What is Energy Market Reform?
The UK is heavily focused on investing in energy infrastructure and achieving environmental targets including an 80% reduction in carbon emissions on 1990 levels by 2050. In addition, the aim is to generate at least 15% of our power from renewable sources by 2020.
To achieve these targets and encourage growth of secure and sustainable energy generation in the future, the government introduced legislation named Electricity Market Reform (EMR).
The cost on investment in the energy sector was estimated by the government to be in excess of £100 billion before 2020 as part of the transition towards a ‘green’ future. Capital raised through EMR will be used to create generation with lower carbon energy sources that will help realise the emission reduction targets. New and existing generation will also be supported by the legislation so that the UK continues to have a reliable source of electricity.
The government predicts as a result of EMR a further 4-5% will be added to the end users electricity invoice. At present, third party costs (TPCs) make up more than half of the standard electricity invoice and are set to continue increasing. This is largely as a result of two charges introduced in August 2014; Contracts for Difference and Capacity Market which are now appearing on invoices.
Four main mechanisms behind EMR
1. Contracts for Difference was created to support investment in new low carbon technology and will inevitably replace the Renewable Obligation charge. CfD costs will vary each year due to wholesale price fluctuations in power and the volume of CfD generation over a 12-month period.
2. To ensure the UK has sufficient power available to meet our future needs, EMR introduced the Capacity Mechanism. The CM offers all capacity providers (new and existing power stations, electricity storage and capacity provided by voluntary demand reduction) a stable revenue stream.
Capacity providers secure the revenues by entering into auctions that set the level of capacity payments. The auctions occur twice a year with the T4 auction securing capacity 4 years ahead and a ‘top up’ T1 which is for the coming delivery year.
3. The Carbon Price Floor sets a minimum price for carbon emissions released by fossil fuelled power generators.
4. Introduction of the Emissions Performance Standard (EPS) from Autumn 2014. This limits the emissions on new power stations equivalent to 450g/kWh at base load.
Opportunities for Electricity Consumers
Although costs will be covered by end users, EMR does present opportunities in terms of revenues as a result of the Capacity Market. Consumers with onsite generation that are capable of providing Demand Side Response (DSR) capacity by load-shifting or reducing consumption are able to participate in the annual capacity auctions.
*Revenue calculation assumes 15% facilitation fee