Following an announcement this afternoon in the House of Commons by Chris Huhne, Secretary of State for Energy and Climate Change, the Government published a White Paper detailing its plans for reform of the electricity market.

The much anticipated proposals are set to make the most radical changes to the electricity market since privatisation.

The proposals

The Government provided details of the first of its four Electricity Market Reform proposals in the Budget 2011, confirming that a floor price for carbon in the electricity generating sector will be introduced from 1 April 2013 (see our e-bulletin on the Budget dated 20 March).

Today's White Paper details the Government's three remaining policy proposals. As expected, these broadly reflect the Government's preferred policy options set out in the Electricity Market Reform consultation (see our e-bulletins dated 16 December and 23 December for further details).

Feed-in tariffs

The Government has chosen a "contract for difference" (CfD) based feed-in tariff model for low-carbon generation, rather than a premium feed-in tariff (which was seen as being a credible alternative). The Government will tailor the design of the CfDs for different technology types to reflect their respective commercial and operational characteristics. A different approach is envisaged for baseload and intermittent plant, with day ahead prices used as the market reference price for intermittent plant and year-ahead prices for baseload plant. The Government intends that the CfDs will start from the basis of price discovery before moving to technology specific auctions and eventually technology blind auctions when the market will support them. The Government hopes that this model will control costs for consumers, provide stable returns for investors, and maintain the market incentives to generate when electricity demand is high. Generators will enter into long term contracts on a fixed price basis and receive variable payments to ensure they receive the agreed tariff (assuming they sell their electricity at the average market price). The payments will "top up" the generator’s revenues from selling electricity in the market. The mechanism will be two-way, such that generators will return money to the pot if electricity market prices exceed the agreed tariff.

The Government acknowledges there are design and implementation issues which will need further consideration. In particular the Government plans to publish a "technical update" addressing key implementation issues such as who will be the counterparty to the contracts for difference and the precise mechanism for funding them. The Government’s recognition of points raised in consultation responses about the need for a sophisticated and credit worthy counterparty is very welcome and we look forward to the publication of further detail on this key issue.

Capacity mechanism

The Government has put forward two potential options for the capacity mechanism and has launched a consultation, closing on 4 October 2011, seeking views on the detailed design for each option. The options are:

  • a targeted, centrally procured mechanism, involving tendering for specific amounts of capacity from different generation technologies, based on a strategic reserve model (which would work alongside the existing Short Term Operating Reserve (STOR) mechanism); or
  • a market-wide mechanism in the form of a capacity market, under which all providers willing to offer capacity (whether via generation, non-generation technologies, storage or demand side response) can sell that capacity. The Government is considering the type of capacity market that could be used, and will seek stakeholder views on the use of a "reliability market", based on auctions or a supplier obligation, or other types of market-wide mechanism, including a capacity payment mechanism with a centrally set price.

Emissions performance standard

A limit of 450g/CO2 will be introduced on emissions from new fossil fuel power stations. The Government hopes that the limit will reinforce the existing requirement that no new coal is built without demonstrating carbon capture and storage (CCS) technology.

The UK Renewable Energy Roadmap

Alongside the White Paper, the Government has published a UK Renewable Energy Roadmap, setting out the Government's action plans to encourage the deployment of eight types of renewable technology that the Government believes have the greatest potential for use in the UK by 2020:

  • onshore wind;
  • offshore wind;
  • marine energy;
  • biomass electricity;
  • biomass heat;
  • ground and air source heat pumps; and
  • renewable transport.

The Government will monitor the progress made towards implementing the action plans and will publish annual updates setting out what progress has been made in the past year, and explaining any changes to the evidence on which the action plans are based as a result of working with stakeholders.

Role of Ofgem

The Government has also published a report setting out the findings of its review of the role of Ofgem. The review seeks to support the implementation of the Government's electricity market reforms by providing greater clarity for investors on the respective roles of Government and the regulator.

The Government will publish a statutory ‘Strategy and Policy Statement’, as soon as Parliamentary time allows, which will set out the Government’s policy goals for the gas and electricity markets; describe the roles and responsibilities of Government, Ofgem, and other relevant bodies; and define policy aims that Government would like Ofgem to deliver.

Ofgem will be required, on an annual basis, to set out how it plans to deliver its contribution to each policy aim and how it will monitor progress towards achieving that aim. Ofgem will also be required to report annually on the progress it has made, outlining and justifying its decisions and, if satisfactory progress is not being made, explaining why and what mitigating action could be taken to rectify the situation.

Ofgem's liquidity review

While the Government has been working on its Electricity Market Reform proposals, Ofgem has been conducting a review into the liquidity of the electricity wholesale market. On 21 March 2011, Ofgem published its initial findings and proposals following its Retail Market Review for consultation (see our e-bulletin dated 23 March for more details). Following the conclusion of that consultation, in its summer assessment (available here) of electricity market liquidity in Great Britain, Ofgem announced that it will continue to develop its proposals further and is aiming to publish detailed proposals and an impact assessment towards the end of 2011.

Next steps

The Government aims to finalise its electricity market reform policy proposals and publish a technical update by the end of 2011. Critically, issues relating to the interaction of the CfD feed-in tariffs and the capacity mechanism need to be worked through in detail. Much still needs to be done to flesh out the Government's proposals and important decisions taken. The Government intends that new primary legislative powers needed to implement the reforms will be put in place from May 2012 onwards. Secondary legislation, code and licence modifications will be made during 2013/2014, subject to Parliamentary time.

To smooth the transition to, and implementation of, the new measures proposed, the Government will seek to minimise uncertainty and delays to planned investments by establishing appropriate "grandfathering" arrangements, in particular in relation to the Renewables Obligation. The Government envisages that the first CfD feed-in-tariff contracts could be entered into in 2014, but developers can still elect to choose to be accredited under the Renewables Obligation until 31 March 2017. The Government has also made specific reference to the possibility of wider transitional arrangements to enable early investment decisions.

Further information

The White Paper, and the documents accompanying it, are available here.