12/07/2011 07:13 BST | Updated 11/09/2011 06:12 BST

Electricity Market Reform: Keeping the Lights on in the Cheapest, Cleanest Way

I have three key goals with our new electricity market reform, which I have been working on for months and which goes live today. The first is to keep the lights on by encouraging a big wave of replacement investment in power plants. The second is to ensure that our electricity is generated without carbon emissions, and the third is to give the consumer the best possible deal. It is not as easy to get all these objectives in a line as you might hope.

Our ageing power plants are shutting down. In less than a decade, a quarter of them will go offline. We must build the equivalent of twenty large power stations by 2020 if we are to assure supply and meet our binding renewables and carbon targets. Some £110 billion is needed - double the amount invested over the last decade.

This is a huge challenge, and the current market is not fit to meet it. Left untouched, it would drive us deeper into fossil fuel import dependency. The UK already relies on imported fossil fuels for a third of our energy; unless we act, by 2025, it will be half.

That reliance would leave us vulnerable to price shocks as global competition for energy resources grows. Our own reserves in the North Sea are declining, yet worldwide demand for energy could increase by 40% by 2030.

China is already world's biggest energy consumer. Its thirst for raw energy supplies could double over the next twenty years. We estimate demand for electricity in Britain could double by 2050, as we plug into the grid to heat our homes and charge our cars.

Faced with shrinking capacity, growing demand, and volatile resource prices, we need a clear path to secure, affordable energy. The investment and the energy we need has to come from somewhere. And the decisions we make today will determine our energy mix for decades to come.

First, we will ensure the security of our energy supply, by changing the way we contract for our back-up electricity - so that when the nation's kettles flick on during the infamous Coronation Street ad-break, the system has the spare capacity to cope.

Second, we will send a clear message that our future energy mix will rely on clean electricity. We've announced a new carbon price floor, to put a fairer price on carbon emissions - reducing uncertainty, and providing a greater incentive for investors in low-carbon generation.

Third, we will introduce a new system of long-term contracts, which will drive investment in all forms of low-carbon energy. 'Contracts for difference' will allow clean technologies - which often have high-up front and low long-run costs - to compete fairly against fossil fuels.

Fourth, we will introduce an Emissions Performance Standard, limiting the carbon emissions from new fossil-fuel power stations. That means no new coal power will be built without carbon capture and storage - a technology that will be critical if the world is to keep global temperatures within 2 degrees of pre-industrial levels.

Together, these reforms will secure our energy future. They will get us off the fossil fuel hook, insulating our economy from volatile global prices and helping us hit our climate change targets. And bills will be lower than they would be if we stuck with the existing arrangements - for the average house, £40 a year lower.

If we take a more sustainable route now the rewards will be tremendous. We can have secure, reliable low-carbon electricity, with a good deal for the consumer and jobs in lucrative new industries; and we can deliver an energy and climate legacy we can be proud of.

Hitting our long-term greenhouse gas emissions targets and meeting our future energy needs will not be easy. And the decisions we make now will have a direct effect on the lives of the next generation. If we are to succeed in rebuilding our energy system, we'll need to take people with us. DECC's Youth Panel make the case better than I can: