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THE ENERGY MARKET REFORM (EMR)
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A Unique Perspective | The Energy Market Reform (EMR)
Welcome! As you may already be aware, all energy consumers will be facing far higher costs as part of the government’s new Electricity Market Reform (EMR) measures, legislated for in the energy bill, which became law in December last year. With a fifth of the UK’s generating capacity due to close within a decade, the new bill sets out the policies that aim to incentivise private investment of £110 billion in new energy infrastructure to ensure security of supply. Find out more about how these new reforms could impact your business in A Unique Perspective on the Energy Market Reform or by calling your dedicated Relationship Manager today. Thank you again for choosing EnergyQuote JHA.
Andrew Hill Andrew Hill Head of Analytics, Risk and Trading
EnergyQuote JHA, 66 Hammersmith Road, London W14 8UD United Kingdom. T: +44 (0)20 7605 2300 E: enquiries@energyquote.com
Following the completion of a Master’s degree in Energy Economics and Law in 1996, Andrew worked in consultancy for both Petroleum Economics Ltd and Wood Mackenzie before taking up a role as Head of Oil Markets Analysis at Enron Corp in Houston. After this he became Editorial Director at Heren Energy and then Director of Energy Markets at Datamonitor before joining EnergyQuote JHA in 2010.
A Unique Perspective | The Energy Market Reform (EMR)
The impact of EMR on consumer bills All energy consumers will be facing higher costs as part of the government’s new Electricity Market Reform (EMR) measures, legislated for in the energy bill, which became law in December last year. The new bill sets out the policies that aim to incentivise private investment of £110 billion in new energy infrastructure to ensure security of supply as a fifth of the UK’s generating capacity is due to close within a decade. The impact of the new reforms will be felt from 2015/16 as consumers will be expected to bear the cost burden of the new policies.
£110 billion private investment needed to ensure security of supply
Key mechanisms Contracts for Difference (CFD) will replace the Renewables Obligation (RO) as the new financial support mechanism to incentivise investment in renewable electricity generation. Long-term contracts will provide stable revenues for investors in new low-carbon energy projects. The strike price will be fixed at a specific level for each technology and will help to lower the cost of capital. Money will be clawed back from generators if the electricity market price rises above the strike price. Similarly generators will be paid the difference if the strike price falls below the wholesale price.
Contracts for Difference (CFD) will replace the Renewables Obligation (RO)
The first contracts are expected to be awarded from April next year and suppliers are now starting to include the impact into consumer bills from April 2015. A Capacity Market will insure against future supply shortages as more inflexible plant, such as nuclear, and intermittent generation, such as wind, dominates the electricity mix. Capacity providers, such as new and existing power stations, electricity storage and voluntary demand reductions, will be offered a steady, predictable revenue stream on which they can base their future investments. In return for capacity payments, participants must deliver energy when needed to ensure security of supply, or face penalties. The cost to consumers for this capacity will be minimised as a result of the competitive nature of the auction process that will set the level of capacity payments.
Participants must deliver energy when needed to ensure security of supply, or face penalties
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A Unique Perspective | The Energy Market Reform (EMR)
The first primary auction to set the capacity price for winter 2018/19 will take place in December. Once the auction has taken place market participants will have a better understanding of the impact on consumer bills, which will not impact until April 2018. There will be an opportunity for some businesses with flexible consumption patterns to participate in the auction.
Scale of costs £50 million will be competed for by established technologies, such as onshore wind and solar PV
The government has published the draft budgets that renewable energy projects will compete for. In 2015/16 some £50 million (in 2011/12 prices) will be competed for by established technologies, such as onshore wind and solar PV, with a potential further £38 million available. Eight projects have also been awarded fast-tracked investment contracts and some of these schemes may also be operational next year. We estimate that the CFD element of the new EMR arrangements could increase consumer bills by £2-3MWh in 2015/16, although this will depend on the number of schemes that compete for support under the new support mechanism as the RO will remain open to new capacity until April 2017. It will also depend on how many of the fast-tracked projects are operational and will depend on the government’s final budget allocation.
We estimate that the CFD element of the new EMR arrangements could increase consumer bills by £2-3MWh in 2015/16
Suppliers will have an obligation to fulfil the associated costs and it will be down to individual companies as to how this is recovered from consumers, for example recovery equally from domestic and business consumers or a bias depending on corporate strategy. Some suppliers have started to offer contracts incorporating the cost of CFDs as a fixed price, although others are still more wary and are opting to pass through. It will be up to how suppliers how they manage the risks associated with movements in the wholesale electricity price. The scale of the costs should become more transparent when the Low Carbon Contracts Company, the scheme administrator, starts to publish its interim £/ MWh rate, three months in advance of a quarter, along with a rolling forecast for the following three quarters for suppliers. There will be a reconciliation at the end of each quarter. There will also be some additional costs to cover the operational costs of the administrator, plus reserve and collateral funds.
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A Unique Perspective | The Energy Market Reform (EMR)
The government published the draft budget notice for the first CFD allocation round in July and must publish the final budget before the first allocation round in October.
Energy intensive user exemption The government has proposed that electricity suppliers of eligible energy intensive industries will be exempt from some of the costs associated with CFDs and it expects that suppliers will pass this exemption on. The exemption is expected to be implemented next year.
Electricity suppliers will be exempt from some of the costs associated with CFDs
The government’s preferred option is to use a methodology that assesses eligibility by levels of electricity and trade intensity and is currently consulting on the eligibility criteria. While energy intensive users will be partially exempt, the overall costs will still have to be recovered from all other consumers. Government analysis suggests that an exemption for energy intensive industries from the CFD costs will add an average of £0.20/MWh to electricity prices for non-exempt consumers from 2015 to 2020. Those consumers subject to the full CFD costs will still be able to reduce their overall energy bills by implementing energy efficiency measures.
Government analysis suggests an average of ÂŁ0.20/MWh will be added to electricity prices for non-exempt consumers from 2015 to 2020
Non-UK electricity generation The government is considering the benefits of supporting renewables electricity projects located outside the UK in order to help the UK meet its renewables target and ensure security of supply. It has highlighted the high level issues associated with this policy and sets out indicative areas of work that would need to be addressed.
The government does not expect non-UK projects to be eligible for CFDs until 2018 at the earliest
Given that UK contracts are not due to be issued until the end of the year and that the CFD regime in Northern Ireland is not due to be implemented until April 2017, the government does not expect non-UK projects to be eligible for CFDs until 2018 at the earliest. The government also warned that opening the CFD scheme to projects located outside the UK would require most aspects of the EMR policy design to be reviewed, such as CFD allocation. If non-UK projects were to be eligible for CFDs, it is not expected to impact on consumer bills until at least April 2018.
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