UK energy market reforms "due by end of the year", says government, as EMR regulations published

Out-Law News | 25 Jun 2014 | 4:36 pm | 2 min. read

Secondary legislation giving effect to aspects of the UK government's electricity market reform (EMR) programme has been published, paving the way for the first contracts for difference (CfDs) and first auction to provide guaranteed energy capacity to happen before the end of this year.

In a statement, the Department for Energy and Climate Change (DECC) said that the publication was a "major milestone" which would give industry "the certainty they need to invest under the new system".

DECC also published a number of documents which it said would provide more detail on the reforms to industry and developers. These included five government responses to EMR consultations; an updated CfD Allocation Framework setting out the technical rules and procedures which would apply to the first CfD allocation round; and a further document providing a comprehensive overview of the reforms.

EMR is the UK government's plan to attract the estimated £110 billion investment needed over the next decade to replace the country's aging energy infrastructure and match increasing demand while still meeting international climate change commitments. The main instruments of reform are a new system of financial incentives designed to ensure that low-carbon forms of electricity generation can compete fairly in the marketplace, known as CfDs; which will be backed by a 'capacity market' aimed at ensuring that consumers continue to benefit from reliable electricity supplies at an affordable cost.

"The reforms are already starting to deliver this investment, with up to £12bn of private sector investment to be provided as a result of the early contracts that were awarded to renewable electricity projects in April," said DECC in a statement. "Further investment will come forward when the first CfDs under the new system are allocated, and the first capacity market auction is run, later this year."

"Achieving the reforms will enable the UK to develop a clean, diverse and competitive mix of electricity generation – ensuing that the lights will stay on and we have secure, low carbon energy for years to come," it said.

CfDs are due to replace existing incentives such as the Renewables Obligation (RO), which will be phased out entirely by 2017. They will provide guaranteed payments to operators of approved renewable energy generation technologies, 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, while places within the scheme will be allocated to more established technologies through a competitive process.

The capacity market will allow operators of new and existing power stations, electricity storage and capacity provided through voluntary demand reductions to bid for a share of a steady, predictable revenue stream four years in advance of that capacity being needed. In return for this, they would have to deliver energy when needed or face penalties. The first capacity market auction is due to take place in December to cover the winter of 2018. National Grid is currently tendering for a demand side project to run in winter 2015 and 2016, which would reduce demand for energy in the interim rather than increase the supply of it.