EMR is the UK Government's flagship policy to reform the electricity market and deliver low carbon energy and reliable supplies to UK consumers, while minimising costs. EMR introduces two key mechanisms to provide incentives for the investment required in the UK's energy infrastructure:
- Contracts for Difference (CFD), which provide long-term price stabilisation to low carbon plants with a view to allowing investment to come forward at a lower cost of capital and therefore at a lower cost to consumers;
- The Capacity Market, which provides a regular retainer payment to reliable forms of capacity (both demand and supply side), in return for such capacity being available when the system is tight.
Some of the CFD budget was released early to successful projects in a Final Investment Decision (FID) Enabling for Renewables process in order to avoid an investment hiatus ahead of the full implementation of the enduring regime. Eight renewables projects were awarded Investment Contracts under the FID Enabling for Renewables process in April 2014.
The European Commission confirmed State Aid approval of the Capacity Market, the CFD for Renewables and five of the eight FID Enabling for Renewables projects (all of which were offshore wind projects) on 23 July 2014.
DECC has been separately negotiating a bespoke Investment Contract with an EdF led consortium for the development of a new nuclear plant at Hinkley Point in Somerset. On 18 December 2013, the European Commission announced that it had decided to open an in-depth state aid investigation into the proposed Investment Contract to be awarded to Hinkley Point. At the time, the Commission expressed material doubts that the proposed Investment Contract would meet the criteria for approval. However on 22 September 2014, after a 9 month investigation, the Commission provisionally recommended approval of the support to be provided by the Project, subject to certain conditions. We understand that these conditions will include an obligation for the project to share (for example, by means of a reduction in the strike price) savings in capital costs, an obligation to share gains made on a refinancing of the project and an obligation to share project equity returns above specified thresholds. In addition, the cost of the government support package to be provided to the project (which needs to be paid for on a commercial basis) will increase significantly. Austria has indicated that it will launch a legal challenge if the Investment Contract for Hinkley Point is approved. At the very least, this is likely to result in further delay to the project.