The Government is today releasing its EMR proposals, billed by Chris Huhne, Secretary of State at the Department of Energy and Climate Change (DECC), as the ‘most significant reform of our electricity market for 30 years.’
This quick guide answers some basic questions on the EMR.
1. What is happening today?
Today, after a period of consultation, the Department of Energy and Climate Change is publishing a White Paper on EMR. DECC is also today releasing a separate ‘roadmap’ document setting out in detail how the UK plans to reach its 2020 renewable energy targets (see below).
The Climate Change Act requires the UK to reduce its carbon emissions (from heat, transport and electricity) by 80% on 1990 levels by 2050. The government also has to meet EU targets, under which 15% of the UK’s energy demand (15% of the total demand for heat, transport and electricity) must be supplied from renewable sources by 2020. An estimated £200-300 billion of investment will be needed over the next decades to meet these targets.
Given the scale of investment and the targets involved it is felt that a) current electricity market arrangements are only really designed to meet affordability targets, and don’t encourage long term strategic planning; b) current price support for renewables, needs to be extended to nuclear energy and other forms of low carbon generation, such as carbon capture and storage.
3. What are the central four Government EMR proposals?
1. Carbon price support – setting a price for emitting carbon; 2. feed-in tariffs – price support for all low carbon generation, including nuclear, instead of Renewable Obligation Certificates (ROCs); 3. capacity payments – price support for back up power plants; 4. emissions performance standard – no new coal power stations can be built without a system to capture and store CO2.
4. Haven’t some of these proposals, such as the carbon floor price, already been announced?
Yes, the Treasury is already leading on a price for carbon, having announced in the 2011 budget that a floor price will come into effect from 2013, starting at £16 per tonne of CO2, rising to £30 by 2020.
5. What does EMR put forward in place of the RO?
Instead of the Renewable Obligation, the chief price support mechanism for renewable energy technologies, the government wants to introduce a feed-in tariff (FiT) for large low-carbon power plants, similar to the system already in place for smaller generators, to provide investors with certainty about the level of support they will receive. The government’s preferred option is a FiT with a Contract for Difference (CfD). This would allow generators to sell their electricity into the market, at market rates, and then receive a top-up payment up to a pre-set level.
6. How much will all this affect costs?
The estimates vary: a pre EMR estimate published by DECC in 2010, quantified the net cost of reaching UK’s 2020 targets at £13 or a 1% rise on an annual consumer bill, compared to a bill with no policy measures. Latest estimates put this figure at £16 on bills compared with bills with no measures, given the expected wholesale price rises of coal and gas (which supply around 80% of the UK’s electricity).
7. What to look out for in the EMR announcement?
RenewableUK has set out four key requirements in its response to the consultation: 1) the price for the new low carbon support mechanism must not be set by auctions 2) the government’s preferred pricing option, Contract for Difference (CfD), needs to be indexed to as near to real time prices as possible 3) the crossover from ROCs to any new support system needs to be managed sensibly, with robust grandfathering in place and 4) an incentive on suppliers to buy renewable electricity needs to be retained.