Some of the key challenges explored are the influence of carbon markets, feed-in tariffs and other long term subsidies.
A few of the challenges are formed around mixed policy messages and whether the target is renewables generation or carbon. “Another problem”, he explains, “is that we all pretend to believe in market-based measures and energy trading but in practice if you try to understand what a market would look like that leads to a decarbonised power system, it doesn’t seem very plausible..” In order to solve this, the price of carbon must be established.
To attract investments in low carbon generation to be based on carbon price rather than on a feed-in tariff , support regime or green certificate, the investor needs visibility of 20-25 years into the of the future carbon regime.
They need to know what the revenue and price risks are and that there are accessible markets in the future. In this way, investors are able to forecast the carbon price and hedge the risks. However, carbon is unlike gas. It is a political market. He says that in principle, we all agree that the future is in markets but in practice we are doing things in reverse by searching for non-market based solutions.
These include the establishment of national support schemes for renewables that contradict one another, national capacity payment schemes which don’t value cross-border capacity, and the perpetuation of a world where the government makes decisions on energy projects and who enjoys financial gain.
The real challenge is about building credibility around a regime that’s strong enough to deliver decarbonisation. The carbon price is weak now because people are concerned about political intervention. This uncertainty creates volatility.All markets have risks but contracts can be arranged and deals can be made to circumnavigate these.
However , when the carbon price goes under review because of political will, the only counter-party to that risk is government. Because it is difficult to get the government to offer a long-term commitment, feed-in tariffs and renewable support has been put into place as they underwrite that risk in a particular way.
So, can markets beat regulation?
There is no objective view that markets can beat regulation. The market pricing for renewables will only be successful if the market is left to do what a market does. This means potentially ring fencing or legislating against political intervention which is nigh on impossible in an energy market.