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More price shocks and supply cuts 'inevitable'

Price shocks and possible supply disruptions are inevitable due to a failure of government energy policy – according to a report by the Renewable Energy Foundation (REF).

The report titled Electiricity Prices in the United Kingdom: Fundamental Drivers and Probable Trends 2008-2020 was completed by the REF’s director of policy research John Constable and Hugh Sharman, from Danish consultancy Incoteco.

It calls on the Government to withdraw from interfering with the energy market as the researchers argue the Government has actually undermined the development of renewables while making the UK dangerously reliant on gas.

Campbell Dunford, the Foundation's Chief Executive, said: 'A combination of governmental indecision, negligence, and incredibly clumsy intervention have damaged the UK's electricity supply industry, exposing us all to grave risk, but of course creating opportunities for private enterprises willing to attempt solutions.

“This paper is a contribution to understanding that opportunity, and also a plea to government to get out of the way and allow market action to respond as effectively as may be to the onset of crisis.'

The report argues the government has failed to recognise the huge cut in generating capacity which will hit the UK over the next decade by underestimating the impact of the European Union Large Combustion Plant Directive.

Government figures indicate only 20GW of generating plant will close by 2020 due to the directive, but major generating companies argue this figure will be closer to 30GW – equivalent to 40 per cent of all generators and 50 per cent of peak load.

The REF also believes the Government is being too optimistic about the amount of capacity provided by wind and allowing the UK to become too dependent on imported gas.

Other issues raised by REF include the National Grid and Government attributing too much capacity credit to the likely wind portfolio.

The report says this will mean the margin of generation over demand is likely to be very tight in the next decade, unless obsolete and illegal coal plant is brought back into use which the REF says would have “a disastrous effect on emissions of sulphur dioxide, nitrogen oxides, and carbon dioxide.”

The report also argues that due to “distortions in the electricity market, including the excessive and poorly designed subsidies for renewables” investors are likely to build only gas plant, even though international competition for this fuel will be intense and prices very volatile.

The researchers conclude overdependence on one conventional generation type has stunted innovation in the alternative energy sector.

They suggest The Government should now focus on social policy to tackle hardship and maintain order in the face of rapidly increasing energy costs and problems of supply instead of interfering in the market.

The report concludes: “Rising fossil fuel prices will motivate the spontaneous uptake of renewable energy sources. The provision of income support subsidy is counterproductive, since it requires civil servants and politicians to pick winners, either openly or implicitly, with the inevitable truncation of much needed technological innovation.”

See the report in full by clicking here.