1. Draft Energy Bill 2012: Energy UK Briefing Jonathan Brearley, Director, Energy Markets and Networks 21 May 2012

2. Bill Timing: Pre-legislative scrutiny (PLS)
The Commons’ Energy & Climate Change Select Committee will hold an inquiry to examine the draft Bill with a view to reporting soon after the House rises for the summer recess (17 July). This will ensure the Committee’s conclusions and recommendations can feed into preparations for the introduction of real legislation later this year.
PLS will not add any delay to the date at which the reforms are introduced.
The publication of the Bill in draft makes it available to all parties for pre-legislative scrutiny which ultimately could speed up its passage through Parliament.
We anticipate legislation reaching the statute book in 2013 so that the first low-carbon projects can be supported (as we originally envisaged) in 2014.

3. The complete market reform framework:
Government
Sets overall policy direction and sets out key parameters
System operator (National Grid)
Will advise government on contract parameters and administer the arrangements
Contracts to develop low carbon generation – contracts for difference
Market wide capacity contracts: open to all forms of capacity
Existing wholesale market (plus small-scale FiTs)
Investment in low-carbon generation also supported by Carbon Price Floor & Emissions Performance Standard

4. EMR Accountability Framework: Overview
The System Operator provides regular progress reports against criteria set by Government.
Government
Government will be responsible for setting policy, (e.g. CfD strike prices/volumes and volume of capacity to contract for), and for the policy costs.
Government will put into regulation the terms of the System Operator delivery role, and the reporting requirements.
Appoints and defines terms for a Panel of Technical Experts to review the System Operator’s analysis and report to Government
System Operator
Responsible for EMR delivery:
Providing analysis to Government to support policy decisions.
Administration of the CfD and the Capacity Market, including oversight and ownership of the settlement role.
Ofgem
Continues to regulate the System Operator through a system building on the existing incentive regime.
Holds the System Operator to account for its performance and internal admin costs for EMR.
The System Operator continues to provide regular reporting to Ofgem as required
through a system building on the existing incentive regime.

5. Delivery Plan Process

6. Delivery Plan Contents

7. Conflicts of Interest: Timetable/ early summary conclusions
March – OfGem/DECC publish open letter seeking views on synergies and conflicts between National Grid’s EMR role and other functions
March – OfGem/DECC hold a stakeholder workshop
May – OfGem/DECC publish a summary of initial findings
Autumn – DECC and Ofgem run a consultation on conflicts
End of the Year – Final report of joint DECC/ Ofgem project
Implementation of project findings
Early conclusions:
Conclusion 1: given the current stage of EMR it is not yet possible to fully identify the synergies and conflicts, and all appropriate mitigations.
Conclusion 2: It is, however, already clear that mitigation measures will need to include requirements for the SO to be transparent and to manage the information it obtains through EMR.
Conclusion 3: As the detail is worked up – all options need to remain on the table

8. Contracting Model: Current DECC model
National Grid as the CfD Delivery Body:
1. Sets CfD terms for individual generators with Government’s agreement
2. Issues CfD on behalf of suppliers
3. Embeds the payment terms in the BSC
Enforced as contract
Obligations on all suppliers
CfD
CfDs G1 S1
Settlement Agent G2 S2
Information and money flows
Information and money flows G3 S3
Key:
G – Generator
S – Supplier
Regulatory framework

9. “Alternative model” – need to assess whether it is viable
We have not found any “show-stoppers” but key issues for us to address:
Balance sheet impacts (Government, National Grid, Suppliers);
Status of counterparty (public/private).

10. Legal framework – current position
The publications and draft Bill reflect the model that has been developed in discussion with industry since autumn 2011.
Aware of concerns raised by some industry elements over the legal framework, in particular its perceived complexity and whether it can provide sufficient level of certainty to invest.
We believe the model we have developed can provide a sufficient level of certainty . However, we continue to consider stakeholders’ concerns and welcome further views.
We anticipate this issue to be carefully considered as part of the pre-legislative scrutiny process. 

11. Price Setting and Allocation

12. Price setting
Initial price setting process for CfDs will be set administratively.
For Renewables this will involve System Operator using a process and data based on RO banding review;
for early stage CCS projects the level of the strike price will be determined through the CCS Commercialisation Programme competitive process and the FID Enabling process;)
The first new Nuclear plant this will involve negotiation with developers within the FID Enabling process. [We are currently assessing whether an administrative mechanism will be necessary for the next few projects]
We intend to make strike prices for renewables available as far as possible ahead of the 2014 implementation date to avoid hiatus. This will mean the System Operator starting work shortly to assess current data and fill gaps.
Government is committed to adopting competitive price setting in the medium term and expect to introduce technology specific competitions for some technologies from circa 2017.

13. Allocation and managing budgets

14. Key CfD Terms

15. The draft Operational Framework sets out our emerging proposals on the majority of substantive CfD terms…
Our aim is that CfD terms should be largely standardised across technologies:
this provides a stable basis for investment, and
is consistent with long term plan to have competition for CfDs
However, in the short term we may need to vary CfDs for certain technologies to ensure that they can come forward at reasonable cost. That said:
risk should remain with the party best placed to manage it,
variations should represent value for money, and
be consistent with securing state aid clearance.
Our focus remains on Intermittent and Baseload CfDs. At this stage we are not developing a flexible CfD but this remains part of our longer term plans.

16. On individual terms, our emerging proposals are…
Description
Emerging Proposal
Reference Price
Market price referenced in the CfD
Intermittent: Hourly Day Ahead Price
Baseload: Year Ahead, price source to be determined
CfD Volume
The definition of the volume of electricity on which CfD payments are based
Pay the CfD on metered output unless it is instructed to turn off by the System Operator, in which case to pay on a measure of availability
CfD Length
The length of the CfD from the date on which payments start.
Initial views:
Renewables - 15 years.
First CCS Project(s) - 10 years (subject to negotiations)
Nuclear and long-term - to be determined.
Inflation indexation
Arrangements for adjusting the CfD strike price in line with inflation.
Minded to choose CPI as a standardised and established inflation measure that is familiar to international institutional investors.
Fuel Price indexation
Arrangements for adjusting the CfD in order that payments reflect a generator’s input fuel costs.
Biomass - Minded not to adjust the CfD to fuel costs.
First CCS project(s), minded that the CfD should provide indexation needed to hedge against long term fuel price variability.

17. Emerging proposals on terms (continued)
Description
Emerging Proposal
Billing and Settlement
Process and timing for invoicing and administering CfD payments.
Minded to base processes on Balancing and Settlement Code processes.
Minded that settlement periods will be at most one month.
Credit and Collateral
The requirements on generators and suppliers to provide credit / collateral.
Minded to place a collateral requirement based on an estimate of likely settlement amounts due in a given billing period.
Allocation of supplier payments
How suppliers’ payment obligations / entitlements are calculated.
Minded to base suppliers’ payment obligations on market share (supplier cap take)
Amending CfD parameters
Responding to e.g. market changes which impact the indices used to calculated the reference price.
Minded to include an independent expert role in the CFD framework to manage any review of CfD parameters and determine any amendments required.
Change of Law
Allocation of risk associated with the occurrence of changes in law.
Minded in principle that the CFD should contain change of law provisions, the form and scope of which remain to be determined.
Dispute Resolution
Procedures for resolving any disputes arising under the CfD.
The Government will seek further advice in this area before engaging with stakeholders later in the year

18. We will issue a Call for Evidence to address concerns that independent renewable developers will not be able to secure long-term contracts (PPAs)
The problem:
Independent renewable developments could make a material contribution to meeting our renewables and carbon reduction targets.
Most independent renewable projects will not be financed without a PPA.
Developers are reporting a decline in the PPA market – both in the number of offers received and the terms on which they are offered.
We think the CfD will remove some risks and reduce PPA discounts, provided there is a competitive market. This may take time as the market adapts and liquidity improves.
The Call for Evidence:
We will publish a Call for Evidence in June 2012
We will seek evidence on the extent and nature of the current problems in the PPA market and views on likely future development under EMR.
We will set out high-level options to address the concerns that have been raised and seek views. This will include regulatory and possible market-led approaches.
We have not decided whether or not it is right for the Government to intervene, but will make sure there is scope in the Energy Bill if that is necessary and appropriate.

19. Capacity Market – high-level design
Forecast of peak demand made, and translated into a capacity requirement
Modelling of what market will bring forward – timing of first auction decided by Ministers
Total amount of capacity contracted for from providers willing to provide it (potentially including DSR, storage etc as well as generation) through a central auction
Providers of capacity commit to be available when needed or face penalties
Capacity Market does not replace the energy market
Costs of capacity shared between suppliers, probably in proportion to their market share.
Detailed rules (e.g. on establishing the criteria for providing capacity, auction design, incentive regime) are set in detailed design phase
We are also considering the relationship between energy and capacity prices and may consider options to integrate these

20. Capacity Market – high level questions we need to answer in the next phase
Capacity to procure
Quantity
Flexibility and interactions with balancing services
Auction
Auction design
Lead time
Duration of agreements
Treatment of new/ existing
Grandfathering
Prequalification
Low carbon plants and non-generation approaches
Secondary trading
Secondary auctions
Delivery
Penalty regime and physical checking
Interaction with cash out
Payment
Payment model
Targeting costs
4-5 yrs

21. Capacity Market May update Key decisions now:
Implementation timetable
Decision on timing will be taken by Ministers on basis of security of supply outlook
First capacity auction could take place as early as 2014
Treatment of new and existing plant
Considering different treatment for new/existing plant
Minded that plant building before the introduction of the CM will have the option of being treated as new
Penalty regime
Considering administrative and hybrid models
See major problems with “pure” financial model
More detailed “straw men” in circulation
Treatment of low carbon plant receiving FiT CfD
Minded to exclude plant receiving administrative FiT CfD from Capacity Market

22. Next steps
Need to strike balance between speed of decisions and getting the design right
Aim to set out preferred policy options in key areas later this year – new/existing plant, penalty regime
Will work with Expert Group and bilaterally with stakeholders

23. Final Investment Decision (FID) Enabling work
For some investors and developers, early and robust certainty on key aspects of the revenue support that will be available (such as the strike price and contract duration) will be key in enabling FIDs.
Among the options available to give comfort to developers is the option for the SoS to issue investment instruments (broadly similar to CfDs) in advance of the EMR CfD regime being implemented (subject to the will of Parliament in relation to the “Investment Instruments” provisions set out in the Draft Energy Bill).
The actual option that might be offered in relation to projects will depend on the projects that come forward for the FID Enabling process and the outcome of any such engagement.
Any eventual offering will need to be compliant with domestic law and be subject to the Government’s obligations under EU law, including the terms of any necessary state aid approvals.
The final decisions on offering any form of comfort to developers will rest with Ministers. Any enabling product or arrangement offered would have to be clear value for money for consumers and affordable.
Where the option to issue investment instruments is utilised in relation to an individual project, the FID Enabling process is likely to be the route for setting the strike price for that project, or contribute to the setting of the strike price for that project.

24. Emissions Performance Standard
Limit applies at the point of consent and fixed (“grandfathered”) for a pre-determined period, currently until 2045
Existing plant that undergo significant upgrade of life extension will be caught by EPS (replacement boiler, supercritical technology)
Exemption for projects within the CCS Commercialisation Programme
Energy from Waste outside EPS, Biomass zero rated in line with EU ETS, CHP adjustments
Timing – detailed regulations developed working closely with EA, Defra & others with consultation following Royal Assent
Reviewed as part of existing statutory requirement (S5. Energy Act 2010) to report every 3 years on progress with decarbonising electricity system – next report 2012, but in practice first review of EPS in 2015

25. The next stage is scrutiny of draft legislation leading to implementation in 2014
Consultation Document
December
2010
White Paper
CfDs
CPF
EPS
July
2011
Technical Update
Capacity Market
Institutional Framework
Dec 2011
Publication of draft Bill; EMR overview document and annexes
May 2012
Legislation introduced
Autumn
2012 (subject to Parliament)
Royal Assent
2013
1st CfDs signed:
2014
End of transition 2017

26. Annex A: What is in the draft Energy Bill (1)
The draft Energy Bill includes measures necessary to reform the electricity market to enable large-scale investment in low-carbon generation capacity in the UK and deliver security of supply, in a cost-effective way.
Feed-in-Tariffs with Contracts for Difference (CfDs) - long-term instruments that provide stable and predictable incentives for companies to invest in low-carbon generation;
Final Investment Decisions – to enable early investment in advance of CfDs;
Capacity Market – to provide security of electricity supply, if required, by ensuring sufficient reliable capacity is available;
Renewables Transitional measures will ensure that existing investments under the Renewables Obligation remain stable;
Measures relating to Conflicts of Interest and Contingency Arrangements will ensure that the institution which will deliver these schemes is appropriate.
An Emissions Performance Standard (EPS) will curb the most polluting fossil fuel power stations.

27. Annex A: What is in the draft Energy Bill (2)
The draft Energy Bill will also improve regulatory certainty by ensuring that Government and Ofgem are aligned at a strategic level through a Strategy and Policy Statement, as recommended in the Ofgem Review of July 2011.
The Bill also ensures that the Office for Nuclear Regulation will be fully able to meet the future challenges of regulating the nuclear industry, as the first new power plants since the 1980s are built.
The Bill contains provisions that will enable the sale of the Government Pipeline and Storage System (GPSS), a Ministry of Defence asset.