How it all started?
How it all started...
In 2011, the Government estimated that around £100 billion of investment was required by 2020 in the electricity sector alone, to both replace the UK’s ageing power stations and deliver secure low carbon electricity at a cost-effective price.
To achieve this, the Government set up the Electricity Market Reform (EMR) programme. Contracts for Difference (CfD) and Capacity Market are key EMR schemes.
The schemes are key cornerstones within the Government’s EMR programme, designed to provide incentives for the investment in the UK’s energy infrastructure that is required to deliver secure, sustainable and affordable electricity for the future.
Our mission is to build confidence in electricity market reform through effective commercial delivery and continuous improvement. This reflects the Guiding Principles set out in their respective Framework Documents which, for LCCC, is to maintain investor confidence in the CfD scheme and minimise costs to consumers and, for ESC, is to maintain market participants’ confidence in the Capacity Market settlement process and minimise costs to consumers.
Both organisations are private companies with operational independence, but due to their sole shareholder being the Department for Energy Security & Net Zero, are also categorised as governmental arm’s length bodies. They are led by independent (identical) Boards on which the government is represented and their constitutional documents form part of their governance structure.
What challenges are the schemes trying to address?
The UK needs a secure low carbon electricity system at a cost-effective price for consumers. To achieve this, the CfD and CM schemes are designed to tackle three market challenges.
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1. Decarbonisation
There is an urgent need to decarbonise our economy. In the electricity sector this means we need to change from fossil fuel-based power stations (like coal and gas) to clean low-carbon generation (such as wind). In June 2019 Parliament set a new target to achieve a ‘Net Zero’ target by 2050, and in December 2019 the target for offshore wind was raised from 30GW to 40GW by 2030.
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2. Replacing old power stations
Many of the UK’s coal, nuclear and gas power stations are reaching the end of their life span. Their closure will create a shortfall in power generation, sometimes referred as a Capacity Gap. The UK will need new power stations to replace them. Electricity users will also need to find ways to consume less electricity.
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3. Investment challenge
Billions of pounds of investment will be needed over the next three decades to replace the old power stations with low carbon generation. In the 2020s alone around £50bn is needed just to build the offshore wind farms needed. It’s vital that this is obtained at the lowest possible cost.