It’s an alphabet soup which has been criticised from almost all sides for its complexity, so here are 10 questions you may - someday - need answered about the bill and the future of the UK’s electricity market...
1. What is Electricity Market Reform?
It’s a bill which will bring in a number of changes to the way we pay for electricity generation in the UK. It is scheduled to be introduced in October, or November, or...
It will be introduced alongside (or after) the government’s ‘gas strategy’ expected around the time of the autumn statement.
The gas strategy focuses on all aspects of the UK’s gas industry including extraction, but may also include proposals to promote investment in gas-powered generation.
A leaked letter from Chancellor George Osborne to Liberal Democrat Energy Secretary Ed Davey suggests there may be some conflict between the aims of the two measures.
2. Why do we need it?
The current support regime for renewable energy, the Renewables Obligation (RO) expires in 2017.
The RO supports investment in renewable energy by obliging electricity suppliers to buy a certain number of Renewable Obligation Certificates (catchily called ROC’s) which have a fixed value.
Investors in renewable energy projects are offered a certain number of ROCs for every MW of electricity their project generates (This is called ROC banding). They can then sell these ROCs to suppliers to guarantee a return on their investment.
Without an extension the UK won’t have a chance of meeting its 2020 renewables targets or the objective set by the government’s Committee on Climate change to almost entirely decarbonise our electricity supply by 2030.
Secondly, around a fifth of our existing generation capacity is closing over the next decade. A significant proportion of this is made up of ageing coal plants which must be closed under the EU’s Large Combustion Plant Directive.
Under the directive, which aims to control emissions of sulphur dioxide, oxides of nitrogen and dust, power stations built before 1987 must either comply - normally by fitting sulphur scrubbers - or opt-out in which case they must closed by 2015. E.ON, for example, has three plants due to close.
The impact of this on the need for new plants is not clear. The UK currently has many gas plants running below capacity. There is disagreement over how much new fossil fuel plant needs to be built to keep the lights on - if any.
| EMR alphabet soup explained |
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In total DECC estimates that up to £110bn investment in electricity generation and transmission is likely to be required by 2020, which it says is more than double the current rate of investment.
3. How about new nuclear?
As the name suggests the current Renewables Obligation doesn’t support investment in nuclear power.
In addition, the market price of electricity - which tends to be set by the wholesale cost of gas - is not currently seen as sufficient to justify investment in new nuclear power stations, which have very high capital costs.
French utility EDF, who are planning to build the first new nuclear plants in the UK, is one of the only companies clearly in support of the current proposals.
4. What measures do we have already?
In addition to the RO there is also a feed-in-tariff (FiT) for small scale electricity generation from households and community projects.
Both of these are subject to a levy control framework - essentially a limit on how much can be spent.
The FiT limit is currently around 5% that of the RO, indicating it is not a major part of the government’s efforts to generate renewable energy.
Electricity that is not subject to any kind of support - generated by gas, coal and old nuclear plants (though these do get support in the form of decommissioning costs and insurance) - sell their power on a market managed by the national grid.
The market price varies and tends to be set by the price of gas, which is the most variable cost for electricity generation.
5. Why not just use the carbon price?
The government has already announced a floor price for carbon emissions from fossil fuel plants.
This is due to come into force in April 2013 and means that owners of power plants will have to pay a minimum price for each tonne of carbon emitted by their power stations.
If this price is higher than the price of carbon credits in the EU emissions trading scheme then the surplus goes to the Treasury which is set to make about £1.4bn from the scheme by 2016 and more thereafter.
Some academics, including government advisor Professor Dieter Helm and the centre-right Policy Exchange have suggested market reform is unnecessary and the government should instead rely on a rising carbon price to achieve its carbon objectives.
The clean energy industry argues that a carbon price is too uncertain to justify large capital expenditures on new infrastructure.
Without long term contracts, e.g. a feed-in-tariff, a sudden collapse in the cost of gas could reduce the market price of electricity and effectively force companies to sell at a rate which fails to pay off the money they borrowed, sending them bankrupt.
But these mechanisms have been rejected by the gas industry because the main cost of gas power - fuel - varies with supply and demand. A fixed price contract would force gas providers to sell power at a loss if the gas price rose, bankrupting them too.
Marrying these two conflicting demands is one of the main challenges of market reform.
6. What is the aim of EMR?
This isn’t entirely clear.
The government says the aim is security of supply and a cleaner, more diverse energy mix. However, environmental groups claim that the bill contains no renewable targets and no reference to decarbonising the electricity supply.
It is clear that EMR is designed to promote investment - but it is not yet clear whether it will succeed or where that investment will go.
7. How will it work?
EMR is a package of measures designed to work together.
a. Emissions Performance Standard (EPS). Simply put it is a limit on emissions from fossil fuel power stations set at 450g CO2/kwh.
However, it contains a potential loophole allowing the construction of new coal plants if they contain an element of carbon capture and storage (CCS), e.g. a pilot capture plant that may, or may not, store the carbon dioxide.
Clean energy payments will continue to be funded through the levy control framework - set by the Treasury and regularly reviewed.Naturally this has been fiercely criticised by environmental groups including Greenpeace.
Gas plants will have their emissions limit guaranteed until 2045.
b. Contracts for difference (Fit-CfDs).
"It makes more pronounced the perceived risk that the Electricity Market Reform (EMR) will perpetuate the current stop-start approach to investment in low carbon technologies. - Lord Deben, chair, Committee on Climate Change"
Long term contracts offered to any clean energy supplier, e.g. an offshore wind plant, or a nuclear plant which guarantees a fixed “strike” price for the electricity it generates.
CfD’s have been criticised for being overly complex. Generators must first sell power on the market, then get paid the difference between the market price and the strike price. If the market price is better than the strike price they don’t get all the difference, though they may get some of it.
It is also unclear who pays - but it is unlikely to be the Treasury and will probably be the system operator, which is likely to be the National Grid.
The National Grid in turn raises the cash from suppliers introducing an element of financial complexity. This so-called “counter-party risk” is one of the biggest objections some energy companies have to the reforms.
c. The capacity mechanism.
This is designed to back-up intermittent forms of generation such as wind.
To provide backup the government wants to encourage gas plants to be built - or to stay open - by setting up a capacity market run by the National Grid, where providers with reliable on-off power will compete to provide capacity at the lowest cost.
It is unclear at this stage whether the capacity mechanism will be available only to gas or whether it will provide payments to other forms of backup, such as interconnectors, pumped storage and demand management.
8. What about the money?
EMR sets up the structures, but it doesn’t give an indication of how much money is available, and for what - gas, nuclear or wind?
On the whole payments to generators comes from consumers, though they currently account for a small portion of the overall bill.
This has led to concerns about competition for resources between technologies e.g. nuclear versus wind, and uncertainty for investors who have called for greater long term certainty on funding.
Investors in renewable energy argue that certainty is the only way of reducing the costs of technologies like offshore wind; however, advocates for gas want the UK to be able to take advantage of any sudden fall in global gas prices.
Gas power which is sold on the market based on the cost of gas will not be subject to any kind of levy control.
9. How has it gone down in Parliament so far?
The influential Energy and Climate Change Select Committee, headed by Conservative MP Tim Yeo has examined the bill and issued a highly critical report.
The committee criticised CfD's for being overly complex and risky and potentially forcing out smaller providers, it called for changes to the support mechanisms.
It criticised the bill for having no clear objectives. It called for changes to include an objective to decarbonise the power sector by 2030 in the legislation.
It criticised the Treasury for a lack of cooperation and criticised the levy control framework for introducing risk and therefore driving up the cost of technologies.
It criticised the emissions performance standard as ‘next to useless’ and said it would allow for a new dash for gas.
The committee called for greater transparency on nuclear - especially on the price agreed for nuclear contracts - and suggested this must be less than offshore wind.
Finally, the report called for the committee on climate change to be given legally binding powers to ensure implementation is in line with government’s carbon targets, making it a bit like a carbon Bank of England.
10. And everyone else?
Most of the controversy has focused around whether the bill implicitly allows a new dash for gas.
In September the new chairman of the CCC Lord Debden, formerly John Gummer, wrote to the Prime Minister to ‘express the great concern of the Committee on Climate Change about the recent Government statement “that it sees gas as continuing to play an important role in the energy mix well into and beyond 2030...[not] restricted to providing back up to renewables”.’
The letter warned this would be ‘would be incompatible with meeting legislated carbon budgets’ and 'makes more pronounced the perceived risk that the Electricity Market Reform (EMR) will perpetuate the current stop-start approach to investment in lowcarbon technologies.'
The committee called for the bill to include a reference to decarbonising the power sector by 2030. A similar motion, tabled by chief secretary to the Treasury, Douglas Alexander, was debated at the Liberal Democrat party conference.
Outside politics the bill has been welcomed by EDF and to a lesser extent by Centrica but criticised by RWE, Npower and SSE.
Environmental groups have made a range of demands - including a decarbonisation target also recently backed by the engineering and manufacturing organisation EEF.
