The United Kingdom demand for renewable electricity in a liberalised market

Abstract

This paper analyses how the liberalisation of the UK electricity market in 1998 may encourage demand for renewable electricity through pricing and informational incentives. The analysis argues that prices and beliefs will be crucial for influencing customers’ willingness to pay for environmental costs associated with electricity generation, as well as their decision to not just buy the cheapest electricity. In 1998, when UK electricity markets are liberated, a small price differential between renewable and standard electricity – certainly less than 20% – and clear, credible and captivating information about the external costs of electricity generation could create a considerable demand for renewable electricity. But, because renewable generating capacity will initially be small and slow to adjust to incentives, initially high demand may drive up prices, discouraging customers from wanting to buy renewable electricity. Low demand, on the other hand, will not provide the incentives to invest new capacity, which probably means that renewable technology will not be able to reduce its unit costs of electricity generation and compete in a liberalised market without continued financial support. To avoid either scenario, this paper recommends that Government should extend the non-fossil fuel obligation (NFFO) to promote investment in renewable technology, provide tax incentives to minimise the price differential between renewable and standard electricity, encouarge non-governmental organisations to develop schemes for providing customers with clear, consistent and reliable information about sources of renewable electricity, and stagger the introduction of electricity liberalisation. While the analysis is of a speculative nature, such policies may create incentives for markets to reduce environmental damage associated with electricity generation.