Electricity Market Reform - EMR

What is Electricity Market Reform?

 

Electricity Market Reform (EMR) is a package of Government policies designed to deliver new investment in lower carbon energy sources.

 

The UK needs approximately £110bn of investment in its energy infrastructure over the next decade in order to secure power supplies for the future, and reduce our environmental impact - and to do so in a way that controls the impact on customer bills.

 

New power generation capacity is needed to replace retiring nuclear and fossil-fuelled power stations and to help maintain a secure power supply and it’s crucial that the UK delivers new investment in lower carbon generation to help meet Government environmental targets.

 

The key mechanisms of EMR will create a system of support for lower carbon power generation (eg wind farms) as well as providing security for those who ‘keep the lights on’ by keeping their plants available as back-up for times when renewable sources are unavailable.

 

What are the key elements of EMR?

 

Through the EMR, two key mechanisms will be introduced:

 

  1. Feed-in Tariffs with Contracts for Difference (CfD) – this will pay generators a fixed price for low carbon generation, providing greater certainty to those investing in new technologies. CfDs work in tandem with the wholesale energy market, providing an extra payment for generators when the market price falls below the pre-agreed ‘strike’ price, with generators paying back any surplus should the market price rise above it.
  2. Capacity Market (CM) – a capacity market has been set up to make sure that supply will be available when it’s needed the most. It provides incentives for developers and owners of generating capacity (eg power plants) to make their capacity available. Capacity providers are paid on a kilowatt per year basis for the capacity that they can make available.

 

What does this mean for Corporate customers with existing contracts?

 

Different suppliers will manage the change in legislation in different ways but from April 2015 suppliers will start to incur EMR costs and most suppliers will be passing these costs on to Corporate customers.

 

As suppliers don’t yet know what the actual EMR costs will be suppliers don’t know the impact on each customer, but once suppliers have a clearer view on these charges they are likely to be writing to all customers affected to let them know what this means for them and how the changes will be managed.

 

What does this mean for customers agreeing new Corporate contracts?

 

From 1 August 2014 most suppliers will include estimates of EMR costs on all new quotes which run past 1 April 2015. There are two methods for including these charges:

 

In most cases suppliers will include the EMR charges in your fixed unit rate, based on suppliers forecast of the costs.

 

Suppliers can pass these costs through to you when suppliers invoice, instead of including them in your unit rates and there will be a reconciliation once the actual costs are known. Talk to your supplier for more information.

 

Is there any way of avoiding EMR charges?

 

Unfortunately not, EMR is legislation passed by Parliament and affects all electricity consumers. However, controlling how much energy you use and when you use it may help to reduce your total costs.

 

The government is seeking to exempt energy intensive industries from some of the Contracts for Difference (CfDs) costs. Details of which industries will be exempt and by how much are still to be determined but initial discussions suggest these customers may receive a considerable discount.

 

What are the forecasts for EMR costs?

 

We anticipate that costs associated with EMR will initially be low - in 2015 we expect the total charge to be under 0.1p/kWh. However we expect charges to rise over time as the new market mechanisms come in to play.

Contact us for advice on how to minimise the effect of EMR in energy procurement

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