3.71 To ensure security of supply in both electricity and gas:
• the Government will progress the next phase of the Electricity Market Reform programme and produce final proposals for a capacity mechanism (to provide financial incentives for ensuring that adequate generation capacity is always available to meet demand) around the turn of the year. Alongside this, it will also set out the institutional framework to deliver the electricity market reforms. The aim is to put in place the legislative framework for future energy generation by 2014;
• the Government will work with Ofgem, the independent energy regulator, to increase the liquidity of wholesale electricity markets. Ofgem aim to produce final proposals by December 2011;
• the Government will support Ofgem in revising the regulatory regime for electricity interconnection in order to facilitate investment in further interconnection where there is a strong business case. Ofgem aims to publish its decision on the new regime by the end of 2011;
• through the North Seas Countries' Offshore Grid Initiative, the Department of Energy and Climate Change will explore the potential of an integrated grid for transmission of electricity from offshore wind farms, by linking the markets around the North and Irish Seas to improve security of supply and reduce the cost of producing renewable electricity in UK and other EU markets;
• on electricity networks, the Government introduced a new enduring 'Connect and Manage' grid access regime in August 2010 to ensure that new electricity generation can connect to the transmission network in a timely manner. This built on successful interim arrangements introduced by Ofgem and has provided greater certainty for new generators about the rules for grid access over the long term. Under 'Connect and Manage', a new generation project can connect to the network once its local connection works are completed rather than waiting, as before, for wider network reinforcements to take place. To date 73 large generation projects have advanced their connection dates under 'Connect and Manage' by an average of six years. The Government is working with Ofgem and National Grid to monitor the implementation of the regime and ensure it continues to meet its objectives. Ofgem published its latest 'Connect and Manage' monitoring report to Government in September 2011 and a further report will be produced in autumn 2012;
• in the Energy Act 2011, the Government gave powers to Ofgem to sharpen the commercial incentives on gas market participants to reduce the duration, likelihood and severity of a gas deficit emergency. Ofgem are pursuing their proposals by reviewing the industry code that regulates gas security through a process called the Gas Security Significant Code Review (SCR). The Government has asked Ofgem to produce a study by spring 2012 to consider the need for further incentives beyond those considered in the SCR; and
• seek to clarify the potential contribution of shale gas and other unconventional resources to indigenous gas supplies. While a potentially significant discovery has recently been made in Lancashire, the scale of possible production is unknown at present. The Government will aim to produce updated estimates of the resource by March 2012.
3.72 To reduce the carbon intensity of the electricity system while ensuring a diverse generation mix, the Government will:
• set out in early 2012 further details on the Contract for Difference Feed-in Tariff for securing a diverse, low carbon electricity generation fleet as part of the next phase of the Electricity Market Reform programme. The Contract for Difference Feed-in Tariff is a contract designed to provide greater revenue stability for all low carbon generation, which should help reduce the cost of capital for investment in this area. The first Contract for Difference Feed-in Tariffs are expected to be available for generators by 2014. A choice of support scheme will be available to new renewable generation from 2014, before the Renewables Obligation scheme closes on 31 March 2017;
• introduce a Carbon Price Floor in 2013 to reduce uncertainty amongst investors relating to the (often volatile) carbon price produced by the EU Emissions Trading Mechanism, and to provide a strong incentive to invest in low-carbon energy;
• publish final proposals by spring 2012 for providing financial support for renewable technologies (including offshore wind, onshore wind and biomass) through the Renewables Obligation scheme. These proposals will set out the level of support from April 2013 (for offshore wind, April 2014) until March 2017. After this date, the Renewables Obligation support scheme will be closed to new plant;
• publish around the turn of the year a process for enabling final investment decisions for new generation projects to progress to timetable wherever possible, including those that may need to be taken prior to the legislation for the new Contract for Difference Feed-in Tariff scheme being in place. This is particular relevant to technologies with long lead times such as new nuclear power;
• the Government's new electricity system work programme will aid the development of a smarter system, maximising the efficiency of generation and network assets while ensuring security of supply. The Government is planning to publish the first electricity systems policy document by summer 2012;
• complete the rollout of smart meters by 2019, so that electricity customers can participate actively in helping reduce carbon intensity (by consuming less energy) and maintain security of supply (by smoothing their consumption over time). Development of the communications and data infrastructure required to support smart meters is expected to commence by 2014; and
• in addition to the market-wide measures described above, the Government will act to address technology-specific challenges as set out below.
3.73 As a result of these measures, the Government expects that, by 2015, the energy system will remain on track to meeting carbon budgets, and that the proportion of the UK's energy that comes from renewable sources will have increased from 3.3 per cent in 2010 to over 5.4 per cent.
3.74 To ensure that energy networks remain competitive with trading competitors, and affordable to both households and businesses, the Government will:
• work with industry to reduce the cost of low carbon technologies such as offshore wind and carbon capture and storage, with the aim to reduce the cost of generating electricity from such sources, ensuring the price of electricity remains affordable to consumers. For offshore wind, an industry led taskforce has been established to reduce the costs of offshore wind to £100 per megawatt hour by 2020;
• increase the climate change levy discount on electricity for Climate Change Agreement participants available from 1 April 2013 from the previously announced level of 80 per cent to 90 per cent;
• provide up to £100 million over the Spending Review period to mitigate the impacts of the carbon price floor on electricity costs to businesses that are electricity intensive and operate in internationally competitive markets from April 2013. It will consult on the precise thresholds for eligibility to ensure the most at risk industries are captured. This compensation is state aid and subject to Commission approval;
• provide compensation for the indirect impacts of the EU Emissions Trading System on electricity costs from January 2013 of up to £110 million over the Spending Review period, from existing departmental budgets. Eligibility will be based on EU rules, which are due to be agreed in 2012;
• explore options for reducing the impact of electricity costs arising as a result of Electricity Market Reform policies, including the Feed-in Tariffs, on electricity intensive industries, where this significantly impacts their competitiveness and subject to value for money and state aid considerations;
• invest as UK Green Investments (UKGI) in green infrastructure projects from April 2012, ahead of obtaining state aid approval for the Green Investment Bank. Non-domestic energy efficiency will be one of the priority sectors for UKGI, which will make available up to £100 million in the next financial year for commercial and industrial energy efficiency projects;
• support Ofgem in their development of retail market reforms aimed at increasing the level and quality of competition in the UK supply market. Ofgem aim to publish final proposals in relation to their review of retail electricity markets by spring 2012;
• exploit cost-effective opportunities to improve energy efficiency in the UK, establishing the Energy Efficiency Deployment Office to advise on and co-ordinate the Government's energy efficiency policy;
• launch the Green Deal framework by October 2012 . The Green Deal will provide householders and businesses with support to improve energy efficiency through impartial advice, accredited installation and access to finance for energy efficiency measures with no upfront costs. For hard to treat homes, the Energy Company Obligation (ECO) will subsidise measures such as solid wall insulation in hard to treat homes as well as helping the fuel poor. The 2011 Autumn Statement announced an additional £200 million of funding to support the Green Deal; and
• put in place the powers to meet the requirements of the EU Renewable Energy Directive by importing or exporting renewable energy, where this provides best value for money for UK consumers; and