The Government's flagship Electricity Market Reform was designed to drive investment in our energy infrastructure and manage the transition towards generating low-carbon, secure and cost-effective electricity. After years of planning, the Government has successfully put in place the necessary framework for the first Capacity Market and Contract-for-Difference (CfD) auctions under EMR, and DECC, National Grid and the Low Carbon Contracts Company have been helpful in preparing industry in the run-up to the auctions.
However, the speed at which participants have had to assimilate the complex policies have made it a challenging environment for smaller companies, and DECC is still failing to ensure that demand-side response (DSR) providers are given a level playing field in the Capacity Market. In order to avoid paying for more expensive generation capacity that may not be needed in the future, the Government should consider means to further support DSR in the Capacity market, for instance by increasing the contract length of DSR capacity agreements.
There also remain strong concerns around National Grid's potential conflicts of interest as EMR Delivery Body, and it is important that clear steps are taken to ensure that it does not have an unfair commercial advantage in future Capacity Market auctions.
With over 80% of the successful capacity agreements going to existing generating capacity, including coal-fired power stations, the CfD and Capacity Market mechanisms seem to be pulling in opposite directions, with the Capacity Market risking locking us into a higher carbon and more expensive trajectory than needed. A diversity of sources is clearly desirable, but CfDs and the Capacity Market are in danger of pursuing competing aims rather than complementing each other.
The proportion of the Levy Control Framework (LCF) already allocated to the early contracts for renewables may have pre-empted better value-for-money in the latter years of the LCF. Uncertainty in future wholesale prices, corresponding uncertainty in the buying power of the LCF, and uncertainty around the Government's intentions in the event that the LCF total is exceeded, all raise doubts in the minds of investors.
When conducting its first review of EMR in the summer, the Government will need to promptly detail lessons learned and assess the extent to which the 2014 rounds have contributed to the objectives of EMR. In conducting the review, DECC should particularly focus on:
· How engagement with small players can be improved
· How potential conflicts of interest with National Grid will be avoided or addressed
· How DECC will further develop the demand-side sector within the enduring EMR regime
· The future of coal-fired power generation in the capacity market
· How the cost of the Capacity Market will be controlled in future auctions
· Clarity and visibility of the LCF beyond 2020
The Government has succeeded in rolling out its reform relatively smoothly, but if EMR is to create a long-term secure, affordable and low carbon energy system, it must provide a stable policy framework to give investors the confidence they need.