Put simply Electricity Market Reform, or EMR, is the governments plan for attracting investment into low carbon generation (and away from non-renewable sources).
The rationale is two-fold:
(1) To reduce our reliance on imports (which are expensive & being reliant on other countries is cumbersome). (2) To hit renewable targets & legally binding commitments (with the wider reason for these being to protect our global resources and prevent global warming issues).
To give a bit of back-ground as to why EMR is pushing forward aggressively... Quoting DECC, the Department of Energy & Climate Change, "It is estimated that due to plant closures and the need to replace and upgrade the UK?s electricity infrastructure, over the next decade the UK electricity sector will need around £110 billion of capital investment.
We need to reform the UK electricity market to attract the investment needed to replace our ageing energy infrastructure and meet the projected future increases in electricity demand from the electrification of sectors such as transport and heat.
Electricity Market Reform (EMR) is our initiative to make sure the UK remains a leading destination for investment in low-carbon electricity."
There are 4 key pillars to the EMR:
(1) Carbon Floor Price (2) Emission Performance Standard (3) Contracts for difference (Cfd) (4) Capacity Mechanism
The Carbon Floor Price is an additional tax to the EU ETS that sets a minimum price for Carbon going forward. Set at just below £5 this financial year. Then doubling each year there-after...£9 then £18. The tax applies to generators but you will see this in the form of a price increase via the wholesale price element of your bill.
The Emission performance standard places a limit of 450grams of CO2 per kWH of energy produced. This only applies to new plant and will not have an impact on your final bill but just ensures 'dirty' forms of energy production are not added to the system.
Contracts for difference, or Cfd, provides a fixed price for energy to generators (to provide confidence in their investment to generate). The generator will get the wholesale price plus a "top up price". This will be funded by your energy bill and will add around 0.85p/kWH to your bill. This will be added to your bill much like the climate change levy i.e. number of units used multiplied by the Cfd rate.
The final pillar is the Capacity mechanism. This is a bid to supply system that is held 4 years out to ensure we have enough supply to meet demand. Whilst a lot of additional wind capacity is being built it is very intermittent so additional capacity will need to fill the gap when the wind doesn't blow. To ensure the lowest price is achieved an auction will be held 4 years ahead with the first one being held in 2014 for delivery winter 2018. The capacity mechanism is likely to add around 1p/kWH to your energy bill.
This means that a price increase, attributable to the EMR, of 1.85p/kWH to 2.5p/kWH should be built in to your Energy Policy model. The price increases are likely to begin hitting the bill in 2014 on a gradual basis and the full impact won't be seen until 2020.
Considering the above it is very likely that your energy bill will no longer be 60% wholesale prices (energy costs) and 40% non-energy costs. This will be reversed so that it's 60% non-energy costs and 40% wholesale prices.