UK: UK Electricity Market Reform: Shaping the Future

Last Updated: 20 January 2011
Article by Deloitte Energy & Resources Group

Most Read Contributor in UK, August 2017

The Need for Reform

Reform of the UK electricity market is intended to solve a number of problems that the UK Government believe prevent the current electricity market arrangements from supporting the achievement of key policy objectives. There are three objectives in particular that are felt to be at risk:

  1. A Low Carbon Generation Mix

    At the moment, the main incentives for the development and operation of less carbon intensive generation in the UK come from the imposition of carbon costs on fossil-fuelled generators under the EU ETS, and from additional revenue to renewable electricity generators from the renewables obligation scheme. However, the combination of these are not sufficient to achieve the scale of investment into low carbon generation that is required to meet the UK's targets. The current arrangements do not adequately incentivise investment in low carbon generation because of electricity price uncertainty, low prevailing levels of EU allowance prices, and policy uncertainty.
  2. Security of Electricity Supplies

    Around a quarter of existing UK generating capacity will close by 2020 due to its age (combined with tightening environmental regulations). A significant share of new capacity is expected to be wind power. As more wind power is added to the system, there will be an increased need for flexible generating plants that can ramp up and down to offset fluctuations in wind output. Given that future baseload electricity supply is envisaged to come from nuclear, renewables and coal-fired generation fitted with carbon capture and sequestration (CCS) (none of which are particularly adaptable), flexible plants will need to recover a return over a limited number of operating hours. But, the current UK electricity market arrangements do not adequately reward peaking and flexible plants which therefore risks compromising security of supply.
  3. Affordability

    Low carbon generation is more expensive than the marginal fossil-fired generation – a combined cycle gas turbine (CCGT). This means that electricity prices will rise as the sector decarbonises, which makes ensuring affordable electricity a significant challenge for government. Consequently, the UK Government has to ensure that its measures to incentivise low carbon generation are cost effective and mitigated by initiatives to promote and support energy efficiency.

The Proposed Interventions

The DECC consultation, in parallel with the consultation on a floor price for carbon, is intended to set out potential changes to the market arrangements that will resolve these issues, without requiring public subsidies for nuclear projects. The proposed interventions include:

  1. A Form of Feed-in-Tariff for Low Carbon Generation, Including Nuclear

    Top up payments to be made to low carbon generators under long-term contracts to achieve an aggregate revenue appropriate for their type of technology. The top up payment would be assessed by the difference between a benchmark index for wholesale electricity prices and a pre-determined revenue requirement for each technology. If wholesale prices rise above the agreed price, generators would pay-back the difference. Low carbon generators would still sell their electricity through the existing bilateral electricity market. The consultation paper opens up the option for this tariff to be set by periodic auctions, with potential new low carbon generation bidding in their required tariff.
  2. An Emissions Performance Standard for New Power Plants

    A maximum CO2 per MWh limit for new UK power stations would be set. This would effectively rule out new unabated coal-fired power stations, but would allow new gas-fired plants and coal-fired plants with at least partial carbon capture and sequestration (CCS).
  3. Targeted Capacity Payments to Flexible Plants

    Targeted capacity payments are made to flexible plants to act as cover for intermittent wind output. Capacity payment systems are used in a number of electricity markets around the world, with a different framework for setting the level of payments and ensuring capacity availability. In this case, the suggested option is for a central body to contract for capacity to cover any expected market shortfall via periodic tenders. Other than this contracted capacity, there would be no capacity payment to generation on the system. This would in effect extend the capacity available under existing short-term operating reserve.

Will They Work?

Although the measures will interact and the overall effect on the market will come from the combination of them, it is possible to consider the extent to which the main individual elements of the package will achieve their desired effect:

  1. The Feed-in-Tariff

    The proposed feed-in-tariff will reduce the market risk faced by low carbon generators, hence improving the investment flow. But, the consultation paper is silent on how this will operate in the bilateral UK power market, appearing to hand over much of the responsibility to Ofgem

    The proposed system will largely remove the wholesale electricity price as a risk faced by low carbon generators - importantly ensuring that the low carbon generation incentive delivers an acceptable revenue stream regardless of fossil fuel and carbon prices. It is to achieve this through contracts-for-differences (CfDs), which at the margin still leave the generators exposed to incentives based on wholesale market prices that are used as a reference price for the CfDs. The question mark hanging over this mechanism, is whether a sufficiently liquid UK wholesale electricity price index can be identified to act as a reference price that is a reasonable estimate of the revenue that low carbon generators would otherwise earn, and which is not open to uncompetitive distortion. This was one of the problems with CfDs struck against the Pool price during the 1990s.

    Illiquid exchanges can have prices affected by large trades and this is an issue if the UK Government is bound to make compensation payments on the basis of these prices. Requiring low carbon generators to sell their output through the bilateral market under a specified process would increase liquidity, but would then transfer significant risks onto supply markets.
  2. An Emissions Performance Standard (EPS) for New Power Plants

    The proposed emissions performance standard will prevent unabated new coal-fired generation. It is proposed that any perceived risk for CCGT investors, who may be concerned that that the EPS will be tightened through time, is catered for by grandfathering of the EPS for existing and new plant according to their online date. This proposed reform should achieve its stated objective - in terms of preventing the most carbon-intensive forms of new generation. The setting of an emissions limit at a level where coal-fired generation with partial CCS can still be built, balances the need to limit emissions against the desire to prove carbon capture and sequestration on coal-fired plants. However, it is not clear what risks a new coal-fired plant faces in the event its CCS is offline. It may put the whole plant's output at risk which would deter such investment.
  3. Targeted Capacity Payments to Flexible Plant

    The splitting of the market between contracted and un-contracted plants, and the asymmetric value placed on capacity provided by these groups, will further reduce the operation of market forces.

    The introduction of contracts for some peaking capacity will reduce the need for this plant to rely on peak prices. This indifference may lead to wholesale energy prices being depressed. Given the potential effect on peak prices, not paying capacity prices to existing plants that are not contracted for system support, raises a risk that too much will shut, either threatening security of supply or forcing the contracted part of the market to expand to fill the gap. Together, these points serve to emphasise the need under the government proposals for a new centralised body to not just offer capacity payments, but also to co-odinate CfD auctions and generally take responsibility for the power sector. This is a significant risk for market players, not least because the government has not yet faced up to the logical consequences of its own proposals.

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
Check to state you have read and
agree to our Terms and Conditions

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.

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 by clicking here .

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.


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.