Department for Energy and Climate Change - overview of major schemes and relevant secondary legislation 1

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1 Department for Energy and Climate Change - overview of major schemes and relevant secondary legislation 1 Renewables Obligation Feed-in Tariffs Scheme Renewable Heat Incentive Scheme Warm Home Discount Scheme Home Energy and Energy Companies Obligation Smart Metering Programme Electricity Market Reform Renewables Obligation Draft Renewables Obligation Order 2015 laid 21 July 2015 under Section 32L(2) of the Electricity Act 1989 and paragraph 2(2) of Schedule 2 to the European Communities Act 1972 Background The Renewables Obligation (RO) has been in place since 2002 and incentivises the deployment of large-scale renewable electricity generation in the UK. It places an obligation on UK licensed electricity suppliers to source a specified proportion of the electricity they supply to customers from renewable sources, or pay a penalty. Generators receive Renewable Obligation Certificates (ROCs) in relation to the amount of renewable electricity they generate, and may sell their ROCs to suppliers for use in fulfilling their obligations. It is assumed that suppliers pass on the costs of the RO to consumers in their energy bills. The RO works on the basis of three complementary obligations: one covering England and Wales, and one each for Scotland and Northern Ireland. Changes to the RO in Scotland and Northern Ireland are approved respectively by the Scottish Parliament and the Northern Ireland Assembly. The RO has undergone various reforms since it was introduced. The most significant of these was the introduction of banding in April 2009, which moved the RO from a mechanism which offered a single level of support for all renewable technologies to one where support levels vary by technology according to a number of factors, including their costs and level of deployment potential. The RO Order 2009 provides that banding levels may be reviewed every four years to ensure that support levels are set as cost-effectively as possible and deliver good value for money to consumers. The first banding review concluded in 2012 and revised support levels came into effect in April 2013 as a result of changes made by the Renewables Obligation (Amendment Order) The RO (subject to certain exceptions see further below) will close to new capacity generation on 31 March 2017 and will be replaced by Contracts for Difference (CFD). The Renewables Obligation (Amendment) Order 2014 put in place the measures to begin moving the RO towards closure in 2017 and paved the way for transition to Contracts for Difference. Generating stations that are accredited under the RO before it closes will continue to receive full RO lifetime of support (20 years) until the scheme finally closes in The information is this note was correct at September 2015, but some aspects may be overtaken by subsequent policy development.

2 The Renewables Obligation Closure Order 2014 closed the RO to new capacity after 31 March 2017, as part of the transition away from the RO to the CFD. It also set up a range of grace periods that allow generators subject to delay under certain circumstances to accredit under the RO for a further months from 31 March Full detail of these grace periods was set out in the RO Transition and Grace Periods Government Response published on 12 March The Renewables Obligation Closure (Amendment) Order 2015 closed the RO to new solar pv generating stations or additional capacity after 31 March 2015, where the generating capacity of the station is, or would become, over 5 megawatts (MW) in size. It also set up a range of grace periods that allow generators who have been granted preliminary accreditation, made significant investments or are subject to delay under certain circumstances to accredit under the RO for a further 12 months until 31 March Full details of the early closure and the grace periods were set out in the Government Response to consultation on changes to financial support for solar PV published on 2 October Draft RO Order 2015 The draft RO Order 2015 revokes, consolidates and re-enacts the RO Order 2009 (S.I. 2009/785) ( the 2009 Order ) and revokes the renewables obligation orders that have amended the 2009 Order. It also: implements outstanding policy decisions in relation to the reporting requirements and sustainability criteria for stations using solid biomass and biogas feedstocks to generate electricity; implements outstanding policy decisions relating to the transition from the renewables obligation to the Contract for Difference and Capacity Market mechanisms introduced as part of the Electricity Market Reform; and makes consequential amendments to the RO Closure Order The outstanding policy decisions in relation to biomass sustainability are explained in the explanatory memorandum laid alongside the draft instrument and are set out in: in Chapter 2, pages and Chapter 3, pages 17 21of the Government Response to the consultation on proposals to enhance the sustainability criteria for the use of biomass feedstocks under the Renewables Obligation of 22 August 2013; and pages of the Government response to the consultation on adjustments to sustainability and reporting provisions for biomass 12 August The outstanding policy decisions relating to the transition from the renewables obligation to support under the Contract for Difference and the Capacity Market are set out in pages of the Government Response to the consultation on the Transition from the Renewables Obligation and Grace Periods of 12 March. In addition: we are consulting on changes to the level of support for small scale solar pv (less than 5 MW in size), which if implemented, may require amendment to the RO Closure Order 2014 and the RO Order 2015 at the end of this year or early next; 2

3 we cannot at this stage rule out the possibility that we may have to make changes to the RO to bring the scheme into line with new EU guidelines on environmental and energy state aid. Further proposed changes to the RO DECC Ministers are also considering further changes to the RO, primarily for cost-control reasons. In particular: - In June we proposed to close the RO a year early for onshore wind, which would fulfil the manifesto commitment to end new subsidies for that technology. We proposed this would be implemented through primary legislation (via the Energy Bill); - In July we launched a consultation on controlling subsidies for solar PV of 5 MW and below, including early closure and a banding review, which we proposed would be implemented through secondary legislation. Although not relevant this year, it is worth noting that we will also lay a Certificate Purchase Order before Parliament at a later date, setting out the detailed arrangements for the Fixed Price Certificate Scheme which will replace the Renewables Obligation for the final ten years of its existence. The power to set up this replacement scheme was taken in the Energy Act As the RO is a market-based mechanism, it will need replacing with a fixed price scheme once projects begin leaving the RO as they reach the end of their 20 year terms of support, which we expect to occur predominantly from 2027 onwards. Alongside the Certificate Purchase Order, we would amend the RO Closure Order to set the date of transfer from the RO to the Fixed Price Certificate Scheme. The Certificate Purchase Order will be subject to the affirmative procedure. Feed-in Tariffs Scheme (FITs) Alongside the Renewables Obligation and, more recently, the Contract for Difference regime, FITs is part of a set of initiatives to encourage the deployment of renewable energy across the UK. It works by paying two tariffs to accredited installations: one based on the amount of electricity generated (the generation tariff); and the other for the amount of electricity exported to the grid. The tariffs are paid out by the electricity suppliers and the costs recovered through consumer bills. A levelisation process ensures that the costs of the FITs are borne equally by all GB electricity suppliers according to their share of the GB market. The FITs scheme applies to Great Britain only. No part of the scheme is devolved, although under the new Scotland Bill DECC will have to consult the Scottish Ministers in respect of any changes to the scheme than are not minor, administrative or technical. The FITs scheme (made under powers in sections 41 to 43 of the Energy Act 2008) was introduced in 2010, with a comprehensive review of the scheme in introducing several changes through the Feed-in Tariffs Order 2012 (and several minor changes since then). The European Commission s State Aid approval for FITs places an obligation on the Government to review the scheme s performance every three years. We are therefore carrying out a further review in 2015, following on from our 2012 review. In particular, we are required to reassess the costs of technologies, electricity price forecasts and whether the target rate of return is still appropriate, and consider revision of tariff levels and decrease rates accordingly. 3

4 We will be consulting on any proposed changes as a result of the review at the end of August. It is highly likely that, as a result of the consultation, we will be making changes to the Feed-in Tariffs Order 2012 and modifications to the Standard Licence Conditions for Electricity Suppliers involving a reduction in tariff levels and the introduction of further cost control measures. Such changes would be implemented by laying amending instruments in November/December In addition, we are consulting on removing pre-accreditation for all new participants in the FITS scheme and the tariff guarantee part of pre-registration for new community installations that are equal to or under 50kW in size and solar pv. If these changes are implemented, this will require amendment to the Feed-in Tariffs Order we would hope to lay the amending instrument in early September Renewable Heat Incentive The Non-Domestic Renewable Heat Incentive Scheme Regulations 2011 (SI 2011/2860) came into force on 27 November 2011 under section 100 of the Energy Act The Domestic Renewable Heat Incentive Scheme Regulations 2014 came into force 9 April 2014, under section 100 of the Energy Act 2008 What is the RHI? The Non-Domestic Renewable Heat Incentive (Non-Domestic RHI) scheme is designed to encourage the generation of renewable heat by giving subsidy payments to owners of eligible plants that generate heat from eligible renewable sources for non-domestic properties. It opened for applications on 28 November The Domestic Renewable Heat Incentive (Domestic RHI) scheme is designed to encourage the renewable generation of heat by giving subsidy payments to owners of eligible plants that generate heat from eligible renewable sources for domestic properties. It opened for applications on 9 April Why was the RHI introduced? The Non-Domestic RHI scheme is DECC s key delivery tool to increase take up of renewable heating by industrial, commercial, public sector, not-for-profit organisations and community installations. The Domestic RHI scheme aims to increase the take up of renewable heating in households. Both schemes were introduced primarily to help meet the UK's target under the Renewable Energy Directive 2009/28/EC that 15% of energy consumption is to come from renewable sources by The UK intends that renewable heat will make a significant contribution towards that target, and both RHI schemes are expected to support around 7.7 TWh of renewable heat over 2015/16. The schemes also supports the UK s long-term goal to reduce emissions across the economy by 80% by 2050, by building supply chains and reducing costs this decade in preparation for mass rollout of low-carbon heating in the 2020s. 2 In fact, the Feed-in Tariffs (Amendment) (No. 2) Order 2015 (SI 2015/1659) was laid on 9 September 2015 for this purpose. 4

5 How does the Non-Domestic RHI scheme work? The scheme will pay financial support at a set rate per unit of renewable heat produced for twenty years, to the owner of the heating system. The support is set at a level designed to compensate for the difference between the cost of installing and operating a renewable heating system and a fossil fuel system, including non-financial barriers. Payments are based on meter readings of actual heat generated or used. There are several eligible renewable heating technology types: several varieties of air source heat pumps, biomass boilers, bio-methane injection into the grid, combined heat and power, deep geothermal, district or community heating (heat networks), energy from waste, ground source heat pumps and solar thermal. The scheme is administered by Ofgem. How does the domestic RHI scheme work? The scheme will pay financial support at a set rate per unit of renewable heat produced for seven years, to the owner of the heating system. The support is set at a level designed to compensate for the difference between the cost of installing and operating a renewable heating system and a fossil fuel system, including non-financial barriers. In most cases, the renewable heat produced is estimated (deemed), though there are certain systems which require metering, if there is a back-up system or it is in a second home. There are four eligible renewable heating technology types: biomass, air source heat pumps, ground source heat pumps, and solar thermal. Systems must be certified by the Microgeneration Certification Scheme or equivalent, to protect consumers by ensuring high quality installations. The scheme is also administered by Ofgem. Interactions between the Non-Domestic RHI and other DECC renewable energy policies Eligible Combined Heat and Power (CHP) applicants can receive the RO on their electricity generation plus the RHI CHP tariff for their renewable heat generation. Under the Government s new support mechanism, Contracts for Difference (CFD), the administrative strike price for biomass CHP is set to be equivalent to the Renewables Obligation support for dedicated biomass power only. The final strike price awarded will be dependent on the clearing price following the auction. The intention is for participants to be able to apply for the RHI as well as CFD support. However, the arrangements for receiving CFD and RHI are particularly different for Energy from Waste (EfW) with CHP. Applicants developing EfW with CHP stations may apply for either CFD or RHI funding for their station, but not both. This reflects the CFD strike prices for EfW which have been set to include both the power and heat component supplied. All other CHP technologies (i.e. Geothermal with CHP, Biomass with CHP, Anaerobic Digestion (AD) with CHP and Advanced Conversion Technologies (ACT) with CHP) are eligible for both CFD and RHI support. The justification being the strike price under the CFD was based on power-only and therefore also needs to allow for funding to apply to the supply of the heat component. 5

6 Interactions between the Domestic RHI and other DECC policies for householders The Domestic RHI scheme is one of a package of Government policies (ECO, Warm Homes Discount, Central Heating Fund, FiTs) which support customers in saving carbon and reducing their energy bills, and will help the country meet its carbon targets and improve energy security. The design of the Domestic RHI scheme has been integrated with other policies to ensure that households install the most cost effective measures first, and to smooth the customer journey: All applicants (excluding social landlords and new self-builders) must complete a Green Deal Assessment, to enable them to find out what energy efficiency measures are cost-effective for their home As a minimum, they must install any loft and cavity wall insulation recommended in their Energy Performance Certificate before applying to the scheme. As long as the homeowner has part-funded their installation and the installation meets the requirements of the domestic RHI regulations, the domestic RHI can be combined with funding from other sources, such as the Energy Company Obligation and the Central Heating Fund. Evolution of the Non-Domestic RHI Since its introduction, the Non-Domestic RHI has been amended as follows: In 2012 we introduced an interim cost control mechanism for the Non-domestic RHI scheme. In 2013 we: o Introduced a long-term budget control mechanism until the end of 31st March 2015, and introduced air quality emission limits to all biomass boilers seeking accreditation under the Non-domestic RHI scheme; o Introduced a new streamlined approach to metering along with a number of minor changes, o Amended the RHI Regulations to correct two points relating to the operation of Non-domestic RHI scheme. In 2014 we introduced new tariffs and technologies into the Non-domestic RHI scheme. It also introduced changes to the budget management mechanism. Changes clarified eligibility rules and rules regarding public grants to give greater flexibility. In 2015 we: o Introduced apportioning to Combined Heat and Power to add additional flexibility, as well as simplification to the requirements of underground piping and manufacturer s instructions. Changes also clarified when Ofgem can apply sanctions. o Introduced sustainability criteria for biomass, including the setting up of a Biomass Suppliers List. o Corrected an error in the regulations relating to heat being produced from the combustion of biogas from the biogas production plant. 6

7 o Introduced the Seasonal Coefficient of Performance (SCoP) calculator. o Made changes to the budget management forecasting methodology for biomethane in order to reduce uncertainty and fluctuations in forecasts which undermine the effectiveness of budget management policy. o Made minor amendments to the reporting requirements which participants will have to meet to demonstrate compliance with the biomass sustainability rules and corrected minor errors in relation to the definition of sustainable biomethane and land criteria for non-woody fuels. o Introduced an explicit power to reject applications. Ofgem has been provided with an explicit power to reject applications to the Non-domestic RHI scheme, where the applicant fails to provide further information to support the application within the time period specified in a request by Ofgem. Evolution of the Domestic RHI Since its introduction, the Domestic RHI has been amended as follows: o In February 2015 we introduced updates to MCS standards, removed the requirement for a green deal assessment for social landlords, confirmed some cooker stoves as being eligible for the scheme and made clarifications to the regulations to ensure they were delivering policy intent. o Also in February 2015 we introduced sustainability criteria for biomass, including setting up of a Biomass Suppliers List. o In June 2015 we introduced further updated MCS standards as part of the implementation of the Energy Related Products Directive. Further secondary legislation We anticipate making further changes to both the Domestic and Non-domestic RHI in 2015/16 and potentially in the longer term. However, the precise nature of these changes will depend on Ministerial decisions on the future of the RHI following the Spending Review. 7

8 Home Energy and the Energy Company Obligation (ECO) Overview of Home Energy and ECO The Government recently decided not to invest further in the Green Deal Finance Company (GDFC) due to the low take-up of Green Deal finance. However, the Green Deal pay-as-you-save framework remains open for the collection of payments. This means that the GDFC can seek other investors and other finance providers, should they wish, can enter that market. The Government is committed to creating a more stable, more coherent and more affordable policy framework for home energy in the long term. We are now working with the building industry and consumer groups on a new value-for-money approach, and we have also commissioned an independent review led by Peter Bonfield to investigate standards, consumer protection and enforcement of energy efficiency schemes and ensure that the system properly supports and protects consumers. This is in addition to our commitment to work in partnership with the Department for Communities and Local Government to improve the UK s existing housing stock. The longer-term future of the Energy Company Obligation (ECO) scheme will be part of these discussions around a new, better-integrated policy. At present, there is no further secondary legislation planned for ECO for This, however, may be subject to change following Ministerial steer. Warm Home Discount Scheme Draft Warm Home Discount (Amendment) Regulations 2014 laid 20 January 2014 under Section 31(2) of the Energy Act 2010 The Warm Home Discount is a key policy in tackling fuel poverty. Through regulations, Government places obligations on suppliers to help low income and vulnerable households with their energy costs. The majority of that help is provided by direct rebates off electricity bills ( 135 in 2013/14). The majority of rebates are provided to the poorest pensioners those in receipt of Pension Credit Guarantee Credit. Help is also provided to other low income households, including other pensioners, families and those with disabilities. Suppliers who have over 250,000 domestic customer accounts have to participate in the scheme. Since the launch of the scheme in 2011, around 2 million households in or at risk of fuel poverty have benefitted from lower energy bills each year. The Warm Home Discount is not dependent on other DECC policies though the eligibility criteria for the scheme are based on the welfare and benefits system including pension credit. The Energy Company Obligation, a scheme through which people are provided with heating and insulation measures has an element specifically designed to help the fuel poor (the Affordable Warmth group). There is a large overlap between the people eligible for the Warm Home Discount and the Affordable Warmth group. As a result of this overlap, there is also some link up between the delivery of the two schemes from Government and suppliers. 8

9 The Government have committed to extending the Warm Home Discount scheme with spending of 320m in 2015/16. However, the remit of the current regulations is until 31 March Therefore, we will need new or amending regulations in order to implement changes. We will be consulting this spring on changes to the scheme for 2015/16 and we expect to lay the new regulations by end of 2014 or early The regulations will be affirmative as specified in the Energy Act Smart Metering Programme Draft Modifications to the Smart Energy Code, Smart Meter Communication Licences and the Standard Conditions of Electricity and Gas Supply Licences (No. 1 of 2014) laid 30 January 2014 under Section 89(3) of the Energy Act Smart Metering Implementation Programme Overview The Government's vision is for every home in Great Britain to have smart electricity and gas meters and for smaller business and public sector premises to have smart or advanced metering suited to their needs. The roll-out of smart meters will play an important part in Britain s transition to a low-carbon economy and help us meet some of the long-term challenges we face in ensuring an affordable, secure and sustainable energy supply. The Smart Metering Programme aims to replace 53 million meters with smart electricity and gas meters in all domestic properties, and smart or advanced meters in smaller non-domestic sites, impacting approximately 30 million premises. The Programme forms a key part of DECC s work to improve energy efficiency and help consumers take control of their energy bills. The roll-out of smart meters is distinct from other DECC programmes and policy initiatives, such as the Green Deal. However, installers are required to provide energy efficiency advice as part of the installation visit, which we would expect to include generic information about programmes such as the Green Deal. The programme is being delivered in two phases. During the current Foundation Stage, which began in March 2011, the Government is working with the energy industry, consumer groups and other interested parties to ensure that all of the necessary groundwork is completed before energy suppliers start the process of providing smart meters to their customers. This includes establishing the policy, regulatory and commercial framework that will underpin and drive the roll-out of smart metering. Most householders will have smart meters installed by their energy company between Autumn 2015 and 2020, although some energy companies are starting to install smart meters now. Legal framework The Energy Act 2008 (sections 88-91) sets out the scope of the Government s powers to amend the existing regulatory framework for the purposes of the Smart Metering Programme. The Energy Act 2011 (section 73) extended the 2008 Act s provisions to All of the key smart meter specific regulation is provided for in energy licences and codes. Industry licences set out the obligations that apply to licensees operating in the gas and electricity markets. 9

10 Sitting underneath licences are the regulated industry codes which set out the detailed day to day rules, rights and obligations for how these obligations should be met. In September, a new licensed entity, the Data and Communications Company (DCC), was established. Together with its sub-contractors, the DCC will provide smart meter communications services through which suppliers, network operators and others can communicate remotely with smart meters in domestic premises in Great Britain. Following the award of the DCC Licence, the Government designated the first stage of the Smart Energy Code (SEC), including the DCC s charging methodology, in September 2013, which came into effect immediately. The SEC is a multiparty contract, which sets out the terms for the provision of the DCC's smart meter communications services, and specifies other provisions to govern the end-to-end management of smart metering. Further Secondary Legislation Following its initial designation, further content for the SEC is being introduced in stages. We expect to publish further stages of the SEC in We also expect to lay licence conditions relating to the smart metering equipment technical specifications in Electricity Market Reform Overview The Electricity Market Reform (EMR) programme went live in August 2014 and is intended to incentivise investment in low-carbon electricity generation, while improving affordability for consumers, and maintaining energy security. The EMR scheme comprises two key components: Contracts for Difference (CFDs): The CFD is a private law contract signed between low-carbon electricity generators and a government appointed counterparty (the Low Carbon Contracts Company). The CFD provides generators with long-term price stability, allowing investments to come forward at a lower cost of capital and therefore at a lower cost to consumers. Capacity Market (CM): The CM provides a regular retainer payment to reliable forms of capacity (both demand and supply side), in return for such capacity being available when electricity supply is squeezed. The programme closed in August 2015 and work on the Capacity Market and Contracts for Difference is managed by two distinct teams within the Department. Contract for Difference (CFD) SIs and related documents Statutory Instruments The Secretary of State has power to make statutory instruments in relation to CFDs in Chapter 2 of Part 2 of the Energy Act The Secretary of State may also make related provision in relation to investment contracts, using powers in Chapter 4 of Part 2/Schedule 2 of the Act. The following instruments have been made: 10

11 Contracts for Difference (Counterparty Designation) Order 2014 (S.I. 2014/1709) This Order designates the Low Carbon Contracts Company Ltd as the CfD Counterparty using section 7 of the Energy Act Contracts for Difference (Definition of Eligible Generator) Regulations 2014 (S.I. 2013/2010) The Eligible Generator Regulations define an eligible generator as required by section 10(3) of the Energy Act For the purpose of that definition, particular types of electricity generating station are defined, which include nuclear and generating stations to which a Carbon Capture & Storage system is connected. Contracts for Difference (Allocation) Regulations 2014 (S.I. 2014/2011) The Allocation Regulations set out how and when an allocation round for contracts for difference is established and requires an allocation framework to be identified which applies to the round. The Regulations provide for the Secretary of State to give budget notices to the Delivery Body, which set out the various budgets which apply to the round and the administrative strike prices. The Regulations provide that applications for CFDs need to meet certain qualification requirements. The allocation process must ensure that the value of CFD notifications is within budget and none exceed the administrative strike price. The allocation process will be set out in the allocation framework applicable to the allocation round. The Regulations also include a review procedure and an appeal process with Delivery Partners and enables further appeals on points of law. The Regulations require an independent audit process of the allocation process and for an allocation process (or part of it) to be re-run in certain cases. A separate Part of the Regulations deals with directions by the Secretary of State to offer to contract under section 10(1) of the Energy Act We expect nuclear projects and Carbon Capture & Storage projects to be offered CFDs further to the provisions of that Part, following bespoke negotiations with the Secretary of State. The allocation process for an allocation round set out in the allocation framework is complementary to the Regulations. The allocation process includes the auction rules to be applied by the Delivery Body. The allocation framework also sets out some additional matters, including the valuation methodology to value qualifying applications. The comparison of the budgets with those valuations, applying the validation methodology using the administrative strike prices, determines whether or not an auction for CFDs must be held. The allocation framework for the October 2014 round is published here: al_allocation_framework.pdf Contracts for Difference (Standard Terms) Regulations 2014 (S.I. 2014/2012) These Regulations establish the framework for how the CFD contract will function through providing a list of key provisions which shall be included in the Standard Terms and mandate the Secretary of State to provide the Counterparty with a Standard Terms Notice in advance of each allocation round in order to allow for the completion of the terms. The Regulations outline the process for the CFD Counterparty making minor and necessary modifications and sets out the timescales for modifications requests to be lodged and considerations which will be taken into account by the CFD 11

12 Counterparty. In addition the Standard Terms Regulations describe how the CFD Counterparty shall maintain a register of all signed CFD contracts. The Regulations also set out that where the Secretary of State publishes an updated version of the Standard Terms, an explanation of any changes made must be provided. The Electricity Market Reform (General) Regulations 2014 (S.I. 2014/2013) These Regulations impose obligations on the CFD Delivery Body to provide information and analysis to inform the Government s decisions on policy parameters, such as the CFD strike prices for renewable technologies. The Regulations enable the delivery body, in turn, to require information so as to provide that advice. In addition these Regulations set out the provisions by which a Supply Chain statement application should be made and what it should cover and setting out the circumstances in which the Secretary of State must not disclose information contained in a Supply Chain statement application. The Regulations also make provision in relation to the liability of the national system operator. Contracts for Difference (Electricity Supplier Obligations) Regulations 2014 (S.I. 2014/2014) The Contracts for Difference (Electricity Supplier Obligations) Regulations 2014 establish the mechanism to allow the CFD Counterparty to raise funds from all licensed suppliers in Great Britain to pay for the CFD. The Regulations also require the CFD counterparty to make payments to suppliers in the circumstances where payments from generators to the CFD counterparty exceed the payments required to be paid to generators under the CFDs. Payments are made initially on the basis of a levy rate fixed for the payment period, and then reconciled. The Regulations set out arrangements for the CFD Counterparty to cover its losses in the situation of default of an electricity supplier which include holding sums in reserve, the provision of collateral by suppliers, and mutualisation of defaults. The Regulations also set out the arrangements for collection of a levy from all licensed suppliers to pay for the CFD Counterparty s operating costs. The Electricity Market Reform (General) (Amendment) Regulations 2015 (S.I. 2015/718) The standard CFD terms make provision so that generators operating fuelled technologies (Dedicated Biomass, Biomass Conversion, Anaerobic Digestion, Advanced Conversion, Energy from Waste, Sewage Gas and Landfill Gas) only receive CFD payments in relation to energy that is both renewable and sustainable in its origin. In order to obtain the technical information required for assessing fuel sustainability, these Regulations allow the Gas and Electricity Markets Authority (Ofgem), the body that currently holds the expertise in conducting such work, to provide this support by enabling it to enter into arrangements to do so. The Regulations also make provision to ensure that transferred investment contracts are treat as CFDs for the purposes of the Act and some Regulations. 12

13 The Electricity Supplier Obligations (Amendment & Excluded Electricity) Regulations 2015 (S.I. 2015/721) The Electricity Supplier Obligations (Amendment & Excluded Electricity) Regulations 2015 introduced two exemptions from CFD costs, for certain electricity intensive industries and Green Imported Electricity. The exemptions will reduce the cost to suppliers who supply electricity to large industrial users of electricity and who supply electricity generated in other EU member states from renewable sources to customers in Great Britain. The regulations also make technical amendments to a number of provisions in the Contracts for Difference (Electricity Supplier Obligations) Regulations 2014 Regulations, and set the operational costs levy rate, the compulsory levy that electricity suppliers must pay to the CFD Counterparty for it to recover its operational costs. The Contracts for Difference (Allocation) (Amendment) Regulations 2015 (S.I. 2015/981) The instrument amends the Allocation Regulations to enable the Secretary of State to implement the policy of a Non Delivery Disincentive (NDD) and corrects a crossreferencing error. The NDD is intended to incentivise applicants who have been successful in the CFD allocation process to sign the CFD offered to them and to minimise the risk that those who enter into a CFD fail to deliver the project. This is an important mechanism to ensure the efficient allocation of budget to viable projects whilst deterring speculative applications, thus ensuring the Government s carbon reduction targets are met in the most effective manner. The Contracts for Difference (Standard Terms) (Amendment) Regulations (S.I. 2015/1425) Amendments were made to the Standard Terms Regulations in order to introduce a narrow exception to the rule that the LCCC will always pay the generator in the event the Market Reference Price is below the Strike Price. This change ensures that in the rare circumstance that the day-ahead electricity price is negative for an extended period, CFD payments are not made. Introducing the aforementioned provisions was a condition of the CFD scheme s State Aid approval in July These Regulations also enable the Secretary of State to issue a replacement standard terms notice in limited circumstances. Draft Contracts for Difference (Miscellaneous Amendments) Regulations 2015 The Government consulted on various amendments to CFD Regulations in March 2015, and published the Government Response in June: Draft Regulations to give effect to that policy will be laid ahead of the next CFD allocation round. 13

14 Related Documents Modifications to industry codes and licences Under the powers conferred in the Energy Act 2013, the Secretary of State has the power to make modifications to industry codes and licences. The modifications made ensure that industry codes and licences relating to transmission, distribution, measurement, generation and supply of electricity allow the EMR programme to function. Modifications must be laid before Parliament in draft. Changes have been made to the following: Transmission Licence Standard Conditions National Grid Electricity Transmission plc (NGET) Special Conditions Grid Code Connection and Use of System Code System Operator/Transmission Owner Code Balancing Services Agreements Balancing & Settlement Code Balancing and Settlement Code Subsidiary Documents Further measures In addition to the above, in the autumn of 2014 further measures are laid under EMR to set-up the Offtaker of Last Resort scheme. Power Purchase Agreement Scheme Regulations 2014 The Power Purchase Agreement Scheme Regulations support the Contract for Difference (CFD) by implementing the Offtaker of Last Resort (OLR) scheme. The OLR scheme provides eligible renewable CFD generators with a guaranteed backstop route to market for their power: a backstop power purchase agreement (BPPA). These Regulations set out provisions regarding: how generators can apply for a PPA and the procedure for entering into a BPPA; information requirements on the CFD counterparty and suppliers to provide information requested by Ofgem; conferral of functions on Ofgem and the Secretary of State in relation to the operation of the OLR scheme; the OLR levelisation process administered by Ofgem which includes mutualisation of unpaid amounts; and the OLR auction process. These Regulations are made using the powers in Chapter 6 of Part 2 of the Energy Act Modification of Electricity Supplier Licences: Offtaker of Last Resort functions To implement the OLR scheme successfully, the changes set out in the OLR regulations need to be supported by appropriate modifications to electricity supplier licences. The 14

15 licence modifications set out various aspects of the OLR including eligibility of certain generators and requirements on suppliers to participate in the scheme. Power Purchase Agreement Scheme (Amendment) Regulations 2015 Minor amendments were made to the regulations to ensure correct implementation of the policy intent. Capacity Market (CM) SIs and related documents Statutory Instruments The Electricity Capacity Regulations 2014 The Electricity Capacity Regulations 2014 established a Capacity Market to ensure security of electricity supply in times of system stress. It does this by providing certain, regular payments to capacity providers, in return for which those providers must be available and produce electricity (or reduce demand) when the system is under stress, or face penalties. The Regulations included key aspects of the design where it is appropriate for the Secretary of State to retain responsibility for fundamental policy matters that are of a strategic nature. These included matters such as whether and when capacity auctions should be held, the amount of capacity to contract for, eligibility criteria and penalties. The Electricity Capacity (Supplier Payment etc.) Regulations 2014 The Electricity Capacity (Supplier Payment etc.) Regulations 2014make provision about payments to be made by and to electricity suppliers in relation to the Capacity Market established by the Electricity Capacity Regulations 2014 ( the Principal Regulations ). In particular, it imposes an obligation on electricity suppliers to pay a Capacity Market supplier charge to fund capacity payments payable to capacity providers under the Principal Regulations, and a settlements costs levy to fund the cost of administering those payments. The Regulations also conferred functions on the Settlement Body appointed under the Principal Regulations in relation to the calculation, determination and administration of such payments. The Electricity Capacity (Amendment) Regulations 2015 The primary purpose of these Regulations was to enable electricity interconnectors (within the meaning given in the Electricity Act 1989) to participate in the Capacity Market from 2015 onwards and to be eligible to receive a capacity agreement if successful in a capacity auction. This required a number of amendments, in particular to allow interconnectors to participate in capacity auctions and to ensure penalties under the Principal Regulations apply to interconnectors.. The amendments to the Principal Regulations came into force on 23rd March Draft Electricity Capacity (Amendment) (No.2) Regulations

16 These Regulations will, if approved by both Houses of Parliament, make two relatively minor amendments to the principal Regulations. The changes will be technical in nature, and relax rather than tighten existing provisions in the Principal Regulations. One amendment will, in principle, allow a greater number of plant to participate in the Capacity Market (though in practice we think it will affect few if any plant at least for time being). The second will permit applicants a longer period in which to submit credit cover (financial collateral) after receiving a conditional prequalification notice allowing to participate in a capacity auction. The draft Regulations were laid in parliament prior to the dissolution of Parliament for the 2015 General Election and are due to be debated by both Houses this Autumn. Related Documents Capacity Market Rules 2014 The Capacity Market Rules 2014 provide the detail for implementing the operating framework set out in the Electricity Capacity Regulations 2014, which establish a Capacity Market to ensure security of supply in times of system stress. The Rules contain the technical and administrative rules and procedures for how the Capacity Market will operate, such as procedures relating to the day-to-day running of the Capacity Market, the process by which capacity providers pre-qualify, rules for running capacity auctions and issuing capacity agreements to successful bidders. Under the Electricity Capacity Regulations 2014, both the Secretary of State and Ofgem have the power to make capacity market rules (or amend the Capacity Market Rules 2014). The first set of Rules were laid in both Houses before they were made, and were subject to a procedure equivalent to the draft negative procedure for statutory instruments. The Capacity Market Rules 2014 have been amended by both the Secretary of State and Ofgem to align with changes to the Electricity Capacity Regulations 2014 and to improve the administration and operation of the scheme. In accordance with the Energy Act 2013, amendments to the Rules must be laid before Parliament and the most recent set of amendments were laid on 23 March Draft modifications to the Transmission Licence of National Grid Electricity Transmission plc (NGET) Special Condition 2N: Electricity Market Reform (EMR) Functions The GB Electricity System Operator function sits within NGET and NGET is part of National Grid plc (NG) a large private company with both monopoly and competitive businesses. The licence modification introduces mitigation measures to manage potential conflicts of interest between NGET s new public role as EMR Delivery Body and its other business interests. In particular it requires:- the legal and functional separation of NGET plc and relevant other competitive businesses; 16

17 the establishment of an EMR data handling team and EMR administrative team; and restrictions on the use of confidential EMR information. DECC, September