On Tuesday, DECC released the eagerly awaited Energy Bill (“Bill”) which, amongst other matters, seeks to clarify certain aspects of Electricity Market Reform (“EMR”). The Bill marks a great step towards a new electricity market in the UK and covers a wide range of aspects, many of which still lack the required level of detail and have a challenging timeline for implementation.
We set out below an overview of the topics covered in the Bill and detail the proposals put forward in respect of EMR.
1. Overview of the Bill
Aside from the EMR, the Bill also addresses a number of other matters, including:
1.1 Strategy and Policy Statement (“SPS”)
The SPS looks to align the Government and OFGEM at a strategic level in an aim to improve regulatory certainty. The SPS will set out the Government’s strategic priorities for the energy sector.
1.2 Nuclear Regulation
In 2011 the Government announced that it would create a statutory body, The Office for Nuclear Regulation (“ONR”), which will regulate the nuclear industry. Under the Bill, the ONR is given statutory grounding and the Bill also sets out the ONR’s purpose, regulation and functions.
1.3 Government Pipe-line and Storage Systems (“GPSS”)
The Bill details provisions to enable the sale of the GPSS. The GPSS is a Ministry of Defence held asset, which supplies aviation fuel in the UK to major commercial airports.
1.4 Offshore Transmissions
The Bill provides for an exception to the prohibition of taking part in the transmission of electricity during testing in the commissioning phase for offshore grid infrastructure without committing a criminal offence. This is vital in the context of the generator build model under the OFTO regulations for round 3 windfarms. It is noted by DECC that without this change, ‘it would cause a significant barrier to this infrastructure investment’.
2. Impacts on the EMR
The EMR provisions in the Bill are stated to ‘establish a framework for delivering secure, affordable and low-carbon electricity’.
2.1 Institutional Framework
The policy overview builds on the institutional framework previously proposed. It confirms the position that the Government will set the overall policy and approach for EMR which will include setting the strike prices and auction volumes to apply during competitive price setting such decisions to be based on evidence and analysis provided by the System Operator (“SO”).(National Grid has previously been identified as fulfilling the role of SO). The SO will administer both the Feed-in Tariff Contract for Difference (CfD) and the Capacity Market. Ofgem will be responsible for regulating the SO’s activity.
DECC states that ‘a stable revenue should in turn reduce investment risk and financing costs, and so drive innovation and development of low-carbon technologies’. However, the industry requires security and confidence and as such, the Government’s challenge will be to ensure that adequate information is provided sufficiently in advance of the time when investment decisions are required.
In Annex B of DECC’s EMR Policy document, DECC has helpfully constructed a table setting out the Key features of the CfD, a link to a version of this table is available here.
Counterparty – The Bill sets a statutory obligation on suppliers. Under this model, suppliers will collectively act as counterparty to the CfD. However, DECC highlights that it is seeking industry feedback on this point and will not take a firm decision until the final bill is published. The importance of a creditworthy CfD counterparty is critical to the success and uptake of the CfD.
Liquidity – One of the challenges for EMR is the current lack of liquidity in the electricity offtake market and ensuring that developers have a route to market. DECC will publish a Call for Evidence in June 2012 which will ‘seek to understand any barriers to a competitive PPA market in the current arrangements and in the future when EMR measures are implemented’. It is acknowledged that for many renewable generators, a PPA will still be required as a route to market to plug the resource gap and to manage the imbalance risk however, there is concern that even with the CfD, offtakers may not be incentivised to offer PPAs for these generators. DECC acknowledges that further action is required to address poor liquidity and states that it will continue to work with industry and Ofgem to address this issue.
Investment - DECC acknowledges industry concerns regarding the EMR leading to a potential stagnation in investment whilst the details are being finalised. One of the measures proposed to address this is the concept of the Final Investment Decision (FID) Enabling Project – the idea behind this having been trailed in the Technical Update from December 2011. This should enable investors – provided their project satisfies the relevant criteria – to obtain comfort from the Government to permit them to make early investment decisions ahead of EMR implementation.
Transitional Arrangements - The transitional arrangements for the phasing out of the Renewables Obligation (“RO”) remain largely as planned. DECC note that the “aim is to avoid any hiatus in investment as a result of the EMR” but uptake in the EMR away from the already bankable RO will require clarity at an early stage to encourage investor interest in this new market. The Bill contains provisions to replace the existing RO with a fixed RO Certificates Purchase Scheme from 2027 with broadly equivalent effect.
2.3 Capacity Market
The design of the Capacity Market mechanism – proposed to be ‘a policy intervention designed to ensure the future security of electricity supplies’ remains at a high level design stage. Emerging design choices are scheduled to be made available by the end of the year with formal consultation not due until late in 2013. This delay in crucial detail is likely to see the continued mothballing of gas fired power stations and a reluctance on the part of developers to build new gas fired power stations in the short term.
2.4 Emissions Performance Standard (“EPS”)
The Bill confirms the initial limit on the annual CO2 emissions allowed for new fossil fuelled generation stations namely, 450g/kWh, it being confirmed that grandfathering will apply to this limit. It therefore reinforces the Government’s message that new coal powered stations may not be constructed with CCS.
2.5 Timescales and Implementation Roadmap (“IR”)
The IR is ambitious and DECC aims to publish the Operational Framework in Autumn 2012, which will include a firm decision on the CfD design and the terms of the CfD. DECC intends to consult on the first set of strike prices for renewable technologies in 2013 with the aim to publish the 2014-2018 delivery plan in the latter half of that year. This will give developers up to a year’s visibility.
3. EMR and Devolution
Northern Ireland – With the exception of most elements of nuclear power, energy policy is transferred to the Northern Ireland Executive. The Executive have agreed that extension of the CfD, Investment Instruments and EPS provisions will apply to Northern Ireland. Due to market conditions being different in Northern Ireland, the strike prices may be slightly different.
Scotland and Wales – The EMR policy applies to both Scotland and Wales and DECC will work with the Scottish Government and Welsh Government respectively.
The timescales for the EMR are challenging and it will require stakeholder support to educate and promote uptake in this new market. The proposals in the Policy Overview are an encouraging step towards providing more clarity on the EMR but there still remain many gaps to be plugged. DECC highlight many of the issues raised by industry but we still await further detail on how these concerns will be addressed and only time will tell if the EMR can promote investment certainty in these timescales to prevent a development hiatus.
If you would like further information, please contact:
Michelle T Davies
Head of clean energy and sustainability
Tel: 0845 498 7553
Intl: +44 29 2047 7553
Tel: 0845 497 4554
Intl: +44 20 7919 4554
Tel: 0845 498 8265
Intl: +44 29 2047 8265