Supporting detail:

Electricity Market Reform (EMR)

The reformed electricity market will deliver the low carbon energy and reliable supplies that the UK needs, while minimising costs to consumers.

EMR introduces two key mechanisms to provide incentives for the investment required in our energy infrastructure.

  • Contracts for Difference (CFD) provides long-term price stabilisation to low carbon plant, allowing investment to come forward at a lower cost of capital and therefore at a lower cost to consumers.
  • The Capacity Market provides a regular retainer payment to reliable forms of capacity (both demand and supply side), in return for such capacity being available when the system is tight.

Stimulating the UK economy now and in the future

The UK faces very rapid closure of existing capacity as older, more polluting plants go offline, whilst UK electricity demand is expected to grow with our economy and as heat and transport systems are increasingly electrified. Attracting the investment to transform the UK’s electricity infrastructure will stimulate the economy, support the growth of UK supply chains and boost the jobs market. We will need a substantial increase in skilled professionals to design, plan, manufacture, construct and operate the projects across the UK. To achieve this investment we need to attract new sources of capital, and do so whilst keeping costs to consumers as low as possible.

Benefits of reform

The reformed electricity market will deliver the greener energy and reliable supplies that the country needs, while minimising costs for consumers in the long term. It will transform the UK electricity sector to one in which low-carbon generation can compete with conventional, fossil-fuel generation – ensuring we build a cleaner, more sustainable energy mix.

EMR is designed to:

  • decarbonise electricity generation
  • keep the lights on
  • minimise the cost of electricity to consumers

Helping meet our carbon targets

To help us meet our legally binding carbon targets, it is critical that the power sector makes large reductions to its carbon emissions by the 2030s. Our reforms to the electricity market encourage investment in a range of low-carbon technologies so that they generate an increasing proportion of our electricity.

In addition to Contracts for Difference (CFDs), the Carbon Price Floor will indicate to the market our commitment to low-carbon electricity – as will the new Emissions Performance Standards, which will require any new coal-fired power station to be equipped with CCS.

Securing the UK’s energy supply

The risks to the security of the UK’s energy supply will increase, if there is not significant investment in the UK’s energy network. The Department of Energy & Climate Change (DECC) and the Office of Gas and Electricity markets (Ofgem) models suggest capacity margins will tighten towards the end of this decade, significantly increasing the risk to reliable supplies.

The Capacity Market will help keep the lights on by driving new investment in gas and demand side capacity, as well as getting the best out of our existing generation fleet as we transition to a low carbon electricity future.

By supporting all forms of low-carbon generation, CFDs will diversify the UK’s domestic energy supply. This will help improve the UK’s energy security and reduce reliance on energy imports. It will also ensure we keep the lights on and protect consumers against global spikes in fossil fuel prices.

Keeping bills down

The ultimate aim of these reforms to the electricity market is to create a competitive environment in which low-carbon technologies compete fairly on price and so deliver the best deal for the consumer. Our latest analysis suggests that EMR will reduce household electricity bills by £41 or 6 per cent per year on average over the period 2014-2030 compared to meeting the Government’s objectives using existing policy instruments.

Find out about reforms to the electricity market

Implementing Electricity Market Reform

Implementing Electricity Market Reform sets out the reforms and provides a comprehensive overview of EMR policy. The document includes chapters on the two main mechanisms that the Government is introducing to reform the electricity market: Contracts for Difference (CFDs) and the Capacity Market, as well as detail on measures to encourage greater energy efficiency through the Electricity Demand Reduction (EDR) programme.

EMR stakeholder bulletins

Stakeholders interested in Electricity Market Reform can be notified of new publications, announcements and upcoming events through our stakeholder bulletins.

If you would like to be added to the distribution list please contact harry.bannister@decc.gsi.gov.uk.

How the reformed market will work

Contracts for Difference (CFDs)

CFDs support new investment in low-carbon electricity generation. It has been designed to provide efficient and cost-effective price stabilisation by reducing exposure to the volatile wholesale electricity price.

CFDs require generators to sell energy into the market as usual but, to reduce exposure to fluctuating electricity prices and provide a variable top-up from the market price to a pre-agreed ‘strike price’. At times when the market price exceeds the strike price, the generator is required to pay back the difference, thus protecting consumers from over-payment.

CFDs will be implemented through a bilateral private law contract between the Generator and the Low Carbon Contracts Company Ltd (the ‘CFD Counterparty’). In order to be eligible to apply for a CFD contract, generators need to satisfy certain eligibility criteria. Please see the Contracts for Difference webpage for further details. Also see CFD Standard Terms and Conditions.

The payments to be made to generators will be calculated and paid out by the Low Carbon Contracts Company. The cost of CFDs will be met by consumers via the supplier obligation; a levy on electricity suppliers.

Five statutory instruments implementing CFDs set out how applicants can apply for a CFD and the detail of the allocation process; the criteria and eligibility for generators seeking a CFD; how a CFD contract may be drawn up, offered and publicised; establish the ‘supplier obligation’ mechanism, to meet the costs of CFDs; and set out a number of general provisions relating to the scheme.

Following on from the publication in April of the draft Contract for Difference (‘CFD’) contract and the successful passage of the EMR legislation through Parliament, the Government has published the final CFD contract and supporting notices. The final Allocation Framework and Notice followed.

For more detail see Chapter 2 of the Implementing EMR handbook

Capacity Market (CM)

The Capacity Market will enhance the security of our electricity supply by ensuring that sufficient reliable capacity is in place to meet demand.

The Capacity Market works by offering all capacity providers (new and existing power stations, electricity storage and capacity provided by demand side response) a steady, predictable revenue stream on which they can base their future investments.

In return for this revenue (capacity payments) they must deliver energy when needed to keep the lights on, or face penalties. The cost to consumers for this capacity will be minimised due to the competitive nature of the auction process which will set the level of capacity payments.

The first capacity auction will took place in December 2014. Capacity will be in place by the winter of 2018. In advance of this, the government will run two transitional auctions for demand side capacity in 2015 and 2016. This will help grow the demand side industry and ensure effective competition between traditional power plants and new forms of capacity; driving down future costs for consumers.

The Electricity Capacity Regulations 2014 establish a Capacity Market designed to ensure that sufficient electrical capacity is available to ensure security of electricity supply.

The Capacity Market Rules provide the detail for implementing the operating framework set out in the Regulations. The Rules focus on the technical and administrative rules and procedures for how the Capacity Market will operate.

For more detail see Chapter 3 of Implementing EMR handbook.

EMR State Aid

The European Commission confirmed State Aid approval of the Capacity Market, the CFD for Renewables and 5 FID Enabling for Renewables offshore wind projects on 23 July 2014. As part of the State Aid approval process, it has been necessary to make some changes to the schemes. The details of all the changes are set out in the 1 August stakeholder bulletin.

The full text of the European Commission’s decisions on these State Aid cases is now available.

Delivery Plan

The first EMR Delivery Plan was published in December 2013. It set out the administrative strike prices for renewable technologies under Contracts for Difference commissioning in the period 2014/15-2018/19 including the robust methodology which provided the basis for the strike prices. It also set out and the reliability standard for the GB electricity market, which has been used to inform the amount of capacity to be contracted.

Electricity Demand Reduction Pilot

The purpose of the Electricity Demand Reduction (EDR) Pilot is to understand whether capacity savings resulting from the installation of more efficient electrical equipment (which provide lasting rather than temporary reductions), could also form part of the Capacity Market and to learn lessons for the Government and wider stakeholders about the delivery of any final scheme. EDR projects could contribute to the Capacity Market as they reduce the demand placed on the system and in turn lower the amount of generation capacity that needs to be delivered to meet that demand.

Visit the Electricity Demand Reduction page for more information.

For more detail see Chapter 4 of the Implementing EMR handbook.

Participation

CFD allocation and pre-qualification: National Grid

National Grid has been appointed as the Delivery Body for Contracts for Difference, responsible for publishing CFD application/allocation guidelines and running the CFD allocation process.

To access pre-qualification information and guidelines or to submit a supply chain plan please see the Supply chain guidance page or go to the National Grid EMR portal.

CFD Contract Management and Supplier Obligation: Low Carbon Contracts Company

The Low Carbon Contracts Company is new government-owned company which will now act as a counterparty to a CFD contract. Its principal functions are to manage Contracts for Difference, and to administer the collection and payment of monies under the supplier obligation for the CFD regime. For more detail see Chapter 2 of the Implementing EMR handbook.

Generators wishing to apply for a CFD and Suppliers seeking information on the supplier Obligation can find further details on the Low Carbon Contracts Company website.

Capacity Market Settlement: Electricity Settlements Company

The Electricity Settlements Company is responsible for the administrative functions associated with the collection and verification of bid bonds and collateral in respect of the Capacity Market. It will make capacity payments and retain accountability and control of the Capacity Market settlement process. Key documents relating to the CM settlement process can be found on the Electricity Settlements Company website.

Low Carbon Contracts Company & Electricity Settlements Company framework documents

Low Carbon Contracts Company Ltd framework document (PDF, 391KB, 19 pages)

Electricity Settlemends Company Ltd framework document (PDF, 376KB, 17 pages)

These framework documents set out the relationship between the Electricity Settlements Company and the Low Carbon Contract Company and their sole shareholder, the Secretary of State for Energy and Climate Change, and the broad framework within which they will each operate.

Follow these links for more information on the Electricity Settlements Company and the Low Carbon Contracts Company

For more detail see Chapter 1 of the Implementing EMR handbook.

EMR Budget

Technology Groupings and Competition

Our ultimate aim is that all technologies should move to competitive allocation as soon as it is appropriate to do so, with the eventual aim of technology neutral auctions for all low carbon generation.

We recognise that not all technologies are currently at the same level of development. So a technology neutral auction at this point would result in high levels of deployment of a small number of technologies with technologies which are currently more expensive, but which have the potential for further industry development and cost reduction, unlikely to secure CFDs and deploy.

We are introducing competition within two groupings: established and less established technologies. The move to immediate competition reflects the need to manage the budget effectively, ensure value for money and bring the scheme in line with EU guidance on renewables and new State Aid guidelines.

The government’s policy on technology groups and competitive allocation can be found on the Further consultation on allocation of Contracts for Difference page.

Budget notice

Final CFD budget notice for the autumn 2014 CFD allocation round

This document is the CFD budget notice that the Secretary of State has given to the EMR Delivery Body, National Grid, ahead of the first allocation round that occured in October 2014. This followed on from the draft budget notice which was released three months ahead of the round opening to provide visibility and certainty for investors, enabling them to prepare their applications.

The budget notice set out what is required of the Delivery Body for the allocation round, as per the allocation regulations 2014; and is accompanied by explanatory notes with respect to biomass conversion, future allocation rounds and remaining budget, maxima and minima, and Scottish Islands Onshore wind projects. The budget notice should be read in conjunction with the explanatory notes.

£300million will be allocated to renewables projects this autumn in the first CFD auction. This is a near 50% increase of the £205 million indicative budget announced in July. This budget will be split between two “pots”: one for more established technologies, such as onshore wind and solar PV, and one for less established technologies such as offshore wind.

This means that we are releasing budget as follows for the first allocation round commencing 16 October 2014:

  • Pot 1 (established technologies): we intend to release for allocation in the 2014 allocation round £50m for projects commissioning in 2015/16, and an additional £15m for projects commissioning from 2016/17 onwards.

  • Pot 2 (less established technologies): we intend to release for allocation in the 2014 allocation round £155m for projects commissioning in 2016/17 onwards, and an additional £80m for projects commissioning from 2017/18 onwards.

  • Pot 3: No budget released in 2014. Decisions on budget for the 2015 allocation round will be taken in 2015.

While we have increased the CFD budgets since our indicative budget in July, the increase in budget comes within the Levy Control Framework cap – and so does not have impacts on bills in addition to those already announced.

Levy Control Framework

The Levy Control Framework (LCF) sets annual limits on the overall costs of all DECC’s low carbon electricity levy-funded policies to control public expenditure paid for through consumer energy bills. The LCF was extended to 2020/21 specifically for low carbon electricity policies to inform decisions on new mechanisms, and has been set at a level which will enable us to cost-effectively meet our low carbon and renewables ambitions.

For more detail see Chapter 1 in the Implementing EMR handbook.

Route to Market under CFDs

Independent renewable generators play an important role in delivery investment in renewables: they have a significant pipeline of projects and support competition and innovation.

DECC has developed the Offtaker of Last Resort mechanism to provide independent renewable generators with access to a ‘backstop PPA’ at a minimum price. The OLR guarantees eligible renewable CFD generators a route-to-market, reducing the risks that they face, and in doing so:

  • reduces the cost of investment in renewable electricity generation,
  • boosts competition, and
  • ultimately lowers costs to consumers.

For more detail see Chapter 2 in the Implementing EMR handbook.

The institutional framework

A number of parties are involved in the delivery of the market reforms:

  • Government – Sets the policy framework, provides sponsorship, leads design and legislative action.
  • Ofgem – Regulates the electricity market, provides design advice, analysis and regulation.
  • National Grid – Delivery Body, administrator of CFD allocation and the Capacity Market auction and provides advice to the Government.
  • Low Carbon Contracts Company (the CFD Counterparty) – Administers and acts as counterparty to the CFD, manages the supplier obligation.
  • Electricity Settlements Company (the Capacity Market Settlement Body) – Makes capacity payments and retains overall accountability and control of the Capacity Market settlement process.
  • Devolved Administrations – Oversee implementation and monitoring of EMR with DECC.
  • Generators – Participants and parties to CFD and Capacity Market agreements.
  • Suppliers – Contributors to CFD and Capacity Market funding arrangements.

For more detail see Chapter 1 in the Implementing EMR handbook.

Transitional Arrangements

Final Investment Decision Enabling for Renewables

Some of the CFD budget was released early to successful projects in the FID Enabling for Renewables process in order to avoid an investment hiatus ahead of the full implementation of the enduring regime.

Eight renewables projects were awarded Investment Contracts under the Final Investment Decision (FID) Enabling for Renewables process in April 2014. Investors are committing up to £12 billion of investment, backed by new Contracts for Difference (CFDs) which provide them with greater certainty about the income that they will receive in the market. In accordance with the Energy Act 2013, the signed contracts were laid before Parliament in both Houses on 4 June 2014.

These projects include biomass conversion, dedicated biomass with combined heat and power and offshore wind. The contracts awarded in April will bring forward:

  • up to 15 TWh/y of generation. This will be enough generation to power the equivalent of up to three million homes;
  • approximately 4.5GW of renewables capacity across offshore wind farms, coal to biomass conversion plant and dedicated biomass plant with combined heat and power. This is around 14 per cent of the UK’s 2020 renewable energy target; and
  • a reduction of about 10MtCO2 from the UK power sector per annum compared to fossil fuel generation.

The Investment Contracts have been published on the Future electricity networks page.

Read the latest on Final Investment Decision Enabling for Renewables: Updates 1, 2 and 3.

Transition from the Renewables Obligation

The government is committed to supporting investment in renewables in order to maintain investor certainty and confidence, and with the aim of preventing an investment hiatus ahead of implementation of Electricity Market Reform, we have put in place robust transitional arrangements from the Renewables Obligation (RO) to the new support mechanism. In July 2013, the government published a consultation paper setting out proposals for the operation of the RO during the transition period to the new Contracts for Difference (CFD) support mechanism. A further consultation was published in November 2013 proposing detailed arrangements for the eligibility criteria and lengths that would apply to the grace periods to be offered at the point of RO closure. The Government published its response to both consultations on 12 March 2014.

Key points include: that the new renewable generating capacity will have a choice of scheme that should take place at the point of application for the RO or CFD; that operators of dual scheme facilities would be expected to treat the capacity in each scheme as distinct and separate; and there are some technology-specific requirements for biomass plants and offshore wind.

This comprehensive transition policy will ensure a smooth shift from the RO to the CFD for renewable generators, suppliers and consumers alike. We are giving the renewables industry the assurance and comfort needed to ensure ongoing investment, and ensuring value for money for consumers.

We have also published the Government Response to the consultation on changes to financial support for Solar PV under the Renewables Obligation (RO) and Feed in Tariffs (FITs).

For more detail see Chapter 1 in the Implementing EMR handbook.

EMR in the Devolved Administrations

Throughout the development of these reforms we have sought to ensure that the approach to incentivising investment in low carbon generation is applicable and usable by all financiers and investors, and beneficial to all UK consumers. The Northern Ireland Executive, Scottish and Welsh governments have been closely involved in the development of the reforms and this collaboration will continue throughout their delivery.

For more detail see Chapter 1 in the Implementing EMR handbook.

EMR Panel of Technical Experts

To ensure the information underpinning the policy making is robust, the Government has put in place an independent Panel of Technical Experts (PTE). Their role is to impartially scrutinise and quality assure the analysis carried out by National Grid in its role as Delivery Body, the choice of models and modelling techniques employed, the inputs to that analysis (including the inputs provided by DECC) and the outputs from that analysis scrutinised in terms of the inputs and methods applied. An independent Panel of Technical Experts for the enduring regime was appointed in February 2014.

Energy Intensive Industries Exemption

The government consulted on eligibility for schemes designed to provide relief to electricity intensive industries from the indirect costs of renewables. This comprises of compensation from the renewable obligation (RO) and feed-in tariffs (FIT), which was announced in Budget 2014, and re-consults on Electricity market reform: contracts for difference costs exemption eligibility- CFDs which ran from 4 July 2013 to 30 August 2013.

A further consultation on EII implementation has been published, seeking views on several proposed changes to the CFD supplier obligation: the implementation of exemptions from CFD costs for electricity intensive industries and imported renewable electricity; and minor and technical amendments to the CFD Supplier Obligation regulations. Published alongside the consultation are draft Regulations, an updated Impact Assessment and the Vivid Economics and Cambridge Econometrics report ‘Impact of exemptions from the CFD’.

More information on EIIs can be found on the main EII page.

The Emissions Performance Standard

The Energy Act 2013 established an Emissions Performance Standard (EPS) to limit carbon dioxide emissions from new fossil fuel power stations. The Government has now consulted on draft regulations that will fully implement the EPS.

The consultation, titled ‘Implementing the Emissions Performance Standard: Further Interpretation and Monitoring and Enforcement Arrangements in England and Wales’ was launched on the 25 September. The consultation ran until the 6 November 2014. On 15 January 2015 the government published their response to the consultation, together with an impact assessment.

EMR policy development archive

All publications, meeting group and event papers, reports and presentations published in the EMR development and implementation phase can be accessed on the National Archives version of this page.