Summary and implications

On 15 December, the Department of Energy and Climate Change (DECC) released a technical update to the Electricity Market Reform (EMR) White Paper – “Planning our electric future: a White Paper for secure, affordable and low-carbon electricity”.

The Technical Update covers four key areas from the White Paper, providing further clarity on:

  • the institutional framework;
  • ensuring security of electricity supply;
  • enabling investment decisions for early projects; and
  • the Government’s proposed next steps.

Institutional framework

The institutional framework will comprise three key players:

  • the Government, which will be responsible for setting out the policy approach and objectives, and for taking final decisions on key rules and parameters;
  • the System Operator (National Grid has been chosen), which will provide expert independent advice to Government on key rules and parameters and administer the Feed in Tariff Contract for Difference (FiT CfD) (the proposed low carbon generation payment incentive mechanism under the EMR) and the Capacity Market (the proposed mechanism under the EMR to secure adequate levels of electricity supply and stabilise prices for consumers); and
  • Ofgem, which will continue its independent regulation of the market incorporating the new instruments.

To retain clear accountability, the Government will set the policy approach, including the roles and responsibilities of the organisations involved; details of the payment mechanism; how to manage interactions between the FiT CfD, the Capacity Market and the Renewables Obligation; the detailed design of the two mechanisms, including standard contract terms for the FiT CfD and the level of capacity to be commissioned through the Capacity Market.

The Government will also decide when to move to auctions as the price setting mechanism for the FiT CfD.

Ensuring security of electricity supply

The Government has decided to legislate for the establishment of a Capacity Market, based on advice from the System Operator and other technical experts (including Ofgem).

At a high level, the Capacity Market involves:

  • estimating the total volume of reliable capacity required a number of years ahead;
  • contracting for the required volume of reliable capacity from providers through a mandatory central auction process, optional auctions, and supplier obligations; and
  • placing incentives on providers of capacity to ensure they are available when needed (for example through market-based penalties with minimal central intervention, or more administrative approaches, where a central body administers penalties under a set of pre-agreed rules).

Enabling investment decisions for early projects

The EMR White Paper recognised that the proposed reforms to the electricity market could lead to some investment decisions being delayed. To avoid this, the Government has proposed to enter into early discussions with developers to provide, what they describe as “comfort”, to developers for projects due to be implemented prior to the introduction of the FiT CFD.

The technical update provides details on the type of developers the Government is prepared to enter into discussions with, in relation to significant projects. The projects involved will have the following characteristics:

  • the type of generation to which the project relates is one that is capable of benefiting from the proposed FiT CfD;
  • the developer is able to demonstrate to the satisfaction of DECC that there is a real prospect that, if the project is not in receipt of some form of comfort from Government before 2014, it will be cancelled, put at significant risk, or delayed;
  • the developer is able to demonstrate to the satisfaction of DECC that there are credible plans in place to progress the project, in order to start generating electricity in or after 2016; and
  • the project is not eligible for the Renewables Obligation (RO) or if it is eligible for the RO, then the developer must demonstrate to the satisfaction of DECC that:
    • there is no realistic prospect of it being accredited as being eligible to receive ROCs by 31 March 2017; or
    • at the time an expression of interest is made to DECC, there is a real prospect of the project being delayed and that this delay is likely to prevent the project being accredited as being eligible to receive ROCs by 31 March 2017.

DECC does make clear that developers should not proceed on the assumption that any particular form of comfort which they may seek will ultimately be made available to them.

Next steps

  • Technical details on FiT CfD and Emissions Performance Standards will be issued in early 2012.
  • An Electricity Market Reform policy update, in line with the intended timetable for primary legislation will be published in spring 2012.
  • A further update on enabling investment decisions for early projects will be provided in spring 2012.
  • The Electricity System Policy (which will focus on the challenges around balancing supply and demand of future networks and the system flexibility needed for the more integrated electricity system required to support Electricity Market Reform) will be published in summer 2012.

We will provide further updates when these proposals become available.