The British market price of electricity moves in close alignment with the spot gas price, because gas is the marginal fuel for the big generators. By the time the Labour government had completed its "rescue" of British Energy in 2005, the gas price had nearly tripled from its 2002 low, and nuclear generation was again profitable.
The existing electricity market is better than the old pool, but it is not fully transparent. It has allowed the Big Six companies to flourish by transferring nearly all of their generated electricity directly to their marketing arms. Transfer prices are produced on a spot market conducted at the margins of their business, and closely aligned to gas prices. This makes it difficult for new entrants.
The solution favoured by many observers — including the Commons Select Committee on Energy and Climate Change — would be to reform the wholesale market, probably by requiring every generator to offer all of its output on to a new and more open type of electricity pool, from which all marketers would buy their supplies. The Big Six could continue to market as well as generate electricity, but they would be buying it on the same terms as everyone else.
Although Huhne has instituted a programme he calls electricity market reform, he has shied away from reforming the wholesale market. Instead, his department has ploughed on with elaborations of the green energy price-support schemes first brought in after Labour signed up to EU-wide policies to promote renewable energy. These policies include the large combustion plant directive, which will lead to the closure of much of Britain's coal-fired generation capacity by 2016. More importantly Labour pledged that 20 per cent of electricity would be generated from low-carbon sources by 2020.
Since 2002 the principal delivery mechanism has been the Renewables Obligation (RO), which obliges suppliers to buy a specified percentage of renewables, or hold Renewable Obligations Certificates (ROCs) equal to that percentage. The current annual RO is 12.4 per cent, or twice the actual availability of renewables, which means that suppliers have to make up the shortfall by purchasing certificates at £30/MWh. The current market price of electricity is about £50/MWh, which must be added to the cost of the certificates.
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