ELECTRICITY MARKET REFORM
process; and how the FiT CfD will work with the devolved administrations where large amounts of renewable resources are located. These issues quite rightly remain a cause for concern amongst investors who urgently require this information to support their investment decisions. However, they are, for the most part, structural considerations and finding acceptable solutions is not likely to present the main challenge to the Government. More challenging will be calibrating the substantive
market intervention required by these new regimes – just how far will the electricity consumer be expected to go to provide price stability and risk insulation to secure carbon-busting investment? Those in the thick of it during the late 1980s and 1990s
will look on the CfD proposals with a sense of déjà vu, given that CfDs were a popular (market-driven) device for achieving price certainty in the days of the electricity pool, before the New Electricity Trading Arrangements (NETA) were implemented in 2001. Many will recall negotiating CfDs between generators and regional electricity companies, often for months at a time, and then trawling through them again with a fine toothcomb when parties had no choice but to exit those contracts in the transition to NETA.
A separate factor to bear in mind is that EMR is taking
place in the context of wider reforms which directly affect future generation projects. For example, the major reforms to the planning and permitting processes for new energy facilities and the publication of national policy statements (approved on 18th
July 2011) that are designed to reduce
the barriers to project development. EMR’s success is dependent on both the key policy
instruments described above and also on the measures designed at improving liquidity in the electricity wholesale market. Energy market regulator Ofgem identified particular concerns in its March 2011 Retail Markets Review that low levels of liquidity are acting as a barrier to entry and growth in the generation market. In the context of EMR, liquidity is particularly important in giving investors comfort that reference prices under the FiT CfD are reliable. Ofgem is not due to publish its decision on the required intervention until the end of 2011; until then, DECC cannot provide the required level of certainty on the specific implications for EMR.
CfDs – Déjà Vu? At the heart of EMR is the FiT CfD model. Many
market commentators have focused on the questions that the White Paper has left unanswered. For example, how and when the strike price will be determined; the identity and creditworthiness of the counterparty; the mechanics of moving from an administered price-setting process to a competitive tender or auction price-setting
14 September 2011
Those in the thick of it during the late 1980s and 1990s will look on the CfD proposals with a sense of déjà vu
Unlike CfDs in the financial markets, which are often
short contracts, CfDs relating to the physical output of a generating station are always going to be more complex and lengthy. They need to address many different risks and dovetail with the energy regulatory and industry arrangements in place; an understanding of how those contractual risks ought to be dealt with will clearly be important.
Next Steps The Government will publish a technical update by the
end of 2011, which will include the detailed design of the capacity mechanism and the institutional arrangements needed to deliver the other EMR policies. Primary legislation will be introduced from May 2012, and is intended to be brought into force by spring 2013. In parallel to this legislative process, the White Paper
also announces that there will be discussions with investors who are endeavouring to make significant investment decisions in advance of this timetable. We can expect that these discussions will help shape what EMR will finally look like and how generous the terms are for new market investment. •
Rajan Phakey and Jeremy Chang are lawyers at SNR Denton, specialising in energy regulation and projects.
www.snrdenton.com
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