy
and Technology. Existing transmission prices were set in 1990
under Thatcher to cut power costs by promoting generation as
close as possible to consumers.

Government Guarantees

Thatcher created Europe's most competitive electricity and
gas markets, privatizing state-owned businesses including
British Gas, British Energy, National Power and PowerGen. By
1997, the change had driven down consumer prices by as much as
20 percent, compared with pre-privatization costs, according to
former British Energy Plc Chief Executive Officer Robert Hawley.
While privatization has kept down energy prices, the scale
of investment needed to meet climate change targets and replace
aging plants is so large it won't happen without government
guarantees, according to regulator Ofgem. The global financial
crisis, tougher carbon targets and increasing gas dependency,
have weighed on industry funding, the regulator said.
Tomorrow's proposals may include so-called capacity
payments, levying a pool of funds from consumers that would make
pay-outs to low-carbon generators, including nuclear reactors
and offshore windfarms, Easton said.
The government may also introduce so-called contracts for
difference to deal with the volatility of future power prices
and prevent windfall profits, Easton said. These contracts would
compensate utilities for lower-than-expected energy prices or
charge them if prices are higher, in this way locking in a price
and allaying concerns that costly projects won't get paid off.

Nuclear Renaissance

Britain's 19 operating nuclear reactors account for 18
percent of the country's power generation. The government
approved eight sites for new plants in October. Electricite de
France, Centrica, Scottish & Southern Energy Plc, Spain-based
Iberdrola SA and France's GDF Suez SA, as well as RWE AG and
E.ON AG have announced plans for about 19,000 megawatts of new
reactors through 2050. Utilities may need to spend as much as 6
billion pounds on each reactor in Britain, according to minister
of state for energy Charles Hendry.
A carbon floor would benefit nuclear and renewable energy
assets-owners like Centrica Plc and EDF by raising the cost of
other forms of generation, according to analysts at Matrix
Corporate Capital LLP. Such a policy is likely to hurt companies
such as Drax Plc, owner of western Europe's largest coal-fired
power plant, they said.
The Committee on Climate Change suggested replacing the
climate change levy to introduce a carbon floor that rises to 27
pounds a ton by 2020. European Union carbon permits closed
yesterday at 14.46 euros a ton on ICE Futures Europe in London
The U.K. generates about half its electricity from gas and
is forced to import increasing amounts as its reserves dwindle.
The U.K.'s gas market makes it possible to track wholesale costs
at any time. That transparency can allow other nations to bid
higher for gas deliveries, leaving Britain vulnerable to

For Related News and Information:
U.K. power market stories: TNI UK PWRMARKET <GO>
Top energy news: ETOP <GO>
U.K. electricity prices: ELEU <GO>

--Editors: Mike Anderson, Will Kennedy.

To contact the reporter on this story:
Kari Lundgren in London at +44-20-7073-3442 or

To contact the editor responsible for this story:
Will Kennedy at +44-20-7073-3603 or