New details of reforms vital to keeping the lights on and emissions and bills down
• Government action to unlock up to £110 billion energy infrastructure investment and support up to 250,000 jobs by 2020
• Capacity Market to be initiated in 2014 to bring on gas and other flexible electricity supply to meet future demand and reduce risks to security of supply from winter 2018
• Renewable Strike Prices to help renewables contribute more than 30% of total power by 2020
The potential scale of investment, growth and job opportunities available in the energy economy was made clear today as Cabinet Ministers announced new details of reforms vital to keeping the lights on and emissions and bills down.
With around a fifth of Great Britain’s ageing power plants due to close over the coming decade, and further closures in the 2020s, we need huge investment in our energy infrastructure. The Energy Bill currently before Parliament introduces vital market reforms to bring this about.
Chief Secretary to the Treasury Danny Alexander and Energy and Climate Change Secretary Edward Davey today announced more details about the reforms, ahead of schedule, to give developers and investors the confidence to progress with new projects.
Secretary of State Edward Davey said:
“No other sector is equal in scale to the British power market, in terms of the opportunity that it offers to investors, and the scale of the infrastructure challenge. “Our reforms will renew our electricity supply, attracting up to £110 billion investment in a mix of clean, secure power and demand reduction, and will support up to 250,000 jobs up and down the supply-chain.
“The Energy Bill is already progressing well through Parliament and received overwhelming cross-party backing at Commons Third Reading.
“Developers and investors have been crying out for more details, sooner, and that is what we are giving them today.
“The Capacity Market will incentivise investment in new gas plant and other flexible capacity to maintain an adequate supply margin – the safety blanket over and above expected demand – for 2018 onwards.
“Ofgem and National Grid will consult on possible steps they could take to ensure that mothballed power plant or demand response is available if needed in the middle of the decade. This will mean the public can continue to enjoy a reliable supply of electricity.
“The Strike Prices for renewable technologies announced today aim to make the UK market one of the most attractive for developers of wind, wave, tidal, solar and other renewables technologies, whilst minimising the costs to consumers.
“This will help boost home-grown sources of clean secure energy, and enable us to decarbonise the power sector, with renewables contributing more than 30% to our mix by the end of this decade.
“Our reforms will keep the lights on and emissions down, and will save consumers money on their bills. The result – low-carbon, affordable and reliable power for the long-term”
The Government will run the first Capacity Market in 2014. This will ensure sufficient electricity supplies from winter 2018 by attracting necessary investment in new and existing generation, as well as other forms of capacity such as demand response.
Capacity agreements, alongside long-term Contracts for Difference (CfDs) for low-carbon power, will boost supplies into the next decade and protect consumers against volatility in market price.
Similar capacity markets already operate in the USA and a number of EU countries, and one is being introduced in France.
Detail confirmed today:
• A Capacity Market (CM) will be initiated with the first auctions taking place subject to State Aid approval in 2014, for the delivery of electricity capacity from the winter of 2018-19, as previously proposed. This confirmation, alongside further detail on the design of the CM, will enable industry to prepare for implementation.
• Participants in the CM (who could include existing generators and investors in new plant such as gas or demand-side response), will bid to provide the total amount of electricity capacity that is forecast to be required through an auction, and if successful would receive a steady payment in the year they agree to make capacity available.
• In exchange they will be obliged to deliver electricity in periods of system stress or face financial penalties.
• The costs of capacity agreements will be met by suppliers. But the impact on bills will be partially offset by reduced wholesale prices, and consumers will be protected against volatility in market prices and costly blackouts.
Ofgem today updated their assessment of supply margins in the middle of this decade, anticipating that the buffer between peak demand and supply could be lower than previously expected.
This is in part due to the low price of coal that has led coal-fired power stations in the UK to operate more often, whilst gas has become uncompetitive, leading plants to close. This surge in the use of coal has also brought forward the point at which the dirtiest plants are required to close in compliance with environmental standards.
In response, Ofgem and National Grid will each consult on extending existing arrangements they use to balance supply and demand in the short term, and to ensure enough power is available when needed. This could include contracting for additional reserve in the form of currently mothballed plant or incentivising flexible demand response.
As a result of the prudent action set out today by DECC, Ofgem and National Grid, customers will continue to enjoy security of electricity supply throughout the rest of this decade, and into the next.
Renewable Strike Prices
Also announced today are details, earlier than expected, of the proposed strike prices that will be available from 2014 - 2019 for renewable electricity including onshore and offshore wind, tidal, wave, biomass conversion and large solar projects. This support comes from within the £7.6 billion Levy Control Framework, as previously announced.
Strike Prices effectively remove price volatility risk for electricity generated from low-carbon sources, under new long-term CfDs being established by the Energy Bill. This ensures greater certainty to generators and therefore a better deal to consumers.
They form a core component of the Government’s strategy to bring forward investment in affordable low-carbon electricity generation – including renewables, Carbon Capture and Storage and new nuclear.
CfDs are vital to give investors the confidence they need to pay the up-front costs of major new infrastructure projects, and will help ensure that renewable energy makes up more than 30% of the UK’s electricity mix in 2020, helping to significantly decarbonise the power sector by 2030.
These prices are broadly comparable to the support levels available under the Renewables Obligation, with a number of adjustments to account for the benefits of CfDs.
CfDs will make it cheaper to deliver low-carbon generation by around £5 billion* up to 2030, because they will deliver cost of capital reductions that cannot be achieved through existing policy instruments.
Other detail of Electricity Market Reforms announced today:
• Levy Control Framework – There will be a cap set to limit the costs passed on to consumers through the long-term contracts. This cap (the Levy Control Framework) covers all of DECC’s support mechanisms for low-carbon generation and, as announced in November 2012, will be £7.6 billion (in 2012 prices) in 2020/21. New profiling of the LCF shows the cap will start in 2015/16 at £4.3 billion (real terms).
• Contract Terms - Further details of the contract terms were published today, which provide a number of protections and flexibility to developers, allowing projects to be brought forward at lower cost to consumers.
• Final Investment Decision Enabling for Renewables – the application process opened today for developers of renewable electricity projects who can now apply for Investment Contracts ahead of when the long-term EMR contracts (Contracts for Difference) are finalised, to help ensure that financially viable projects can proceed apace. Projects that support the long-term growth and economic viability of the energy industry, as well as delivering credible renewable electricity generation will be eligible for support.
• Renewable Energy Trading - DECC published a response to a Government Call for Evidence on Renewable Energy Trading today, which confirmed the Government is minded to allow renewable electricity to be imported to the British Grid from abroad, so long as obstacles can be overcome, and to enable renewable electricity to be exported from the UK to elsewhere. This will help meet renewable energy targets, boost energy security and investment.
• Scottish Islands – The Government announced its intention today to consult in the summer on additional support for renewables projects located on islands (where these have clearly distinct characteristics to typical mainland projects). This is on a timetable to allow a differential strike price to be set for these projects in the final Delivery Plan in December.
• Hinkley Point C new nuclear – The Treasury has announced the decision to pre-qualify EDF’s Hinkley Point C new nuclear power project for a UK Government Infrastructure Guarantee. Negotiations remain on-going between Government and NNB Genco (a subsidiary of EDF) on the potential terms of an investment contract (an early form of Contract for Difference) for Hinkley Point C. A contract will only be offered it is value for money, fair and affordable, in line with Government policy on no public subsidy for nuclear and is consistent with State Aid.
• The Spending Review settlement confirmed that Government is allocating £75 million of capital for investment in innovative energy projects that aim to lower the cost of deployment in technology areas such as offshore wind, renewable heat, carbon capture and storage, and to pilot approaches to permanently reducing demand for electricity.
• The Government has amended the Energy Bill so that projects that deliver permanent reductions in electricity demand (EDR) could participate in the Capacity Market. Final decisions on implementation will be made following completion of the proposed pilot to test the approach. We will provide further detail on the pilot in due course.
Government will consult on the draft strike prices published today and the remainder of the Electricity Market Reform Delivery Plan, as planned, by 18 July.
The Government has also been working with industry to produce three outward facing Energy Industrial Strategies. These are a key element of Government’s overall industrial strategy programme, a whole of Government approach to supporting UK business, giving them the confidence they need to invest and grow.
The nuclear and oil and gas industrial strategies have been published, and we will be publishing an offshore wind industrial strategy in mid-July. The Offshore wind sector strategy is designed to increase investment in the UK offshore wind supply chain and Industry and Government will work together to build competitive advantage in this sector.
Notes for Editors
The Energy Bill is making good progress through Parliament. It was backed at Commons Third Reading by an overwhelming majority of MPs – 396 in favour, just 8 against. It is now in the House of Lords.
The Chief Secretary to the Treasury published a document on energy policy as part of the Spending Review
Electricity Market Reform: Delivering UK Investment summarises the further details announced today
The Capacity Market is a supplement to the electricity market that will attract the investment needed in new and existing generation and demand-side response in order to ensure adequate supplies from winter 2018 onwards. The introduction of a Capacity Market is subject to legislation and State Aid clearance. The need for a Capacity Market will be reviewed every 5 years. National Grid will administer Capacity Market auctions and issue capacity agreements. The Capacity Market will cover England, Wales and Scotland but will not apply in Northern Ireland (given the existence of the Single Electricity Market in Ireland). The Government intends to consult in the autumn on its proposals on the design of the Capacity Market, and will draft secondary legislation to implement them, so that legislation can be further refined prior to coming into force in July 2014. Read more about the Capacity Market
The 2020 figure for the Levy Control Framework was previously announced by DECC in autumn 2012, and represents a tripling of Government support for renewable energy. We have today announced the trajectory of spend for each year from 2014 to 2020.
The £5 billion figure captures the impact of a reduced cost of capital under Contracts for Differences, Net Present Value up to 2030 (in 2012 prices).
A Response to Call for Evidence on Renewable Energy Trading was published today
More detail was set out today on the criteria against which applicants for investment contracts under the Final Investment Decision Enabling for Renewables (Updates 1 & 2)
Scottish Islands – Government today announced its intention to consult on additional support for renewable projects located on the islands. This follows on from the conclusions of a research project undertaken jointly with the Scottish Government. The consultation will consider, what level of additional support would be appropriate, as well as deliverability, the potential impact on deployment, and affordability. We will take forward this work in time to allow a differential strike price to be set for these projects in the final Delivery Plan in December.
Ofgem today published its Electricity Capacity Assessment, setting out the supply picture for the coming five years . Ofgem also published a letter to industry regarding a consultation on the potential requirement for new balancing services by National Grid Electricity Transmission plc (NGET):
DECC’s Gas Generation Strategy estimated that up to 26GW of new gas generating capacity could be required by 2030. The bulk of this will be used to replace retiring coal, nuclear and older gas capacity, so it is expected there will be a net increase of around 5GW in new gas capacity by 2030. DECC’s Gas Generation Strategy (December 2012)
Government is not announcing strike prices for new nuclear or Carbon Capture and Storage technologies today as these are subject to bilateral negotiations. A full list of strike prices and notes is set out in the table below.