Electricity Market Reform

What is Electricity Market Reform?

On 1 August 2014 new legislation was passed by the Government introducing new costs in to the electricity market. This was through a package of measures known as Electricity Market Reform (EMR).

What are the benefits of reform?

The reformed electricity market will deliver the greener energy and reliable supplies that the country needs, while minimizing costs for consumers in the long term. It will transform the UK electricity sector to one in which low-carbon generation can compete with conventional, fossil-fuel generation – ensuring we build a cleaner, more sustainable energy mix.

EMR is designed to:

Decarbonize electricity generation

Keep the lights on

Minimize the cost of electricity to consumers

Electricity Market Reform: Capacity market

What is the capacity market?

Capacity represents the need to have adequate generating resources to ensure that the demand for electricity can always be met. In a capacity market the utility or other electricity supplier are required to have enough resources to meet its customers' demand plus a reserve amount.

How will market reform support my business?

Part of the government’s Electricity Market Reform package, the Capacity Market will ensure security of electricity supply by providing a payment for reliable sources of capacity, alongside their electricity revenues, to ensure they deliver energy when needed. This will encourage the investment we need to replace older power stations and provide backup for more intermittent and inflexible low carbon generation sources.

The Capacity Market has also been designed to support the development of more active demand management in the electricity market. For more information visit GOV.UK

 

 

EMR explained

What is Electricity Market Reform?

Electricity Market Reform (EMR) is a package of Government policies designed to deliver new investment in lower carbon energy sources.

 

The UK needs approximately £110bn of investment in its energy infrastructure over the next decade in order to secure power supplies for the future, and reduce our environmental impact - and to do so in a way that controls the impact on customer bills. New power generation capacity is needed to replace retiring nuclear and fossil-fuelled power stations and to help maintain a secure power supply,and it’s crucial that we deliver new investment in lower carbon generation to help meet Government environmental targets.

 

The key mechanisms of EMR create a system of support for lower carbon power generation (e.g. wind farms) as well as providing security for those who ‘keep the lights on’ by keeping their plants available as back-up for times when renewable sources are unavailable.

 

Two new companies - the Low Carbon Contracts Company and the Electricity Settlements Company -   have been created by the government as a result of a change in law to manage how these mechanisms will work.

What are the key elements of EMR?

Through EMR, two key mechanisms have been introduced:

 

Feed-in Tariffs with Contracts for Difference (CfD) – these will ensure generators receive a fixed price for low carbon generation, providing greater certainty to those investing in new technologies.  CfDs work in tandem with the wholesale energy market, providing an extra payment for generators when the market price falls below the pre-agreed ‘strike’ price, with generators paying back any surplus should the market price rise above it. This mechanism will be managed by the Low Carbon Contracts Company (LCCC).

 

A Capacity Market (CM) – a capacity market has been set up to make sure that supply will be available when it’s needed the most. It provides incentives for developers and owners of generating capacity (e.g. power plants) to make their capacity available. Capacity providers are paid on a kilowatt per year basis for the capacity that they can make available. This mechanism will be managed  by the Electricity Settlements Company.

I signed my contract before EMR was passed. What does this mean for me?

For those customers on E.ON’s corporate terms and conditions, EMR costs have not been included in any contracts agreed on or before 31 July 2014. For contracts agreed from 1 August 2014 onwards, please refer to the question about new contracts.

 

From 1st April 2015 we’ll start to incur EMR costs as part of our customer supply activities and we’ll be passing these costs on to our Corporate customers on half-hourly contracts. These additional costs are a result of the new legislation only – we have never re-opened contracts due to an error in our forecasts and we take pride in that.

 

There will be no change in existing contracts for customers whom we know to be micro businesses, but EMR will be factored in to all micro business contracts agreed from 1 August 2014.

 

Due to the structure of the EMR charges and the nature of non-half-hourly metering data, we will not be able to pass on these costs to non-half-hourly contracts in a transparent way. Therefore we will not be applying EMR charges to these contracts. EMR will be factored into all non-half-hourly contracts agreed from 1 August 2014.

 

Half-hourly metered contracts will start to see the new EMR charges from April 2015. These charges will be itemised on your invoice based on the latest forecast which we’ll reconcile once the actual costs are known. 

What does this mean for customers agreeing new Corporate contracts?

From 1 August 2014 we started to include estimates of EMR costs on all new quotes which run past 1 April 2015. The charges are detailed as a separate line item so you can see exactly what they are.

 

There are two methods for including these charges:

 

1.  In most cases we will include the EMR charges in your fixed unit rate, based on our forecast of the costs. We’ll provide this rate on our Proposal to help you compare rates with other suppliers but there will be no reconciliation – the charges remain fixed as part of your unit rate throughout the contract. This is how the costs will always be included for micro businesses.

 

2.  We can pass these costs through to you when we invoice, instead of including them in your unit rates. To help you plan ahead, we’ll still provide an estimated cost as part of your Proposal. Your invoice will include the itemised EMR charges based on our latest forecast, which we’ll reconcile once the actual costs are known. Talk to your Account Manager for more information on this option.

What are these charges and when will I see them on my invoice?

There are four EMR charges which you may see  on your invoices. This table outlines these charges and when you will begin to see them on your invoices.

 

Charge

Description

Indicative cost

EMR Contracts for Difference (CfD) payments

Pay generators a fixed price for low carbon generation, providing greater certainty to those investing in new technologies. The payment is associated with the difference between wholesale costs and the fixed price generators will receive.

0.000p/kWh from April 2015 to 30 June 2016 but rates may increase after this period.

EMR Contracts for Difference (CfD) operational costs levy

Pays for the operational costs of the Low Carbon Contracts Company who manage the CfD payments process

0.005p/kWh from 1 April 2016

EMR Capacity Market (CM) charges

 It provides incentives for owners of generating capacity (e.g. power plants) and customers with interruptible consumption to make their capacity available to make sure that supply will be available when it's needed most.

Costs are based on peak winter usage so the amount each customer is charged will depend on how much they use during peak winter times.

EMR Capacity Market (CM) settlement costs levy

Pays for the operational costs of the Electricity Settlements Company who manage the CM settlement process

 0.001p/kWh from 1 April 2016

 

Note: These costs will be updated quarterly. 

Is there any way of avoiding EMR charges?

Unfortunately not. EMR is legislation passed by Parliament and affects all electricity consumers. However, controlling how much energy you use and when you use it may help to reduce your total costs. The government is seeking to exempt energy intensive industries from some of the Contracts for Difference (CfDs) costs. Details of which industries will be exempt and by how much are still to be determined but initial discussions suggest these customers may receive a considerable discount.

Legal notice

The information (including any forecasts or projections) contained in this document (the “Information”) reflects the views and opinions of E.ON UK plc on 30 March 2015. The Information is intended as a guide only and nothing contained within this document is to be taken, or relied upon, as advice. E.ON UK plc makes no warranties, representations or undertakings about any of the Information (including, without limitation, any as to its quality, accuracy, completeness or fitness for any particular purpose) and E.ON UK plc accepts no liability whatsoever for any action or omission taken by you in relation to the Information. Any reliance you place on the Information is solely at your own risk. This document is the property of E.ON UK plc and you may not copy, modify, publish, repost or distribute it. © E.ON 2015