The Energy Market

The UK pioneered the original revolution in free and open energy markets, allowing competition to drive efficiency and innovation and lowering costs to the customer.

The UK’s energy market has therefore been designed for the efficient running and dispatch of fossil fuel based power plants, to deliver energy to consumers at the lowest cost. However, what the UK now requires is investment in large scale, low carbon generation - including offshore wind farms or new nuclear power - in order to deliver secure, affordable and low carbon energy for the future.

This driver for new investment at a large scale and at a high pace of delivery necessitates a change to how the energy market operates. A new incentive framework is required to encourage the construction of low carbon generation in addition to familiar options such as gas-fired generation. However, it is vital that the competitive element of the market is maintained to protect customers by ensuring the lowest cost solutions are found, and to give best value to investors by ensuring that new technologies can prosper.

Low carbon technologies, such as nuclear and wind, have very different investment profiles to fossil fuel generation. The initial capital investment required can be much higher – for example, an offshore wind farm can cost around three times as much as an equivalent gas-fired station of the same generating capacity, though operating costs could be lower. Additional challenges faced by building the new technology and gaining planning consents also make low carbon technology a higher risk. A long-term, stable policy framework that allows attractive, stable returns over a period of twenty or more years is what will attract investors to the UK and to the energy sector, allowing the low carbon transformation to occur.

Market reform

In December 2010, the UK Government announced the Electricity Market Reform, or EMR. The Government plans to introduce changes to the electricity market framework, aimed at helping the UK to deliver low-carbon, affordable and secure energy in the future.

In 2011, following a series of public consultations, RWE npower worked with other RWE companies in the UK, including RWE npower renewables, to develop a full response to the Government plans. We feel that an important factor in the EMR is simplicity. The EMR is aiming to deliver a number of mechanisms; however, the most important issue is securing certainty for long-term investment as soon as possible.

We are now continuing to work with Government as they determine the final details of the EMR before primary legislation is expected in 2012. Alongside the EMR, there are other ongoing consultations, including plans to review the retail market and the way that transmission charges are structured. It is essential that any changes to the current market structure and regulations are delivered in the most cost-effective way at the lowest cost to the consumer.