2 From legislation to implementation
8. The Energy Act 2013 received Royal Assent on 18
December 2013, and the first EMR delivery plan[11]
was published the following day. DECC published its finalised
policy positions for the timetable of EMR implementation in June
2014, maintaining that "the first CfDs are expected to be
allocated during 2014" and "the first Capacity Market
capacity auction will be run in December 2014".[12]
Many of the key missing details on the CfD and Capacity Market
were provided in June and July 2014.[13]
The secondary legislation, needed to implement the package, passed
into law during the summer of 2014.[14]
9. National Grid took on responsibility as the main
delivery body for EMR on 1 August 2014. Its role includes:
· Carrying
out analyses to inform Ministers' decisions, including the level
of support for CfDs and how much capacity to procure in the Capacity
Market auctions.
· Administering
both CfDs and the Capacity Market, establishing whether projects
meet eligibility criteria to receive CfDs and running auctions
for both mechanisms.
Two Government-owned companies have key roles in
managing EMR mechanisms: the Low Carbon Contracts Company (LCCC)
acts as counterparty to CfDs, manages the contracts and is responsible
for payments under them; the Electricity Settlements Company is
responsible for payment flows under the Capacity Market.[15]
Setting a framework for Contracts-for-Difference
10. The Contracts-for-Difference are long-term contracts
between Government and a low-carbon generator that give a guaranteed
tariff or price for electricity over a defined period of time.
Their purpose is to reduce price volatility by providing a top-up
payment between a market-based reference price and a pre-defined
"strike price".[16]
EDF Energy explained that "we expect Contracts-for-Difference
to support investment in low carbon generation projects and to
reduce risk for investors and reduce costs for customers by removing
exposure to energy price risk".[17]
11. In September 2014, DECC published the final framework
for the first CfD allocation round, which opened for applications
in October 2014.[18]
In this round, technologies were grouped into three "pots":
· Established
technologies (Pot 1), which includes onshore wind (>5MW), Solar
Photovoltaic (PV) (>5MW), Energy from Waste with CHP, Hydro
(>5MW and <50MW), Landfill Gas, and Sewage Gas;
· Less established
technologies (Pot 2), comprising offshore wind, wave, tidal stream,
Advanced Conversion Technologies, Anaerobic Digestion, Dedicated
biomass with CHP, and Geothermal; and
· Biomass conversion
(Pot 3).[19]
Payments made to generators will be recovered from
electricity suppliers, who are expected to pass on the costs to
consumers. CfD expenditure is to be governed by the Levy Control
Framework (LCF). The LCF places limits on the aggregate amount
levied from consumers by energy suppliers to implement Government
policy, so that DECC can achieve its fuel poverty, energy and
climate change goals in a way that is consistent with economic
recovery and minimises the impact on consumers. In its current
form the LCF will support electricity policies to 2020-21. The
level of the cap on spending under the LCF in 2011-12 was £2
billion, and will rise to £7.6bn in 202021
(in 2011-12 prices).[20]
We note that the NAO report suggests there is a 20% headroom on
top of the LCF cap,[21]
subject to subsequent clawback.
Preparing for the first Capacity
Market auction
12. The aim of a capacity mechanism is to ensure
a reliable electricity supply to consumers and reduce the likelihood
of future power outages. RWE explained that the Capacity Market:
has been designed to deliver an economic and
efficient outcome based on a competitive market-based approach.
It has the potential to significantly enhance GB security of supply
at the lowest cost for customers.[22]
In June 2013, DECC issued detailed Capacity Market
design proposals, confirming that an auction would be held four
years ahead of the proposed delivery year where capacity may be
needed (the so-called "T-4" auction), followed by a
second auction one year ahead (so-called "T-1").[23]
The first delivery year is 2018-19. The "T-4" auction
took place in December 2014 and the "T-1" auction is
planned for 2017. This framework will apply for different delivery
years, with a second "T-4" auction planned for December
2015, for delivery in 2019-20.[24]
13. The amount of capacity auctioned is based on
an annual security of supply analysis carried out by National
Grid.[25] In October
2014, the Rt Hon Edward Davey MP, Secretary of State for Energy
and Climate Change, confirmed that the final target capacity for
the 2014 four-year-ahead auction would be 48.6 GW.[26]
A further 2.5 GW of capacity is expected to be contracted in the
year-ahead auction in 2017.[27]
Following a pre-qualification stage that saw 62 GW of capacity
qualify,[28] the first
Capacity Market auction successfully took place in December 2014.
Meeting the timetable
14. Many contributors acknowledged DECC's efforts
in meeting the "challenging"[29]
timetable of EMR implementation and minimising delays,[30]
describing this as "a significant achievement"[31]
that should be "congratulated".[32]
Mark Ripley, Director of Regulation at National Grid, acknowledged
that "the last 12 months have been very busy", adding
that it had been "quite a big push to get the secondary legislation
through" but that "industry, DECC and ourselves, worked
very well together".[33]
The Rt Hon Matthew Hancock, Minister of State for Energy, told
us:
Over the last year, the implementation of EMR
has involved two absolutely mission-critical moments, both of
which have been successful. [
] The first is that, in the
summer, we successfully gained State Aid approval for the structures
and the processes, and that was very important for implementing
it. The second was the execution of the capacity market auction
over Christmas and in the run-up to Christmas.[34]
15. However, concerns were raised that the successful
pace of implementation may have been at the detriment of its quality.[35]
While E.ON argued that DECC had "struck the right balance
between ensuring the various rules and regulations work sufficiently
and avoiding delays to implementation",[36]
the Renewable Energy Association (REA) warned that there was "a
danger of valid policy concerns being overlooked in the rush to
meet the relevant deadlines and the bigger picture being missed".[37]
The REA added that the numerous decisions rolled-out through secondary
legislation may not have been subject to sufficient scrutiny.[38]
Leonie Greene, from the Solar Trade Association, called it "a
tale of two halves",[39]
with very little being done for years and a sudden rush in the
months leading to the first auctions. The Independent Renewable
Energy Generators Group (IREGG) explained that:
The timeline for the policy development of CfD
auctioning has been rushed. This put significant pressure on DECC,
whose consultation documents were increasingly showing signs of
strain as they included multiple mistakes; on industry, who had
to dedicate substantial resources to assessing hastily drafted
proposals and replying to DECC consultations at extremely short
notice; and on investors, whose confidence has been shaken by
a mechanism developed in this manner and confirmed only weeks
before the first auction is due to take place.[40]
The Minister rejected these criticisms as unfair,
explaining that:
Of course, it has been implemented at pace. There
has been an awful lot of work, and I want to pay tribute to the
work of the officials in DECC. This has been one of the best
teams that I have worked with in Government. It has moved fast
and the electricity market is a complicated market, but I don't
think it has been rushed, no.[41]
16. We commend DECC for maintaining the ambitious
timetable of EMR implementation and ensuring that the necessary
framework was put in place in the lead up to the first Capacity
Market auction and CfD allocation round.
Industry preparedness
17. The speed at which final legislation and policy
positions were laid out has meant that industries wishing to participate
in the Capacity Market auction or apply for a CfD have had to
rapidly assimilate intricate documents and complicated eligibility
criteria. Dr Nina Skorupska, from the REA, described the CfD policy
as "highly complex",[42]
and many stakeholders similarly commented on the intricacy of
EMR.[43] Engagement with
DECC and relevant EMR bodies has therefore been crucial in helping
the industry gear up towards the first round of auctions. The
Renewable Energy Association explained that DECC had been "very
open in offering to meet with stakeholders"[44]
and others similarly felt that they had been adequately engaged
throughout the process.[45]
However, Leonie Greene warned that the process had at times felt
"quite erratic"[46]
and Sara Vaughan, Director of Strategy and Regulation at E.ON,
added that some in the industry considered they had "not
had as much time to be consulted on as [they] might have liked".[47]
18. Within such a new and complex policy landscape,
DECC, National Grid and the Low Carbon Contracts Company (LCCC)
have a crucial role in communicating with industry stakeholders
and potential participants. We heard that the roles of National
Grid and the LCCC were well defined,[48]
and several stakeholders commented positively on their interactions
with both of these bodies.[49]
We heard that they had made worthwhile efforts to establish and
run a series of workshops, which had been "very useful in
this transition".[50]
However, the REA warned that the number of different bodies involved
in EMR "may lead to some confusion among generators"
and that these bodies should beware of "mixed messages being
communicated to stakeholders".[51]
Mark Ripley, Director of Regulation at National Grid, explained
that:
We spent a lot of time engaging with people in
the industry to ensure that they understood what they needed to
do, and understood the various bits of paper and the various commitments
they needed to make.[52]
Neil McDermott, Chief Executive Officer of the LCCC,
said that they had been "leading the implementation of the
industry readiness to take part in the allocation rounds for CfDs",[53]
adding that the LCCC was doing its best to "ensure that generators,
large and small, are aware of the process, understand the contract,
and can take part".[54]
Difficulties for small players
19. SMEs and independent generators, who may have
more limited resources than their larger counterparts, have faced
difficulties in adapting and fully engaging with the complex EMR
process.[55] RenewableUK
said that their "sense is that smaller players and supporting
sectors, such as finance, have not had time to fully come to terms
with the CfD framework".[56]
The Solar Trade Association explained that:
The eligibility requirements for the [CfD] scheme
require considerable upfront expenditure, with no guarantee of
return, therefore benefitting larger companies better able to
spread and absorb risks over a portfolio of several possible development
sites. The sheer complexity of CfDs will also favour large companies
with the resources to pursue complex bidding strategies over many
years.[57]
20. Neil McDermott, Chief Executive of the LCCC,
and Mark Ripley, Director of Regulation at National Grid, explained
that they had put particular emphasis on running workshops on
both CfDs[58] and the
Capacity Market,[59]
respectively, and engaged with trade associations "to ensure
that generators, large and small, are aware of the process, understand
the contract, and can take part".[60]
Neil McDermott reassured us that he was "particularly interested
in the small end of the generators and suppliers," and that
one-on-one meetings had been "offered [
] to all generators".[61]
He added:
You mentioned the Solar Trade Association. We
have worked with them. We have worked with Energy UK, RenewableUK
and the Renewable Energy Association to be able to try to maximise
the reach that we tried to achieve.[62]
Some organisations claimed that the framework was
still geared towards people who really understood the market very
well rather than people who wanted to enter the market.[63]
However, Mark Ripley considered that "some familiarity with
the electricity sector is in fact necessary if you are going to
choose to be generating".[64]
21. In addition to being potentially disadvantaged
by the complexity of the process, SMEs also face financial barriers
in attempting to secure CfDs. In particular, the frequency of
CfD allocation rounds-currently once a year-means that, after
having invested large sums of money to meet prequalification criteria,
unsuccessful applicants have to remain afloat for an entire year
before being able to bid in the next auction for a chance to secure
revenues for their projects.[65]
Lark Energy, a UK-based developer of large-scale solar projects,
explained that:
As a minimum, we strongly believe that there
should be more than one auction a year to enable SMEs to participate
properly in the auction market. The alternative is to allow the
CfD market to be totally dominated by large companies and utilities.[66]
The REA questioned "the feasibility of meeting
Ministers' stated aims for moving 'from the Big 6 to the Big 60,000',
as the reality is likely to be the opposite".[67]
22. The Minister explained that the desire to open
the market to new entrants and small businesses had to be balanced
with "a reasonable certainty that the businesses on the other
side are going to be able to deliver on their piece",[68]
explaining that other routes were available for small generators:
Of course, there will be very small suppliers
who say they would love to be part of the capacity market or the
CfDs, but they do not have the money to get going and they do
not have a track record, and that presents us with a challenge.
The answer is that this is only one part of the suite of solutions.
The other part of the suite of solutions includes the feed-in
tariffs and other measures to be able to encourage small generation.[69]
Reviewing the first year of EMR
23. Following the first Capacity Market auction and
first allocation of CfDs, DECC expects to conduct a comprehensive
review of the first round of EMR delivery, ahead of the rounds
opening later in 2015. The second "T-4" auction will
take place in December 2015, and the volume to be procured will
be published before the prequalification window opens.[70]
A second CfD allocation round is intended to open in October 2015,[71]
with the budgets to be confirmed later this year.[72]
The Minister explained that DECC "will go through this [review]
process over this summer to make any decisions on whether there
needs to be changes"[73]
and "do things in time to make changes".[74]
He added that he "fully expect[s] this to be an annual process".[75]
While the review has been welcomed by industry, Dr Skorupska told
us that:
We believed we needed more auctions, more frequency
in the year, and the argument we got back was that they needed
to do an in-depth review first before they know how to run the
next one. That is very goodbig tick. However, it is
not very good for businesses that have to wait and see if they
have the chance to have a go again.[76]
24. We welcome the efforts by DECC, National Grid
and the Low Carbon Contracts Company to help prepare industry
in the run-up to the first Capacity Market and CfD auctions. However,
the complexity of the policies and the speed at which participants
have had to assimilate information have made it a challenging
environment for smaller companies. A robust review of the auctions
is clearly needed and lessons learned must be acted upon ahead
of the next round of EMR delivery. We are worried that the timing
of the review means that it risks taking place too close to the
opening of the second CfD allocation round and Capacity Market
auction. This may mean that industry concerns-particularly the
concerns of small companies-are not addressed.
25. We recommend that DECC ensure its review of
the first round of CfD allocation and first Capacity Market auction
is concluded by the end of August 2015. The review should detail
lessons learned from each step of the CfD allocation and Capacity
Market auction outlined by DECC, and assess the extent to which
the 2014 rounds contribute to the objectives of EMR. In conducting
the review, DECC should particularly look at how engagement with
small players can be improved. The review should also include
an assessment of the pros and cons of running more frequent CfD
auctions.
11 Department of Energy and Climate Change, Electricity Market Reform Delivery Plan
(December 2013) Back
12
Department of Energy and Climate Change, Implementing Electricity Market Reform (EMR)
(June 2014), p 27 Back
13
Department of Energy and Climate Change, Implementing Electricity Market Reform (EMR)
(June 2014), Department of Energy and Climate Change, Final Capacity Market Design Presentation
(July 2014) Back
14
The Contracts for Difference (Allocation) Regulations 2014 (SI 2014/2011) Back
15
Department of Energy and Climate Change, Implementing Electricity Market Reform (EMR)
(June 2014), p 22 Back
16
Tempus Energy Ltd (IEM 015) para 11 Back
17
EDF Energy (IEM 021) para 8 Back
18
Department of Energy and Climate Change, Contracts for Difference: Final Allocation Framework for the October 2014 Allocation Round
(September 2014) Back
19
Department of Energy and Climate Change, Budget Notice for CFD Allocation Round 1
(October 2014) Back
20
Department of Energy and Climate Change, Annex D: Levy Control Framework Update: Extending the framework to 2020/21
(July 2013), p 2 Back
21
National Audit Office, The Levy Control Framework (November 2013),
p 9 Back
22
RWE (IEM 010) Back
23
Department of Energy and Climate Change, Electricity Market Reform: Capacity Market - Detailed Design Proposals
(June 2013), p 7 Back
24
Department of Energy and Climate Change, Electricity Market Reform Annual Update 2014
(November 2014), p 20 Back
25
Department of Energy and Climate Change, Implementing Electricity Market Reform (EMR)
(June 2014), p 91 Back
26
Department of Energy and Climate Change, 'Update to the target capacity for the Capacity Market auction,'
accessed 5 February 2015 Back
27
Department of Energy and Climate Change, 'First Capacity Market auction begins today,'
accessed 6 February 2015 Back
28
National Grid, 'Results of Capacity Market prequalification announced,'
accessed 5 February 2015 Back
29
Scottish Renewables (IEM 016) para 2.1, VPI Immingham (IEM028)
para 8, Vattenfall (IEM 032), Q173 [Mark Ripley and Neil McDermott] Back
30
Scottish Renewables (IEM 016) para 2.1, E.ON (IEM 017) para 2,
InterGen (IEM 018) para 7.1, EnergyUK (IEM 020) para 1.3, EDF
Energy (IEM 021) para 6, Renewable Energy Association (IEM 024),
Institution of Civil Engineers (IEM 034), ScottishPower (IEM 038)
para 5, RenewableUK (IEM 040) para 1, Q1 [Leonie Greene and Paul
Spence], Q108 [Chris Elder] Back
31
Statkraft (IEM 045) para 2.1 Back
32
Q108 [Sara Vaughan] Back
33
Q173 [Mark Ripley] Back
34
Q242 (Matthew Hancock) Back
35
Q1 (Leonie Greene) Back
36
E.ON (IEM 017) para 2 Back
37
Renewable Energy Association (IEM 024) Back
38
Q1 (Dr Nina Skorupska) Back
39
Q1 (Leonie Greene) Back
40
IREGG (IEM 036) Back
41
Q243 [Rt Hon Matthew Hancock] Back
42
Q28 [Dr Nina Skorupska] Back
43
Solar Trade Association (IEM 008), E.ON (IEM 017) para 1, Statkraft
(IEM 045), Q8 [Paul Spence], Q84 [Andrew Buglass] Back
44
Renewable Energy Association (IEM 024) Back
45
Q1 [Paul Spence and Danielle Lane], Q67 [Andrew Buglass] Back
46
Q3 [Leonie Greene] Back
47
Q108 [Sara Vaughan] Back
48
Solar Trade Association (IEM 008), Renewable Energy Association
(IEM 024), RenewableUK (IEM 040) para 14 Back
49
Vattenfall (IEM032), Q4 [Danielle Lane], Q5 [Paul Spence], Q109
[Rupert Steele] Back
50
RenewableUK (IEM 040) para 5 Back
51
Renewable Energy Association (IEM 024) Back
52
Q179 [Mark Ripley] Back
53
Q188 [Neil McDermott] Back
54
Q189 [Neil McDermott] Back
55
Renewable Energy Association (IEM 024), Qq1,3,25 [Dr Nina Skorpuska],
Qq3,25,33,34 [Leonie Greene] Back
56
RenewableUK (IEM 040) para 4 Back
57
Solar Trade Association (IEM 008) Back
58
Q197 [Neil McDermott] Back
59
Q208 [Mark Ripley] Back
60
Q189 [Neil McDermott] Back
61
Q188 [Neil McDermott] Back
62
Q188 [Neil McDermott] Back
63
Q11 [Dr Nina Skorupska] Back
64
Q208 [Mark Ripley] Back
65
Lark Energy (IEM 011), Renewable Energy Association (IEM 024),
Q25 [Leonie Greene] Back
66
Lark Energy (IEM 011) Back
67
Renewable Energy Association (IEM 024) Back
68
Q263 [Rt Hon Matthew Hancock] Back
69
Q268 [Rt Hon Matthew Hancock] Back
70
Department of Energy and Climate Change, Electricity Market Reform Annual Update 2014
(November 2014), p 20 Back
71
Department of Energy and Climate Change, Electricity Market Reform Annual Update 2014
(November 2014), p 16 Back
72
Department of Energy and Climate Change, Electricity Market Reform Annual Update 2014
(November 2014), p 10 Back
73
Q250 [Rt Hon Matthew Hancock] Back
74
Q294 [Rt Hon Matthew Hancock] Back
75
Q294 [Rt Hon Matthew Hancock] Back
76
Q33 [Dr Nina Skorupska] Back
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