Government Response to the March 2016 consultation on further reforms to the Capacity Market

DECC has published the conclusions of the Capacity Market Review which took place earlier this year. There are three key messages arising from their consultation which closed on 1 April 2016:

  • DECC will hold an early auction to bring forward the first CM delivery year to 2017/2018

To address the risks posed to energy security the consultation set out proposals to hold an additional auction in January 2017, for delivery in 2017/2018. This brings the CM forward by one year – targeting demand side response through encouraging enterprise and ability to participate in future auctions.

  • Delivery incentives will be tightened and penalties for those who renege will be made more severe

The Consultation highlighted the need for a more robust system of checks through a series of core proposals: raising termination fees, disqualifying failed units from two years' of future auctions and increasing the level of credit cover needed for relevant applicants. This will ensure that existing capacity providers do not view their obligations as optional (and price dependent) and that new build projects are on target to deliver in their delivery year.

  • DECC will buy more capacity, sooner

The review goes as far as to say that up to 3MW capacity will be bought in the next auction. This is to balance changes in the market as older plants reach the end of their life.

Brexit – Renewables impact?

Most critics seem agreed that Brexit would lead to a period of uncertainty for UK investment whilst the UK re-establishes its position with Europe and globally. We have seen a slowing of the UK renewables market due to the recent policy changes in the sector which stems from a lessening of investor confidence. Brexit would likely shake this confidence further, having a most prominent impact on the power and renewables sector.

A leave vote may cause the UK to lose funding from EU initiatives which promote investment in energy infrastructure. Projects which have already been funded may need to re-examine their agreements to determine the impact of Brexit. Legally speaking, the 'change of law' clause found in most energy contracts may well be triggered leading to a re-negotiation of contracts.

Renewable targets: The UK is currently required to source 15% of its energy requirements from renewables by 2020 under the Renewable Energy Directive (which is directly effective in the UK). A vote by the UK to leave the EU would have an impact on the effectiveness of this target. Any impact would be seen most prominently in the heat and transport sectors where we are currently falling far short of the mark. For electricity at least, the goal has almost been realised by projects that have already been deployed or are in the course of construction. Beyond 2020 the path would not be clear. The UK has lobbied within Europe for a number of years for a carbon rather than a renewable target. The Paris Agreement enshrined a decarbonisation target which supports the UK's preference, meaning the underlying position of the UK to continue with decarbonisation through to 2030 and beyond is likely to continue in spite of a 'leave' vote. Whether the EU itself would choose to follow the decarbonisation targets or to continue to set a renewables target will then be a matter outside of UK influence, and clearly any renewables target set by Europe would not have effect in the UK.

In terms of the 2030 decarbonisation target from Paris, this currently includes the UK in a European target as a whole. A UK allocation would therefore need to be made and the overall target for the EU adjusted.

Better Markets Bill - Adoption of Competition Markets Authority's recommendations on the Energy Market

Announced as part of the Queen's speech, the Better Markets Bill draws on draft energy legislation published earlier this year. The Bill aims to aim to increase the powers of Ofgem whilst enabling customers to switch their suppliers more easily - both through technological advances and though increased consumer protection against hitches. This ties in with increasing powers being given to the CMA to ensure that the market is moving in the right direction and at a faster pace.

Research has shown that the average energy consumer could save up to £390 per year through switching. In March 2016 the CMA published its provisional decision on remedies and its key proposals included the need for a range of measures to actively engage consumers in the market. The purpose of the Better Markets Bill is open up the energy market by encouraging consumers to switch - it will be laid before Parliament within the next year.

Summary of key aims:

  • Power to consumers to compare and switch quickly;
  • Improvement in regulated sectors concerning handling of 'when things go wrong'; and
  • Opening up markets and promoting competition to speed up the UK's completion regime.

Committee on Climate Change Mitigation Report

On Wednesday 29 June the Committee on Climate Change will deliver its 2016 Mitigation Progress Report to Parliament. The report aims to assess the progress being made in meeting UK Carbon Budgets. In the light of the government's decision to slash the Carbon Capture and Storage (CCS) competition in late 2015 (and their recent U-turn on renewable energy policy), it remains to be seen how the government will evidence this progress.

In February 2016 a report produced by the House of Commons on the future of CCS in the UK called on the government to quickly and firmly outline its objectives in terms of CCS; setting out how big a part they perceive CCS will play- if any - with substantive reasoning as to how they have come to their conclusions. The committee implies that if the decision is not taken soon, the UK will 'miss the boat' on CCS implementation and it will effectively be ruled out of the UK's future energy mix. 

The UK is party to the Paris Agreement as a member of the EU. It is a requirement of signatories to the Paris Agreement to reduce global emissions to a level that prevents temperatures reaching above 2 degrees (and hopefully 1.5 degrees) above current levels. The EU has also committed to supporting CCS both financially and with regulatory steps. The European Commission has put forward options to encourage CCS demonstration and deployment, in order to support its long term business case as an integral part of the EU's strategy for a low carbon transition. Stepping up research and innovation activities in this area is one of the ten actions identified in the new Strategic Energy Technology Plan to accelerate energy system transformation and create jobs and growth. Support will continue through the EU Framework Programme for Research and Innovation Horizon 2020.