Higher bills pay for electricity market reform

The coalition's White Paper is designed to tackle carbon emissions and encourage investment

The Government is to set out plans for massive reform of the electricity market on Tuesday, which will lead to further hikes in bills in the coming years.

After a long period of consultation, the coalition is unveiling its White Paper on electricity market reform to encourage investment in the industry and tackle carbon emissions. Countries that followed the UK and privatised their utilities are looking on with interest, as they are expected soon to follow suit.

The White Paper will propose four key areas of reform: a carbon price floor, an emissions performance standard, contracts for difference and a capacity mechanism.

The carbon price floor was introduced in this year's Budget, whereby an amount is charged for every tonne of carbon produced, encouraging companies to switch to lower-emitting technologies. However, costs could be passed on to consumers. The White Paper reiterates that it will come into effect in 2013.

The emissions performance standard puts a limit on the amount of carbon any new plants would be allowed to produce. This is likely to be set at 450g per tonne – more than a typical new gas plant emits but less than coal plants produce.

A Whitehall source said this and other policies would mean electricity companies will phase out coal within the next two or three years.

Contracts for difference would be used to stabilise electricity prices. If the price is above a certain index, companies would give the excess profit to a central agency. If it is below, the companies would receive extra money. There were several other options, but contracts for difference have been the coalition's preferred option for some time and officials suggested that will remain the case this week.

"The precise levels [of the index] won't be in the White Paper," said an industry source. "And the levels will have to vary for the range of different technologies and how their cost will be different."

The final element is the capacity mechanism, whereby a minimum amount of electricity would always be available to the market to avoid widespread blackouts. A centralised body would buy up electricity, to allow for any potential shortfalls. This could then be tendered out to utilities.

How this system will work is not yet clear. Companies and interested parties are likely to have the summer to respond, as the Government would "like to keep the timetable tight", according to one industry player.

Next week, on 18 July, the national policy statement on nuclear power is expected to come before Parliament. This will come as a huge relief to the nuclear industry, as it will in essence give the go-ahead to the whole roll-out programme.

The parliamentary term is shorter than usual this year and there were fears that the statement would not be voted on until after the summer recess. Construction timing issues, such as not being able to build at times that would harm certain animal species, could have delayed nuclear new build by at least a year, to 2019.

Last week, EDF said that it was working on revising the timetable for the completion of its new nuclear plant at Hinkley Point in Somerset in the wake of the government-sponsored review into the implications of the Fukushima disaster in Japan.