The Department of Energy and Climate Change (DECC) had responsibility for all aspects of UK energy policy, and for tackling global climate change on behalf of the UK. Its energy duties are now taken forward by BEIS.

ESP Consulting worked with DECC on several projects that included topics of wholesale market policy and reform.

Further information on our projects is available below.

EMR FiT CfD Design

We worked with the DECC team responsible for designing instruments to support investment in low carbon generation as part of the Electricity Market Reform (EMR) programme. This work was part of a wider engagement led by Cambridge Economic Policy Associates (CEPA), in advance of the EMR White Paper.

Working jointly with the DECC team, we provided subject matter expertise in a number of areas including:

  • Development of high level design concepts for CfD Instruments (“strawmen”) for low carbon generation;
  • Impact assessment of the instrument design against a range of commercial, market and consumer related evaluation criteria as well as public policy objectives; and
  • Supporting CEPA in the assessment of potential impact on Cost of Capital associated with different CfD design elements.
Liquidity Intervention Options

DECC commissioned ESP Consulting to conduct a study of options for intervening in the GB wholesale power market with the objective of improving market liquidity and supporting Ministers during the passage of the Energy Bill. The scope of our study included:

  • Analysis of the GB power market and identification of the key drivers of liquidity, considering the GB market structure, generation mix and interconnection, trading arrangements, availability of proxies, regulatory developments such as EMR and the Ofgem reform initiatives, industry structure including the degree of vertical integration, and financial arrangements such as credit and collateral requirements;
  • Analysis and design of potential intervention options. We considered the manner and degree to which design features could be flexed to achieve various outcomes (e.g. to stimulate liquidity in different areas of the curve, minimise delivery risk, impact on the trading requirements of different business models). We also analysed the technical arrangements required for the implementation and maintenance of the interventions in practice. The key intervention options which we evaluated included:
    • Mandatory Auctions (obligations on certain players to participate in auctions of forward products);
    • Mandatory Market Making (obligations on certain players to continually offer to both buy and sell volumes of power in the forward market);
    • Self-Supply Restrictions (measures to restrict a vertically integrated utility from supplying power from its own generation); and
    • Functional Separation (constraints on the internal organisation of vertically integrated companies separating up- and downstream trading activities and commercial decision making).
  • Development of a clear framework for assessing the different intervention options, balancing the potential liquidity benefits against the costs and risks associated with the intervention; and
  • Evaluation of each of the intervention options against the assessment framework together with our conclusions and recommendations.
Contract Reference Price

We were engaged to advise DECC on how to form and manage the reference price for the baseload contract for difference. This included a review of various information publicly available on the traded price of electricity, and the issues with each such information source, and the resulting index, in terms of:

  • The reliability of that data in terms of accurately reflecting the price of traded electricity; and
  • The ability of FiT generators and of Suppliers to trade to match the reference price – leading to an estimate of the costs for the resulting risks.

This led to a workshop with the relevant industry working group, with our presentation being published by DECC at the following link:

Reference Price Presentation

We then went on to consider arrangements to “govern” the reference price such that investors can have confidence it will continue to reflect the traded price for electricity as new price indices emerge, and old indices fall away.

EMR Policy Development

We were engaged by DECC with a focus on the detailed design of the contractual mechanisms associated with the large scale FiT, as well as input to the wider EMR programme, including:

  • Considering the arrangements being put in place for the North West Europe (NWE) market coupling, to see whether this provides a suitable reference price for the contract;
  • The development of institutional arrangements to administer FiT contracts and provide a credit worthy counterparty for FiT generators;
  • The development of mechanisms to manage the risk of a generator reneging on its commitments to build and operate a low carbon generator;
  • The development of market based mechanisms to drive an efficient price for the low carbon generation; and
  • Providing expert input to the wider Energy Market Reform programme, and in particular the options to develop a capacity mechanism to support wider concerns over sufficient power stations being built to assure security of supply.
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