Canada: Electricity Market Reform In The United Kingdom

Last Updated: September 10 2012
Article by Michael Taylor

A draft Energy Bill was announced by the UK's Secretary of State for Energy and Climate Change at the end of May but has been heavily criticised by the House of Commons Energy and Climate Change Committee in a report published on 23 July.

The draft Bill is the latest stage in the UK Government's planned electricity market reform (EMR) which will radically reform Britain's electricity market which has been largely de-regulated and open to competition since privatisation of the electricity industry over 20 years ago.

The stated purpose of EMR is to deliver secure, affordable and low carbon energy by establishing price mechanisms designed to support investment in new generating capacity and an improved transmission network.

There has been relatively little investment in generation in the UK since the so called "dash for gas" (construction of a large number of combined cycle gas turbine plants) in the 1990s. As a result, there is a great deal of old plant which needs to be replaced – perhaps a third in the next decade – and additional capacity is required to meet projected increases in electricity demand. At the same time, the UK Government is committed to reducing greenhouse gas emissions by decarbonising generation and to having 15% of the country's energy needs (around 30% of its electricity) met from renewable sources by 2020.

The International Energy Agency puts the investment needed at £110 billion by 2020 (£75 billion in new generating capacity and £35 billion in improvements to the transmission network). This compares with current investment of around £4 billion a year.

Against this background, the UK Government decided that radical reforms were necessary and, following a consultation process, a White Paper on EMR was published by the Department of Energy and Climate Change in July 2011.

The Energy Bill will set out the proposed primary legislation which the UK Government plans to have in place by the end of 2013 but this will only provide the broad legislative framework for EMR with many details needing to be implemented through secondary legislation and changes to codes and licences.

EMR will consist of a number of key measures, including:

  • Low carbon generation support through "Feed-in-Tariffs with Contracts for Difference" (CfDs) to provide stable and predictable prices for companies investing in low-carbon generation;
  • Introduction of a capacity market providing incentives to ensure the availability of sufficient generating capacity to provide security of electricity supply;
  • Introduction of an Emissions Performance Standard (EPS) limiting carbon dioxide emissions from new fossil fuel power stations. The effect of this will be to prevent construction of new coal-fired plants unless capable of carbon capture and storage (CCS).
  • Transitional arrangements.
  • Appointment of the System Operator, National Grid plc, as the EMR delivery body (to administer CfDs and the capacity market) and arrangements regarding possible conflicts of interest on the part of the System Operator.

The UK Government's original EMR proposals contained another key measure – introduction of a carbon price floor, but this has already been covered in the Finance Act 2011.

Contracts for Differences (CfDs)

The CfDs are intended to provide generators of low carbon electricity with stable prices for the electricity they generate by setting a "strike price", with the generator receiving (or paying back) the difference between the strike price and the market reference price.

The draft Energy Bill proposes a "multiparty payment model" whereby the liability to make payments to a generator under a CfD would be borne collectively by all electricity suppliers.

It is envisaged that there will be a minimum strike price for each technology (with strike prices up to 2017 to be announced next year) but some strike prices, particularly for nuclear and CCS, will be decided on a project-by-project basis.

Although the UK Government will initially set strike prices administratively, it proposes a move to auctions at least for some renewable energy technologies, from 2017 and seems determined to influence the generation mix by having different strike prices for each technology (at least until 2020), with offshore wind and nuclear likely to get strong support notwithstanding concerns as to their cost.

Prior to introduction of auctions or some other tendering process, it is proposed that prospective renewable energy generators should be awarded their CfDs through participating in allocation rounds, with the volume of contracts on offer reflecting both the UK Government's renewable energy targets and financial cost caps (reflecting the Treasury's cap on green levies) to be established through secondary legislation.

It is proposed that CfDs for renewable energy projects will have a duration of 15 years while those for CCS projects will only be for 10 years and those for nuclear are likely to be for more than 15 years.

Capacity Market

The UK Government believes that a capacity market is needed to ensure that there will be sufficient plant available to prevent future blackouts. In part, at least, this need is driven by the increased role which wind and other intermittent or inflexible sources of energy will play in the generation mix.

The draft Energy Bill does not provide the details of the capacity mechanism but a Technical Update published by the Department of Energy and Climate Change in December last year envisages capacity being contracted through competitive auctions with the cost of securing capacity being shared between electricity suppliers. More detailed proposals will be set out in a further document towards the end of this year following which there will be a process of consultation with the industry and other interested parties.

The capacity market is likely to favour new gas-fired plant with short start-up times and a highly versatile operating response but the UK Government has indicated that existing plant will be able to bid for capacity contracts. However, it is likely that plants benefiting from the new CfDs will be excluded from the capacity market. .

Emissions Performance Standard (EPS)

The draft Energy Bill proposes a statutory limit on the amount of annual CO2 emissions allowed from new fossil fuel generating stations. It is envisaged that the limit will initially be set at 450g/kWh and apply until 2045 for projects approved before it is reviewed in 2015. Provision is made to exempt plants which form part of the UK's CCS Commercialisation Programme or benefit from European Union or CfD funding for commercial scale CCS.

Transitional Arrangements

The Renewables Obligation (RO) is currently the main financial mechanism by which the UK Government incentivises large scale renewable energy projects. Under this mechanism, renewable energy projects receive Renewable Obligation Certificates (ROCs) for which there is a market price.

The White Paper on EMR proposed a transition phase, between April 2014 and March 2017, during which new renewable generating stations will be able to choose between support under the RO or under the new CfDs. Any new renewable generating stations after March 2017 will only be entitled to support under the CfDs.

The RO continues until 2037 but there are concerns as regards the income for generators during the final years of the scheme. The draft Energy Bill therefore contains provisions whereby, from 2027, the energy regulator, Ofgem, or the Secretary of State will be obliged to purchase certificates at a fixed price which will be set by the Secretary of State and funded by a levy charged on the supply of electricity by electricity suppliers. It is envisaged that this fixed price will be the 2027 ROC buyout price plus 10 per cent and then inflation-linked.

The Secretary of State will also be given power to issue what is being referred to as an investment instrument to a generator ahead of the introduction of CfDs. This power is intended to address the risk that EMR could otherwise delay investment decisions and is likely to be used for the first new nuclear plant (at Hinkley Point in Somerset). Market participants are watching these early bilateral negotiations to see the precedent set and for competition implications. The lack of transparency of the closed door negotiations will make this a sensitive area.

Conflicts of Interest

The draft Energy Bill proposes to confer EMR functions on the System Operator, National Grid plc, a private sector company. The UK Government considers that there is a potential risk of conflicts of interest arising between the new EMR functions which the System Operator will take on and its existing role and interests in the energy market, including its ownership of transmission infrastructure. The draft Bill proposes to give the Government powers to manage any conflicts of interest and to confer the functions on a new delivery body if it becomes apparent that the System Operator should no longer be responsible for the EMR functions.

House of Commons Energy and Climate Change Committee Report

The Committee scrutinised the draft Bill and its Report, which draws on extensive evidence from generators and other energy companies, industry associations, environmental groups, regulatory bodies, local councils, academies and other interested parties, is highly critical of the draft Bill. It identifies "serious concerns with the proposals as they currently stand, which could make the reforms unworkable if they are not resolved" and makes a series of recommendations, including:

  • The Government should publish draft secondary legislation, including a model CfD, prior to consideration of the Bill in Parliament.
  • The Government should set a 2030 carbon intensity targets for the electricity sector to supplement the overall carbon reduction targets set out in the Climate Change Act 2008.
  • The Government should abandon the multiparty payment model for CfDs proposed in the draft Bill and revert to a single counterparty payment model which, in the view of the Committee, should be underwritten by Government. The Committee considered that the multiparty payment model was not bankable and the CfDs might not be legally enforceable. Many market participants share this concern.
  • A simple fixed Feed-in Tariff would be a more appropriate form of support for smaller scale renewable energy projects. This form of support is already available for very small projects but the Committee recommends that it be extended to renewable energy projects up to at least 10 MW and potentially up to 50 MW in size.
  • Rationing the number of CfDs under the Treasury's levy cap increases development risk and the Committee recommends the introduction of a two-step or pre-registration process to give developers greater confidence that they will be able to obtain a CfD.
  • The Committee notes concerns that awarding CfDs through auctions may increase development risk and does not guarantee a cheaper outcome for consumers. It recommends that the Department of Energy and Climate Change consider setting out a planned reduction pathway for strike prices which would guarantee a reduction in the level of subsidy paid by consumers over time. Current FIT arrangements for small-scale projects have a similar policy of subsidy reduction over time, reflecting political concerns at ongoing subsidy levels.
  • The Government should provide clarity on the strike price level beyond 2017 as soon as possible in order to help secure investment for emerging technologies, such as wave and tidal power.
  • Independent generators need to be able to sell the electricity they produce at or close to the market price if they are to get the full benefit of CfDs. This could be difficult in the UK's current vertically integrated electricity market and a solution to this issue needs to be identified before the Bill is introduced to Parliament later this year.
  • The proposed process for setting the nuclear strike price lacks sufficient transparency and the Committee recommends that an independent panel of experts should be appointed to oversee negotiations with prospective nuclear generators.
  • The Committee concluded that concerns regarding European Union state aid rules as well as political considerations have influenced the design of the CfD package and recommended that the Government differentiate nuclear from other low-carbon technologies within an overall support regime. The Committee will consider further the building of new nuclear and its associated challenges later this year.
  • The Government should set out a system reliability standard which, along with a decarbonisation target for electricity, would provide a clear framework for the System Operator to work within when operating the capacity market.
  • The Government should clarify how the Energy Bill will ensure that the capacity delivered by auctions will have the appropriate characteristics, such as flexibility.
  • The Government's intention to review the EPS in 2015 could cause a new "dash for gas" and an understanding is needed of the likely impact of EMR on the future role for gas generation.
    • The initial EPS limit should not continue until 2045. Instead, there should be a shorter period commensurate with decarbonising the electricity system by 2030.
  • The Energy Bill should provide support to demand-side and storage technologies similar to that given to the supply-side and should remove any legislative and other barriers preventing storage from competing fairly in the market.
    • National Grid plc should not act as the EMR delivery body and this role should instead be performed by a new independent, not for profit, company.

How Government will respond to these recommendations remains to be seen.


There is a broad consensus within the electricity industry and amongst politicians in the UK that EMR is needed and the UK Government has said that it will bring the Energy Bill before Parliament towards the end of this year and expects to have the primary legislation in place by the end of 2013.

Much of the criticism of the draft Energy Bill from the House of Commons Energy and Climate Change Committee and others has been directed at its lack of detail on important issues. However, it is on the details that there is most disagreement, with strongly held opposing views on issues such as the extent of financial support which should be provided for low carbon generation and the role of nuclear and natural gas in the generation mix.

As the details emerge, we can expect a lively debate both within Parliament and in the mass media and among the general public. To date, there has not been much interest in EMR beyond energy and environmental circles but this will surely change as the details emerge and there is a greater appreciation of the importance of EMR and its long-term implications as regards energy policy and likely energy costs.

There is a risk that the Energy Bill will expose disagreements within the current coalition Government (formed by the Conservative and Liberal Democrat parties) and/or that parts of the Bill will be opposed by a significant number of MPs from one or both of the coalition parties. However, now that the Government have embarked upon the process of EMR, they must bring it to a successful conclusion if they are to attract the huge investment which is so urgently needed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions