About Electricity Market Reform
During 2010 to 2015 the UK Government committed to a series of reforms (known collectively as Electricity Market Reform, or EMR) in order to, in the Government’s own words: ‘transform the UK’s electricity system to ensure that our future electricity supply is secure, low-carbon and affordable.’
EMR will deliver the low carbon energy and reliable supplies that the UK needs, while minimising costs to consumers. The reforms introduces two key mechanisms to provide incentives for the investment required in our energy infrastructure.
• Contracts for Difference (CfD) provides long-term price stabilisation to low carbon plant, allowing investment to come forward at a lower cost of capital and therefore at a lower cost to consumers.
• Capacity Market provides a regular retainer payment to reliable forms of capacity (both demand and supply side), in return for such capacity being available when the system is tight.
Further details on EMR and the implementation is available on the webpage: 2010 to 2015 Government Policy UK Energy Security.
EMR Delivery Partners
The EMR Delivery Partners involved in the delivery of CfD and Capacity Market schemes are outlined below.
Department for Energy Security & Net ZeroArrow
Department for Energy Security & Net Zero (DESNZ) sets the policy framework, provides sponsorship, and leads on design and legislative action.
The CfD scheme is the government’s main mechanism for supporting low-carbon electricity generation. CfDs incentivise investment in renewable energy by providing developers of projects with high upfront costs and long lifetimes with direct protection from volatile wholesale prices, and they protect consumers from paying increased support costs when electricity prices are high.
Renewable generators located in the UK that meet the eligibility requirements can apply for a CfD by submitting what is a form of ‘sealed bid’. There have been three Auctions, or allocation rounds, to date, which have seen a range of different renewable technologies competing directly against each other for a contract. Further information on CfDs and Allocation Round 4 is available on the DESNZ website.
The Capacity Market ensures security of electricity supply by providing a payment for reliable sources of capacity, alongside their electricity revenues, to ensure they deliver energy when needed. This will encourage the investment needed to replace older power stations and provide backup for more intermittent and inflexible low carbon generation sources.
The Capacity Market also supports the development of more active demand management in the electricity market. Further information on Capacity Market on the DESNZ website.
Ofgem was given key roles within EMR including:
The Regulations provide the overarching policy and design, including the powers the Secretary of State (SoS) will hold in overseeing the Capacity Market. The Rules have been made by the SoS and provide the practical detail on how the Capacity Market will operate under the Regulations. The Rules cover:
- Details on the contents of capacity agreements
- Obligations of capacity agreement holders, including penalties
- Technical operation of the Capacity Market.
EMR Delivery Body, National Grid ESOArrow
The role of the EMR Delivery Body, National Grid ESO is responsible for:
Administering key elements of the Capacity Market including:
- Capacity Market Register
- Agreement Management
Administering key elements of the CfD regime including:
- Application and Qualification
Also, for producing annual Electricity Capacity Reports for Government to advise on capacity requirements in order to meet the published reliability standard.
Low Carbon Contracts Company (the CfD Counterparty) (LCCC)Arrow
LCCC is a private company owned by DESNZ. They manage the contracts awarded to CfD Generators successful via the CfD Allocation Rounds. The management of the contracts includes during the construction, delivery phase and making CfD payments. This also involves LCCC managing the Supplier Obligation Levy that funds CfD payments, which LCCC forecast.
LCCC’s Guiding Principle is to maintain investor confidence in the CfD scheme and minimise costs to consumers. Further information is available in the LCCC Framework document.
Electricity Settlements Company (the Capacity Market Settlement Body)Arrow
ESC is responsible for carrying out the obligations to manage Capacity Market payments to Capacity Providers. This also includes holding Credit Cover for Applicants and conducting Metering Assurance.
Key to both roles is providing feedback to DESNZ on the schemes and to Ofgem on the Capacity Market Rules to support them in making improvements in line with ESC Guiding Principles.
ESC’s Guiding Principle is to maintain market participants’ confidence in the Capacity Market settlement process and minimise costs to consumers. Further information is available in the ESC Framework Document.
Settlement Service Provider (EMR Settlement Limited (EMRS))Arrow
EMRS is the Settlement Service Provider for both CfD and Capacity Market schemes on behalf of LCCC and ESC.
- It is our responsibility to run the CfD Settlement System and operate the processes to enable CfD payments to be calculated and settled.
- For the Capacity Market it is also our responsibility to manage the settlement of payments to and from Capacity Providers and electricity Suppliers.
Contracts for Difference ( CfD)
CfDs are designed to support investment in new low-carbon generation by fixing the price received for power generated in advance. It is a long-term contract between an electricity generator and LCCC (a body established by Government). The contract enables the generator to stabilise its revenue at a pre-agreed level (the strike price) for the duration of the contract. Under the CfD, payment can flow from the Counterparty to the generator, and vice versa.
Capacity Market (CM)
There is a risk to the security of electricity supplies in the future; around 20% of the existing generating capacity is expected to close over the next decade and more intermittent (wind) and less flexible (nuclear) generation is built to replace it.
The Government has introduced the Capacity Market intended to provide an insurance policy against the possibility of future blackouts – for example, during periods of low wind and high demand – to ensure that consumers continue to benefit from reliable electricity supplies at an affordable price.
The Capacity Market is designed to ensure sufficient reliable capacity is available by providing payments to encourage investment in new capacity or for existing capacity to remain open. EMRS administers the payment mechanism.