Introduction to the EMR
The UK Government's Electricity Market Reform ("EMR") consultation aims to examine the reforms necessary to achieve the Government's objectives on renewable energy production, security of supply, affordability and decarbonisation. The consultation's proposals are four-fold, covering:-
- the introduction of a feed-in tariff as the key revenue support mechanism for all lowcarbon technology (discussed further below),
- capacity payments (targeted payments to encourage security of supply, eg through construction of flexible reserve plants)
- carbon price support (strengthening the carbon price in order to increase the cost of fossil fuel generation and accordingly make lower-carbon power more attractive), and
- an emissions performance standard (a limit on how much carbon can be emitted by power stations).
Revenue support reform
Under the current Renewables Obligation system ("RO"), electricity suppliers are obliged to source a specific proportion of their electricity from renewable sources and face financial penalties if they fall short. The EMR consultation asks whether we should move away from the RO towards a feed-in tariff ("FiT") system that would regulate revenue support for all low carbon technology (including nuclear).
The consultation looks at three models of FiT, namely "Fixed Rate FiT", "Premium FiT" and "FiT with Contracts for Difference".
Fixed Rate FiT
The Fixed Rate FiT would comprise a static payment that generators receive in place of any revenues from selling electricity in the wholesale electricity market. As such, generators would receive a fixed tariff per unit of electricity regardless of its wholesale price. This is similar to the current FiT regime for sub-5MW projects.
Premium FiT
The Premium Fit would comprise a static payment that generators receive in addition to the revenue from selling electricity in the wholesale market.
FiT with Contracts for Difference ("FiT with CfD")
FiT with CfD is the UK Government's favoured option. It would comprise long-term contracts whereby generators sell electricity at market prices but, to ensure that the generators receive an agreed tariff (known as the "Strike Price") the generator's income would be adjusted as follows, namely, (a) if electricity prices fell below the Strike Price, generators would receive a top-up payment of the difference between the Strike Price and the electricity price and (b) if, on the other hand, electricity prices rose above the Strike Price, generators would be required to pay back the difference between the Strike Price and the electricity price. The UK Government believes that this system will control costs for consumers and provide stable returns for investors.
It is proposed that the chosen FiT system could be introduced from 2013 but that accreditation under the RO system could continue alongside the FiT as an alternative option until March 2017 to reduce the risk of disruption for developers.
Scottish angle
DECC has recognised that the EMR consultation proposals have not been arrived at through full consultation with the Scottish Government and that further work would be required to establish how the reforms might apply to Scotland. Numerous concerns have been expressed by Scottish commentators, including concerns that abolition of the RO in favour of a new FiT support mechanism (which is designed to support more than just renewable energy and which abandons the current obligation to secure electricity from renewable sources) runs a serious risk of diverting investment away from emerging renewable technologies in Scotland. What happens next? The EMR consultation closed in March and the UK Government intends to publish a White Paper in late Spring 2011 incorporating a response to this consultation and setting out detailed legislative proposals to support the reforms.
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