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Select committee inquiry

Implementation of Electricity Market Reform

Closed

Energy and Climate Change Committee · Opened 15 September 2014 · Closed 30 March 2015

7 recommendations · 10 conclusions
Inquiry on parliament.uk ↗

What the inquiry looked at

“The Government’s Electricity Market Reform (EMR) aims to decarbonise electricity generation and keep the lights on, while minimising the cost of electricity to consumers. Initiated in 2010, it puts in place measures to help attract the £110 billion investment which is needed to replace current generating capacity and upgrade the grid by 2020, as well as cope with a rising demand for electricity. EMR was designed to transform the UK electricity sector to one in which low-carbon generation can compete with conventional, fossil-fuel generation, paving the way towards a cleaner and more sustainable energy mix.”

The committee's words, from the inquiry page on parliament.uk ↗.

What the government said

The government responded on 16 July 2015.

Summary written by Accountability Index from the government's response.

The Government welcomes the Committee's report and responds to each recommendation, in several cases setting out existing arrangements or declining to adopt the specific step proposed.

  • On the review of the first year of EMR, the Government has appointed independent evaluators and says the evaluation "will be completed this summer", while noting that conclusions drawn from one round "may be limited".
  • On the Panel of Technical Experts, it says a point-by-point response "is not expected to be included in the evaluation report"; National Grid will respond directly in its 2015 Electricity Capacity Report, due at the end of June.
  • On demand-side response, it does not adopt the proposed definition excluding backup generation, saying doing so "could significantly reduce" DSR participation in the short term. It says the evaluation will assess barriers to DSR participation.
  • On Levy Control Framework visibility, it will "review the timetable" for future updates and CFD allocation rounds and communicate these "in due course", and will set out plans on long term budget visibility "in the near future".

Read the government's response ↗ Read the report ↗ Report an error

How the inquiry ran

Each dot is a dated item listed on this page, from the inquiry's opening on 15 September 2014 to 16 July 2015.

  1. Oral evidence 3 sessions
  2. Report 4 Mar 2015
  3. Government response 16 Jul 2015
  4. Correspondence 25 Mar 2015

What it recommended 7 recommendations · 10 conclusions

1We commend DECC for maintaining the ambitious timetable of EMR implementation and ensuring that the...
Concluded (the committee's words)
We commend DECC for maintaining the ambitious timetable of EMR implementation and ensuring that the necessary framework was put in place in the lead up to the first Capacity Market auction and CfD allocation round.
2We welcome the efforts by DECC, National Grid and the Low Carbon Contracts Company to...
Concluded (the committee's words)
We welcome the efforts by DECC, National Grid and the Low Carbon Contracts Company to help prepare industry in the run-up to the first Capacity Market and CfD auctions. However, the complexity of the policies and the speed at which participants have had to assimilate information have made it a challenging environment for smaller companies. A robust review of the auctions is clearly needed and lessons learned must be acted upon ahead of the next round of EMR delivery. We are worried that the timing of the review means that it risks taking place too close to the opening of the second CfD allocation round and Capacity Market auction. This may mean that industry concerns–particularly the concerns of small companies–are not addressed.
3We recommend that DECC ensure its review of the first round of CfD allocation and...
Recommended (the committee's words)
We recommend that DECC ensure its review of the first round of CfD allocation and first Capacity Market auction is concluded by the end of August 2015. The review should detail lessons learned from each step of the CfD allocation and Capacity Market auction outlined by DECC, and assess the extent to which the 2014 rounds contribute to the objectives of EMR. In conducting the review, DECC should particularly look at how engagement with small players can be improved. The review should also include an assessment of the pros and cons of running more frequent CfD auctions.
4We remain concerned about potential conflicts of interest between National Grid’s executive and advisory role...
Concluded (the committee's words)
We remain concerned about potential conflicts of interest between National Grid’s executive and advisory role within EMR, and its commercial incentives–particularly given the move to include interconnectors in future Capacity Market auctions. The Panel of Technical Experts (PTE) and Ofgem have important roles in holding National Grid to account.
5The questions raised by the PTE in its scrutiny of National Grid must be responded...
Recommended (the committee's words)
The questions raised by the PTE in its scrutiny of National Grid must be responded to publicly so that there is a clear line of sight between National Grid’s original analysis, scrutiny by the PTE, and subsequent policy decisions by DECC and Ofgem. We recommend that DECC’s upcoming review of EMR should include a point-by- point response to the issues raised by the PTE. The review should look again at how conflicts of interest are dealt with. We also expect DECC to set out what steps will be taken to ensure that National Grid does not have an unfair commercial advantage when interconnectors participate in future Capacity Market auctions.
6We recommend that the definition of demand-side response should exclude consumers turning on their own...
Recommended (the committee's words)
We recommend that the definition of demand-side response should exclude consumers turning on their own generation assets such as diesel generators. This agreed definition should be consistently and immediately applied by DECC, Ofgem and National Grid.
7DECC is still failing to ensure that demand-side response (DSR) measures are on a level...
Concluded (the committee's words)
DECC is still failing to ensure that demand-side response (DSR) measures are on a level playing field in the Capacity Market. If we do not invest in DSR today, we may be forced to pay for more expensive generation capacity that we do not need in the future, thereby locking ourselves into a pattern of higher costs and, potentially, higher emissions.
8We recommend that DECC’s review of EMR makes it easier for DSR to have a...
Recommended (the committee's words)
We recommend that DECC’s review of EMR makes it easier for DSR to have a much bigger role in future Capacity Market auctions. DECC should consider increasing the contract length of DSR capacity agreements in the next Capacity Market auction. We also recommend that DECC set out a more detailed strategy on how to help the DSR market grow to reach its full potential, in line with its proclaimed approach of supporting early stage technologies.
9While EMR was designed to bring forward investment in the electricity infrastructure and replace the...
Concluded (the committee's words)
While EMR was designed to bring forward investment in the electricity infrastructure and replace the UK’s existing generation plants with lower carbon alternatives, there is a risk that the current design of the Capacity Market could result in a failure to meet these policy objectives. A diversity of sources is clearly needed, but Contracts-for-Difference and the recent Capacity Market results are in danger of pulling it in opposite directions.
10We recommend that the Government clarifies its ambitions for the future of coal- fired power...
Recommended (the committee's words)
We recommend that the Government clarifies its ambitions for the future of coal- fired power stations in the Capacity Market and its expectations for both new plant and DSR in the second four-year-ahead Capacity Market auction in 2015. The Government’s review of EMR should include a cost-benefit analysis of the 2014 Capacity Market auction in terms of balancing low clearing prices with long-term objectives to provide secure, affordable low-carbon energy.
11The Levy Control Framework (LCF) finances existing (RO and FiTs), transitional (FIDeR) and new low...
Concluded (the committee's words)
The Levy Control Framework (LCF) finances existing (RO and FiTs), transitional (FIDeR) and new low carbon projects (CfDs). The scope for support of new renewable generation under the CfDs is therefore dependent on the cost of a number of existing commitments. There is a risk that such a large proportion of the LCF is already allocated to the early contracts for renewables, including an excessive proportion of very expensive offshore wind capacity, that it has pre-empted better value-for-money in the latter years of the LCF, when other technologies may have developed and their costs reduced. The uncertainty in future wholesale prices and corresponding uncertainty in the buying power of the LCF create a difficult landscape for investors. More clarity and visibility of the funds available for CfD projects is crucial to bring forward investment.
12We recommend that DECC sets out what its intentions are across a range of potential...
Recommended (the committee's words)
We recommend that DECC sets out what its intentions are across a range of potential future wholesale prices. DECC should commit to publishing more frequent updates of the funds left in the current LCF envelope and clarify rapidly what the timetable and budget of future CfD allocation rounds will be.
13If EMR is to become a successful and enduring policy that brings forward the investment...
Concluded (the committee's words)
If EMR is to become a successful and enduring policy that brings forward the investment in the electricity infrastructure that is needed to ensure a secure, affordable and low carbon energy to Britain, more clarity is needed beyond the life of the current Levy Control Framework.
14We recommend that the Government clarifies the future of the LCF beyond 2020-21 as soon...
Recommended (the committee's words)
We recommend that the Government clarifies the future of the LCF beyond 2020-21 as soon as possible after the General Election. Rolling forward projections of LCF funds should be published annually thereafter, so that investors are always able to look at least seven years ahead to make their investment decisions. The Government should also clarify its intentions in the event that the Levy Control Framework total is exceeded because gas prices remain much lower than previously anticipated.
15Despite a challenging timetable, the Government has succeeded in putting in place a robust framework...
Concluded (the committee's words)
Despite a challenging timetable, the Government has succeeded in putting in place a robust framework for the reform of the electricity market. The implementation of EMR through its first year has been relatively smooth. It is perhaps inevitable that some hurdles would arise when introducing a new and complex set of policies, and DECC, National Grid and the LCCC have done a good job in working to anticipate industry’s concerns and helping participants prepare for the new regime.
16Despite this smooth start, some key concerns remain.
Concluded (the committee's words)
Despite this smooth start, some key concerns remain. In particular, the Capacity Mechanism has committed taxpayers to annual payments of nearly £1 billion, only 5% of which will provide new capacity and just 0.4% going on Demand-side reduction–the rest going to existing, largely coal fired power stations, possibly paying them to do what they would normally have done anyway. Potential conflicts of interest, notably around the role of National Grid with the inclusion of interconnectors, must be addressed. It is also imperative, as we have previously called for, that EMR provides a level playing field for demand-side response. Addressing these concerns will help to ensure that future stages of EMR provides value-for- money for consumers.
17If the EMR regime is to achieve its aim of creating a lasting secure, affordable...
Concluded (the committee's words)
If the EMR regime is to achieve its aim of creating a lasting secure, affordable and low-carbon energy landscape, it must provide a clear landscape for investors and participants. Long-term policy stability and clarity around funds available under the Levy Control Framework will be crucial in achieving its targets.

Evidence

Oral evidence sessions 3

Correspondence 1 letter