What the Electricity Market Reform (EMR) means for businesses
The government is carrying out a programme of reforms to the electricity market that aim to ensure its long-term stability. The purpose of the changes are to secure essential investment in the UK’s energy infrastructure over the next decade, and new costs will be introduced to make this possible.
Why are the reforms necessary?
The three objectives behind EMR are to:
1. Keep the lights on 2. Ensure affordability of energy bills3. Reduce carbon emissions from energy generation
Achieving these goals will require £110 billion of investment in the energy sector by 2020. The funding will be used to build generation with lower carbon energy sources that will help meet environmental targets. It will also be used to support new and existing generation that can provide a reliable source of electricity and there may also be opportunities for demand-side response.
The reforms, enacted in legislation passed by parliament this summer, will create a structure to encourage lower carbon forms of generation like wind farms and solar power, as well as a market to ensure that there will always be enough generation capacity to meet our energy needs.
Between 2016 and 2020 the government expects that EMR will add a further 4-5% to business electricity costs.
How will the reforms work?
Under EMR, two new mechanisms have been introduced:
1. Feed-in Tariffs with Contracts for Difference (CfD)
These guarantee a fixed unit price for generators of low-carbon electricity, providing the certainty that investors need to back new technologies. CfDs take the uncertainty out of the wholesale energy market by providing top-up payments to generators if the market price falls below a fixed ‘strike price’, but taking back any surplus if the market price rises above it.
2. A capacity market
This mechanism will ensure that there is always enough power generation capacity to keep the lights on even when demand for power spikes. Owners of power stations will be reimbursed for making their capacity available, and this will be paid on a kilowatt per year basis for the capacity they make available, regardless of whether it needed to be used.
The capacity market will be open to both new and existing generators who are not already receiving Government support. New build plant, such as Gas-fired power stations which can be brought online quickly, will receive payments for up to 15 years.
What does it mean for your business?
All electricity suppliers, including Gazprom Energy, will have an obligation to fund these two mechanisms and these costs will be recovered from customers through electricity bills. We will begin to incur the additional costs from April 2015 and, like all other suppliers, we will be adding these costs to any contracts that extend beyond that date.
Are any businesses exempt from the charges?
In December 2014, a Government consultation closed on a proposal for most electricity-intensive businesses to be exempt from some CfD costs. The exemption will be for up to 85% of CfD costs and is set to apply from 1st October 2015, but the scope for which businesses are eligible for the discount has yet to be completely confirmed.
Further detailed guidance is set to be issued by the Government later in 2015, once state aid approval from the European Commission has been received.
Unfortunately, for small and medium-sized businesses, any exemption for energy-intensive businesses would mean a likely increase in the share of the costs they are asked to bear.
We are keeping a close watch on developments and will provide information as it becomes available. If you have any questions, please contact your usual Gazprom Energy contact.