In 2019, the UK Government committed to a new ambitious binding target to eradicate its net contribution to climate change by 2050. Meeting this target – Net Zero by 2050 – will be challenging and will require significant new investment in low carbon and renewable generation. That, in turn, will have implications for how we guarantee sufficient capacity to meet the demand for electricity when there is likely to be more intermittent (renewable) generation on the system. LCCC and the Electricity Settlements Company (ESC) will play a key role in incentivising and facilitating investment and in supporting a well-functioning capacity market.
Net Zero represents the next step in the UK’s policy goal for its electricity sector and it builds on the earlier policy approach – Energy Market Reform (EMR) in 2014. EMR was, at the time, the most significant change to the electricity market since privatisation, designed to attract investment in secure and/or low carbon electricity generation, at an affordable level for consumers. EMR, and now Net Zero, aim to address key challenges facing the electricity sector including:
- The closure of existing capacity as older, more polluting plants, go offline;
- The need for the generation mix to respond to the challenge of climate change and to meet the UK’s legally binding carbon and renewable targets; and
- The expectation that electricity demand will continue to grow over the coming decades as there is increasing use of electricity for heat and transport (e.g., rail electrification).
LCCC is a private limited company owned by the Secretary of State for the Department for Energy Security and Net Zero as sole shareholder. The company operates in the commercial energy sector acting as the counterparty to a portfolio of private law CfDs valued at circa £100 billion. These contracts are critical to incentivising low carbon electricity generation. Currently, LCCC has c360 contracts under management as part of the company’s CfD portfolio (including the Hinkley Point C nuclear CfD), with the portfolio having increased significantly following the CfD Allocation Round 6. CfDs are long term private law contracts between LCCC and generators which encourage generators to build low carbon infrastructure by giving them price certainty for the electricity they generate. This price certainty enables the generator to access finance at a lower cost, which helps drive down build costs. Generators building new green energy power plants sell their electricity to the market in the usual way but receive the difference between the wholesale market price and a fixed ‘Strike Price’ from LCCC when the market price is lower than the Strike Price. LCCC receives its funding to make these difference payments from a levy on all electricity retail suppliers. LCCC is the counterparty to all CfD’s with generators and has responsibility for managing the contracts over their lifetime, which is typically 15 years post construction. Recognising the success of the CfD, the Government is maximising the use of CfD mechanisms to accelerate the decarbonisation of not only the power sector but also other sectors of the economy including power generation with Carbon Capture Use and Storage (CCUS) and Bioenergy with Carbon Capture and Storage (BECCs) as well as Hydrogen.
ESC settles and clears well over £1 billion of payments every year (£1.3 billion in 2024/25) in the Capacity Market (CM), to ensure sufficient capacity is available to maintain the GB electricity supply at all times. It will settle any stress events in the CM and manage supplier and capacity provider credit cover arrangements. The guiding principles of both companies is to maintain investor confidence and minimise cost to consumers. The CM will continue to change to meet new requirements, such as allowing smaller generators and interruptible (renewable) generators to participate as well as the potential for non-UK generators to participate in the future. Today, LCCC sits at the heart of the electricity sector, as a well-established part of the market framework, working with industry and the UK Government towards achieving a decarbonised electricity sector, whilst also supporting Government’s work to develop schemes to decarbonise other sectors of the economy.
The company is also engaging with other government departments to explore how we can support development of schemes to decarbonise other sectors of the economy including Sustainable Aviation Fuels. The next few years will be a challenging and exciting time for the companies, as they will remain at the forefront of helping to deliver low carbon and secure energy supplies. Together with the important task of managing ESC’s work and LCCC’s own portfolio of CfDs, a major responsibility for LCCC is the management of the nuclear CfD for Hinkley Point C. This is an important project, with the companies well positioned to support the vastly increased UK Government ambition to deliver Net Zero by 2050.