Draft electricity market reform legislation published, although implementation timetable delayed

Out-Law News | 15 Oct 2013 | 1:46 pm | 3 min. read

The timetable for implementation of some of the most significant reforms to the energy market since privatisation has fallen behind by several months, according to draft legislation published by the Government for consultation.

The Government is consulting on implementation proposals for its electricity market reform (EMR) programme, alongside a number of illustrative pieces of draft legislation which will give effect to new financial incentives for renewable energy generation and other elements of the package. According to the documents, it is now expected to lay final draft regulations before Parliament in late spring 2014, to enter into force in July 2014.

Energy and environmental law expert Fiona Ross of Pinsent Masons, the law firm behind Out-Law.com, said that it would not now be possible for the new incentives, known as Contracts for Difference (CfDs), to be effective until the second half of 2014. Industry had expected the first contracts to be finalised and entered into during this timeframe, she said. However, she said that the draft documentation made it clear that the Government was "on the home straight" in relation to the reforms although much still remained to be completed.

"The draft legislation published for consultation contains some important detail on both CfDs and the Capacity Market," she said. "In terms of CfDs this includes detailed eligibility criteria, allocation process and appeal provisions, whilst the final CfD contract and Allocation Technical Framework will be published in late 2013 or early 2014."

"For the Capacity Market, details of eligibility criteria have been published, along with the rules for the Capacity Market and mechanisms for payment, as well as the detail on the auction process and issues such as secondary trading outside the auction. The first Capacity Market auction is now expected to take place by the end of 2014, instead of mid-2014," she said.

The EMR will be implemented by the Energy Bill, which is currently before the House of Lords after receiving the approval of the House of Commons in June, related secondary legislation and various industry codes and agreements and Electricity Act 1989 licence amendments. The programme is intended to attract the estimated £110 billion of investment needed over the next decade to replace the UK's aging energy infrastructure and match increasing demand, while still meeting the UK's international climate change commitments.

Once in force, the reforms introduced by EMR are intended to implement a new system of financial incentives designed to ensure that low-carbon forms of electricity generation can compete fairly in the marketplace, backed with a 'capacity market' aimed at ensuring that consumers continue to benefit from reliable electricity supplies at an affordable cost. Participants in the first capacity market auction will bid to provide electricity in 2018-19, and will receive a steady payment to deliver this capacity if successful.

The Government published details of the first 'strike prices', guaranteeing the prices for low carbon energy generation under the first CfDs, and the end of June and again in the draft delivery plan in July. Under the proposals, investors in low carbon energy projects, to include nuclear and CCS as well as renewables, will be able to receive technology-dependent guaranteed payments calculated with reference to the strike price and a market reference price.

Energy Secretary Ed Davey said as the consultation was published that, taken together, the measures set out in the EMR implementation programme would help the UK to reduce emissions by 34% by 2020. MPs voted against including a formal decarbonisation target for 2030 as part of the Energy Bill. The legislation as it stands instead gives the Government the power to take a decision on whether to set a decarbonisation target in 2016, at the same time as the UK's fifth Carbon Budget will be set. The carbon budgets place an economy-wide limit on carbon emissions over a set period.

"We've already had record amounts of planned investment in the energy sector and today we have given further confidence to the industry of the support available from Government for new energy infrastructure out to 2021," Davey said. "This could support 250,000 jobs in the energy sector."

"Our latest projections show that we are on track to meet our first three carbon budgets, but we recognise the scale of the challenge that we face in delivering further emissions reductions and meeting the target of the fourth carbon budget. We agree that we need to increase the rate of decarbonisation which is why we are taking action in a number of areas across the economy," he said.

According to the Government, the EMR Delivery Plan will be published by the end of 2013 alongside the final CfD contract and strike prices. Further consultations are also expected on the supply chain assessment process, in November 2013; and route to market, in early 2014.

The consultation on implementation proposals closes on 24 December 2013. Stakeholder workshops will be held by the Department of Energy and Climate Change throughout the consultation period. These are intended to help it to identify and address any issues with the proposals as early as possible.