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

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)


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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Prepared 4 March 2015