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

4  Providing a clear, coherent and forward-looking policy

EMR: A cohesive package?

44. The Government stated that its vision for EMR was "to transform the electricity system to ensure it provided secure, affordable and low carbon energy",[114] with retired capacity to be replaced "with a cleaner mix of generation to help us meet our climate change and renewables targets and lay the pathway to a greener, more sustainable future".[115] One of EMR's key objectives is to promote "investment in secure and low carbon electricity generation".[116]

45. There is a risk that EMR as it is currently developing will see its different strands pursuing competing aims rather than complementing each other. The Capacity Market, which "supports fossil fuel generation regardless of carbon emissions or plant efficiency",[117] risks locking us into a higher carbon and more expensive trajectory than needed, and failing to address the low-carbon objective of the overall EMR framework.[118] Simon Moore, from Citizens Advice, explained that:

    We have seen it with the treatment of demand-side response and interconnection in the capacity market. I would also say we have seen it with things like the way CCS [Carbon capture and storage] has broadly been left outside the entire EMR package. These examples are things that were not seen as being inherently the focus of EMR so have been left behind. That potentially leads to a concern for the bill payer if these are things that could offer a more cost-effective solution to some of the problems that EMR is attempting to tackle but are not being incorporated into it.[119]

Sara Bell, CEO of Tempus Energy, warned that "the two parts of EMR have not been looked at holistically".[120] Similarly, Dr Skorupska's concern was that:

    Most Capacity Market participation of the plants will be at part-load or at lowest capacity, at the lowest efficiency of that plant. Therefore, in a way, we are driving a market through CfDs to introduce renewable energy and then securing the Capacity Market mechanism, which locks in a high carbon future.[121]

46. A number of participants maintained that a diverse mix of technologies was needed[122] to achieve reliable and affordable electricity while meeting our decarbonisation targets. However, over 80% of the 49.3 GW of successful capacity in the 2014 Capacity Market auction was existing generating capacity, with coal plants making up nearly a fifth of the total.[123] While EMR was designed to replace the ageing generation plants and bring forward investment, only one new-build gas power station was successful in the auction. Mark Ripley, from National Grid, acknowledged that:

    We haven't seen a huge amount of new build in the [2014] auction. I think that reflects the fleet we have. I would imagine as you get into the 2020s, when some of the coal plant that is on an [Industrial Emissions Directive][124] exemption closes, you would see more capacity being built.[125]

The Minister stated that he was "very happy with the outcome",[126] of the first Capacity Market auction, which he considered had "been fair across technologies"[127] and produced "a good balance between supporting existing generation, supporting refurbishment and supporting new build".[128] The clearing price of £19.40 per kW per year, he said, was "cheaper than we anticipated" and provided "good value for bill payers".[129] National Grid estimated the total forecast cost of Capacity Agreements awarded to be nearly £1 billion.[130]

47. However, with only 5% of capacity being new-build and less than 0.4% going to DSR, the "good balance" is questionable. Similarly, while the clearing price was cheaper than could have been expected had more new gas-fired power stations been successful, much of the successful existing capacity bid at much lower prices than this,[131] but will receive the higher clearing price for their capacity-leading to the question: Are we just paying existing generators to do what they would normally have done anyway?

48. One reason for introducing the Capacity Mechanism is that as renewables - particularly wind - grow to provide a significant share of capacity it will be essential to provide back-up capacity which can be speedily ramped up when there are lulls in the wind. Evidence submitted to the Committee suggests that using generators not designed for this purpose will be costly in fuel and maintenance, have high carbon emissions and will shorten plant life considerably.[132] It is therefore surprising that the auction mechanism did not seek to elicit capacity specifically designed for speedy, efficient and sustainable back up.

49. While EMR was designed to bring forward investment in the electricity infrastructure and replace the UK's existing generation plants with lower carbon alternatives, there is a risk that the current design of the Capacity Market could result in a failure to meet these policy objectives. A diversity of sources is clearly needed, but Contracts-for-Difference and the recent Capacity Market results are in danger of pulling it in opposite directions.

50. We recommend that the Government clarifies its ambitions for the future of coal-fired power stations in the Capacity Market and its expectations for both new plant and DSR in the second four-year-ahead Capacity Market auction in 2015. The Government's review of EMR should include a cost-benefit analysis of the 2014 Capacity Market auction in terms of balancing low clearing prices with long-term objectives to provide secure, affordable low-carbon energy.

Greater visibility for investors

51. EMR is an important transformation of the current energy market framework, and short consultation periods and fast decisions have created a degree of investor uncertainty. The Independent Renewable Energy Generators Group (IREGG) explained that "frequent policy reversals make it almost impossible for the needed infrastructure investments to be sensibly deployed".[133]


52. The Levy Control Framework (LCF) is the means by which the Government controls the expenditure paid for by households through higher energy bills or industry passing on its higher energy costs. The Government estimates that "the Levy Control Framework (LCF) is likely to support enough renewable capacity to achieve at least 30% of electricity generation from renewable sources" by 2020-21.[134]

53. CfDs are to be paid for through the Levy Control Framework. As the price of CfDs will depend on the difference between the agreed strike price and the market electricity wholesale price, an important factor in determining the low-carbon buying power of the LCF will be future wholesale electricity prices. If wholesale prices fall, the cost for each CfD will rise, therefore increasing the burden on the LCF. This interaction between CfDs and the LCF creates allocation risks for investors. Additionally, the LCF is also used to fund the Renewable Obligation (RO) and small-scale Feed-in Tariffs (FiTs), so the budget available for CfDs will vary depending on the extent of other LCF expenditure.[135] WWF expressed their concern that "the vast bulk of the Levy Control Framework budget will be taken up by existing schemes […] with only a comparatively small amount available under the enduring EMR regime".[136] Statkraft, a Norwegian state-owned electricity company and generator of renewable energy, called for more frequent updates on the resources available under the LCF, and suggested that the Government should:

    set out the remaining budget available for future CfD allocation and […] include revised commodity price assumptions underpinning the existing and projected costs of CfDs. Developers could then determine their competitive position and engagement strategy for future CfD allocation rounds and diminish the risk of poor transparency, resulting in attrition of the development pipeline.[137]

Infinis, an independent renewable energy developer and generator, told us in October 2014 that:

    The lack of a firm timetable for future [CfD] auctions is preventing us from planning our investment effectively. Currently there is very little commitment to any auctions beyond the first auction in October 2014 and as a result it is placing unnecessary pressure on companies to either drop projects or attempt to expedite them into the current allocation round.[138]

54. Some stakeholders were also worried that a vast proportion of the LCF had been committed to the "Final Investment Decision enabling for Renewables" (FIDeR) projects.[139] FIDeR was designed to enable developers of low carbon electricity projects to take final investment decisions ahead of the Contract for Difference regime being put in place as part of Electricity Market Reform, with eight projects signed in May 2014. According to the National Audit Office, the FIDeR contracts have committed up to £16.6 billion (58%) of the funds available for renewable CfDs to 2020-21.[140] While Danielle Lane, from DONG Energy, explained that these projects had successfully allowed investors and developers to manage the transition to the new market,[141] others judged that the decision of which projects would be awarded these funds was conducted in an opaque manner.[142]

55. Mark Ripley, Director of Regulation at National Grid, told us that:

    One of the things DECC has done in setting the Levy Control Framework is it can be reviewed. There is the scope for additional moneys. What I would say is that we need to see how things play out. We have not paid out any CfDs yet. We are trying to think what prices will be at some point in the future. But some of the sensitivities we modelled when we were providing evidence to DECC about strike prices were high and low wholesale price, to see whether, scenario-wise, you got to 2020 within the 7.6 billion. That has formed part of the analysis. On an annual basis, that analysis will be reviewed to provide information that Government is able to make decisions upon.[143]

56. The Levy Control Framework (LCF) finances existing (RO and FiTs), transitional (FIDeR) and new low carbon projects (CfDs). The scope for support of new renewable generation under the CfDs is therefore dependent on the cost of a number of existing commitments. There is a risk that such a large proportion of the LCF is already allocated to the early contracts for renewables, including an excessive proportion of very expensive offshore wind capacity, that it has pre-empted better value-for-money in the latter years of the LCF, when other technologies may have developed and their costs reduced. The uncertainty in future wholesale prices and corresponding uncertainty in the buying power of the LCF create a difficult landscape for investors. More clarity and visibility of the funds available for CfD projects is crucial to bring forward investment.

57. We recommend that DECC sets out what its intentions are across a range of potential future wholesale prices. DECC should commit to publishing more frequent updates of the funds left in the current LCF envelope and clarify rapidly what the timetable and budget of future CfD allocation rounds will be.


58. With investment decisions having to be made years in advance of delivery, industry and the supply chain need visibility beyond 2020. DONG Energy told us that offshore wind projects have a lead time of up to ten years, and "projects […] being considered today would plan to be delivered after the end of the decade".[144] Dr Nina Skorupska, from the REA, told us that with the current Levy Control Framework expiring in 2020-21, "we do not know what is going to happen post-2020 at this moment in time".[145] Urgent consideration therefore needs to be given to the future of the LCF in the next decade.[146] Paul Spence, Director of Strategy and Corporate Affairs at EDF Energy, explained that:

    The two things that are desirable under EMR are that it provides a clear framework and it provides some predictability that allows investment to happen. The questions that face all of us, whatever technologies we are developing at the moment, are all about what happens as we go into the 2020s and towards 2030. Having a sense of how the categories are going to be defined and a sense of how much is available in each of those categories will help us as we look at the potential projects that we need to develop. So having that sense of where this goes beyond 2020 and out beyond 2030 will only be helpful.[147]

Andrew Buglass, former Head of Energy, Royal Bank of Scotland, and Co-Chair of Low Carbon Finance Group, added that visibility to 2020 "is not enough"[148] for investors:

    I had one offshore developer say to me a little while ago that 2020 is almost tomorrow already because of the lead times. […] As we look to industrialise the build-out of the various technologies, it is increasingly challenging for companies trying to bring forward projects that need to have visibility beyond that 2020 to know where they will end up. It was very interesting to hear a couple of the comments in the previous session about the sheer volume of developments costs involved before one can even know that one has a CfD. That is certainly consistent with comments that I have had from clients and fellow members of the Low Carbon Finance Group.[149]

59. The Secretary of State suggested that it "would not be wise"[150] to provide information on the future of the LCF before the general election. He added that "investors in the UK have greater long-term visibility on this issue than they do in any other country in the world",[151] and could "take quite a lot of confidence that this Government and this country sets long-term frameworks and has long-term targets, probably more so than almost any other country".[152] He added that "the next government is going to have to have another Levy Control Framework to support those legally binding targets on us both from the Climate Change Act and from European agreements".[153]

60. If EMR is to become a successful and enduring policy that brings forward the investment in the electricity infrastructure that is needed to ensure a secure, affordable and low carbon energy to Britain, more clarity is needed beyond the life of the current Levy Control Framework.

61. We recommend that the Government clarifies the future of the LCF beyond 2020-21 as soon as possible after the General Election. Rolling forward projections of LCF funds should be published annually thereafter, so that investors are always able to look at least seven years ahead to make their investment decisions. The Government should also clarify its intentions in the event that the Levy Control Framework total is exceeded because gas prices remain much lower than previously anticipated.

114   Department of Energy and Climate Change, Implementing Electricity Market Reform (EMR) (June 2014), p 7 Back

115   Department of Energy and Climate Change, Implementing Electricity Market Reform (EMR) (June 2014), p 7 Back

116   Department of Energy and Climate Change, Implementing Electricity Market Reform (EMR) (June 2014), p 9 Back

117   Renewable Energy Association (IEM 024) Back

118   Q41 [Dr Nina Skorupska and Leonie Greene] Back

119   Q67 [Simon Moore] Back

120   Q108 [Sara Bell] Back

121   Q41 [Dr Nina Skorupska] Back

122   Q43 [Paul Spence]. Q45 [Dr Nina Skorupska], Q124 [Sara Vaughan] Back

123   National Grid, Final Auction Results (January 2015) p 7 Back

124   The Industrial Emissions Directive (IED) commits EU member states to reduce the impact of industrial emissions on the environment. Back

125   Q235 [Mark Ripley] Back

126   Q242 [Rt Hon Matthew Hancock] Back

127   Q287 [Rt Hon Matthew Hancock] Back

128   Q242 [Rt Hon Matthew Hancock] Back

129   Q242 [Rt Hon Matthew Hancock] Back

130   National Grid, Final Auction Results (January 2015) p 3 Back

131   National Grid, Final Auction Results (January 2015) p 4 Back

132   Stag Energy (IEM 003), Q158 [Jeremy Nicholson] Back

133   IREGG (IEM 036) Back

134   Department of Energy and Climate Change (IEM 023) para 13 Back

135   Scottish Renewables (IEM 016) para 7.1, Vattenfall (IEM 032), Independent Renewable Energy Generators Group (IEM 036), RenewableUK (IEM 040) para 30, 32, Statkraft (IEM 045) para 1.9 Back

136   WWF (IEM 031) para 20 Back

137   Statkraft (IEM 045) para 1.10 Back

138   Infinis plc (IEM 035) Back

139   WWF (IEM 031) para 21, Q11 [Dr Nina Skorupska] Back

140   National Audit Office, Early contracts for renewable electricity (June 2014) p 7 Back

141   Q6 [Danielle Lane] Back

142   Q11 [Dr Nina Skorupska] Back

143   Q240 [Mark Ripley] Back

144   DONG Energy (IEM 022) para 5.3 Back

145   Q53 [Dr Nina Skorupska] Back

146   Horizon Nuclear Power (IEM 009), Scottish Renewables (IEM 016) para 7.2, Vattenfall (IEM 032), Statkraft (IEM 045) para 1.10 Back

147   Q13 [Paul Spence] Back

148   Q79 [Andrew Buglass] Back

149   Q79 [Andrew Buglass] Back

150   Oral evidence taken on 21 January 2015, Q16 [Rt Hon Edward Davey] Back

151   Oral evidence taken on 21 January 2015, Q17 [Rt Hon Edward Davey] Back

152   Oral evidence taken on 21 January 2015, Q17 [Rt Hon Edward Davey] Back

153   Oral evidence taken on 21 January 2015, Q17 [Rt Hon Edward Davey] Back

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Prepared 4 March 2015