“Keeping the lights on, consumers energy bills down…creating cleaner electricity to help tackle climate change…” and providing “investors with transparency, longevity and certainty in order to attract £110 billion of investment to bring forward new low-carbon power generation for the 21st century” is how the UK Department of Energy and Climate Change (DECC) summarises the ambitious goals of its Electricity Market Reform legislation published in a draft energy bill on 22 May.

Over the next decade, around a fifth of existing UK power generating capacity will come off-line, DECC estimates, and “without these reforms, we could in the future see blackouts affecting millions of homes in some years. We would also be more dependent on importing oil and gas from overseas, this could present geopolitical risks and make our energy supply unsecure.”

At the heart of the legislation is a new system of revenue support for low-carbon generation (including renewables, nuclear and coal with CCS): a “feed-in tariff with Contracts for Difference (CfDs)”, designed to replace, over time, the existing RO (Renewables Obligation) scheme of tradeable certificates awarded per MWh of renewable electricity generated.

The idea is that CfDs will make investment in clean energy more attractive by removing long term exposure to electricity price volatility and will provide stable and predictable incentives for companies to invest in low-carbon generation. The aim is to stabilise returns for generators at a fixed level known as a “strike price” while insulating consumers by clawing back money from generators if the market price is higher than the strike price. The government says it will consult on the first set of CfD strike prices in 2013 and will announce the prices in the second half of that year, giving developers up to a year of visibility of prices ahead of them coming into force in mid-2014.

To enable investment (eg in new nuclear by EDF) to come forward in advance of the new CfD regime coming into force the proposed legislation also contains measures to allow the government to work with developers under a process called “Final Investment Decisions (FID) Enabling.”

The government believes the CfD approach is more cost effective than the alternatives and points to examples of its successful application in other countries, eg Holland and Denmark.

Another key element of EMR set out in the draft energy bill is the establishment of a capacity market, which is seen as a form of insurance policy to reduce the likelihood of blackouts in the future , eg during periods of low wind and high demand.

The CfD scheme and the capacity market will be administered by National Grid, which is to be appointed as the Independent System Operator, providing the “analytical basis for government decisions.”

The CfD and capacity market mechanisms are supported by two other measures, an emissions performance standard (EPS), which provides a regulatory backstop to prevent construction of new coal plants emitting more than 450g/kWh, and a carbon price floor. The latter was announced by the chancellor in his 2011 budget and was introduced in the finance bill. This provides a “clear economic signal to move away from high carbon technologies by increasing the price paid for emitting carbon dioxide.” This will be set at around £16/tCO2 (2009 prices) in 2013, rising to £30/tCO2 (2009 prices) by 2020.

With or without reform, household electricity bills are likely to increase over time, driven primarily by rising fossil fuel prices, the government believes, but the EMR “will help to reduce the amount that bills will increase.” The government estimates that as a result of these reforms, “electricity bills are estimated to be, on average, 4% lower over the next two decades than they would otherwise have been.”

The energy bill, once introduced into parliament, is expected to achieve royal assent (that is, the final stage before passing into law) in 2013, so that the first low-carbon projects can be supported in 2014. It has been introduced in draft form to allow pre-legislative scrutiny.

Other measures in the bill include provisions for creation of a new, industry financed, independent statutory nuclear regulator, the Office for Nuclear Regulation.

The UK government says it remains committed to nuclear new build and also envisages that gas will continue to play an important role in the transition to a low-carbon economy, to provide flexibility and help maintain security of supply. A separate strategy on the role of gas (see p16) is due to be published in the autumn of 2012.