December 2011
“We welcome the announcement and look forward to playing our partin delivering government policy on EMR. There is still a lot of work todo, but we believe we are well placed to deliver these changes that willNational Grid is fully supportiveof the principles and aims ofthe EMR
The detail and processesregarding how we deliver thenew market mechanisms is yetto be ironed out, but webelieve that we have the
necessary expertise to deliverthe mechanisms outlined in thetechnical paper, and deliverthis stage of government policyto support the development ofthe energy market
A CM should be designed tominimize any additional cost oncustomers by ideally onlypaying out to the extent thatthe existing market
arrangements do not providesufficient revenue to bringforward investmentMarket-based mechanismsoffer the best way to deliversecurity of supply and whilereducing the cost to
consumers
help provide secure and reliable energy supplies into the future.”
Nick Winser, UK Executive Director, National Grid
EMR
The Electricity Market Reform (EMR) project was announced in the Coalition Government’sfirst Annual Energy Statement in July 2010. The project aims to overhaul the current
electricity market arrangements and assess the role that a package of incentives could playin supporting delivery of low carbon generation and security of supply for 2020 and beyond.The EMR proposes a preferred package of four main mechanisms to encourage investmentin low carbon generation: a Capacity Mechanism (CM) as well as changes to the currentbalancing arrangements, Feed-in Tariffs (FiTs) and a price floor for carbon, EmissionPerformance Standards (EPS).
Announcement: Technical update
The Department of Energy and Climate Change (DECC) has proposed that National Gridimplements and operates a Capacity Mechanism and implements, operates and is thecontract counterparty for a Feed in Tariff (FiT) for low carbon generation as part of itsElectricity Market Reform (EMR) package.Capacity Mechanism
The EMR Consultation in December 2010 was predicated on a targeted mechanism, wherepayments are only provided to resource what is needed to make up a shortfall in the marketand ensure a secure electricity supply. However, a number of responses to the consultationwere against that option.
In the EMR White Paper published in July 2011, the paper put forward two policy options; atargeted mechanism using a proposed strategic reserve and a market-wide mechanism,potentially in the form of a reliability market.
National Grid believes that any mechanism rewarding capacity should be designed to
minimize any additional cost on consumers by ideally only paying out to the extent that theexisting market arrangements do not provide sufficient revenue to bring forward investment.Furthermore, additional market-based measures for example, sharper imbalance pricesignals or obligations on suppliers to procure sufficient capacity may offer more efficientmechanisms to secure sufficient capacity.
National Grid believes that the required level of security of supply that is provided by thecapacity mechanism and the amount of low carbon generation should be facilitated by FiT,and these are policy decisions that should be taken by the Government.Feed-in Tariffs (FiTs) with contract for difference
FiTs are financial support mechanisms to provide revenue certainty for investors in low
carbon generations plants. In the EMR White Paper the Contract for Difference (CfD) FiT wasidentified as the financial mechanism that would be adopted. The CfD FiT will top up thewholesale electricity price from the revenues received in the wholesale market up to a
contracted strike price, set relative to the average market wholesale electricity price. In theevent that the wholesale price exceeds the strike price, the purchasing generator will repaythe difference, providing certainty for investors and consumers.
Electricity Market Reform
National Grid plans to run both schemes on an‘open-book’basis. The principle of the proposals is that we will take responsibilityfor implementing and managing the scheme but will not carry any financial risks of time lags of credit and debit payments ofrunning the FiT, therefore our risk profile will be unchanged and there will be no impact on the wider financeability of the Group.
Additional Incentives to help deliver a secure and low carbon future
National Grid does not have the responsibility for the management or the delivery of the following incentives but they are part ofthe Government's overall package in supporting delivery of low carbon generation and security of supply for 2020 and beyond.Changes to the balancingarrangements
Reform to the balancing arrangementsare being proposed through changes tocash-out payments paid by parties outof balance, and this work is being ledby Ofgem and is likely to be the subjectof a Significant Code Review (SCR)during 2011.
In addition to cash-out, Ofgem are alsolooking to improve liquidity in themarket which National Grid supports.Liquidity is necessary to safeguard thecompetitiveness of the electricity
market, and the ability for new firms toenter and compete alongside
incumbents –often known as the UK’s‘Big Six’energy companies; ScottishPower, EDF Energy, SSE, British Gas,nower and Centrica.
Emissions Performance Standards(EPS)
An EPS is a restriction on the amount ofcarbon dioxide that can be emittedfrom power stations. EPS will apply toall fossil fuel plant that is larger than 50MW from 2014, with the EMR WhitePaper proposing to set the level at 450gCO /kWh. Projects in the UK CCS2
demonstration programme or benefitingfrom EU funding for commercial scaleCCS will be exempt, however the
decision remains open whether EPS willapply to Combined Heat and PowerPlants (CHP).
Carbon price floor support
In March 2011, the government
announced that it would be introducinga floor price for carbon–starting at£16/tonne of carbon dioxide in April2013, with a target price of £30/tonne in2020 and increasing to £70/tonne in2030. The aim is to provide greater longterm certainty around the additionalcost of running polluting plant andmake lower-carbon investment moreattractive. The Government also intendsto introduce carbon price relief for
carbon capture and storage (CSS) andcombined heat and power (CHP), inorder to ensure that these technologiesare not penalized.
Timeline
DECC EMR
Consultation and HMTCarbon priceconsultation
(16/12/10-10/02/11)
NG at ECCCoral evidence
session (15/02/10)
Final decisionon Carbon Price
support in
budget 2011(23/03/11)
EMR whitepaper published(12/07/11)
CM consultaion
closed
Decision on CM/
Industry architecture Bill proposed
before Parliament
Royal Assent
Further information
John Dawson
Director of Investor RelationsT +44 (0)20 7004 3170M +44 (0)7810 [email protected] Laskaris
US Investor Relations DirectorT +1 718 403 2526M +1 917 375 0989
Andy Mead
Investor Relations ManagerT +44 (0)20 7004 3166M +44 (0)7752 [email protected] Smart
Investor Relations ManagerT +44 (0)20 7004 3214M +44 (0)7767 [email protected]
Victoria Davies
Investor Relations ManagerT +44 (0)20 7004 3171M +44 (0)7771 [email protected] Hughes
Investor Relations AnalystT +44 (0)20 7004 3169M +44 (0)7900 [email protected]
Tom Hull
Investor Relations AdvisorT +44 (0)20 7004 3172M +44 (0)7890 [email protected] Grid plc1–3 Strand
London WC2N 5EHUnited Kingdom
www.nationalgrid.com
December 2011
“We welcome the announcement and look forward to playing our partin delivering government policy on EMR. There is still a lot of work todo, but we believe we are well placed to deliver these changes that willNational Grid is fully supportiveof the principles and aims ofthe EMR
The detail and processesregarding how we deliver thenew market mechanisms is yetto be ironed out, but webelieve that we have the
necessary expertise to deliverthe mechanisms outlined in thetechnical paper, and deliverthis stage of government policyto support the development ofthe energy market
A CM should be designed tominimize any additional cost oncustomers by ideally onlypaying out to the extent thatthe existing market
arrangements do not providesufficient revenue to bringforward investmentMarket-based mechanismsoffer the best way to deliversecurity of supply and whilereducing the cost to
consumers
help provide secure and reliable energy supplies into the future.”
Nick Winser, UK Executive Director, National Grid
EMR
The Electricity Market Reform (EMR) project was announced in the Coalition Government’sfirst Annual Energy Statement in July 2010. The project aims to overhaul the current
electricity market arrangements and assess the role that a package of incentives could playin supporting delivery of low carbon generation and security of supply for 2020 and beyond.The EMR proposes a preferred package of four main mechanisms to encourage investmentin low carbon generation: a Capacity Mechanism (CM) as well as changes to the currentbalancing arrangements, Feed-in Tariffs (FiTs) and a price floor for carbon, EmissionPerformance Standards (EPS).
Announcement: Technical update
The Department of Energy and Climate Change (DECC) has proposed that National Gridimplements and operates a Capacity Mechanism and implements, operates and is thecontract counterparty for a Feed in Tariff (FiT) for low carbon generation as part of itsElectricity Market Reform (EMR) package.Capacity Mechanism
The EMR Consultation in December 2010 was predicated on a targeted mechanism, wherepayments are only provided to resource what is needed to make up a shortfall in the marketand ensure a secure electricity supply. However, a number of responses to the consultationwere against that option.
In the EMR White Paper published in July 2011, the paper put forward two policy options; atargeted mechanism using a proposed strategic reserve and a market-wide mechanism,potentially in the form of a reliability market.
National Grid believes that any mechanism rewarding capacity should be designed to
minimize any additional cost on consumers by ideally only paying out to the extent that theexisting market arrangements do not provide sufficient revenue to bring forward investment.Furthermore, additional market-based measures for example, sharper imbalance pricesignals or obligations on suppliers to procure sufficient capacity may offer more efficientmechanisms to secure sufficient capacity.
National Grid believes that the required level of security of supply that is provided by thecapacity mechanism and the amount of low carbon generation should be facilitated by FiT,and these are policy decisions that should be taken by the Government.Feed-in Tariffs (FiTs) with contract for difference
FiTs are financial support mechanisms to provide revenue certainty for investors in low
carbon generations plants. In the EMR White Paper the Contract for Difference (CfD) FiT wasidentified as the financial mechanism that would be adopted. The CfD FiT will top up thewholesale electricity price from the revenues received in the wholesale market up to a
contracted strike price, set relative to the average market wholesale electricity price. In theevent that the wholesale price exceeds the strike price, the purchasing generator will repaythe difference, providing certainty for investors and consumers.
Electricity Market Reform
National Grid plans to run both schemes on an‘open-book’basis. The principle of the proposals is that we will take responsibilityfor implementing and managing the scheme but will not carry any financial risks of time lags of credit and debit payments ofrunning the FiT, therefore our risk profile will be unchanged and there will be no impact on the wider financeability of the Group.
Additional Incentives to help deliver a secure and low carbon future
National Grid does not have the responsibility for the management or the delivery of the following incentives but they are part ofthe Government's overall package in supporting delivery of low carbon generation and security of supply for 2020 and beyond.Changes to the balancingarrangements
Reform to the balancing arrangementsare being proposed through changes tocash-out payments paid by parties outof balance, and this work is being ledby Ofgem and is likely to be the subjectof a Significant Code Review (SCR)during 2011.
In addition to cash-out, Ofgem are alsolooking to improve liquidity in themarket which National Grid supports.Liquidity is necessary to safeguard thecompetitiveness of the electricity
market, and the ability for new firms toenter and compete alongside
incumbents –often known as the UK’s‘Big Six’energy companies; ScottishPower, EDF Energy, SSE, British Gas,nower and Centrica.
Emissions Performance Standards(EPS)
An EPS is a restriction on the amount ofcarbon dioxide that can be emittedfrom power stations. EPS will apply toall fossil fuel plant that is larger than 50MW from 2014, with the EMR WhitePaper proposing to set the level at 450gCO /kWh. Projects in the UK CCS2
demonstration programme or benefitingfrom EU funding for commercial scaleCCS will be exempt, however the
decision remains open whether EPS willapply to Combined Heat and PowerPlants (CHP).
Carbon price floor support
In March 2011, the government
announced that it would be introducinga floor price for carbon–starting at£16/tonne of carbon dioxide in April2013, with a target price of £30/tonne in2020 and increasing to £70/tonne in2030. The aim is to provide greater longterm certainty around the additionalcost of running polluting plant andmake lower-carbon investment moreattractive. The Government also intendsto introduce carbon price relief for
carbon capture and storage (CSS) andcombined heat and power (CHP), inorder to ensure that these technologiesare not penalized.
Timeline
DECC EMR
Consultation and HMTCarbon priceconsultation
(16/12/10-10/02/11)
NG at ECCCoral evidence
session (15/02/10)
Final decisionon Carbon Price
support in
budget 2011(23/03/11)
EMR whitepaper published(12/07/11)
CM consultaion
closed
Decision on CM/
Industry architecture Bill proposed
before Parliament
Royal Assent
Further information
John Dawson
Director of Investor RelationsT +44 (0)20 7004 3170M +44 (0)7810 [email protected] Laskaris
US Investor Relations DirectorT +1 718 403 2526M +1 917 375 0989
Andy Mead
Investor Relations ManagerT +44 (0)20 7004 3166M +44 (0)7752 [email protected] Smart
Investor Relations ManagerT +44 (0)20 7004 3214M +44 (0)7767 [email protected]
Victoria Davies
Investor Relations ManagerT +44 (0)20 7004 3171M +44 (0)7771 [email protected] Hughes
Investor Relations AnalystT +44 (0)20 7004 3169M +44 (0)7900 [email protected]
Tom Hull
Investor Relations AdvisorT +44 (0)20 7004 3172M +44 (0)7890 [email protected] Grid plc1–3 Strand
London WC2N 5EHUnited Kingdom
www.nationalgrid.com