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DECC publishes long-awaited Electricity Market Reforms

The Department of Energy and Climate Change published the long-awaited draft energy bill, which includes the UK Electricity Market Reform (EMR). Announcing the news the UK Secretary of State, Ed Davey, highlighted keeping the lights on, consumers energy bills down and creating cleaner electricity to help tackle climate change as the three most significant problems the EMR is seeking to resolve.

“Leaving the electricity market as it is would not be in the national interest. If we don’t secure investment in our energy infrastructure, we could see the lights going out, consumers hit by spiralling energy prices and dangerous climate change,” Davey explained.

“The reforms will also be better for the economy, leaving us less vulnerable to rising global energy prices and supporting as many as 250,000 jobs in the energy sector.  

“By reforming the market, we can ensure security of supply for the long-term, reduce the volatility of energy bills by reducing our reliance on imported gas and oil, and meet our climate change goals by largely de-carbonising the power sector during the 2030s”.

The publication of the EMR comes after growing concerns that the UK will soon be left with periods of blackout as approximately one fifth of existing power generating capacity goes off-line. Government is also concerned about the growing dependence on gas and oil imports, which are threatening geopolitical risk and energy insecurity.

Electricity Market Reforms

DECC has put forward two main reforms which will help the UK to decrease dependence on traditional fuel supplies and work towards a low carbon economy. The Department has appointed the National Grid as an independent System Operator to provide analytical basis for Government decisions and to administer a new system of low-carbon generation revenue support known as Contracts for Difference (CfDs) and a Capacity Market.

The CfDs are designed to make investment in ‘clean’ energy more attractive by removing long-term exposure to electricity price volatility. They will stabilise returns for generators at a fixed level known as a “strike price.” This means that if the wholesale electricity price is below the price agreed in the contract, the generator will receive a top-up payment. However, if the wholesale price is above the agreed price, the generator will have to pay the surplus back.

Government will not consult on the first set of CfD strike prices until 2013 with the aim of announcing the prices in the second half of that year within the 2013-2018 Delivery Plan. This delay is likely to frustrate renewables developers who have been waiting for details on likely long-term financial returns before making planned investment decisions.

However, the draft bill does set out plans for “investment instruments” which are designed to deliver “early investment in advance of the CfD regime coming into force”. This mechanism should provide some projects with confirmation of their likely returns ahead of the CfD system launch.

Complementing the CfD system, a new Capacity Market will also be established to reduce the likelihood of future blackouts by ensuring there is sufficient reliable capacity to meet demand. This should also account for periods of intermittency from renewable power supplies.

These two mechanisms will be supported by an Emissions Performance Standard (EPS), which will effectively stop the construction of new coal plants which emit more than 450g/kWh, and a Carbon Floor Price of around £16 a tonne in 2013 that will rise to £30 per tonne by 2020. This was originally announced by the Chancellor in the 2011 Budget.

DECC claims that the reforms are designed to encourage a balanced portfolio of renewables, new nuclear and Carbon Capture and Storage (CCS), and to ensure that these technologies can compete fairly in the marketplace.

This move includes provisions for a "Renewables Transitional," designed to help renewables projects move from the ROC system - which will close to new projects in 2017 - onto the CfDs. According to the EMR document, renewable energy projects can expect to sign CfDs that will last 15 years, while carbon capture and storage (CCS) projects would receive 10-year contracts, subject to negotiation. The length of contracts for nuclear power plants has not yet been clarified.

The Department claims the announced reforms will provide investors with transparency, longevity and certainty in order to attract an estimated £110 billion of investment to the UK. However, those working in the renewables industry are concerned that ministers of creating a regime that favours nuclear power, making life harder for smaller energy companies to challenge the Big Six.

*Source - Solar Power Portal

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