Edie explains: Electricity Market Reform
The cost of the Government's Electricity Market Reform (EMR) landed on some electricity bills for the first time in April, undoubtedly prompting surprise for some, as around 15% of business weren't aware of the policy at all.
With that in mind, edie is here to plug the information gap and tell you everything you need to know about EMR and how it might affect your business.
What is Electricity Market Reform?
EMR is the Government policy to 'keep the lights on' and speed the transition to low-carbon electricity generation, while limiting the impact on utility bills.
The UK faces very rapid closure of existing capacity as older, more polluting plants go offline, whilst UK electricity demand is expected to grow with our economy and as heat and transport systems are increasingly electrified.
The two main elements of EMR are the Contracts for Difference (CfDs) and Capacity Mechanism (CM), and it is the cost of these that will be appearing on energy bills this month.
- Contracts for Difference provides long-term price security to renewable energy providers, allowing investment to come forward at a lower cost of capital and therefore at a lower cost to consumers.
- The Capacity Market provides a regular retainer payment to reliable forms of capacity (both demand and supply side), in return for such capacity being available when the system is tight.
The UK needs approximately £110bn of investment in its energy infrastructure over the next decade to achieve its goals.
How much will EMR cost my business?
The charges will start in April 2015. Although the impact will be minimal at first (£0.4/MWh), costs will ramp up on a quarterly basis, with the Department for Energy and Climate Chaneg (DECC) claiming that large energy users' bills could increase by £8 to £10 per MWh by 2020.
DECC has estimated that this additional amount represents increased electricity charges of about 10%, but the Department also claims that EMR will reduce electricity bills by 6% compared to meeting the Government's objectives using existing policy instruments.
What can my business do about these costs?
Unless your business has already signed a fixed contract, the additional charges are unavoidable.
This could be bad news for some businesses, as more than a quarter of UK food and drink manufacturers recently told Npower that they may be forced to cut jobs and freeze recruitment thanks to rising energy costs. Another 16% are considering moving their production offshore.
Wayne Mitchell of Npower urged the Government and other energy suppliers to help businesses engage with the impact of energy policy: "We should be doing everything we can to help them mitigate the risk of rising prices, maintain their competitiveness, and even turn energy into a commercial opportunity where possible."