Continuing its mission to transform the UK’s energy system through innovation, Energy Systems Catapult was commissioned by the Low Carbon Contracts Company (LCCC) to assess the impacts of current changes to policies, regulations and market rules on the Government’s Electricity Market Reform (EMR).

EMR is a government policy to incentivise investment in secure, low-carbon electricity, improve the security of Great Britain’s electricity supply, and improve affordability for consumers. The EMR is implemented through the Energy Act 2013, which introduced the following key mechanisms:

• a Capacity Market (CM) designed to ensure security of electricity supply at the least cost to the consumer;
• Contracts for Difference (CfD) intended to provide long-term revenue stabilisation for new low carbon initiatives.

The government-owned companies, the LCCC and the Electricity Settlements Company, were established to implement and develop these two electricity market schemes by providing independent expertise, insight, and leadership.

The Innovation

Utilising its unique skills and experience of the wider energy market, Energy Systems Catapult undertook a deep analysis of impact drivers and their interactions. The Catapult used this to inform a multi-perspective assessment of the changes to policies, regulations and market rules impacting the EMR schemes and institutions.

The Challenge

The Great British power sector is undergoing major transformation to meet the Government’s Net Zero climate goals. Consequently, a plethora of changes to various policies, regulations and market rules are underway, which impacts the EMR policy. The interactions are two-way, with the EMR significantly impacting other policies and markets. Policy change analysis therefore involves dealing with considerable complexity.

In their work, the LCCC and Electricity Settlements Company apply two key guiding principles:

• maintain investor confidence in the schemes.
• minimise costs to consumers.

These institutions need to be aware of changes in the policy/regulatory landscape and power markets, and how they might impact the EMR institutions and schemes. With enhanced awareness and improved foresight, the LCCC and Electricity Settlements Company can implement timely actions to adapt and minimise risks to their mission and the EMR policy.

The Solution

The Energy Systems Catapult undertook a systematic impact assessment of sources of current non-EMR (Electricity Market Reform) related changes to policies, regulations and market rules (e.g. strategies, plans, industry codes, policy mechanisms) that might impact the CM, CfDs, the LCCC and the Electricity Settlements Company. The project compiled a database of some ~100 different changes and assessed them against a typology of 20 different impact types.

The impact assessment involved analysis from two different perspectives:

• by impact type such as scheme payments, volume or volatility of levies, costs for the EMR institutions, settlements, metering; and
• by policy/market categories such as wholesale market, retail market, network regulation, innovation support policy and institutions.

The comprehensive analysis, with attention to collective impacts and interactions, made it possible to identify significant themes for LCCC and the Electricity Settlements Company to consider in managing change.

The Impact

We must adapt market design and policies as the power system transforms. Significant change will continue for several years for a number of reasons:

• the major levels of new investment needed in zero carbon energy resources
• the new innovations that need to be supported
• the need to efficiently integrate more variable renewables and distributed energy resources into the power system

The LCCC and Electricity Settlements Company will use The Catapult’s analysis as an assurance mechanism, ensuring that risks to their future work programme are mitigated to ensure the government’s Net Zero policies are delivered as intended.

Next Steps

The Catapult has now finalised its three-year contract but plans to maintain and build on the materials it has developed and will explore opportunities with partners to extract and share relevant insights.

“With the GB power sector undergoing major transformation to meet Net Zero climate goals, being able to draw on the expertise within Energy Systems Catapult to do a systematic impact assessment of this scale has been an invaluable assurance process for us” – Murray Mitchell, Policy and Commercial Development Manager, Low Carbon Contracts Company.