Electricity Market Reform: Overview of consultation

1. Electricity Market Reform: Overview of consultation Hannah Wadcock EMR Programme Team

2. ContextThe EMR framework 2

3. 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 generation Electricity Market Reform

4. Context: Summer 2013 – Policy developmentWe 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(June) 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) 4

5. We are now moving to implementation(1) Collaborative Development with Industry 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]

6. We are now moving to implementation(2) Consultation on detailed implementation of EMR launched October 2013 On 10 October DECC published a consultation on thedetailed policy proposals for the implementation of EMR https://www.gov.uk/government/consultations/proposals-for-implementation-of-electricity-market-reform 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

7. What does the consultation cover?

8. Capacity Market 18 November 2013

9. Capacity Market – high level design

10. Amount to auction • The first auction will runin November 2014, for delivery in the winter of 2018/19* • Ministers will set enduring reliability standard and a method for establishing 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 Illustrative capacity demand curve * Subject to legislative approval and state aid clearance

11. Eligibility and pre-qualification Eligible Ineligible Capacity receiving low carbon support (e.g. CfD) Participants in UK’s CCS commercialisation programme Interconnected non-GB capacity and interconnectors Capacity below 2MW (although may aggregate to qualify)  X • New and existing generation (inc. CHP) • Demand response (inc. embedded generation) • Electricity storage • 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

12. Auction • 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

13. Trading • 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

14. Delivery • 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

15. Payment • 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

16. An Overview of the CfD

17. Supporting investment in Low-Carbon Generation

18. Key Components of CfD Phase 5 Contractual flexibilities and obligations 5) CfD Standard Terms 2) CfD Allocation Framework 7) CfD Supplier Obligation 6) Counterparty Governance & set-up 1) Collaborative Development 4) Strike Prices 3) Budget (‘LCF’) 8) Energy Bill & Regulations

19. Energy Bill Amendments Gives the Secretary of State the power to issue and, from time to time, revise, the CfD standard terms • 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 framework”) Electricity Market Reform

20. CfD allocation framework – what will it contain? Electricity Market Reform

21. 1. The Levy Control Framework (LCF):Stability for investors and protection of the consumer LCF Upper Limit(2011/12 prices) 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 £4.30bn £4.90bn £5.60bn £6.45bn £7.00bn £7.60bn • 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 Market). • 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 way.

22. Initial allocation under First-Come, First-Served • 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 considerations • 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 technologies. • 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

23. 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 below). • 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

24. 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

25. Supplier Obligation : Background • 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

26. Supplier Obligation:Who is doing what • Electricity Market Reform

27. 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