Electricity Market Reform - Energy and Climate Change Contents

12  Transition period and implementation of the new regime


272. Any change in the policy framework creates uncertainty and investors may delay investment decisions to see whether they could secure a better return under a future policy regime. For this reason, the publication of the EMR consultation has already created an investment hiatus. As E3G put it: "the 'Pandora's box' of reform is well and truly open and it is far from clear that even existing investment plans will be pursued whilst uncertainty over the market arrangements remains".[314]

273. A protracted hiatus could jeopardise the 2020 renewables target since there are long lead times associated with construction in the energy sector (DONG Energy told us that an offshore wind farm project can take around five years to complete).[315]

274. Equally, a hiatus could delay the construction of new nuclear power plants. Industry currently has plans for 16GW of new nuclear capacity in the UK, and DECC's latest indicative timeline for the first new nuclear power stations (published in August 2010) concluded that the path to commercial operation of the first new nuclear power station by 2018 was achievable.[316] However, investment decisions are unlikely to be finalised before the details of the proposed low-carbon generation revenue support are confirmed. EDF suggested in its written submission that if commercial operation of a new nuclear reactor was to be achieved in 2018, then financial investment would be needed "soon". To achieve this, it recommended that legislation to implement the EMR White Paper would need to be presented to Parliament in 2011.[317]

275. While it is clear that a speedy conclusion to the EMR process could help to expedite investment in new electricity generating capacity, the Government faces something of a dilemma. If the reforms are concluded too hastily, further interventions may be needed in future to correct design flaws and redress any unintended outcomes. This would cause additional disruptions to investment. The Committee heard from a number of organisations that wanted the Government to take its time to examine and develop all proposals in order to produce an EMR package that is robust, enduring and that avoids unintended outcomes.[318] The CHPA told us:

    The EMR is a process that occurs every 10-20 years and, as such a long term reform, sufficient time needs to be given to ensure that it will deliver what Government wants. The time spent in designing and implementing a robust and enduring market framework will be rewarded through fewer interventions to correct design flaws once the new arrangements become operational.[319]

276. We recognise the risk of making poor policy decisions if analysis of potential Electricity Market Reform packages is conducted too hastily. However, we are also mindful of the Government's legal obligation to achieve 15% of energy from renewable resources by 2020 and the significant role renewable electricity will play in meeting this objective. We therefore believe the Government's proposed timetable of producing a White Paper in "late Spring" must not slip and we recommend that it introduces an Electricity Market Reform Bill before the end of this Parliamentary session.


277. The proposals set out in DECC's EMR Consultation Document envisage change in the way that revenue support is provided to renewable electricity. There is a risk that the transition from the current mechanism—the Renewables Obligation (RO)—to the proposed Feed-in Tariff will create uncertainty for investors and hence disrupt investment in renewables. It could also affect existing investments in renewables, which have been made on the basis of support available under the RO regime.

278. DECC's consultation document contains a proposal that the current Renewables Obligation (RO) would be maintained until 2017 for new projects. This is intended to avoid disruption to developers who are making initial plans now under the RO. It also states that all existing support commitments will be maintained, as part of retaining investor confidence.[320]

279. While there is broad support for the principles behind these proposals, it is clear that more detail about how they will be achieved in practice is required by industry. The Welsh Power Group told us that recent decisions on grandfathering and the banding review had delayed investment in renewables and that "developers will want more details on FIT levels, [...] grandfathering, etc before progressing projects".[321] Several other energy companies and associations made similar points in their submissions.[322]

280. RenewableUK told us that there were other potential threats to the deployment of renewables associated with the transition to new market arrangements under the EMR :

    It is not just the level of support under the RO that needs to be protected, but the overall position of projects, and in particular the contracting terms of existing or near-term projects. Other parts of the EMR package could result in deterioration of the terms available for the power side of the contract, and this is not reflected in the grandfathering principles set out by DECC.[323]

281. Government needs to explain fully how the transition from the Renewables Obligation to a Feed-in Tariff will work in practice. In particular, greater clarity is needed how DECC plans to ensure that existing investments are not undermined by the Electricity Market Reform. The White Paper should set out proposals for an effective transitional regime.


282. It will take time to design and implement the EMR measures. Providing clear information and detail about the proposals (such as the specific design features of each measure and how different policy measures will interact) will minimise the likely investment hiatus. Joan MacNaughton (Alstom Power) told us:

    I do think we need more granularity around what is said in the document about how some of these decisions are going to be taken. If you take the contract for difference, which has a lot to commend it as a proposal, we don't yet know how it is going to apply across the different technologies, and how the strike price is going to be set. Until investors have some confidence in those issues—not just the formal statement, but how that regulatory regime is going to work in practice—there will be a high value to wait-and-see.[324]

283. In addition, many witnesses to our inquiry called for a "roadmap" or implementation plan that would set out clear timescales and milestones, including when each of the measures would be introduced.[325] The Institution of Engineering and Technology (IET) said:

    A key objective should [...] be clarity over the total package at the earliest opportunity, along with a very clear timeline for implementation. This should be thoroughly "road tested" with investors".[326]

284. We recommend that the Government publishes a proposed Electricity Market Reform implementation plan as part of or alongside the White Paper.

314   Ev 151 (E3G) Back

315   Ev 158 (DONG Energy) Back

316   DECC, Energy mix: nuclear, www.decc.gov.uk  Back

317   Ev 191 (EDF Energy) Back

318   Ev w10 (CHPA), Ev 143 (E.ON UK), Ev w19 (ESB International), Ev 158 (DONG Energy), Ev w35 (RES), Q 84 Back

319   Ev w10 (CHPA) Back

320   DECC, Electricity Market Reform Consultation Document, Cm 7983, December 2010, p 122 Back

321   Ev w26 (Welsh Power Group) Back

322   Ev 153 (International Power), Ev 158 (DONG Energy), Ev w17 (REA), Ev 191 (EDF Energy), Ev 197 (ScottishPower), Ev 208 (GE Energy), Ev 214 (SSE), Ev 216 (RenewableUK), Q 172 [Mr Campbell] Back

323   Ev 216 (RenewableUK) Back

324   Q 225 Back

325   Ev w10 (CHPA); Ev 139 (RWE npower); Ev w19 (ESB International); Ev 153 (International Power); Ev 197 (ScottishPower); Ev w45 (IET)  Back

326   Ev w45 (IET) Back

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Prepared 16 May 2011