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Energy Act receives Royal Assent, but "lots to be done" to unlock promised investment, says expert

The legal framework which will deliver some of the most significant reforms to the UK electricity market since privatisation and incentivise a planned £110 billion in private sector investment has been approved by the Government.

However, an energy law expert warned that there was still "a lot of work to be done, to a very tight timescale" following Royal Assent of the Energy Act and the publication of the final electricity market reform (EMR) Delivery Plan.

"The Energy Bill receiving Royal Assent and confirmation of the Delivery Plan are important milestones in the Government's fundamental reform of the electricity market, bringing industry one step closer to certainty on the framework for support for low carbon energy generation in a process that has spanned the past two years," said Fiona Ross of Pinsent Masons, the law firm behind Out-Law.com.

"However, the real detail in terms of the nuts and bolts of the Contracts for Difference (CfDs) and Capacity Market mechanisms will be set out in secondary legislation; some of which - including eligibility requirements for CfDs - is under consultation until Christmas Eve. There remains a lot of work for Government to do in the New Year if it is going to deliver the mechanisms on time, while taking into account industry feedback on the detailed proposals," she said.

The EMR programme is intended to attract the 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. The reforms will implement a new system of financial incentives designed to ensure that low-carbon forms of electricity generation can compete fairly in the marketplace, backed by a 'capacity market' aimed at ensuring that consumers continue to benefit from reliable electricity supplies at an affordable cost.

New CfDs will replace existing incentives and will provide guaranteed payments to operators of approved renewable generation technology, while enabling the system operator to 'claw back' money when market prices are high. Payments will be calculated with reference to a technology-dependent 'strike price' and a market reference price. The EMR Delivery Plan sets out the methodology behind these strike prices, as well as confirming the three hours per year loss of load expectation (LOLE) reliability standard that will apply to the capacity market.

As part of the Delivery Plan, and to comply with new EU state aid guidelines, the Government has said that it will decide whether to introduce competition for the more established low carbon technologies immediately once the CfD regime is introduced in early 2014. It has also confirmed that it has sent out draft investment contracts to 16 projects that have progressed to the next stage of its 'FID Enabling for Renewables' early investment process, of which 10 have been told that they are provisionally affordable under the budget caps announced earlier this month.

Energy Secretary Ed Davey said that the reforms could attract investment in enough renewable electricity generation to power 10 million homes by 2020.

"We have driven the Energy Bill through Parliament on time to send out a clear signal to investors and industry," he said. "We have delivered the certainty they need and confirmed Britain's position as one of the most attractive countries in the world to invest in energy generation. We are now able to build on the measures already in place to deliver cleaner energy, affordable bills, energy security and the creation of thousands of skilled green jobs across the UK."

Secondary legislation governing the CfDs is due to be enacted in July, ready for the first applications in autumn and the first contracts to be awarded by the end of 2014, according to the Department for Energy and Climate Change.

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