Electricity Market Reform
The Secretary of State for Energy and Climate Change (Mr Edward Davey)
The Government yesterday published for consultation the draft electricity market reform (EMR) delivery plan.
As laid out in my 27 June statement, Official Report, column 12WS, EMR is a central component of the Energy Bill currently being considered by Parliament, and will address the need to attract unprecedented levels of investment in the UK electricity sector over the coming decades as we replace our ageing energy infrastructure with a diverse mix of low-carbon generation, and meet the expected increases in electricity demand as sectors such as transport and heat are electrified. The Energy Bill includes clauses to introduce contracts for difference (CfD) to support investment in low-carbon generation, and a capacity market, to ensure security of supply.
On 27 June, Government made a range of key announcements in relation to reform of the electricity market, and I laid before Parliament two policy documents: “Electricity Market Reform—Delivering UK Investment” and “Electricity Market Reform: Capacity Market—Detailed Design Proposals”. The document published yesterday for consultation provides further detail on the key components of EMR and seeks views from consultees.
Contracts for Difference (CfDs)
CfDs form a core component of the Government’s strategy to bring forward investment in affordable low-carbon electricity generation—including renewables, carbon capture and storage and new nuclear. CfDs provide efficient and long-term support for low-carbon generation, reducing risks faced by generators by increasing revenue certainty and through the backing of a long-term contract. Generators are paid the difference between the market price and a “strike price”, but when the market price is high the generator must pay back the difference, which reduces costs to consumers when electricity prices are high.
Our June publication included draft CfD strike prices for renewables technologies, decisions on key CfD terms, and the levy control framework (LCF) profile to 2020-21.
The draft EMR delivery plan published yesterday provides details of the assumptions which underpin the draft CfD strike prices and seeks views and additional evidence from consultees. The Government will use the evidence gathered through this consultation to inform final CfD strike prices, which we intend to publish in the final EMR delivery plan later this year, subject to Royal Assent of the Energy Bill.
Capacity Market
A key part of the challenge our market faces is in ensuring secure electricity supplies. The capacity market will give investors the certainty they need to put adequate reliable capacity in place, protecting consumers against the risk of supply shortages. It does this by providing a predictable revenue stream to providers of reliable capacity, including both generation and non-generation measures such as demand-side response and storage. In return, they must commit to provide capacity when needed or face financial penalties.
I confirmed on 27 June that Government intend to run the first capacity market auction in late 2014, for delivery in 2018-19—subject to state aid clearance and laid out more detail on design proposals.
I have now published Government’s intended reliability standard for the capacity market—which captures the trade-off between the cost of providing additional back-up capacity, and the level of reliability achieved. The proposed standard is expressed as a loss of load expectation (LOLE), i.e. the number of hours per annum in which, over the long term, it is statistically expected that supply will not meet demand, and which reflects the economically efficient level of capacity. This does not mean that we would have this level of blackouts in a particular year; in the vast majority of cases, loss of load would be managed without significant impacts on consumers. But no electricity system can be 100% reliable. Based on our assessment of the value consumers place on security of supply, and the costs of providing capacity, we are proposing that a reliability standard of three hours LOLE per year most efficiently makes this trade-off between cost and reliability. We are seeking consultees’ views on this proposal and will finalise the reliability standard in the final delivery plan in December.
Analysis and scrutiny
Alongside the draft EMR delivery plan, I have published a report from the system operator—National Grid—which lays out analysis conducted to support the decisions contained in the delivery plan.
I have also published the report of the independent panel of technical experts, which was appointed to oversee the analysis. Information on the members of the panel and their terms of reference can be found at:
https://www.gov.uk/government/policy-advisory-groups/electricity-market-reform-panel-of-technical-experts.
The consultation document is be available at:
https://www.gov.uk/government/consultations/consultation-on-the-draft-electricity-market-reform-delivery.
I will deposit copies of the delivery plan and associated documents in the Libraries of both Houses.