On Tuesday 12 July 2011, Chris Huhne, the Secretary of State for Energy and Climate Change, presented his much anticipated White Paper, “Planning our electric future: a White Paper for secure, affordable and low-carbon electricity”, to Parliament.  At the same time, a number of other papers were published, including the Renewables Roadmap and the Ofgem Review – Final Report.

The White Paper contains few surprises and confirms the Government’s preferred policy package that was put forward in its Electricity Market Reform consultation published in December 2010.  This comprises:

  • a carbon floor price;
  • feed-in tariffs with contracts for differences;
  • an emissions performance standard; and
  • a capacity mechanism.

The White Paper does clarify some details about the proposed measures, particularly in relation to the feed-in tariffs and the transition from the Renewables Obligation, but much remains to be decided, particularly in relation to the capacity mechanism.  The capacity mechanism has the potential to be one of the more radical changes to the electricity market and is now being re-consulted on. 

The Government intends to legislate for the key elements of the reforms through primary legislation in the second session of Parliament, which starts in May 2012.  This legislation should reach the statute book by spring 2013 so that the first low-carbon projects can be supported under its provisions in 2014.

Key Clarifications

Carbon Floor Price: The White Paper confirms the mechanism announced in the Budget.

Feed-in Tariffs: It has been confirmed that:

  • these will be two-way (so may involve generators making payments to the counterparty in the event of higher than expected electricity prices);
  • there will be different models for intermittent and baseload generation (to mitigate some of the wind generators’ concerns about the mechanism); 
  • the mechanism will be reviewed periodically, with the first review taking place in 2016; 
  • initially prices will be set by an administrative price-setting process, with a move towards technology-specific auctions towards the end of the decade and technology-neutral auctions further in the future; and
  • the Government recognises the need for a robust institutional framework, including a credit-worthy counterparty, and will issue a technical update to the White Paper by the end of the year on this framework. 

Emissions Performance Standard: It has been confirmed that:

  • it will be set as an annual limit equivalent to 450g CO2/kWh at baseload; 
  • it will apply to individual plants rather than on a portfolio basis; 
  • there will be limited exceptions in order to maintain energy security; 
  • in the event of a future tightening of the standard, grandfathering will apply to plants from the date on which they obtained consent (although the grandfathering policy for new plants may be reviewed in 2015);
  • biomass emissions will be zero-rated for this purpose;
  • the Government will try to avoid disincentivising CHP when finalising the design;
  • it will only apply to plant of more than 50 MW capacity; and
  •  it is likely to be administered by the Environment Agency and the Scottish Environment Protection Agency.

Capacity Mechanism: This mechanism is still at the design stage, with two options being set out.  The first is a targeted mechanism in the form of a Strategic Reserve, a development of the lead option from the December 2010 consultation.  This comprises centrally-procured capacity that is removed from the energy market and only utilised in certain extreme circumstances.  The alternative is a market-wide mechanism in which all providers willing to offer reliable capacity are provided incentives to do so.  This is subject to a separate consultation and the Government has stated that it will publish a technical update to the White Paper by the end of the year including the detailed design of the capacity mechanism (as well as more details on the institutional arrangements needed to deliver the reforms). 

Transition from the Renewables Obligation: The Government has provided useful clarification about how the transition to feed-in tariffs will work, including that:

  • until 31 March 2017, new generators will have a one-off choice between feed-in tariffs and the renewables obligation;
  • it will close to new generators on 31 March 2017 (which will also be the last date for the registration of turbines in the case of phased offshore wind farms);
  • support will be grandfathered for all technologies (including those not currently entitled to grandfathering) to avoid an administrative burden;
  • the obligation will be calculated on the basis of headroom until 2027, after which a fixed price will be introduced.    

Market liquidity: The Government has restated the importance of market liquidity and has emphasised its commitment to act on this in the event that Ofgem fails to do so and to ensure that generators have a route to market. 

Energy Intensive Manufacturers: The Government has committed to announcing in the autumn a package of measures to reduce the impact of government policy on electricity costs for energy intensive manufacturers whose international competitiveness is most affected by energy and climate change policies and to support energy intensive industries in becoming more energy and carbon efficient. 

Further information

To view the White Paper and related documentation on DECC’s website, please click here