EMR Explained
Helen Scott
Market Development Originator
1
What is a Contract for Difference (CfD)?
▲ Ultimate intention is to promote investment in low carbon by
reducing the cost of capital.
▲ Low carbon generators are paid a fixed price for the electricity they generate
– reference price (linked to wholesale price) plus top up to a fixed strike price –
but have to repay money if wholesale price rises above strike price.
▲ Covers all technologies covered by RO plus nuclear and CCS.
▲ Certain eligibility criteria must be met to participate in an allocation round.
▲ Established technologies (including onshore wind and solar) will move straight to
competitive auction via sealed bids, competing against each other for budget.
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What is a Contract for Difference (CfD)?
▲ Immature technologies (including offshore wind) will not go to auction, but be
allocated administratively will replace the Renewables Obligation from 2017, the
two will run concurrently between 2014 and 2017.
▲ Funded by suppliers (and hence customers) via a compulsory levy with
exemptions for Energy Intensives (which are expected to start from 2016).
▲ Levy Control Framework (LCF) sets a cap on total low carbon costs at £7.6bn
(2012 real prices) in 2020 (more than twice the current £3.3bn p.a.).
CfD costs will start in April 2015 at c. £0.5/MWh
and increase on a quarterly basis through to
2020 when they will be c. £8/MWh

CfD costs will start in April 2015, ramping up over time from approx
£0.5/MWh1 to approx £8/MWh1 by 2020.

DECC have decided on a quarterly “fixed” unit cost (p/kWh) to pass costs on
to suppliers, with a reconciliation at the end of each quarter.

There will also be a fixed operational cost associated with the running of the
LCCC.
Sources:
RWE Analysis, June 2014
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CfD costs will start in April 2015 at c. £0.5/MWh
and increase on a quarterly basis through to 2020
when they will be c. £8/MWh

Suppliers also have to post collateral for a reserve fund and an insolvency
fund.

Energy Intensive users will have some level of exemption but this will not be
in place from 2015 (and will not be applied retrospectively).

There is a BIS/DECC consultation open now on eligibility for Energy Intensive
exemptions.

This will further increase costs for those that are not eligible.
What is a Capacity Mechanism?

An annual auction to secure reliable capacity for delivery four years later,
with first auction held in December 2014 for delivery in 2018/19

Year ahead auction to “top up” any capacity shortfall and allow Demand
Side Response (DSR participation)

DECC have decided to procure 50.8GW in the 2014 capacity auction to
ensure sufficient capacity to meet demand at peak in 2018

A further 2.5GW of DSR will be procured in the T-1 year ahead auction
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What is a Capacity Mechanism?

Plant receiving RO, CfD, FiT, RHI and long term STOR are excluded
(including co-firing plant).

Penalties for non-delivery of capacity (which will be capped at 200% monthly payment,
100% annual payment), but potential reward for over-delivery.

Demand Side Response (DSR) to participate on equal terms after 2 staged transition

Costs will be recovered from Suppliers according to their forecast market share of peak
demand (4-7pm Winter weekdays).

National Grid looking to introduce additional Balancing Services to deal with any capacity
adequacy shortfalls in interim.
Design of the Capacity Mechanism is finalised
although accurate costs will not be known
until the auction has been held in Dec 2014
▲ The Capacity Mechanism provides an insurance premium against the lights going out as it
will result in existing plant staying open and new plant being built.
▲ However, there is an associated cost which will be funded by consumers.
▲ As capacity is procured via an auction, it is very difficult to predict the costs accurately.
▲ With 50.8GW1 procured via the auction at a clearing price of £39/kW2, total cost to
consumers is c.£2bn.
▲ If the auction were to clear at the auction cap (£75/kW), total cost to consumers is c.£4bn.
▲ However, we will have certainty of 95% of costs, 4 years ahead of delivery and total costs
1year ahead of delivery so there will be no surprises.
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Design of the Capacity Mechanism is finalised
although accurate costs will not be known
until the auction has been held in Dec 2014
▲ Costs to be allocated to suppliers according to market share of Winter peak, defined as
4-7pm Winter weekdays between November and February (Triad periods).
▲ It is very difficult to switch off for all of these periods, so only onsite generation will allow
customers to avoid all the charges, but there could be significant cost advantages of
avoiding the charges, meaning investment is worthwhile.
▲ However, onsite generation may participate in the Capacity Mechanism via Demand Side
Response.
▲ Opportunity to participate via Demand Side Response (likely a role for aggregators or small
scale DSR).
EMR is expected to be implemented from Q4 2014
CM Regulations
came into force
Pre-qualification
starts
Jul 14
CfD Regulations
came into force
Final Auction
Guidelines
Oct 14
Allocation
budget
confirmed
First CM Auction
takes place
Jan 15
CfD Auction takes
place
Confirmation of
first CfD unit rate
CM Operational
Cost recovery
starts
Apr 15
CfD Cost recovery
starts
CfD Allocation
Round opens
In August 2014 the EMR secondary legislation was passed into law &
State Aid approval was granted, marking the “go-live” of EMR.
Jul 15
Revenue Generation
& Cost Mitigation
Vish Sharma
Head of npower Structured Products
11
Cost impact of EMR
CfD
CAPACITY
MECHANISM
EMR
£8-£10/MWh
£3-£7/MWh
£11-£17/MWh
by 2020
by 2018/19
12
by 2020
Revenue generation: Participate
DSR IN CAPACITY MECHANISM
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Demand Side Response (DSR) providers will be able to participate
in the Capacity Market on equal terms with traditional forms of
generation
DSR will need to meet testing requirements and post bid bonds if
have no evidence of providing capacity in other balancing services
For DSR providers that are reducing their consumption to meet their
capacity agreement, this will measured using a Baselining approach
to determine whether they delivered their obligation
Their baselines and delivery will be adjusted for participating in
balancing services but not for Triad avoidance
Pre-qualification began on 4th August for the first CM auction for
capacity in 2018
For those that don’t participate in the main auction this year there will
be transitional arrangements specifically for DSR capacity in 2016 &
2017 with reduced bid bonds & 2 products (time banded product and
load following product) designed to introduce new participants to
DSR market
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Revenue generation: Participate
DSBR
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EDR
In June National Grid launched the Demand Side
Balancing Reserve (DSBR)
It will begin with a pilot this Winter to tender for a
maximum 330MW of capacity
Participants will be paid a utilisation fee (they can
bid in fee they wish to receive from a range of
nominal rates between £250/MWh to
£12,500/MWh) with no penalties for not responding
Participants can also opt to receive a set up fee of
£10,000/MW (for demand reduction that can be
sustained for 2 hrs) to support with any upfront
costs
The cheapest utilisation fees will be dispatched first
and participants opting not to receive the set up fee
will be prioritised
Applications to take part in the Winter 14 closed on
Monday 21st July 2014
The results of this tender will be published shortly
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A pilot is being launched this year, expected to last 2
years and will provide financial support to participants
who install new efficiency measures that will deliver
capacity savings over the winter peak period (Nov-Feb
weekdays 4-8pm).
Examples of efficiency measures that would be eligible
for support include installing efficient motors, air
conditioning & lighting.
Good opportunity to revisit projects that didn’t seem
economically viable before this support was available
The final EDR pilot rules and guidance were published
in July
Expressions of Interest are open now and applications
close 31st October 2014
Cost mitigation: avoid & smarter usage
COST ILLUSTRATION OF A “TYPICAL”
WINTER 2018/19 PEAK HOUR
ENERGY EFFICIENCY
& LOAD MANAGEMENT
Value of 17:00-18:00 in Winter 2018/19
Avoid/Reduce Consumption:

£/MWh
The CfD charge is based on overall
consumption, not consumption at a time
specific, therefore the only way to reduce
this cost is to use less!
400
350
300

These additional costs (CfD & CM) make
energy efficiency business cases more
attractive and reduce financial payback
times.
250
200
150
Others
FiT
BSUoS
CfD
Dloss

CM costs are time specific however, so
load management at winter peaks (NovFeb, Mon-Fri, 4pm-7pm) can reduce this
cost (if HH metered).
100
RO
50
DUoS
CM
0
15
Energy
How can my business mitigate the cost impact of EMR?
CONSUME LESS
SMARTER
CONSUMPTION
PARTICIPATION
COST CERTAINTY
WORK IN PARTNERSHIP WITH YOUR ENERGY SUPPLIER
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