Memorandum submitted by the Department
of Energy and Climate Change|
1. What should the main objective of the Electricity
Market Reform project be?
The reforms aim at driving the growth of clean energy
industries in the UK, and ensuring the best possible deal for
Electricity market reform is about ensuring that
the right long-term signals are in place to enable cost-effective
investment in all forms of low-carbon generation while maintaining
security of supply.
2. Do capacity mechanisms offer a realistic
way of achieving energy security, low-carbon investment and fair
A capacity mechanism is intended to achieve security
of supply, and will be designed to do so at lowest cost. The other
instruments in EMR are intended to achieve low carbon investment.
The Government believes some form of capacity mechanism
is necessary to ensure security of supply in future. Analysis
suggests that as levels of low carbon generation increase, the
price signal alone may not be sufficient to incentivise adequate
levels of the additional flexible backup capacity required to
run for only a few hours operation a year. Such a mechanism could
also be designed to reward demand-side response and to encourage
the development of energy efficiency and other "smart"
3. What is the most appropriate kind of capacity
mechanisms for the UK?
Government has undertaken qualitative assessment
of a variety of capacity mechanisms, as well as commissioning
Redpoint to undertake quantitative assessment as part of the analysis
of EMR policy options . Government's detailed rationale is explained
in the Consultation Document.
In summary, based on this initial analysis, the Government
is proposing the following design preferences for a capacity mechanism:
system (ie an obligation on a single central body such as the
system operator) rather than decentralised system;
approach in which volume is set rather than the price of capacity;
approach, rather than offering payments to all generators.
This is based on the Government's objectives of decarbonisation,
security of supply and affordability and key criteria of cost-effectiveness,
durability, practicality and coherence.
It is worth noting that this configuration is an
initial preference only and that the consultation is inviting
views about alternative configurations.
4. Should the system of Feed-in Tariffs be
focused on particular technologies or maintain a wider technology-based
The proposed feed-in tariff with contract for difference
would apply across all low-carbon technologies, although the levels
may vary between technologies to reflect different technology
5. Will it be feasible to deliver EMR in one
go, or will regulations and implementation be spread over time?
A timetable for the implementation of the EMR proposals
will be set out in the White Paper later this year.
The Annex to the EMR consultation document sets out
proposals for ensuring a smooth transition from the current support
mechanism for renewablesthe Renewables Obligation (RO)to
the proposed new mechanism for low carbon.
We propose closing the RO to new accreditations from
1 April 2017, and during the period from the introduction of the
new mechanism until 31 March 2017 the two mechanisms would run
in parallel. We are consulting on whether to offer renewables
generators a choice between the mechanisms during that period.
The aim of this timetable is to ensure a smooth transition between
the two support mechanisms.
6. Will market reform increase political risk
for investors or create certainty?
Market reform will give greater long term certainty,
because the proposed "contract for difference" Feed
In Tariff (CfD) means the Government will agree clear, long term
contracts that guarantee revenue to generators: a CfD contract
would be commercial and binding, and could therefore lower policy
This FIT should deliver support for renewables at
a lower cost than the RO, and integrate the policy framework with
that for other low carbon technologies. Both aspects will be important
for the long term political viability of the renewables programme.
7. Will the Government's proposed package
of carbon price floor, EPS, FITs and capacity mechanism provide
sufficient transformation to achieve goals on climate change,
security of supply and affordability?
Analysis done by the Committee on Climate Change
shows that decarbonising the power sector by the 2030s is the
most cost-effective way of meeting the UK's carbon reduction targets.
Our analysis suggests that all four of the packages
are capable of delivering this rate of decarbonisation if the
incentives are set at the right levels. However there is more
investment sooner with the packages that include the fixed payment
and CfD options because the lower risks and consequent cost of
capital means that low-carbon projects are economic earlier in
the period (given a rising carbon price).
The impact on security of supply would also depend
on the targets or levels of the capacity mechanism set. In all
of the reform packages, the risks to security of supply are low
as the targeted capacity margin of at least 10% is maintained
throughout the period to 2030.
The impact of these reforms on household bills to
2020 will be broadly in line with existing plans as set out in
the Annual Energy Statement. In the longer run to 2030, while
no targets or trajectories have been set for this period yet,
the Government believes the lead package of reforms would deliver
an effective pathway to 2050, security of supply and consumer
bills that are lower than continuing with existing policies.
With an illustrative decarbonisation benchmark of
100gCO2/kWh in 2030, the lead package of reforms would result
in a period of higher investment in the 2020s and household bills
would then be 4% (around £29/year) lower in the five year
period up to 2030 than continuing with existing policies despite
delivering a higher level of ambition.
The actual level of impact depends on the rate of
decarbonisation among other things and since this has not yet
been set it is not possible to be more definite at this stage.
The key conclusion the Government draws from the modelling is
the trend in bill impacts: small impacts on bills in the near
term, but in the longer-term bills are expected to fall by 2030,
despite delivering more low-carbon investment.
8. What synergies and conflicts will there
be between proposed mechanisms and policies already in place?
The Annex to the consultation document sets out our
proposals aimed at ensuring a smooth transition from the current
renewables electricity support mechanism (the Renewables Obligation
(RO)) to the new support scheme for low carbon. The consultation
document sets out our intention, subject to consultee views, to
enable a choice between the mechanisms during the period of dual
running from the start of the new scheme until the proposed end
final date for new accreditations under the RO of 1 April 2017.
The aim of this is to minimise any hiatus in investment due to
uncertainty while the new scheme is being introduced.
The Annex to the consultation document also sets
out our proposals to ensure that even after it is closed to new
accreditations, the RO can continue to run smoothly alongside
the new scheme. It includes proposals to ensure existing generators
accredited under the RO are confident that it will continue to
function until its end date of 2037.
Owing to the length of time the RO has been running
there are a number of lessons which have been learned about how
the renewables market works which will be transferable to the
new scheme. These include issues around bioenergy sustainability
and the interaction with other support schemes among others.
9. Will a carbon floor price be feasible in
the context of EMR and at what level should it be set?
To enable a secure low-carbon transition in the UK
power sector, the Government believes there is a strong rationale
to provide greater certainty and support to the effective carbon
price faced by the sector. Introducing a carbon price support
mechanism could help the UK to meet its decarbonisation objectives,
as part of a wider package of reforms.
The carbon price support commitment is being considered
as part of an HM Treasury and HMRC-led proposal to reform the
climate change levy (and fuel duty) and is the subject of a separate
As a tax matter, and in line with previous public
statements, decisions on the carbon price support mechanism will
be taken at Budget 2011.
10. What effects will EMR have on the development
of capacity for electricity storage and the development of interconnectors
between the UK and other electricity markets?
Currently the GB market is primarily dependent on
fossil fuel generation to provide the flexibility to respond to
changes in demand or supply.
Technologies such as storage, interconnection and,
in addition, demand side response, offer the opportunity to have
a greater diversity of technologies, which should help achieve
EMR aims of improving security of supply as well as reducing emissions.
As with generation investments, investments in storage
are made on commercial terms. Reform of the cash out price will
improve the economic case for storage, by making the costs of
imbalance higher and more cost reflective. Greater penetration
of low short run marginal cost plant on the system will drive
low prices at times of low demand. This should make storage a
more attractive investment, because it increases the opportunity
for arbitrage between periods of high and low demand. Another
factor in the development of storage is the technological readiness
of storage technologies (today, the only market-ready technology
available for large-scale deployment is pumped storage).
Going forward as technologies mature, the costs will reduce, making
them more economic and lower risk.
The GB electricity system is currently relatively
unconnected to the electricity systems of other countries.
Under the current arrangements, investments in interconnection
are made on commercial terms, ie where developers identify an
opportunity for arbitrage between markets then such investments
take place. However, the nature of the investments make them high
risk. As a response, Ofgem is developing a new regulated approach
to interconnector investment which will be consulted on early
in 2011. There is widespread industry support for Ofgem's consultation.
1 There is currently approximately 3GW of pumped storage
in GB, a significant proportion of which is used by National Grid
to fine tune the system in the balancing mechanism. Back
There is currently about 2.5GW of interconnection capacity in
the GB system, with links to the French and Irish markets. Back