Energy Systems Catapult recently published a major report – Rethinking Electricity Markets – which advocates ambitious and far-reaching reforms to electricity markets to make them more innovation-friendly and focused on outcomes for consumers. Our most controversial reform proposal is to phase out CfDs – which many see as a huge success story for UK policy over the past decade, and vital for access to low-cost finance for the new generation we need. It is worth stressing we are not advocating the removal of strong incentives for low carbon generation. Rather, we suggest that CfDs should be replaced with a new market-wide decarbonisation policy mandate to drive the investment and innovation needed for a fully decarbonised electricity system. We agree that CfDs have been crucial over the past decade in helping to drive down the cost of renewables. We also agree that renewables will almost certainly form the backbone of our future electricity system – and therefore that we need lots more investment in them. Any reforms should be implemented to avoid creating any hiatus in investment. In the first instance, this will involve adapting CfDs to minimise distortions to bidding, dispatch, and location decisions before phasing them out. We also agree that it is important to secure good value for consumers in the returns they ultimately pay to investors in electricity assets. Our argument is that the challenges we now face are different to those faced when CfDs were introduced. We now need to phase in new policy tools that are specifically focused on delivering the transition to a fully decarbonised electricity system. Our Rethinking Electricity Markets paper (see table below) set out how we believe that CfDs increasingly impact the efficient functioning of markets. We believe that there are some significant risks if we stand still and remain reliant on mechanisms like CfDs. Conversely, if we push ahead with ambitious policy reforms that shape efficient markets across the whole electricity system, we can unlock a range of new opportunities and innovation that will save costs and deliver better service outcomes for consumers.
Energy System Catapult 29th July 2021 read more »