Implementation of Electricity Market Reform - Energy and Climate Change Committee Contents

1  Introduction

1. Over 14 GW[1] of Britain's existing generating capacity is expected to close by 2020,[2] as European air pollution standards cause coal and oil power plants to be retired and old nuclear plant reaches the end of its working life. The Government's Electricity Market Reform (EMR) was initiated in 2010 to drive investment in the UK's energy infrastructure in order to replace this existing capacity with new, low carbon sources of energy. EMR was designed to: (1) decarbonise electricity generation; (2) keep the lights on; and (3) minimise the cost of electricity to consumers.[3]

2. The Electricity Market Reform is enshrined in legislation in the Energy Act 2013.[4] In order to bring forward the investment needed to meet the goals of EMR, the Act introduced two key mechanisms:

·  Contracts-for-Difference (CfDs) provide long-term price stabilisation to low-carbon plant. The budget for these contracts falls within the Government's Levy Control Framework,[5] and generators can compete for contracts in an annual auction;

·  A Capacity Market provides a regular retainer payment to reliable forms of capacity (both demand and supply side), in return for the capacity being available when the system is tight. Generation and demand-side providers can compete for capacity payments in an auction held four years ahead of the year in which capacity is expected to be delivered, followed by a second auction one year ahead, if more capacity is needed. The first delivery year is the winter of 2018-19.[6] The Capacity Market is expected to be paid for through the Levy Control Framework, but Capacity Market spend will be in addition to the existing £7.6 billion cap for low carbon electricity.[7] The Government plans to set a separate budget for the Capacity Market when there is greater certainty on the size of the costs involved.[8]

In addition to these, the Government also introduced the Carbon Price Floor (CPF), a tax on CO2 emissions, and Emissions Performance Standards (EPS), which require new coal-fired power stations to be equipped with Carbon capture and storage (CCS). Together, these four elements make the pillars of the Government's flagship reform of the electricity market.

3. We have closely scrutinised EMR since its inception, and assessed and commented on the policy as it has developed from initial proposal to final legislation. In our 2011 report, Electricity Market Reform, we recommended a series of improvements to the Government's overly complex initial proposals. In particular, we recommended that the White Paper should include a demand reduction objective. We also called for the Government to publish a target implementation timetable as soon as possible, as uncertainties were already deterring investment. In its response, the Government confirmed its intention to publish a detailed implementation plan alongside draft legislation.

4. We then conducted pre-legislative scrutiny of the Draft Energy Bill[9] after it was published in May 2012. We influenced the final shape of the bill by outlining flaws in the proposed CfD payment model. We also re-iterated our concerns that the Government continued to neglect the contribution that demand-side activities could make to energy security and climate change objectives. As a direct result of our scrutiny, a new Government-owned institution, the Low Carbon Contracts Company Ltd, was created to act as a counterparty to CfD contracts.

5. After years of planning and preparation, EMR is now in the first phase of its execution. Its successful implementation would play a critical role in the UK meeting its decarbonisation and energy security targets. As important milestones are met, continuing scrutiny and review will be central to the successful development of the reformed electricity market over the years, and decades, to come.

6. We launched this inquiry on 16 September 2014 to evaluate the Government's progress towards implementing the different strands of the EMR reforms, and assess whether the policy provides the best value-for-money for consumers. We heard from key stakeholders as the first Capacity Market and CfD programmes unfolded, to determine the extent to which the first year of EMR was in line with the policy's overall goals. We received 40 pieces of written evidence and held three evidence sessions between November 2014 and January 2015. A full list of witnesses can be found at the back of this report. We are very grateful to all those who took the time to contribute to this inquiry.

7. In addition to ensuring a smooth transition to a new market structure, EMR must guarantee that consumers paying for the policy will gain secure and low-carbon energy at the lowest cost. We recognise that we are in the early stages of EMR implementation. Rather than a technical review of the policy details, this report aims to provide a preliminary overview of the implementation of the Capacity Market and CfDs. It is part of the ongoing scrutiny of EMR that we have been involved in, and which we hope our successor committee will continue after the 2015 General Election. Chapter 2 provides an overview of the development of the policy since the passing of the Energy Act 2013, and assesses the ways in which preparations were made ahead of the first round of CfD and Capacity Market auctions. Chapter 3 outlines some key concerns about the value-for-money of EMR and suggests issues to be considered when the policy is reviewed after the General Election. Finally, Chapter 4 highlights the need for more clarity and policy stability if EMR is to attract the £110 billion of investment[10] that is needed to replace Britain's generating capacity and cope with increasing stresses on electricity demand.

1   GW = Gigawatt Back

2   Department of Energy and Climate Change, Statutory Security of Supply Report (October 2014), p 20-21 Back

3   Department of Energy and Climate Change, 'Maintaining UK energy security,' accessed 12 February 2015 Back

4   Energy Act 2013, Part 2 Back

5   The LCF allows Government to control the cost to consumers from pursuing energy policy objectives. It caps the cost of levy-funded schemes.  Back

6   Department of Energy and Climate Change, Implementing Electricity Market Reform (EMR) (June 2014), p 14 Back

7   Department of Energy and Climate Change, Annual Energy Statement 2014 (October 2014), p 75 Back

8   National Audit Office, The Performance of the Department of Energy and Climate Change 2013-2014 (December 2014), p 34 Back

9   Draft Energy Bill, Cm 8362, May 2012 Back

10   Department of Energy and Climate Change, Electricity Market Reform: Delivering UK Investment (June 2013) p 6 Back

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Prepared 4 March 2015