UK: Electricity Market Reform - An Introduction To The Energy Bill

The Energy Bill was published on 29 November 2012. This is one of the most-anticipated pieces of legislation in recent years. It has been promoted by the UK Government as the framework that will unlock the billions of pounds of investment needed to replace generation capacity that will disappear from the system this decade and secure a low-carbon future.

So, will the Energy Bill keep the lights on? Will it give birth to a new world of low-carbon generation in the UK? The Bill has a long way to go through Parliament, and the devil will be in the detail of the regulations spawned by the Act, but in anticipation that its central tenets will remain intact, we are publishing two short guides:

  • Feed-in Tariff with Contracts for Difference
  • Capacity Market

How will Contracts for Difference work?

The Feed-in Tariff with Contracts for Difference is a subsidy regime that is intended to de-risk generation from fluctuations in wholesale market prices. By reducing the financial risks faced by low-carbon projects, it is intended to encourage investment at least cost to the consumer.

In the context of EMR, Contracts for Difference ("CfD") will work as follows:

  • low-carbon generators with a CfD will sell their electricity into the market in the normal way, either through long-term supply contracts or through the wholesale electricity market
  • the CfD – a long-term private law contract with the CfD counterparty – will pay the generator the difference between an estimate of the market price for the electricity ("reference price") and an estimate of the long term price needed to bring forward investment ("strike price")

How will prices be set?

CfDs will only encourage long term investment decisions if the industry has confidence that prices will be set in such a way as to reduce exposure to market fluctuations to the level that it considers comfortable.

Initially, CfD strike prices –which will be CPI-indexed - will be set by the Government (as with RO subsidy levels), but in due course it is intended that it is replaced by competitive price setting.

National Grid (as the System Operator) published a call for evidence for renewables strike prices in October, and it is intended that strike prices will be issued and consulted on in DECC's draft delivery plan in July 2013 and finalised by the end of 2013.

Reference prices for variable and baseload generation will be set differently. Variable generation reference prices are likely to be based on the hourly day-ahead prices, and the Government is committing itself to ensuring that there remains sufficient liquidity in the market so that reference prices (and so, payments under CfDs) cannot be manipulated.

Further analysis requires to be conducted before the market has a clear picture on how prices are to be set for baseload generation.

Allocation of CfDs

CfDs will be allocated on a first come, first served basis.

Generators will be able to apply for a CfD at early stages in project development (e.g. wind projects will be eligible from the point at which they have secured planning permission and accepted a connection offer). This contrasts with funding under the Renewables Obligation, where the level of funding is not known until commissioning.

Each generator will specify a target date for the commencement of generation. If National Grid determines that the project is eligible and affordable within the available budget, it will require the CfD counterparty to offer a CfD to the generator.

Generators will then work to commission their project with the Target Commissioning Window (TCW) prescribed in their CfD (which will vary from one technology to another but will be set to provide developers with a degree of flexibility during the construction phase).

Once a project can generate electricity, a developer can then nominate when –within the TCW –payments under the CfD should start. Generators that commission after the end of the TCW can still claim CfDs, but the term of the CfD will be reduced to reflect the length of delay. Failure to commission by a Long-Stop Date leads to termination of the CfD.

Making payments

The generator sells electricity in the market in the normal way (through long-term contracts with suppliers or by selling through electricity markets). The generator then either receives or makes payment under the CfD, depending on whether the electricity price in the reference market is below or above the strike price. The mechanism is intended to ensure that generators receive (broadly speaking) the strike price for electricity and so can plan for reasonably certain revenue flows without benefitting from spikes in wholesale prices.

The "difference payments"under the CfD will be based on price and volume. So, for each settlement period the difference amount will be calculated as the amount that is the product of the metered output and the difference between the (index-linked) CfD strike price and the CfD reference price.

How will CfD payments be funded?

CfD payments by the CfD counterparty will be funded by a new levy on electricity suppliers, which will undoubtedly be passed on to consumers.

The counterparty's payment obligation under each contract for difference will be conditional on it having received payments from suppliers under the supplier obligation. It is therefore a "limited recourse" obligation –pay when paid - and so the covenant of the counterparty is unlikely to be a funding obstacle.

When the reference price is forecast to exceed the strike price (so potentially giving rise to a generator obligation to pay) the generator will be required to provide collateral to the CfD counterparty.

PPAs and CfDs

In publishing the Energy Bill, the UK Government acknowledges that conditions in the PPA market for smaller, independent generators will need to improve. At this stage, there are no proposals other than a commitment to "initiate work"with independent developers to ease the transition to CfDs, and a largely unsupported expectation that the introduction of CfDs will make it easier for suppliers to offer PPAs. Pronouncements thus far from DECC will offer little comfort to independent generators.

The Contract for Difference

The contract for difference will last for 10 years for carbon capture and storage and 15 years for renewables projects (the duration for nuclear is yet to be determined).

The Energy Bill is published with Heads of Terms for CfDs. The intention of Government is that contracts are standardised so far as possible, while acknowledging that there will be a need for project-by-project variations.

© MacRoberts 2013

Disclaimer

The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.

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

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

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (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 www.mondaq.com

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 Mondaq.com’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.

Disclaimer

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.

Registration

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 unsubscribe@mondaq.com 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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Security

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 webmaster@mondaq.com.

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 EditorialAdvisor@mondaq.com.

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 enquiries@mondaq.com.

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