Earlier this month, the UK released the outline of its white paper on electricity reform.
The key components of the £110 billion ($180 billion) investment include a carbon price floor to reduce uncertainty and encourage the transition to cleaner forms of energy. It also includes an emissions performance standard set at 450 grams of CO2 per kilowatt hour. In order to stabilize electricity prices, utilities will be paid by a central agency if electricity prices fall below a certain price, and will receive money from that same agency if prices go beyond that set price.
Although electricity prices are expected to increase in the short term by one percent, and the £110 billion investment will be paid by consumers, UK Energy Secretary Chris Huhne ensures that the prices will level out eventually. By 2030, consumers will pay £40 less than if the current system is left in place.
The full white paper will be released in December once consultation concludes on how to pay electricity generators for maintaining extra capacity during peak times, and the legislation won’t be introduced to Parliament until May 2012, with adoption expected in the spring of 2013.
The electricity reform is supposed to encourage companies to switch to low-carbon alternatives. As seen in the case of American Electric Power closing its carbon capture and storage (CCS) facility in the United States because of inaction in policy, companies will respond both negatively and positively to legislation.
However, according to a recent study by The Centre for Low Carbon Futures, the business climate in the UK currently lacks confidence in government goals.
In the study Pathways to a low carbon economy: The business response to climate change, only 19 percent of companies asked said they were very confident in the UK government’s 2020 goals of reducing emissions 34 percent from 1990 levels. Forty percent of those asked said they have low or very low levels of confidence. Only 14 percent were very confident in the UK’s 2050 targets of reducing emissions by 80 percent, with 36 percent at medium confidence.
On a more positive note, 65 percent were very confident in the economic opportunities, with 27 percent showing medium levels of confidence. Also, 53 percent of those asked said the board has a high or very high level of commitment to energy and carbon, with 64 percent saying they rate the prospects for incremental change as high or very high.
So while businesses and the government are clearly ready to implement changes and see the economic opportunities, the government now needs to figure out ways to gain the confidence in companies so they will indeed carry out a transition to a low-carbon economy.
The carbon price floor may help to ease uncertainty for investors, but as it stands right now, companies are still skeptical of the government’s promises. Trust in government is needed if the transition to a low-carbon economy is going to translate into business action. If companies aren’t confident that the government will follow through with its 2020 and 2050 targets, the incentives to switch to low-carbon are lost.
