Has the Electricity Market Reform succeeded?

With the review of Electricity Market Reform ('EMR') due in 2019, it is probably a good time to ask 'how successful has EMR been in encouraging decarbonisation?'

28 November 2018

There were three major pillars of the EMR strategy:

  • decarbonising our electricity supply
  • securing supplies
  • controlling and reducing costs to the consumer. 

To help achieve this, EMR consisted of three main policies:

  • the Capacity Market to ensure the security of the electricity supplies
  • the Contract for Difference ('CfD') which encouraged low carbon generation and was the replacement for the Renewables Obligation
  • various carbon measures such as the Carbon Tax and Emissions Performance Standards, which were designed to provide a disincentive for and some transparency on, the true environmental cost of conventional fossil fuel generation.

As I am writing this the European Court decision on the Capacity Market has sent shockwaves through many in the sector.  This piece does not dwell on that decision. That said with the Capacity Market threatened like this, it questions the extent to which the EMR should be adapted.

Where are we now?

Perhaps the easiest way of judging how successful the strategy has been is to look at the winners and losers. The big winner through EMR and, particularly, the CfD, has been offshore wind. It has been so successful that, in many circles, people equate the CfD to offshore wind rather than wider renewables. The cost reductions which the auctions have seen in offshore wind have been fantastic and there is no doubt that it has enabled deployment. The CfD has also been the mechanism to incentivise new nuclear, which is also seen as a low carbon technology. EMR and, particularly, the Capacity Market, has given a new lease of life to old conventional coal and gas plant as well as oil and gas fired peaking plant. This was never the intention of the Capacity Market (which was generally designed to provide an incentive to build new large scale Combined Cycle Gas Turbines ('CCGTs'). Yet, despite tweaking the Capacity Market to try to promote CCGTs, very few have come forward. 

Alongside new CCGTs, the other losers from EMR have been the traditional onshore renewables, such as onshore wind and solar, which were prevented from accessing the CfD after just one auction round. The CfD has done little to encourage deployment of these technologies which conflicts with the low cost to consumer pillar of EMR. It is worth noting that onshore wind and solar has also been excluded from the Capacity Market. The next categories of losers are those innovative new renewables technologies that are on the cusp of deployment. Making these technologies compete with offshore wind has put them in an almost impossible position. Technologies such as wave, tidal, floating wind, geothermal etc. have the potential to bring costs down, but can only do so if supported over time following the example of the offshore wind model. A route to market for the initial arrays and deployment of these technologies needs to be found. Lastly, but more debatable, EMR has provided little in the form of incentives to other low carbon baseload generation such as biomass.

So where does that leave us?

Securing supplies has, to a certain extent, been achieved, but for how long and possibly with conflicting technologies in terms of the decarbonisation agenda. EMR has helped the roll out to low carbon generation, but predominantly offshore wind, it has done very little for other renewables technologies. Has it reduced the cost to the consumer? Well, undoubtedly the auctions for CfDs have driven down the costs of offshore wind, but we must be careful in hanging everything on the lowest cost to the consumer pillar. It may be an unpopular thing to say, but a pure focus on low cost, can sometimes conflict with the need in the short term, to support innovation and take a long term view of what will be best for the UK in terms of decarbonisation. If low cost to the consumer is a fundamental aim of EMR, this is arguably inconsistent with excluding onshore wind and solar from EMR. Finally, what has EMR achieved in the way of promoting new technologies to decarbonise generation? Other than offshore wind, the answer has to be not a huge amount. Novel technologies, that will help decarbonisation in the future and produce revenues and exports for UK plc, have not been encouraged by EMR. 

We also need to consider how the EMR sits with the Government’s Industrial Strategy and Clean Growth Strategy? We are predicting a huge rise in electric vehicles and we are also looking to tackle renewable heat. The Clean Growth Strategy majors on the fact that investment into clean technologies has provided dividends for the UK Plc. To fulfil this, the EMR will need to offer greater support for early stage renewables technologies that the UK has a lead in, to release the benefits of jobs and industrialisation. The EMR should not be thrown out in its entirety because that, in itself, will cause a hiatus for investors and generators, which the UK does not need, but there are clearly areas which could benefit from being looked at and adjusted to facilitate greater decarbonisation.

Key contact

Ross Fairley

Ross Fairley Partner

  • Energy, Power and Utilities
  • Head of Renewable Energy
  • Environment

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