The Government are making a range of key announcements today in relation to reform of the electricity market. Electricity market reform (EMR) is a central component of the Energy Bill currently being considered by Parliament, and will address the need to attract unprecedented levels of investment in the UK electricity sector over the coming decades as we replace our ageing energy infrastructure with a diverse mix of low-carbon generation, and meet the expected increases in electricity demand as sectors such as transport and heat are electrified.
The Energy Bill includes clauses to introduce contracts for difference, to support investment in low-carbon generation, and a capacity market, to ensure security of supply.
Contracts for Difference (CfDs)
CfDs form a core component of the Government’s strategy to bring forward investment in affordable low-carbon electricity generation—including renewables, carbon capture and storage and new nuclear. CfDs provide efficient and long-term support for low-carbon generation, reducing risks faced by generators by increasing revenue certainty and through the backing of a long-term contract. Generators are paid the difference between the market price and a “strike price”, but when the market price is high the generator must pay back the difference, which reduces costs to consumers when electricity prices are high. The Government are announcing today alongside the spending review draft CfD strike prices for renewables technologies, decisions on key CfD terms, and the levy control framework (LCF) profile to 2020-21. I am laying before Parliament our policy document “Electricity Market Reform—Delivering UK Investment”.
The aim of these announcements is to give investors early sight of the principal contract parameters, including terms and draft strike prices. We intend to publish further detail (including supporting methodology and analysis, a draft capacity market reliability standard, and a forward look to 2030) in the draft delivery plan for EMR in July. We will publish detailed drafting of key CfD contract terms in early August.
The paper will be available at:
The Capacity Market
A key part of the challenge our market faces is in ensuring secure electricity supplies. In addition to the closure of ageing plant and increasing demand, the UK is seeking to decarbonise its electricity supply in order to meet our carbon reduction targets. These changes create an investment challenge, for some forms of capacity such as gas generation. The Government are taking clear action to address this by legislating to introduce the capacity market. The capacity market will give investors the certainty they need to put adequate reliable capacity in place and by protecting consumers against the risk of supply shortages. It does this by providing a predictable revenue stream to providers of reliable capacity, including both generation and non-generation measures such as demand-side-response and storage. In return, they must commit to provide capacity when needed or face financial penalties.
Government have confirmed today they intend to run the first capacity market auction in late 2014, for delivery in 2018-19—subject to state-aid clearance. In addition, I am laying before Parliament our proposal document “Electricity Market Reform: Capacity Market—Detailed Design Proposals”.
The detailed design proposals published today have been developed following discussion with stakeholders, and provide further detail on all elements of capacity market design. By publishing this detail now Government are seeking to give investors the information and time they need to start preparing for the capacity market.
We intend to consult in October on these proposals and draft secondary legislation to implement them. Secondary legislation will be subject to Parliamentary scrutiny in 2014 and it is expected to enter into force in July 2014.
Ofgem has also today published its 2013 capacity assessment—this shows de-rated capacity margins decreasing faster in the next few years than in Ofgem’s 2012 assessment. In response, Ofgem has published a letter seeking stakeholders’ views on the rationale for, and principle of, National Grid Electricity Transmission plc (NGET) procuring new balancing services to support electricity security of supply during this period. The Government, Ofgem and National Grid have a shared view of the risks and the suitability of the solutions being proposed for both the short and medium-term.
The paper will be available at: