1. Electricity Market Reform (EMR) Explained
June 2013

2. The energy trilemma AFFORDABILITY
The UK has set some very challenging climate change targets – 80% reduction in carbon emissions in 2050 based on 1990 levels
In order to meet these targets, the UK will need to decarbonise in a number of sectors, a key one of which is electricity generation
A number of initiatives are already in place to discourage generation types that produce high carbon emissions, e.g. the Large Combustion Plant Directive means that coal-fired power stations will need to become much more sustainable by or close down
This allows low carbon generation forms to play a bigger part in meeting UK demand
The “trilemma” for government is how as a nation we adhere to our sustainability targets whilst retaining security of supply and ensuring that electricity is affordable for consumers
Social pressures
CfD
Carbon tax
EU ETS
Capacity Mechanism
SECURITY OF SUPPLY
SUSTAINABILITY

3. The size of the challenge
The UK’s 2050 target
670 MtCO2e
International aviation & shipping 42
Agriculture non – CO2 49
Other non – CO2 and LUC 44
Industry (heat and industrial processes)
125
76% cut (=80% vs.1990)
Residential & commercial heat
103
Domestic transport
134
159 MtCO2e
Power generation
173
2008 emissions
2050 objective
Electricity Market Reform (EMR) is the key way in which the UK intends to hit the 2050 target in the power generation sector
SUSTAINABILITY

4. Demand for electricity is increasing
The electricity market will change fundamentally over the coming years as demand increases and supply changes
Demand for electricity is increasing
Whilst supply (power generation capacity) is decreasing and becoming more intermittent
Building additional fossil fuelled power generation is not an option due to environmental constraints
The Department for Energy & Climate Change (DECC) forecast an increase in demand from the 350 TWh per year to around 550 TWh per year by driven by the electrification of vehicles and heat.
Older, more polluting plant has to close
Existing nuclear plant expected to close by 2020
Renewable supply is intermittent, meaning that alternative standby is needed.
Government has set legally binding CO2 reduction targets
Target of 15% of energy from renewable sources by 2020
Development of future peak demand 2
Development of GB Generating Capacity 2
Decarbonisation trajectory to
Source: 1: DECC Pathways to 2050 Report 2: Statutory Security of Supply Report 3: EMR White Paper
SECURITY OF SUPPLY

5. The Electricity Market Reform (EMR) has 4 pillars
Carbon Price Support
Tax to ensure generators pay a minimum price for their carbon emissions.
Low Carbon Generation Feed In Tariffs/ Contracts for Difference (CfD)
Low carbon generators are guaranteed a fixed price for power generated, but have to pay back if the market price goes above the fixed price.
Carbon Floor Price to 2020
IMPLEMENTED FROM 04/13 WITHIN WHOLESALE PRICE
Operation of Contracts for Difference
Energy Bill
Expected to appear as line items on business bills, similar to FiT
Emission Performance Standard (EPS)
Clearly defined set of emission levels to prevent investment in carbon intensive power stations (i.e. coal without Carbon Capture and Storage (CCS)).
Capacity Mechanism
Market wide mechanism designed to ensure adequate, reliable power generation capacity is in place to meet peak demand.
Peak De-rated Capacity Margin
EPS = 450g CO2 / kWh
- only applicable to new plant
SUSTAINABILITY | SECURITY OF SUPPLY

6. Contracts For Difference
Low Carbon generators will receive a fixed price for their electricity going forward, funded by suppliers
POLICY AREA
Guarantees a fixed price (strike price) for low carbon generation above which generators have to pay the revenue back
Fixed price is wholesale market price and “top up” CfD cost
Single Counterparty Body will sit between the generators and suppliers to manage funds
Levy Control Framework (LCF) sets a cap on costs at £7.6bn (2012 real prices) in 2020
Funds raised via a compulsory levy on suppliers
KEY POLICY UPDATES
CfD costs likely to start in 2015, ramping up over time
Expect CfD costs to be between £5 and £10/MWh by 2020, ramping up over time
We expect that the full Levy Control Framework will be spent
Final decision on Supplier Obligation not due until Autumn with final strike prices available in December 2013
More accurate cost impacts due in Autumn 2013
IMPACT
Contracts For Difference
SUSTAINABILITY | SECURITY OF SUPPLY

7. We expect CfDs to add £5 – £10 /MWh to customer bills by 2020
POLICY AREA
2 Supplier Obligation options on the table:
Variable rate: Based on actual monies (based on actual generation) owed in a defined period according to market share by consumption
Fixed Rate: Central forecast translated into a fixed p/kWh and paid on a defined basis according to market share
Energy Intensive Industries will be exempt from CfD payments (subject to State Aid clearance and consultation)
KEY POLICY UPDATES
Variable rate obligation will result in:
Highly volatile monthly costs and
Likely addition of a risk premium to cover forecasting error
More frequent price changes
We are therefore lobbying for fixed CfD
Additional administration may be needed for Energy Intensive users due to the anticipated exemption
IMPACT
Contracts For Difference
SUSTAINABILITY | SECURITY OF SUPPLY

8. A capacity mechanism will be introduced to ensure adequate reliable generation capacity is available to meet peak demand
POLICY AREA
Secretary of State (SoS) will announce decision to hold an auction based on Ofgem’s Capacity Adequacy report
Descending clock, pay as clear auction held in Autumn for delivery 4 years hence:
First auction for supply in 2014 for 2018/19 delivery
First Demand Side Response (DSR) pilot auction held in 2014 for 2015/16 delivery
Different contract length for new, old and refurbished plant and likely that RO Plant will not be allowed to participate
KEY POLICY UPDATES
Initial Capacity Mechanism costs from 2015/16 from DSR pilot
Costs likely to be visible up to 4 years out (due to auction lead time) and more transparent than CfD costs
Costs will be capped by Secretary of State (but will not be part of the LCF)
Capacity Mechanism will result in a reduction in wholesale prices (£5-£10/MWh)
IMPACT
Capacity Mechanism
SECURITY OF SUPPLY

9. Reductions in wholesale electricity prices as a result of the capacity mechanism will be more than offset by the price of capacity
POLICY AREA
Penalties for non-delivery of capacity
Electricity Demand Reduction to form part of capacity mechanism (but exact details not clear)
Supplier Obligation likely to be different from CfD Supplier Obligation
Current thinking share of peak demand (as at Triads)
Potentially share of total consumption over year by market share
KEY POLICY UPDATES
However, this will be more than offset by cost of Capacity Mechanism of between £7 - £20/MWh
Current inefficiencies in design likely to cost consumers more (contract length, over-procurement)
Depending on design of Supplier Obligation, there may be an opportunity to limit exposure by not being there at peak
Lack of clarity as to how penalties will be treated
Opportunity to participate in DSR and reduce demand in periods of system stress
IMPACT
Capacity Mechanism
SECURITY OF SUPPLY

10. Final Policy details are expected in Autumn 2013
CM Policy Update due
Draft Delivery Plan including draft strike prices
Decision on capacity auction
CfDs available
1st capacity auction
Final Delivery Plan
Jun 13
Dec 13
Jul 14
Dec 14
Draft secondary legislation and final Policy details available
Royal Assent of Energy Bill
(expected)
Secondary legislation comes into force
3rd Reading of Energy Bill
Final policy prepared
Policy
Draft secondary legislation prepared
Consultation
Legislation updated
Legislation before Parliament
Legislation
Collaborative Development
Final preparation for implementation
Implementation
State Aid clearance process
npower will be running webinars & producing update packs in July & August 2013 once more price & design decisions are known