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Electricity Market Reform

Electricity Market Reform (known as EMR) is the Government’s programme to respond to the trilemma facing the UK:

1.    Decarbonising electricity supply
2.    Security of Supply
3.    Minimising the cost of energy to consumers

EMR has been legislated for via 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. Explanations of these are provided below.

This page pulls together in one place all of the latest information relating to the CfD and Capacity Market, although please note that these documents are not Energy UK publications.

Contracts for Difference (CfDs)

CfDs support new investment in all forms of low-carbon generation (renewables, nuclear, CCS) and have been designed to provide efficient and cost-effective price stabilisation for new generation, 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.

The CfD will be implemented through a bilateral contract between the Generator and the Low Carbon Contracts Company Ltd (LCCC).

The payments to be made to generators will be calculated and paid out by the LCCC. The cost of CfDs will be met by consumers via the supplier obligation, a levy on electricity suppliers.

Key organisations

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 provision of capacity 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.

Key organisations

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