The EMR: Five years later, where are we?
By Dr Jonathan Marshall, Head of Analysis
Published:04 April 2018
Back in 2013 the foundations that prop up the UK’s electricity market were laid, as then DECC Secretary of State Ed Davey brought the Electricity Market Reform (EMR) into existence. Designed to tackle the ‘trilemma’ head on - delivering low carbon, low cost and reliable electricity - the terms of the EMR have been dominating the UK's power sector ever since.
More than just a brand new three letter acronym to add to the list, the EMR gave us the capacity market and the contracts for difference (CfD) schemes, programmes to incentivise new low carbon capacity and to ensure that the steady flow of electrons needed to power UK homes and businesses remained unbroken on even the coldest winter days.
Five years on, and the system is up for review. Specifically, Section 66 of the 2013 Energy Act requires the current Secretary of State to report to Parliament by the end of 2018, detailing whether the original goals of the EMR have been met, whether they are still appropriate, and if it is possible to deliver these goals in a manner that requires less regulation.
Trailed in a speech at a recent industry event, Claire Perry announced that the review is firmly on the Government’s radar, prompting a jostling of market players to suggest what tweaks should be made.
Documents from 2013 suggest that the main focus of the review will be assess if changes to the capacity market are needed, a decision on whether the CfD is still the optimum way of delivering low-carbon power, and how best to manage the tail end of the Renewables Obligation (RO) scheme.
Battle lines are starting to be drawn, with the size of the prize evidenced by the huge number of responses to an Ofgem consultation on modifications to the capacity market. Diving into the 110+ suggested rule changes shows a general mismatch between incumbents trying to ‘keep things as they are’, and newcomers hoping for change that can facilitate new and disruptive technologies.
However, another DECC document from around the time shows that a heavier-handed approach might be needed. An overview of the policy states that the review could not take place before the fifth carbon budget was passed into law, and more pressingly that ‘Any decarbonisation target range that is agreed will be reflected in EMR delivery plans and annual updates’.
This suggests that merely tinkering at the capacity market and making minor legal changes to the CfD regime may not be enough. In its latest assessment of the Governments decarbonisation strategy, the Committee on Climate Change (CCC, the body charged with setting and monitoring progress towards the aforementioned decarbonisation target) noted that the power sector is to fall 50-70 TWh short of the low carbon electricity it should be aiming for to meet the fifth carbon budget at the lowest cost – assuming the delivery of EDF’s Hinkley Point C in time.
A few years ago this might have been a real headache for ministers in charge; however, unbelievable recent progress in low carbon energy means the Government is spoilt for choice on how to close this gap. Offshore wind, nuclear and tidal power are all popular within Westminster, with solar PV and onshore wind backed by the vast majority of the country. A recent ECIU report, for example, showed how upgrading the UK’s oldest wind farms to the latest technology could boost output and save money, as new onshore wind projects remain stuck in limbo without a route to market.
The recent gas squeeze has pushed also pushed energy efficiency back onto MPs desks, with the concept of closing the gap by replacing megawatts with ‘negawatts’ another route that the Government could take.
In fact, faced with such a menu of options, BEIS ministers and officials should be rubbing their hands with glee. The UK proudly boasts the world’s largest offshore wind fleet, and is pushing ahead with the world-leading nuclear technology in Somerset.
The review also presents the option to bring in new instruments to deliver low carbon juice, potentially re-introducing exposure to wholesale prices to get the best from tidal and (maybe) nuclear, widening the auction system to more technologies to replicate the effects on the price of offshore wind on other sectors. Or even pegging new ‘subsidy-free’ contracts at a certain price to ensure bargain prices for mature renewables.
With the Government also keen to export low carbon technology, there could even be an additional metric in any impact assessments, to account for the boosts to UK PLC that new policies could bring. In short, the possibilities are (almost) endless.
Using the EMR review to implement policies to close the power gap could see it capitalise on other cutting-edge technologies that are increasingly being adopted around the world, and allow Britain to maintain the climate leadership so proudly touted on the global stage.