Nuclear power is the reason for the new energy regulations

The government's energy market revamp is for one reason only – to build more nuclear power plants
Nuclear power is the reason for the new energy regulations
More nuclear power plants are the reason for the government's energy market revamp. Photograph: Matt Cardy/Getty Images

Are the vast and complex edifice of new energy regulations beginning to emerge there to pave the way for more nuclear power plants? That is the uncomfortable conclusion that many in the industry are reaching, as the consultation on a complete revamp of the UK's energy market closes on Thursday.

The stakes are high: to cut greenhouse gas emissions enough to meet legal targets, the UK's energy industry needs to be virtually carbon-free by 2030.

But almost all stakeholders are critical of the proposals in the consultation, except those who want to build nuclear power plants. The widespread perception is that the four measures put forward are knowingly intended to raise the price of electricity to a point where the government can get by without breaking both the commitment made by Chris Huhne, the energy and climate change secretary, to have no public subsidy of nuclear power – and European rules on state aid.

The details of the measures are complicated. But the effort of examining them is well worthwhile, as most will raise the price of electricity substantially, all have significant downsides, none seem likely to achieve their goal of delivering low carbon investment other than nuclear – and all have cheaper, less complex alternatives.

The four measures, which I'll explain below, are a rising carbon floor price; a contract-for-difference feed-in-tariff (CfD-Fit); a capacity payment mechanism and an emission performance standard. The latter, which limits the carbon a power plant may emit, represents a belt-and-braces approach that ought not be necessary, but could be implemented to ensure no high-carbon electricity plants are built. The other three are all hotly disputed.

The CfD-Fit will mean someone – almost certainly the government, perhaps outsourced to an agency – has to commit to pay a premium for low-carbon electricity, whether it be generated by a nuclear power plant, a demonstration coal plant with carbon capture and storage (CCS) or renewable energy. energy consumers will end up shouldering the cost via their utility bills. It should be noted that this move will seriously damage if not destroy, the market. It effectively rolls back the years to a level of state involvement not seen since before privatisation in 1990. Even if this is acceptable, a key issue is how to set the price to be paid for the low-carbon electricity.

For renewable energy, it should be relatively straightforward to hit the right strike price: there is a real market in renewable energy with a diversity of technologies and companies involved around the world. And because it comes in small units – turbines or solar panels, for example – even if the strike price is wrong the first year, it can at least be reduced rapidly or even cancelled, thereby removing unnecessary cost from the consumer.

However, it is a very different situation with nuclear power: there is almost no transparency of nuclear costs. The government can only negotiate with a couple of nuclear operators – since no others exist – so the information gap will be huge. The CfD-Fit starts paying out with generation, meaning the construction risk is with the generator. Given that the other two nuclear power plants being built in Europe are seriously over budget and late in construction, there must be serious concerns that the nuclear generators will lobby for a higher strike price to make up for that construction risk and pass it on to consumers. The monolithic nature of a nuclear power plant – half a plant is no use – means tying British consumers in to that price for 30-40 years. If costs rise, it gives them limited opportunity to refuse extra payments without leaving a large gap in supply. Support for CCS by CfD-Fits creates the same risks, but with even less experience to fall back on than nuclear power.

The third measure – a capacity mechanism – is there to compensate the owners of coal and gas power plants for providing the back-up supply that ensures the lights stay on. Currently about 20% of the electricity supply comes from low carbon sources, but as that increases, so fossil-based generation is pushed to lower load factors and generators' return on investment becomes too low or risky to build new plants. The government's preferred option is a targeted mechanism to encourage generation to be available at the peaks, or high points of demand. The fossil generators say that this isn't enough, while others argue that CM is not needed at all in the short term.

The final mechanism is the carbon price support (CPS), commonly known as the carbon price floor, which will increase to £70 a tonne of carbon in 2030, as an incentive to generate low-carbon power. If the carbon price via the existing European Union Emission Trading Scheme is lower than the CPS, companies must pay the difference to the government. All agree that reforming the EU-ETS itself, to create a stable European carbon price to drive investment, is the best way to go. Unfortunately, few would bet on the success of achieving that.

However, the UK going it alone in Europe to support the price of carbon must encourage 'leakage', meaning that companies will do all they can to avoid paying the UK carbon price by investing in generation in Europe or buying electricity from there, unless a border tax is put in place. Thus UK customers could be paying heavily for a mechanism which is likely to not even achieve its stated goal of encouraging investment in the UK.

The consultation is also lacking something. If it were really about reform, then reducing energy demand would be at its centre, yet it is all but missing. The opportunity should exist for companies not to generate low-carbon electricity but instead to reduce the demand for energy through efficiency measures, so-called negawatts. In electricity markets in the US, for example, 10% total demand is routinely removed at lower costs than supply. Moreover, the institutional framework for how the complex interaction of all the mechanisms will work is also missing.

Lastly, there is also the question of whether the proposed long-term generation contracts are sailing against the wind of the EU's forthcoming single electricity market directive rules, which emphasise short-term power exchanges to maximise flexible and variable generation. The European juggernaut is almost entirely ignored but must surely raise questions about how long the proposed reforms can last, injecting a wholly unhelpful degree of political risk.

To me, the government's objective seems clear: to underpin investment in nuclear power. There are much simpler ways of doing that, removing the need for the expensive assembly of CPS, CM and CfD-Fit. One would be a direct power purchase agreement, but that would fall foul of European rules on state aid. Another option would be to tender for two nuclear power station's worth of electricity, 2000 MW, via an agency, to see whether a nuclear bid would be cheaper than an alternative combination, including renewables and demand-side measures. But nuclear power would be unlikely to win that.

The government wants nuclear power but cannot be seen to subsidise it, so it has had to set up this set of convoluted measures. Why the government wants nuclear power so badly, given all these unwanted outcomes and given nuclear can, at best, only provide a small proportion of the low-carbon energy needed is a mystery. That enigma will hurt those who have to pay a higher price for electricity.

Catherine Mitchell is professor of Energy Policy at Exeter University