Huhne sets out 'seismic' plans for electricity market reform

Plans to shake up the electricity market and ensure £110bn of infrastructure investment by 2020 were unveiled by the Government yesterday.

Chris Huhne, the Energy Secretary, described the proposals – which include long-term contracts and a carbon price floor – as a "once in a generation" opportunity and a "seismic shift" on the scale of privatisation in the 1980s.

Although domestic power costs are still expected to rise by £160 per household by 2030, the proposals will keep bills 4 per cent lower than they would otherwise have been, Mr Huhne said.

Britain faces a looming energy crunch. By 2020, a quarter of all generating capacity must be replaced and 30 per cent of all electricity will need to be low-carbon, compared with just 7 per cent now.

The way the market currently works encourages suppliers to build low-cost, low-risk, gas power stations. Thereforms aim to address investors' concerns about the long-term payback from low-carbon generation with higher upfront capital costs, such as wind farms and new nuclear power stations.

The most ambitious proposal is for a "feed-in tariff" scheme using contracts for difference (CfD) to create a stable revenue stream for low-carbon generators, although the plan could be pared back to a simpler model if it proves too complex to be workable.

The Government also intends to set an emissions performance standard, ruling out gas power stations not fitted with carbon capture and storage (CCS) technology, and to create a payment mechanism to encourage investment in flexible reserve capacity.

Carbon floor price plans developed by the Treasury offer three separate scenarios ramping up to either £20, £30 or £40 per ton by 2020. The plans will be out for consultation until March, with a view to passing legislation by the end of the year.