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Electricity Market Reform

Electricity Market Reform (EMR) is the Government’s initiative to deliver low carbon electricity supplies to meet our carbon reduction targets, and ensure we secure the UK’s electricity supply – keeping the lights on at times of peak demand, whilst minimising the costs of the measures. It is estimated that because of plant closures and the need to replace and upgrade the UK’s electricity infrastructure, the sector will need to attract around £110 billion of investment (in new networks and generation plant) by 2020. Through EMR, two of the main mechanisms being introduced include;

Contracts for Difference (CfD)

These have been put in place to stimulate long-term investment in low-carbon generation by providing predictable revenue streams for generators. The vision is that this will encourage new and efficient investment by reducing risks to investors under a private law contract.

CfDs will in time replace the existing Renewable Obligation (RO) which closes to new projects in 2017, although the RO will continue past this date to provide support to schemes benefiting from this mechanism.

Capacity Market (CM)

This auction-based arrangement has been put in place to secure the UK’s electricity supply by making financial incentives available to participants – making sure the lights stay on at times of peak demand.

Capacity market participants will receive a regular payment in return for their capacity being available when the system is ‘tight’. They will also face a penalty if it is not available when needed.

Eligible generators and customers that can demand side manage their consumption can both participate in this scheme.

What does this mean for customers?

Haven customers will see the charges relating to EMR appearing on their bills from June onwards.

Half-hourly (HH) Contracts 

For HH customers, there will be four lines on bills under ‘Taxes, Levies and Other Statutory Obligations’ with reconciliation appearing on bills as additional lines. The four lines will appear as follows:

CfD Operational Levy xxxxx.x,KWh at,0.0052 pence per kWh £zz.zz
CfD Interim Levy Rate xxxxx.x,KWh at,0.1553 pence per kWh £zz.zz
CM Settlement Costs Instalment £s per month £zz.zz
CM Supplier Levy £s per month £zz.zz

The CfD Operational Levy covers the operational costs of administrating CfD and is charged on a pence per kWh basis as shown above and will be reviewed by the relevant regulatory body on an annual basis. This has recently been updated from 0.00397 pence per kWh to the published rate for 2016/2017 of 0.00509 pence per kWh.

The CM Settlement Costs Levy is designed to recover the administration costs of running the CM i.e. the costs of the Electricity Settlements Company (ESC) and will be charged from April 2016. Each year the Government publishes a consultation on the proposed ESC budget. The response to the consultation for 2016/17 confirms the total operating costs as £4,283,000; this is then recovered from suppliers based on their market share during periods of high demand. We will recover the charge from customers via monthly instalments based on an estimate of their share of consumption in periods of high demand (4-7pm on working days November – February) and will be subject to reconciliation once actual demand is known.

Read more about the CM Settlements Costs Levy here.

The CfD Interim Rate Levy and CM Supplier Levy cover the operational components of CfD and CM. These charges will be subject to reconciliation. The CfD Interim Rate Levy has been set to zero (pence per kWh) for the final quarter of 2016. The CfD Interim Rate Levy has changed twice for Q4 2016 from the original figure that was set. The figure was originally set in June at £1.016/MWh, then on the 10th October this reduced to £0.594, and then on the 14th November this changed to zero. These changes are due to an unforseen reduction in generation for the quarter.

The CM Supplier Levy will be non-zero for the first time from November 2016. CM Supplier Levy charges are calculated on actual half hourly (HH) consumption. Further details on this charge will be included on your bill.

Please note: although the charges above are calculated using pence per kWh rates expressed to six decimal places, the figures are shown on bills to three decimal places for clarity.  Rounding is applied in a conventional manner.

These schemes are in their infancy and it is anticipated that the associated costs will rise over time. Please find below links to the regulatory bodies responsible for publishing these rates:

Non Half-hourly (NHH) Contracts

For NHH customers, there will be one new line on bills under ‘Taxes, Levies and Other Statutory Obligations’ and it will appear as follows:

EMR Levy xxxxx.x kWh at y.yyy pence per kWh £zz.zz

The EMR Levy is calculated using a pence per kWh rate applied to consumption and replaces the four lines that will appear on HH bills representing the administration and operational costs associated with EMR legislation. The EMR Levy will not be reconciled and is designed to cover all CM and CfD costs, simplifying them into one line on bills.

Please note: the charges above (for both HH and NHH) will be calculated to six decimal places, though the figures represented on bills are shown using just three decimal places for clarity. Rounding is applied in a conventional manner.

The table below shows EMR Levy Rate values.  We expect these to increase over time and the information will be updated to reflect this.  Please note that some values shown below for future consumption periods may be changed before the consumption is invoiced.

Month of Consumption EMR Levy Rate (pence per kWh)
October 2016 0.072000
November 2016 0.045000
December 2016 0.017000
January 2017 0.123000
February 2017 0.123000
March 2017 0.123000
April 2017 0.185000
May 2017 0.185000
June 2017 0.185000
July 2017 0.188100
August 2017 0.188100
September 2017 0.188100

Will any customers be exempt from these charges?

The government has agreed to make electricity intensive industries exempt from some of the CfD costs and other indirect costs incurred through energy and climate change policies, subject to approval from EU State Aid. Details of which industries will be exempt and to what extent, are still to be finalised as are the mechanisms for any compensation.

To keep up to date on the latest Electricity Market Reform news and policy updates click here.

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