Low carbon electricity suppliers to get guaranteed fixed payments

The Government's proposed reforms to the electricity market include guaranteed fixed payments to suppliers to ensure revenue continuity.

Measures were outlined yesterday by the Government to secure future low carbon electricity supplies.

They set out how new generating capacity (such as renewables, carbon capture and storage (CCS) and nuclear) and non-generation capacity (such as demand-side response and storage), could reduce the impact on customer bills, and create a secure mix of electricity sources to meet projected increased demand.

Energy and Climate Change Secretary Chris Huhne said: “The UK faces a huge energy investment challenge over the coming years, with a fifth of our generating capacity coming to the end of its working life and electricity demand set to double. We want to give certainty to investors to develop the mix of clean energy sources that will power the UK in the years to come.”

Measures outlined include:

• next steps for the Electricity Market Reform programme;
• a Capacity Market, designed to ensure reliable electricity supplies and avoid the higher prices that could result from tight capacity margins;
• a proposal for a System Operator who would work with the National Grid to manage the Feed-in Tariff with Contracts for Difference (FiT CfD) and the capacity mechanism;
• detail on work to enable investment decisions for early projects;
• detail on how Renewable Obligation Certificates will work after 2027.

Reform of the electricity market will begin around May 2013, with the first low carbon projects resulting from it beginning the following year.
The New Year will see more information about how Emissions Performance Standards and FiT CfD will work.

The job of the System Operator, sitting within National Grid, will be to advise the Government on key rules and parameters and administer the FiT CfD and Capacity Market. A settlement agent will manage payments. Ofgem will continue to regulate the new system.

What is a Capacity Market?

The proposed Capacity Market is intended to ensure that sufficient reliable capacity is available by providing incentives to invest not only in generation but also non-generation approaches such as demand side response, or, interestingly, for existing capacity to remain operational beyond its previously estimated life.

Approaches that do not involve generation, such as storage and demand management, are, significantly, acknowledged as potentially being cheaper and helping to cut carbon emissions.

The technological options for electricity storage are increasing, with a number of interesting solutions coming forward such as chemical and flywheel storage as well as pumped storage (pictured above at Dinorwig, North Wales).

The government is also looking at further ways to incentivise efficiency in the use of electricity, including the smart grid.

The detailed design of the Capacity Market, including the payment model, will continue throughout 2012 and into 2013 leading to secondary legislation, with the first delivery plan published in 2013.

It represents a state intervention in the market that begins by estimating the total volume of reliable capacity required a number of years ahead, contracting for the required volume of reliable capacity from providers through a central auction process; and then placing incentives on those providers to ensure they are available when needed.

The additional capacity that results from the Capacity Market is expected to have a dampening effect on electricity market prices.

The 'availability payment'

Responding to criticism that there have been too many changes in government policy on feed-in tariffs and other support measures, which have affected revenue flows in the industry, the Government says that it will establish a “robust legal framework to protect investors against unilateral changes to the FiT CfD" to ensure the predictability of revenue flows.

This will include an 'availability payment', which would compensate providers of capacity for lower electricity market revenues. The level of this guaranteed regular payment is yet to be decided.

Capacity Market have been implemented elsewhere, for example in the United States and Colombia. France and Italy, are in the process of introducing similar mechanisms.

The theory is that a Capacity Market provides an ‘insurance policy’ against a tight future electricity generation market resulting in higher levels of blackouts. Of all the models looked at, it is expected to have the least impact on average electricity bills.

It could lead to new entrants in the market in the form of Energy Service Companies and will also provide further incentives to roll out the smart grid.

More detail on the functions of the System Operator and the role of Devolved Administrations will be set out in the Electricity Market Reform policy document that will be published alongside the introduction of primary legislation next year.

Bridging the investment gap

The government has also outlined measures to ensure there is no gap in investment until the new system is established.

DECC is inviting discussions with developers about significant projects which can benefit from the proposed FiT CfD. Such projects might not be eligible for the Renewables Obligation or able to receive ROCs before the end of March 2017.

In order to supply this “comfort", as the technical note quaintly describes grant aid for any projects selected, legislation will have to be passed by Spring 2013; this is not guaranteed.

Reactions

Renewable Energy Association (REA), chief executive Gaynor Hartnell welcomed the announcements, but said that developers of energy-from-waste plants still lacked clarity on whether the proposed Emissions Performance Standards would affect them. "We're at a loss to know why this can't be settled straightaway," she said. Details are, however, promised early in the New Year.

Richard Lloyd, executive director at Which?, commented that since National Grid "will now have a vital role to play in dictating consumers’ future energy bills, the Government must guarantee it will be held accountable.

“With new analysis from the Committee on Climate Change predicting that investment in low-carbon power will add ￡100 a year to bills by 2020, it’s more important than ever that the Government does everything possible to help people manage their energy use and save money,” he added.

Steve Radley, Director of Policy at EEF, the manufacturers’ organisation, cautioned that the government reforms should "not damage the competitiveness of energy-intensive industries".