Conclusions and recommendations
Meeting the timetable
1. 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. (Paragraph 16)
Reviewing the first year of EMR
2. 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. (Paragraph 24)
3. 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. (Paragraph
25)
The role of National Grid
4. We
remain concerned about potential conflicts of interest between
National Grid's executive and advisory role within EMR, and its
commercial incentives-particularly given the move to include interconnectors
in future Capacity Market auctions. The Panel of Technical Experts
(PTE) and Ofgem have important roles in holding National Grid
to account. (Paragraph 33)
5. The questions raised
by the PTE in its scrutiny of National Grid must be responded
to publicly so that there is a clear line of sight between National
Grid's original analysis, scrutiny by the PTE, and subsequent
policy decisions by DECC and Ofgem. We recommend that DECC's upcoming
review of EMR should include a point-by-point response to the
issues raised by the PTE. The review should look again at how
conflicts of interest are dealt with. We also expect DECC to set
out what steps will be taken to ensure that National Grid does
not have an unfair commercial advantage when interconnectors participate
in future Capacity Market auctions. (Paragraph 34)
Demand-side response
6. We
recommend that the definition of demand-side response should exclude
consumers turning on their own generation assets such as diesel
generators. This agreed definition should be consistently and
immediately applied by DECC, Ofgem and National Grid. (Paragraph
37)
7. DECC is still failing
to ensure that demand-side response (DSR) measures are on a level
playing field in the Capacity Market. If we do not invest in DSR
today, we may be forced to pay for more expensive generation capacity
that we do not need in the future, thereby locking ourselves into
a pattern of higher costs and, potentially, higher emissions.
(Paragraph 42)
8. We recommend that
DECC's review of EMR makes it easier for DSR to have a much bigger
role in future Capacity Market auctions. DECC should consider
increasing the contract length of DSR capacity agreements in the
next Capacity Market auction. We also recommend that DECC set
out a more detailed strategy on how to help the DSR market grow
to reach its full potential, in line with its proclaimed approach
of supporting early stage technologies. (Paragraph 43)
EMR: A cohesive package?
9. 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. (Paragraph
49)
10. 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. (Paragraph 50)
Greater visibility for investors
11. 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. (Paragraph
56)
12. 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. (Paragraph 57)
13. 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. (Paragraph
60)
14. 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. (Paragraph 61)
Conclusions
15. Despite
a challenging timetable, the Government has succeeded in putting
in place a robust framework for the reform of the electricity
market. The implementation of EMR through its first year has been
relatively smooth. It is perhaps inevitable that some hurdles
would arise when introducing a new and complex set of policies,
and DECC, National Grid and the LCCC have done a good job in working
to anticipate industry's concerns and helping participants prepare
for the new regime. (Paragraph 62)
16. Despite this smooth
start, some key concerns remain. In particular, the Capacity Mechanism
has committed taxpayers to annual payments of nearly £1 billion,
only 5% of which will provide new capacity and just 0.4% going
on Demand-side reduction-the rest going to existing, largely coal
fired power stations, possibly paying them to do what they would
normally have done anyway. Potential conflicts of interest, notably
around the role of National Grid with the inclusion of interconnectors,
must be addressed. It is also imperative, as we have previously
called for, that EMR provides a level playing field for demand-side
response. Addressing these concerns will help to ensure that future
stages of EMR provides value-for-money for consumers. (Paragraph
63)
17. If the EMR regime
is to achieve its aim of creating a lasting secure, affordable
and low-carbon energy landscape, it must provide a clear landscape
for investors and participants. Long-term policy stability and
clarity around funds available under the Levy Control Framework
will be crucial in achieving its targets. (Paragraph 64)
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