Electricity Market Reform Explained

Electricity Market Reform (EMR) is the Government’s response to the three main issues facing the UK energy market in the future – reducing carbon emissions in the generation of electricity, securing constant supply, and minimising the price paid by the consumer.

EMR was introduced by the Energy Act 2013 and will see the introduction of two new reforms to the energy market, the Contracts for Difference (CfD) and Capacity Market, from the end of 2014.

Contracts for Difference (CfDs)

CfDs support new investment in all forms of low-carbon generation (renewables, nuclear) and have been designed to provide efficient and cost-effective price stability by reducing exposure to the volatile wholesale electricity price.

Low carbon generation projects will apply for a CfD and depending on whether the technology is ‘established’ or ‘less established’, the project may have to compete in an auction in order to receive a contract. CfDs will require generators to sell energy into the market as usual but, to reduce exposure to changing electricity prices, CFDs provide a variable top-up from the market price to a pre-agreed ‘strike price’. At times where the market price exceeds the strike price the generator is required to pay back the difference thus protecting consumers from over-payment.

Capacity Market

The Capacity Market will enhance the security of our electricity supply by ensuring that sufficient reliable capacity is in place to meet demand. In other words, it is an insurance policy to keep the lights on.

The Capacity Market works by offering the opportunity to all capacity providers (new and existing power stations, electricity storage and capacity provided by demand side response) of a steady, predictable revenue stream on which they can base their future investments.

The cost of the Capacity Market will be met by consumers via the supplier levy on electricity suppliers. This will be minimised due to the competitive nature of the auction process which will ensure the lowest cost to meet the level of security of supply determined by the Secretary of State.

In return for this revenue (capacity payments) providers must deliver energy when needed to keep the lights on, or face penalties.


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