Electricity Market Reform:
Overview of consultation
Hannah Wadcock
EMR Programme Team
The EMR framework
Government’s objectives for EMR
• The Government’s energy and climate change goals
are to deliver secure energy on the way to a
sustainable, affordable, low-carbon energy future and
drive ambitious action on climate change at home
and abroad.
• This requires substantial investment in new
generation and networks: approximately £110 billion
of capital investment in the decade to 2020 – this is
like building 20 Olympic stadiums every year.
• To meet this challenge, we need to attract investment
from a broad pool of investors, and support
investment by a wide range of developers.
• The Contract for Difference (CfD) is the proposed
instrument to attract this investment in low-carbon
Electricity Market Reform
Context: Summer 2013 – Policy
We set out key outstanding parts
of the EMR framework
Draft Strike Prices and key contract terms – early certainty of key
parameters for renewables investors (June)
Capacity Market Detailed Design proposals – alongside Ofgem and
National Grid consultations on mid-decade security of supply measures
Draft EMR Delivery Plan – methodology behind draft CfD Strike Prices
and Capacity Market reliability standard (July). Consultation closed 25
September and DECC now analysing responses
August CfD design package – draft terms for Contracts for Difference,
alongside the draft methodology through which contracts will be allocated
and an update on the CfD Supplier Obligation (August)
We are now moving to implementation
(1) Collaborative Development with
DECC, delivery partners (National Grid, Ofgem and Elexon), and industry
participants working together to develop EMR systems and processes
Series of working groups overseen by an Implementation Steering Board
will develop the draft Operational Model for EMR
Working groups on the Capacity Market started in August and on Contracts
for Difference in October. [Workshops have now concluded]
We are now moving to implementation
(2) Consultation on detailed
implementation of EMR launched
October 2013
On 10 October DECC published a consultation on the detailed policy proposals for
the implementation of EMR
Consultation enables stakeholders to see both new and existing proposals - setting
out the overall picture across EMR. It will also publish key sections of draft
secondary legislation to help illustrate the policy proposals
Response to the consultation will be published when we lay secondary legislation in
Parliament, which we expect to do in late Spring and have in force in July 2014
What does the consultation
The consultation
• the detailed policy framework for CfDs and the
Capacity Market, and the institutional delivery
arrangements for both.
• It also seeks views on implementation of measures
to manage any potential conflicts of interest for
National Grid as the EMR delivery body.
Some of the
proposals referred to
in the consultation
have already been
developed through
prior consultation.
• The reliability standard for the Capacity Market
• CfD strike prices and the terms of the generic CfD.
• Therefore these matters are not the subject of this
Presentation title - edit in Header and Footer
Capacity Market
18 November 2013
Capacity Market – high level design
Amount to auction
The first auction will run in November 2014, for
delivery in the winter of 2018/19*
Ministers will set enduring reliability standard and
a method for establishing demand curve
Illustrative capacity demand curve
Demand curve sets target level of capacity to
auction, enables cost/reliability trade off and sets
maximum price cap for auction
Annual security of supply analysis by National
Grid; independently scrutinised
Ministers will decide final volume of capacity to
procure (based on National Grid’s advice)
Quantity required procured through auctions four
years ahead and one year ahead of delivery
Process intended to be as mechanistic as
possible, while controlling costs
* Subject to legislative approval and state aid clearance
Eligibility and pre-qualification
New and existing generation (inc.
Demand response (inc. embedded
Electricity storage
Capacity receiving low carbon
support (e.g. CfD)
Participants in UK’s CCS
commercialisation programme
Interconnected non-GB capacity and
Capacity below 2MW (although may
aggregate to qualify)
Pre-qualification stage – confirms eligibility and bidding status of applicants
All licenced generators must pre-qualify. Demand curve adjusted for such plant
which states it will remain operational for the delivery year
De-rating ranges will be set for each capacity type. Applicants may choose their
level of risk by selecting their de-rating factor within the range
Existing plants wishing to bid above a low threshold must provide justification
Pay-as-clear descending clock auction format. Technology neutral
Clearing price set by most expensive successful bidder
Offers in auction – price (£/MW) and term (years)
CAPEX threshold determines term length: < £125/kW one year, between £125/kW
and £250/kW up to three years and > £250/kW for longer agreements
Ability to postpone/ cancel
auction if considered it will be
insufficiently competitive
Participants to sign ‘Certificate
of Ethical Conduct’
Auction monitor will be
appointed to verify that
auction rules were followed
Obligations can be physically traded (where obligation transfers) from a year ahead of a
delivery year and throughout a delivery year
Trading parties’ eligibility and pre-qualification status assessed
Plant able to take on additional obligations include:
– Plant unsuccessful in auction
– New plant commissioned early
Plant with capacity obligations acquired through an auction, opted out plant or retiring
plant will not be able to take on additional obligations
Registry for capacity obligations
Historic penalty liabilities will not transfer with physical trades – remain with the party that
incurred the original penalty
All plant able to hedge their positions financially in private markets
Penalties applied in ‘system stress events’ where demand is not met, where preceded
by a Capacity Market warning
Performance relative to intended position up to four hours after warning. Switches to
load following obligation after this time
Obligation level and delivery performance will be assessed after the event
Financial penalties for delivery failures applied at rate of (Value of Lost Load x penalty
scaling factor) minus system imbalance price
Overdelivery paid at rate of penalty revenue. Funded by penalty receipts
Penalty liability capped at [101-150%] of annual capacity revenues. Applied on a
portfolio-wide basis
System of checkpoints and sanctions for delayed refurbishing and new plant to ensure
they build on time
System Operator spot testing regime
Obligations adjusted to account for provision of balancing services
Government-owned settlement body
provides ultimate accountability for
payment flows
Costs of the Capacity Market will be
recovered from licenced suppliers
according to their share of peak demand
Overdelivery payments will be funded from
penalty receipts. Any excess will be
returned to suppliers
Suppliers required to lodge collateral to
cover one month’s payments
Providers not required to lodge collateral
against penalties. Defaults will be covered
by withholding future payments or
subsequent mutualisation across suppliers
An Overview of the CfD
Supporting investment in Low-Carbon
CfD Removes
Price Risk
from Investors
allocation of
reducing risk
to developers
Lowering the
cost of
investing in
Clear set of
roles and
and Delivery
backed by a
Key Components of CfD
Phase 5
Contractual flexibilities and obligations
1) Collaborative
2) CfD Allocation
3) Budget (‘LCF’)
5) CfD Standard
4) Strike Prices
8) Energy Bill & Regulations
6) Counterparty
Governance &
7) CfD Supplier
Energy Bill Amendments
1.CfD Standard Terms
Gives the Secretary of State the power to issue and, from time to time,
revise, the CfD standard terms
2.CfD notification
Provides for regulations regarding how the System Operator is to notify
the CfD counterparty of an allocation decision
3.Offer to contract
Provides for regulations regarding how the CfD counterparty is to offer a
contract to a generator following a notification from the System Operator
4.Modifications to the standard terms
Enables the CfD counterparty to agree ‘minor and necessary’ modifications
to the standard terms, on a case by case basis, pre signature
5. Allocation Framework
Gives the Secretary of State the power to issue and, from time to time,
revise, detailed rules governing CfD allocation (the “allocation
Electricity Market Reform
CfD allocation framework –
what will it contain?
Proposed Content for
Proposed Content for
Allocation Technical
Eligible technologies and eligibility
Other information required from
Allocation phases and when to
move between them.
Frequency of rounds.
Precise trigger for moving from
Detailed process for Grid to follow.
Power to vary budget and
restrictions on this.
Scope for maxima and minima.
Where and how budget is
Methodology for valuing CfDs.
Basis of rationing, e.g. by price.
Precise rationing process.
Main elements of appeals.
Detailed process for Grid to follow.
TCWs and LSDs for each
Electricity Market Reform
1. The Levy Control Framework (LCF):
Stability for investors and protection of the
LCF Upper Limit
(2011/12 prices)
2019/20 2020/21
 The Levy Control Framework (“LCF”) sets out the maximum support for low carbon generation on
an annualised basis.
 These numbers include: the RO, small scale FITs, CfDs (not Warm Homes Discount, Capacity
 Transparency provides clarity for investors about the likely availability of support for low carbon
projects. Regular information on remaining CfD budget will be available once allocation is under
Electricity Market Reform
Initial allocation under First-Come,
• The intention is that once a trigger has been met (e.g. 50%) of the CfD
budget within any delivery year has been used up, the EMR delivery body
will seek Government’s approval to move to Allocation Round
• Duration of the First Come First Served phase of allocation will be impacted
by wider decisions on the use of the LCF cap and value for money
There are some scenarios in which FCFS may only last for a short period or may not
be able to operate at all
if so, Government will consider moving immediately to allocation rounds and will
also consider introducing constraints for certain technologies or groups of
• Once Allocation Rounds have been introduced, they will operate for all
delivery years and across all technologies.
• The precise level for this trigger is set will be confirmed in the final delivery
plan, planned for publication in December 2013
CfD allocation: Policy Update
Allocation rounds work much like FCFS
unless constraints are triggered
• Once Allocation Rounds have been introduced, they will operate for all
delivery years and across all technologies.
• Two scenarios are possible under allocation rounds:
Unconstrained allocation: If all the bids within the round can be satisfied within
the CfD budget then all projects are allocated contracts. The exceptions to this
may be where a technology or group of technologies minima or maxima
interact with the wider budget in particular ways (explained in more detail
Auctions/ “Constrained allocation”: If there is insufficient budget to satisfy all
bids or maximum constraints are exceeded, then an auction (constrained
allocation) will apply.
CfD allocation: Policy Update
Supply Chain Plans
New policy to encourage open and competitive supply chains and promote innovation
& skills in the low carbon sector. This will drive down the cost of low carbon
generation over the long term and result in lower energy costs to consumers.
•The EMR Implementation Consultation stated intention to require developers to submit Supply
Chain Plans.
•Projects above 300MW capacity will be asked to submit a Supply Chain Plan to be eligible to
enter the allocation process for a CfD.
•Plans will be assessed by Government and must show the plan demonstrates enough action is
being taken, or will be taken under each criteria.
•Developers will then submit the certificate that shows their Supply Chain Plan has been
approved to National Grid when applying for a CfD.
•Policy was set out in the EMR consultation, but further details and a chance to share views, will
be published in late November.
•Government will publish the Regs and draft guidance next year, before the EMR go live date, to
allow companies to prepare their submission.
Electricity Market Reform
Supplier Obligation :
• Statutory obligation on GB and NI suppliers to pay for CfDs
• Powers within the Energy Bill:
• “Backstops”: collateral, mutualisation, ability to hold funds.
• All licensed suppliers in GB and Northern Ireland.
• Compulsory payment: requirement of license
• Detail in draft CfD (Supplier Obligation) Regulations which we are
currently consulting on
• Regulations will be laid in Parliament and debated next year
Electricity Market Reform
Supplier Obligation:
Who is doing what
Designs and imposes the supplier obligation through primary and
secondary legislation. This includes setting out who will pay, the
formulas for calculating how much they will pay; when they will pay,
and what will happen if they don’t pay. Provides model to the CfD
Counterparty to set the supplier obligation rate.
Uses powers within the Energy Bill to raise the supplier obligation
following the rules within the Supplier Obligation Regulations.
Administers “backstops” according to the regulations. Operates rate
setting model.
Operates on behalf of the CFD Counterparty collecting the supplier
obligation. Underpinning data is from the BSCco.
Enforces the supplier obligation as a license requirement.
Suppliers in
GB and NI
Pay the supplier obligation and into a series of funds; post collateral.
Electricity Market Reform
Strength of the Supplier Obligation
The following framework of backstops are aimed to ensure
payment to generators in case of supplier default:
• Collateral
• Insolvency reserve fund
• Mutualisation of debts
• Supplier of Last Resort (SoLR)
• Energy Supply Company Administration (ESCA)
• Enforcement of debt in the courts
Electricity Market Reform