A recent proposal to implement a capacity mechanism in the UK has sparked concern that government intervention could stifle infrastructure development. A number of energy market players, including investment bank Evolution Securities, warn the UK's electricity market reform (EMR) could raise the risk of energy shortages. The UK is expected to face a capacity shortage starting from late 2015, as nearly 12 gigawatts of coal and oil-fired capacity will have to be decommissioned by then to comply with EU emissions standards. The government published an EMR white paper, Planning Our Electric Future: A White Paper for Secure, Affordable and Low-Carbon Electricity, on July 12. It includes details of a capacity mechanism proposed as a solution to make sufficient power generation capacity available to meet Britain's growing energy demand by setting a central price for capacity. However, such mechanisms are highly controversial among stakeholders and investors in the energy industry. They have been criticised as hidden subsidies in favour of renewable energies and nuclear power. Evolution Securities said in a study published last week that the implementation of the proposed capacity mechanism is likely to prompt the big six energy companies in the UK to hold off investments at least until the beginning of next year. By then, however, it might be already too late to avert a shortage of electricity supply in the UK, the bank warned. RWE npower argues the government has not made a proper case for considering a capacity mechanism as part of the EMR. In a statement about the white paper, the UK energy company says: "Experience around the world suggests that capacity mechanisms have a number of undesirable effects on the economic and efficient operation of electricity markets." Such effects include undermining price signals and impacting the efficient development of storage, demand-side response, interconnection and energy efficiency. RWE npower does not believe the government has given due consideration to the cost of these unintended consequences and has called for further consultation ahead of any decision later this year. Scottish and Southern Energy (SSE) says the white paper is "an important milestone", but also called for additional work on the proposed reforms, including legislation "to further develop these mechanisms, and to put them into place". Ian Marchant, SSE chief executive, said in a statement about the white paper: "Any changes to the electricity market arrangements have to be carefully thought through, in a way which avoids unintended consequences and is supportive of the investment that is needed now and in the next few years." However, EDF Energy chief executive Vincent de Rivaz praised the proposed changes, issuing a statement that argued the reforms would encourage investment and limit the cost of UK infrastructure development. He said: "Current UK electricity prices are driven by volatile fossil fuel prices, which are subject to global events outside Britain's control. As a result, the country is exposed to spiralling energy costs. We need a more balanced mix of energy generation." EDF Energy has announced plans to build four nuclear power plants in the UK with partner Centrica, as well as making "major investments" in renewables and natural gas generation. But, if a significant number of energy companies defer investment in new power generation capacity, it is likely to increase the UK's dependency on importing electricity from continental Europe, Ireland or Scandinavia which would consequentially raise the risk of greater than expected price fluctuations in traded electricity markets. Evolution Securities's utilities analyst Lakis Athanasiou has called on the UK government to refrain from any kind of market intervention, arguing that free markets would by now have already delivered sufficient gas-to-power capacity to cover any emerging electricity shortage post-2015. Michael Pollitt, acting executive director of the Electricity Policy Research Group at the University of Cambridge, takes a similar stance. "The EMR shifts responsibility from the market to the government for energy security," he stated in a presentation in London on 6 July. Pollitt said that analysis of the EMR would raise serious questions about policy consistency. The government's EMR white paper also proposes contractually based, fixed prices for new low-carbon power generation – nuclear, renewables and thermal carbon capture and storage (CCS). Fixed prices are intended to be introduced on a contracts-for-difference (CFD) basis. The government said it would provide further details on CFDs before the end of this year following further consultation. It aims to introduce the legislation set out in its energy white paper into parliament in 2012, with it becoming law in 2013, and contractual and capacity mechanisms put in place by 2014. First payments on the capacity mechanism are envisaged at the back end of the decade....
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