by Brendan Coyne
Electricity Market Reform (EMR) proposals as they currently stand will “inevitably” lead to gaming by generators, according to a former director of UK energy policy.
Malcolm Keay, a senior research fellow at the Oxford Institute for Energy Studies, told a Westminster Forum conference last week that “de-risking low-carbon generation is just another way of taking away pricing signals”. Once that happens, generators have less interest in the market, he said. The remaining market would be “small, easily gamed and give very odd price signals. You are going to get a structure that really won’t work very well,” he said.
Earlier, Jonathan Brearley, director of energy markets and networks at the Department of Energy and Climate Change (Decc), said the government’s mid to long-term intention was to withdraw from the market. Keay said that would be difficult.
With the lack of a counterparty for payment arrangements, “what is going to be underpinning the whole system is not markets but a set of regulations, which may or may not be reflected in contracts”, said Keay. “It is a house of cards. Take away the government from that and the whole thing is going to collapse.”
John Wood, an energy lawyer with Norton Rose, questioned whether Ofgem had the tools to deal with a small number of price setters and a large number of price takers, and any resultant gaming.
An Ofgem spokesman told Utility Week that such behaviour was governed under European Remit legislation. Under Remit, “Decc is required to ensure that we have the investigatory and enforcement powers necessary by 29 June 2013”, he said.
Uncertainty for both parties
Asked by Dong Energy when low-carbon generators would get certainty over whether they would be awarded a contract for difference (CfD) by government, Decc’s Brearley said the department’s fear was that “people take CfDs and do not deliver”. He returned the question: “When can developers give us certainty that they can deliver?”
Investors are comfortable with CfDs, said PwC energy and utilities director Ronan O’Regan, but it was not clear whether Decc’s proposed alternative bilateral counterparty model had solved dispute issues and the potential for regulatory intervention.
This article first appeared in Utility Week’s print edition of 20 July 2012.
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