Electricity Market Reform: what does industry have to say?

This morning the Department of Energy and Climate Change published the Draft Energy Bill, including the much-anticipated Electricity Market Reform (EMR).

The news brought with it a contracts for difference (CfD) programme, aimed at stabilising returns for generators at a fixed level known as a strike price; a capacity market mechanism, designed to prevent expected blackout periods; an Emissions Performance Standard (EPS), which will effectively ban the construction of new coal plants which emit more than 450g/kWh; and a Carbon Floor Price of around £16 a tonne in 2013 that will rise to £30 per tonne by 2020.

Also revealed in the document was the confirmation that contracts for difference will bridge the gap between the end of the Renewables Obligation – which will wind down in 2017 – and the beginning of the CfD programme.

Since the EMR was published many industry commentators have responded to the news. Some are pleased that the document is now public, and that some clarity has been provided, however many remain concerned that there is still considerable uncertainty as to the final form of any secondary legislation. A roundup of the latest comments can be follows:

Bill Easton, Director of Utilities at Ernst & Young, said: “Today’s draft bill is a crucial step as it signals the shift from a debate on policy direction into the details of policy execution. It is clear that Government has been listening hard to the industry and has accepted the need for an overall strategy and policy statement, as well as the need for transitional arrangements that can be activated quickly.

“The level of detail included in the bill and the supporting documents is testament to the complexity of electricity markets and indeed the challenges that still lie ahead. The detail provided starts to give generators a picture as to how the new arrangements will be administered and run and what they may mean for them. However, energy suppliers will be concerned about the lack of detail on future regulations and obligations that they may be required to accept.”

“The critical challenge over the next 12 months is for the debate on market reform to converge on agreed and workable solutions.”

Matt Bonass, a leading corporate finance and climate change lawyer in Bird & Bird’s Energy and Utilities team, said: “The publication of the draft Energy Bill today is, of course, to be welcomed. However, its impact on investment and project development remains a concern as it is presented for pre-legislative scrutiny only at this stage. While this gives more time for debate on the details, it will do little to provide investors with the certainty they are looking for. Further, while the draft Bill sets out the broad themes of Electricity Market Reform, the devil remains in the detail and there is still considerable uncertainty as to the final form of any secondary legislation, for example on CfDs and the capacity market. 

“We have seen from other UK renewable energy policies, such as small scale feed-in-tariffs and the Renewable Heat Incentive, that there can be a long lead time between initial enactment of primary legislation and the introduction of secondary legislation, so uncertainty is likely to continue for some time yet. 

“In addition, in looking to promote certainty, the Government may be accused by some of further muddying the waters.  We are in the middle of a consultation on the banding of Renewable Obligations Certificates.  Added to this now is the introduction of so-called ‘investment instruments’, quasi CfDs which we are told come with no guarantee of converting into the real thing.  Finally, the Government will be authorised to scrap the Renewable Obligations regime entirely and replace it with a Certificate Purchase Obligation regime.”

Dr Neil Bentley, CBI Deputy Director-General, explained: “While it is reassuring to see some progress on the Energy Bill, it’s now important that Parliament not only gets it right, but does so as a matter of urgency. With over a fifth of the UK’s generating capacity coming off stream before 2020, we face a real risk of electricity shortages in the second half of the decade.

“The clock is ticking to create the market certainty that will unlock billions of pounds of private sector investment, generating many new jobs across the UK, and securing an affordable supply of energy.

“We are still some way from having a detailed picture of how the electricity market will look in the future, on which the success of these reforms depends. With major investors waiting in the wings, these details are needed as soon as possible.”

Meanwhile, Juliet Davenport, CEO and Founder of Good Energy, commented: “The Government's persistence with Contracts for Difference is playing with fire. These overly complex instruments risk skewing the market towards nuclear and the ‘Big 6’ at the expense of renewable energy and smaller suppliers. They will restrict competition in the market, rather than attracting the new investment the industry needs, and the result is that consumers will be the losers in the long run because they will end up having to pay higher prices.

“There is an alternative initially proposed by Government – a straightforward premium feed-in tariff would address these problems.

“Renewable energy sourced in the UK is better for our energy security and will lead to lower and more stable prices in the long run, and mean that money spent on our energy bills is re-invested here in the UK. We’ve got a once-in-a-lifetime opportunity to get this right; if the government blows it we’ll be tied into gas and expensive nuclear and prices will continue to spiral higher.”

Caroline Lucas, Brighton Pavilion MP and Leader of the Green party, noted: “The Government has made a big noise about being ‘technology neutral' and not putting all of its eggs in one energy basket, but the Electricity Market Reform proposals expose a clear bias towards nuclear and gas. If we're to avoid ending up with an insecure, dirty and expensive electricity system, we need a far more ambitious energy bill from this Government, which contains an absolute commitment to decarbonise electricity generation by 2030.”

Ben Caldecott, Head of Policy at Climate Change Capital, said: “Whether the package is successful depends entirely on its effective implementation and there is still much that needs to be clarified, especially how we can avoid locking in too much new, import dependent, high-carbon infrastructure.”

While Fergus Ewing, the Scottish Energy Minister, said: “It is essential the reforms send the right market signals for renewables and Carbon Capture and Storage technologies so that industry has clarity over the form of support it will receive … the UK government must recognise that the purpose of this reform is to support renewable energy, not to provide subsidies for nuclear energy.”

Richard Lloyd, executive director of Which?, concluded: “The Government must be transparent and allow full scrutiny of these reforms, particularly on the contract negotiations for new low carbon generation. Contracts for Difference could see potential savings for consumers but the Government must be honest about the cost that this investment will involve.”

The full draft Energy Bill can be read here.