ACE proposes priority based energy auctions to encourage £100bn investment

This week, ACE launched its research into the electricity market. Peter Campbell, ACE’s Policy Manager profiles some of the findings of the association's energy report.

The UK’s energy market currently sits on the horns of a trilemma between the need to secure future supply through replacement of aging, and additional, generation capacity, the desire to ensure consumer costs are kept competitive through a competitive market, and the sustainability obligations that the government has set itself.

ACE’s new report, Electricity Market Reform: Generating Results, suggests that current arrangements might not be providing the best environment and certainty that investors require to come forward. These are the £100bn the 2013 National Infrastructure Plan estimates is required to finance new generation, the contracts that the supply chain desire to provide work, or the right environment for electricity companies and consumers to develop a trusting relationship.

Our research found that while there has been a continued effort to guarantee competition exists for consumers between retail tariffs, focus should now shift to look at the wider market.  Ofgem’s recent market assessment highlighted that since 2009 there has been a shift towards shorter term trading in the electricity market. While this has some benefits to those trading, for instance providing liquidity, it also increases price volatility and the potential risks for generation investors, both of which mean consumers are likely to see greater price volatility in their energy bills.

The report also concluded that while the UK’s energy prices are in line with median prices internationally, only investment in additional capacity will ensure future price rises are limited in scale. While the UK has enjoyed low levels of taxation, other global governments have taken action to ensure capital is directed from markets which are failing to account for the effects of climate change, pollution, and volatile prices, towards more locally-sourced, stable, low carbon based solutions. 

In its analysis the report compares the taxation element of consumer energy prices over time for various countries. The evidence suggests that those countries with a more proactive investment scheme, although having higher levels of taxation, reduce the scale of rises in electricity bills above and beyond the incidence of the tax.

A solution comprising two parts is put forward in the research:

  1. the government should create of a number of Generation Investment Vehicles (GIVs) to complement its Electricity Market Reforms. These GIVs would ensure that investors brings forward much needed capital in capacity to secure the UK’s energy supply;
  2. electricity generated by these GIVs would be sold through a two-stage Priority Auction Mechanism (PAM), providing the required revenue stream and encouraging further competition in the electricity generation market. 

These are the two missing pieces of the jigsaw that will ensure the government’s Electricity Market Reforms will be a success, that investment will come forward, that consumers will see the real benefits of competition, generators and suppliers will see their standing improve, and the construction sector will be able to get on and build. Without them, more drastic measures might be needed in the future to prevent the lights from going off.