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Huhne claims higher bills now will pay for future energy security

Chris Huhne, the Energy Secretary, has been fuming at reports that his flagship policy, the Electricity Market Reform (EMR) White Paper, will lead to the highest bills in Europe. "Absolute nonsense", these figures are based on "rubbish" information, he claims.

But the White Paper, released on Tuesday, will certainly lead to at least a short-term increase in electricity prices. Already rocked by a series of price hikes, such as British Gas's announcement of an 18 per cent surge in bills earlier this month, cash-strapped consumers can be forgiven for feeling at the mercy of the avarice of big utilities.

However, reform is vital if bills are to ever remain stable. For too long, utilities have not had the proper incentives to invest in low-carbon electricity-producing technologies, from solar power to nuclear.

The result, as fossil fuel prices keep soaring, and the availability of alternative sources of electricity generation remains limited, is that the utilities charge ever more and the environmental impact increases.

The EMR has four key proposals. First, it reiterates a commitment by the Government to a "carbon price floor", whereby an amount is charged for the amount of carbon produced which pushes utilities towards cleaner power generation.

Second, there is an emissions performance standard that limits the amount of carbon produced to 450g per tonne, which effectively rules out coal stations in the coming years.

Then, there are contracts for difference, which means that utilities are paid by or have to pay a central agency if electricity prices fall below or above a certain price index. This, it is hoped, will help to stabilise electricity prices.

Finally, there is a capacity mechanism, which will ensure that there is always enough electricity available to the utilities to avoid blackouts.

There are then a series of carrots and sticks to move utility companies to cleaner technologies. But, this, involves an estimated £110bn of investment, which the consumer will have to pay for over the coming years.

The pay-off is that once this initial spike is overcome, electricity generation should become cheaper as companies understand how to get the best out of what should already be relatively inexpensive fuel sources.

Huhne's team has estimated that all this should only lead to a 1 per cent rise in bills, while by 2030 the typical customer will be paying £40 less than if the current system were in place.

A Whitehall source agrees that bills are sure to be lower than under the status quo some time in the 2020s. However, the source points out that to achieve Huhne's claims, the Government has to get right the mix of low-carbon fuels that are used to achieve those figures.

"We can't afford hare-brained schemes," he argues. This means an emphasis on nuclear, which is a proven source of fuel in which energy companies have enough experience to find ways to drive down costs, rather than currently less efficient systems such as wind power.

The emissions standard will almost certainly see coal die out over the next two to three years. Although not applied retrospectively – as the Norton Rose legal group points out it is important for investors that they are not hit on existing projects, so that they feel secure ploughing their billions into a new wave of power stations – it means no new ones will be built.

The price floor will inevitably make existing production unaffordable, though, and the Government will have to find ways of encouraging utilities not to suddenly close down coal stations. An industry source claims government officials are cooking up a plan that will encourage a gradual, rather than sudden, transition from coal.

The UK could find itself in the midst of a power shortage many years before it had built a low-carbon electricity market if coal stations packed up overnight.