Energy firms to get new low-carbon incentives

The government is to guarantee prices for electricity to persuade the private sector to invest in new low-carbon forms of generation.

The move is part of a range of proposals outlined by Energy Secretary Chris Huhne.

Mr Huhne dismissed reports that consumers' electricity bills could rise by £500 a year as a result of the measures as "absolutely bonkers".

He said prices would rise by less than they would without the measures.

'Sustainable future'

Mr Huhne said the government's proposals were fourfold:

• to increase the long-term certainty about investment in power generation by providing greater support to the price of carbon to encourage new entrants into the market

• to introduce long-term contracts for low carbon generation to make clean energy more attractive, including top up payments to low carbon generators if the wholesale price of electricity is low

• to make additional payments to develop reserve plants to ensure "the lights stay on" during periods of high demand

• to limit the amount of carbon emissions from "dirty" power stations, including reinforcing current requirements that new coal power stations must incorporate carbon capture and storage.

Mr Huhne said the measures "were a once-in-a-generation chance to lay the foundations for the sustainable economy of the future".

He said the recommendations would now go out for consultation, and hoped a White Paper would be in place by the Spring of next year.

Opposition MPs said they welcomed the proposed measures, but said the government must ensure that consumers did not bear their costs.

Some, however, expressed concerns that the proposals amounted to subsidies for the nuclear industry.

Mr Huhne responded by saying that subsidies would be available for all forms of low carbon power generation, whichever proved to be the most attractive.

However, he said there would be no subsidies for the construction of any plant, nuclear or otherwise.

"All risks of construction fall on the investor, not on the government," he said.

'Huge cost'

Price comparison website uSwitch has estimated that bills will rise by £500 a year if the measures are introduced.

But Mr Huhne told the BBC that the average electricity bill of £500 a year would rise by £160 a year over the next 20 years, and if the new measures were not put in place, bills would rise by £190 a year.

In fact, the Treasury has calculated that the average annual household electricity bill will be between £4 and £28 higher in 2016, but should be between £20 and £48 lower by 2030.

The industry regulator Ofgem has estimated that bills could rise by as much as 25% over the coming decade.

David Porter, chief executive of the Association of Electricity Producers said: "Politicians and the regulator seem to recognise that the huge cost of doing this will push up customers' bills.

'Best deal'

The aim of the new framework is to ensure the UK has the electricity generating capacity it needs, while still meeting its climate change targets.

"We've got to replace about a quarter of our ageing coal and nuclear power stations anyway, and since energy companies are not the Salvation Army and are going to have to make a return if they are going to make this investment, there is going to be a rise in energy bills," Mr Huhne said.

He said the new framework would provide certainty that would "remove the risks of being buffeted by oil and gas [price] shocks".

This certainty "would ensure consumers get the best possible deal by encouraging more competition into the marketplace", he added.

Energy gap

In the next 10 years a quarter of our generation capacity is due to come off line.

Roughly half of that is due to tightening environmental regulation. But many of Britain's ageing nuclear plants are also due to close.

The government wants industry to build a new generation of power plants using low-carbon technologies including renewables, nuclear, and clean coal and gas.

So it is proposing a range of incentives to give investors the certainty they will need, saying its plans represent the biggest reform of the electricity generation market in 25 years.

For low carbon generation - including nuclear - it is proposing a feed-in tariff with long contracts. This will give investors a guaranteed price for their electricity.

There would be extra support for what are described as younger technologies like offshore wind and wave power.

But the government maintains that there will be no specific subsidy for nuclear.

There will also be capacity payments to ensure there is back-up plant available on those days when the wind doesn't blow.

There will be disincentives too. These will include support for the carbon price - which would make it expensive to generate power using dirty coal.

And an emissions performance target will also ensure there is no new unabated coal-fired electricity generation.

Environmental groups are likely to welcome the plans.

In a statement, Friends of the Earth described the reforms as a once-in-a-generation chance to set energy policy for the next 20 years, adding that "it's crucial the government makes the right decisions to ensure renewable power thrives instead of locking us into a dangerous high-carbon world."