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Electricity Market Reform (EMR) consultation

Consultation by: DECC and HM Treasury
Open date: 16 December 2010
Close date: 10 March 2011

The Government consulted on a package of options for reforming the electricity market. The proposals are designed to strike a balance between the best possible deal for consumers and giving existing players and new entrants in the energy sector the certainty they need to raise investment. Specifically, they are designed to ensure that low-carbon technologies become a more attractive choice for investors and adequately reward back up capacity to ensure the lights stay on.

Energy Institute (EI) response:

EI members views submitted to DECC in response to the introduction of a carbon price support are found in the consultations archive

There is consensus amongst EI members that a low carbon incentive in the form of a FIT is the most important measure to encourage new investment in the energy industry but differing opinion amongst EI members as to which of the three tabled FIT proposals (FIT with CfD, Premium and Fixed) would best serve investors, the energy industry and, importantly, the consumer. The EI has offered to host a workshop session for DECC economists to work through case studies of CfD scenarios for particular technologies. This would provide stakeholders with a better understanding of the FIT with CfD in action, whilst also acting to probe the model for any unintended consequences. 

EI members agree the introduction of carbon price support is a reasonable and robust measure, providing long-term support for investors. Crucially though, this must be seen by the investment community to be a bankable option. Whilst recognising the benefits of introducing a capacity mechanism and understanding the reasons for introducing an EPS, EI members do not see these as important as the FIT or carbon price support mechanisms. EI members recognise the Government has attempted to put forward a balanced package and that there is a risk of losing that balance if one or more pillars were to be taken away, given the complexities of the package.  

Analysis and implementation of the reform package:

To EI members, the issue of sufficient market liquidity is of critical importance. Amongst EI members, there are also concerns about auctioning. Only once low carbon generation technologies become more established could competition between different generators make auctioning work. EI members agree that further definition as to the roles and responsibilities of the proposed central coordinating body is needed.  

There is recognition from EI members that investment is needed across the energy system, not just in low-carbon generation technologies. Investment will be needed in demand-side response, user-technologies and energy infrastructure, particularly smart meters and networks, distributed energy and combined heat and power as well as training and development of the personnel required to achieve Government targets.

How the EI response was formed:

The EI response is the outcome of a build-up of engagement with Government, with EI members participating in scene setting briefings with key government figures prior to the consultation launch. Following publication of the consultations, EI members were invited to attend a stakeholder workshop to discuss the impacts of proposed measures, consider any unintended consequences and identify opportunities that may have been overlooked. The intentions of the session were two-fold:

  • To allow DECC and HM Treasury officials the opportunity of listening to the debate. It is important for the consultation team to hear stakeholder opinion directly and before it is diluted, as is often the case due to the volume and diversity of written consultation responses.
  • To use the EI members’ contributions as the basis of the peer reviewed EI written submission.

This session was followed up with a breakfast briefing between EI Fellows and the Minister of State for Energy. This provided a platform for discussion for representatives of many EI stakeholder groups affected by the proposed reforms. Present were representatives from power generators (incumbents and new entrants), suppliers, CCS and renewables industries, the oil and gas sector, independent consultants and academics as well as consumer groups.

The Electricity Market Reform proposals are fourfold:  

Carbon Price Support  (HM Treasury consultation closed 11.02.11)

EI members views submitted to HMT in response to the introduction of a carbon price support are found in the consultations archive.

Feed-in Tariffs

Long-term contracts would provide more certainty on the revenues for low-carbon generation and make clean energy investment more attractive still. A 'contract for difference' model for low carbon generation is proposed, as this should control costs for consumers, provide stable returns for investors and maintain the market incentives to generate when electricity demand is high. However, there are design and implementation issues which need further consideration and which Government is keen to address through this consultation. In light of these design and implementation issues, the Government feels it is necessary to consider and consult on an alternative model and considers a premium feed-in tariff as a credible alternative that could enable the electricity sector to meet the Government's decarbonisation and security of supply objectives.

Capacity Payments

Targeted payments to encourage security of supply through the construction of flexible reserve plants or demand reduction measures (so-called negawatts) to ensure the lights stay on. Capacity payments will ensure there remains an adequate safety cushion of capacity as the amount of intermittent and inflexible low-carbon generation increases.

Emissions Performance Standard

A back-stop to limit how much carbon the most carbon intensive power stations - coal - can emit. An emissions performance standard will reinforce the existing requirement that no new coal is built without demonstrating carbon capture and storage technology.

Next steps: 

The Government will publish a White Paper in late Spring 2011, incorporating a response to this consultation and setting out detailed legislative and administrative proposals to support these reforms. The conclusions of the Ofgem Review will be published alongside and should support implementation of market reforms by providing greater clarity for investors on the respective roles of Government and the regulator. Legislation will follow as soon as possible thereafter and the transition to the reformed market will folow before the end of the Parliament. 

See also: Ofgem review: a call for evidence

The Energy Institute (EI) is committed to responding to consultations either by encouraging EI members and stakeholders to respond directly or through a coordinated and formal EI response. As a not-for-profit organisation, incorporated by Royal Charter, with membership across the full range of energy sectors, it is not appropriate for the EI to promote specific technologies or options. Instead, the EI seeks to assist the policy process by helping to clarify the key issues and by improving the evidence base on which decisions will be made. 

If you would like to contribute to the above consultation, future formal EI consultation responses on a particular topic or would like to receive updates when new energy related consultations are launched, please contact:

Gareth Parkes, Knowledge Manager
t: +44 (0)20 7467 7131, e: