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The most significant reforms to the electricity market in 30 years will include measures designed to provide "long-term certainty" to gas investors, the government has said.

Energy and Climate Change Secretary Ed Davey, who plans to publish a new gas generation strategy in the autumn, said that the announcement reflected the "important role" gas still has to play, alongside renewables and new nuclear, as the country transitions towards a low carbon economy.

He said that the Electricity Market Reform (EMR) legislation, due to be introduced in the next Parliamentary session, will include plans for a Capacity Market to help ensure sufficient investment in "reliable" electricity generation to cope with peaks and troughs in demand. In addition, power stations granted consent under the initial Emissions Performance Standard (EPS) will be subject to that level until 2045.

Davey said that the proposals would help the UK move towards a decarbonised grid "in the long term".

"A fifth of the UK's ageing fleet of power stations will close this decade and it's not possible to fill that gap entirely with low carbon alternatives in that timescale," he said. "Gas will continue to play a vital role in a low-carbon economy. Modern gas-fired power stations are relatively quick to build and twice as clean as many of the coal plant they're replacing. Carbon capture and storage promises to give gas an even longer-term future in the mix."

A "substantial number" of new projects were already in the pipeline, he said. The Department for Energy and Climate Change (DECC) has provided consent for six new plants from a "backlog" of applications since May 2010.

Davey added that the government would shortly issue a call for evidence to allow the energy industry and investors to comment on whether the reforms would give them sufficient certainty.

The government has claimed that its EMR programme will bring about the widest reforms of the electricity market since privatisation. Its White Paper (142-page/1.8MB PDF), which was published in July 2011, proposed several measures aimed at decarbonisation including the introduction of a 'price floor' on carbon emissions and the introduction of an annual limit on carbon emissions of 450g CO2 per kilowatt hour (kWh). The EPS will affect any new coal plants, which emit nearly 800g/kWh, but is above the 400g/kWh typically emitted by new gas-fired power stations.

The EPS will be guaranteed under the legislation, and any power stations granted consent at the initial 450g limit will be subject to that level until 2045 even if it is reduced for new plants. The government said that this "grandfathering" process would provide "long-term certainty" to investors looking to build new gas plants.

Plants which incorporate carbon capture and storage (CCS) technology can generate "significant quantities of low-carbon electricity", the Government said. CCS technology is used to prevent CO2 from being released into the atmosphere when fossil fuels are burned to generate electricity, capturing the carbon dioxide produced by a power plant before storing it in such a way that it does not enter the atmosphere.

In a technical update to the White Paper, published at the end of last year, the government confirmed that the capacity mechanism which would be contained in the legislation to guarantee that sufficient generating capacity is available when needed would take the form of a capacity market. Through this method the total volume of generation capacity required can be purchased by the National Grid through a central auction. The capacity market also provides incentives for companies to invest in new capacity or to keep existing capacity operational.

"The government is providing certainty to businesses that want to invest in gas," Chancellor of the Exchequer George Osborne added. "Gas is a reliable, affordable source of energy. We need to recognise that gas will be a vital part of the mix in delivering affordable and secure low-carbon energy."

He added that Treasury ministers would host a "roundtable" with the gas industry to hear its views on how the government could encourage investment ahead of the publication of its new gas strategy in the autumn. The strategy will draw on the findings of regulator Ofgem's study, announced in November, on whether further measures are needed to enhance security of gas supplies. Ofgem is due to report on the matter in the summer.

Copyright © 2012, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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