npower’s Wayne Mitchell’s Blog

The only two certainties in life are change and taxes Now I appreciate I’ve substituted change for death in this famous quote often attributed to Mark Twain, but I feel […]

The only two certainties in life are change and taxes

Now I appreciate I’ve substituted change for death in this famous quote often attributed to Mark Twain, but I feel that’s more appropriate when talking about life under Electricity Market Reform (EMR). Nobody’s under any doubt that the aims of the EMR to deliver investment in low carbon infrastructure, but many of our industrial and commercial customers are still unclear about what EMR will mean for them.

In a recent pulse survey we carried out amongst major energy users and consultants , more than 75% of respondents said they are concerned about the impact EMR will have on their businesses. Specifically, 97% are concerned about the cost of energy, 91% about cost forecasting and 86% said they believe EMR could harm UK competitiveness.

Clearly, more needs to be done to explain the implications and ensure businesses are prepared and feel more in control once EMR policies fully kick in.

In addition to establishing awareness levels around EMR, the reason for our survey was to gather feedback on the Contracts for Difference cost exemptions currently under consideration by the government. Ensuring the views of our customers are represented to policymakers is important to us, as once this legislation is agreed, the impacts will be far reaching. So the survey results were submitted as part of our consultation response to the Department for Business, Innovation and Skills (BIS) at the end of August, and we expect the consultation outcome to be made public towards the end of the year.

Like much of EMR policy, there is clearly confusion around how Contracts for Difference will actually work, with less than 17% of our survey respondents saying they were ‘fully aware’ of the measure. So for those who’d like a recap, Contracts for Difference (CfD) will offer a guaranteed price to generators for low-carbon energy from August 2014. The aim is to encourage the investment the UK badly needs in new infrastructure. And while clearly that’s important to us all and will lead to more secure and reliable energy sources for the future, in the short term it means we’ll have to pay more, with estimates of up to £10 per megawatt hour by 2020.
*66 senior energy managers for large businesses and energy consultants completed a survey on Electricity Market Reform in August 2013.

As energy costs increase to fund EMR, remaining competitive is understandably a major concern, especially for energy intensive industries operating in an international marketplace. Hence the planned cost exemptions currently being considered.

The good news is that our survey found 70% of respondents were in favour of the principals put forward by the consultation to “level the playing field”. These include targeting companies whose competitiveness is at risk from rising electricity policy costs, avoiding perverse incentives such as discouraging take-up of energy efficiency measures, and minimising the administrative burden as well as costs to consumers outside of the scope of the exemption.

Four exemption eligibility options were then identified for consideration:

1a. Adopting the same criteria already established for Carbon Price Floor and EU Emissions Trade System compensation, providing 80% cost exemption for a defined group of energy intensives (the government’s preferred option).

1b. As above but with exemption support reduced to 67%, so lessening the impact of redistributing costs to other UK consumers.

2a. Extending the eligibility criteria to a broader base of businesses, with organisations able to qualify where they can demonstrate that the combined cost of Carbon Price Support, the EU ETS and Contracts for Difference amounts to more than 5% GVA in 2020.

2b. Adopting the same approach as 2a but with tapered exemption, with the ‘core’ (ie those outlined in 1a) qualifying for 80% exemption, while those meeting the criteria in 2a, for example, qualifying for 50% exemption.

Of these, the preferred option by far was 1b, selected by 46% of respondents. The advantages given included its relative simplicity, the potential to drive greater energy efficiency and the lower cost to other consumers. However, the main disadvantage cited was a reduced level of competitiveness protection.

Option 1a was the next most popular, with 27% choosing this, and 2a and 2b getting 15% and 12% of support respectively.

When asked about an appropriate level of exemption, a third of respondents felt that CfD exemption should be set at 100% of costs to reduce the impact on competitive issues. However, 54% of businesses anticipate that the redistributive cost impact of any of the options will cause their business or household difficulties.

As I mentioned in my blog on the Contracts for Difference consultation, BIS estimates the additional potential financial impact for those not eligible for CfD exemption to be between 30p and 80p per megawatt hour between 2016 and 2020, depending on the scenario they choose to go with. So we will have to wait and see what they decide.

In the meantime, with more than 70% of our survey participants saying they want to know more about EMR, we will be bringing you further information and updates. We’ve already produced a special EMR newsletter, which you can receive by emailing your details to us at [email protected]. I’ve also written a number of other blogs on EMR. And we are inviting businesses to join our EMR Working Group, so if you are interesting in participating in more EMR-related debate, please contact us at the email above.

Finally, you will be able to get the full EMR low-down at our EMR Explained (And What You Can Do About It) presentation at the Energy Event at Birmingham’s NEC on 10 and 11 September (1330-1500 on both days in the Energy Information Theatre). And if you visit our stand at H80 (just look for the Houses of Parliament), you can speak directly to our Policy experts. We hope to see you there.

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