Insurance Outsourcing – Ensuring a Brighter Future - September 2011
Ensuring the adequacy of Future Energy Systems
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Ensuring the adequacy of Future Energy Systems 26 May 2010 Stephen Smith Senior Partner, Local Grids and RPI-X@20
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Ensuring the adequacy of Future Energy Systems. 26 May 2010 Stephen Smith Senior Partner, Local Grids and RPI-X@20. Project Discovery. Over the last two decades, market has delivered substantial infrastructure investment. Since 1990 market has delivered: - PowerPoint PPT Presentation
Transcript of Ensuring the adequacy of Future Energy Systems
Ensuring the adequacy of Future Energy Systems
26 May 2010
Stephen SmithSenior Partner, Local Grids and RPI-X@20
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Project Discovery
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Over the last two decades, market has delivered substantial infrastructure investment
Since 1990 market has delivered:– Over 30 GW of new generation capacity (≈40%
of total capacity)– 125 bcm/yr of new gas import capacity (≈125%
of annual demand)
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Role of new investment – 8 January 2010
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But context has changed
Wind variability
Gas import dependency
The low carbon
challenge
NewGovernment intervention
Accelerated plant closures
The financial crisis
SECURITY OF SUPPLY
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Ofgem’s global scenarios
Economic recovery
Rapid Slow
Environmental action
Rapid Green Transition Green Stimulus
Slow Dash for Energy Slow Growth
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Our approach
• Our scenarios are intended to be plausible and internally-consistent but also diverse
• These are not forecasts, but an exploration of possible outcomes
• We assume that markets respond to price signals– so our scenarios do not by themselves tell you if markets can deliver
• We are interested in resilience so we need to explore shocks through “stress tests”
• Our scenarios are not policy choices but reflect a global context
UNCERTAINTY/RISK ANALYSIS ARE AT THE HEART OF OUR METHODOLOGY
We cannot predict the future…
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OCTOBER CONSULTATION DOCUMENTRespondent feedback: themes
• Overwhelming support for our approach to modelling uncertainty through scenarios and stress tests
• Respondents highlighted some key challenges over next 10-15 years, including:
– regulatory uncertainty, especially for carbon limits and prices– financial crisis making it more costly to obtain funds– obstacles posed by building/planning requirements– renewable technology’s relatively higher cost and variability– additional risks from oil price shock, gas quality and investment/construction delays
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GB energy demand
Decline in natural gas demand in green scenarios due to:energy efficiency;biogas; and alternative heat technology assumptions
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Gas
Electricity
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GB import dependence
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IMPORT DEPENDENCE INCREASES IN ALL SCENARIOS, BUT BY VARYING DEGREES
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GB electricity de-rated capacity margins
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Green Transition Green Stimulus Dash for Energy Slow Growth
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GB generation output and carbon dioxide emissions from the generation sector Green Transition Green Stimulus
Dash for Energy Slow Growth
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Nuclear
Coal
CCS
CCGT
CHP
Wind
Other renewables
Other
Net imports
CO2 emissions
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February 2010 – update on scenarios
Green Transition
Dash for Energy
Green Stimulus
Slow Growth
Key supply risk:
CO2 impact:
Impact on bills:
Invt required:
Key supply risk:
CO2 impact:
Impact on bills:
Invt required:
Generation variability
Down 33% by 2020
Up by 23% by 2020
£194bn
Generation variability
Down 46% by 2020
Up 13% by 2020
£190bn
Gas import dependency
Down 14% by 2020
Up 26% by 2020 (52% by 2016)
£110bn
Deferred investment
Down 19% by 2020
Up 19% by 2020
£95bn
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Stress test Period Today Green Transition
Green Stimulus
Dash for Energy
Slow Growth
Re-direction of LNG supplies
1-in-20 severe winter
Russia-Ukraine dispute 1-in-20 severe winter
Bacton outage 1-in-20 peak day
No wind output 1-in-20 peak day
Electricity interconnectors fully exporting
1-in-20 peak day
Moderate impactLow impact High impact
February 2010 – update on stress tests
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Finding 1: There is a need for unprecedented levels of investment to be sustained over many years in difficult financial conditions, and against a background of increased risk and uncertainty.
Finding 2: The uncertainty in future carbon prices is likely to delay or deter investment in low carbon technology and lead to greater decarbonisation costs in the future.
Finding 3: Short term price signals at times of system stress do not fully reflect the value that customers place on supply security, which may mean that the incentives to make additional peak energy supplies available and to invest in peaking capacity are not strong enough.
Finding 4: Interdependence with international markets exposes GB to a range of additional risks that may undermine GB security of supply.
Up to £200bn of investment required by 2020
Significantly higher emissions or reduced capacity margins
Greatest risk in scenarios with high gas imports & wind generation
Greatest risk inscenarios withhighest gas importdependence
Key findings from the appraisal
COMBINATION OF FACTORS CAUSES CONCERN
Finding 5: The higher cost of gas and electricity may mean that increasing numbers of consumers are not able to afford adequate levels of energy to meet their requirements and that the competitiveness of industry and business is affected.
Consumer billscould rise by up to50%
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Scale and timing of investment
• Improve price signals• Supplier obligations• Centralised renewables market• Capacity tenders• Central energy buyer
Uncertain future carbon price
• Carbon price intervention• Tender for low carbon plant• Central energy buyer
Weakness of short term signals
• Improve price signals• Supplier obligations• Improve ability for DSR• Short term capacity auctions• Liquidity measures• Central energy buyer
Risks from inconsistencies with international
arrangements
• Improve price signals• Supplier obligations• Storage capacity tenders• Central energy buyer
Range of possible policy measures to deal with issues
MEASURES CAN BE PACKAGED IN VARIETY OF WAYS
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Options for consultation
ATargeted Reforms
BEnhanced
Obligations (EO)
CEO &
Renewables Tenders
DCapacity Tenders
Tenders for all capacity
ECentral Energy Buyer
Central buyer of energy
(including capacity)
Replace RO with renewables
tenders
Minimum carbon price
Improved ability for demand side to respond
Improved price signals
Enhanced obligations on suppliers and system operator
Centralised renewables market
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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Gas storage
Gas ballasting
(to address gas quality
issues on imports)
CCGT
Nuclear/CCS
Wind
Lead times
Lead times
Lead times
Lead times
Lead times
Lead timesPolicypackages
Imports exceed 50% of peak day demand
LCPD closures
Nuclear andIED related
closures
Annual deployment must be at least
double current rate
UKCS supplies fall below 25% of winter demand
EU 20-20-20 targets
Key timings
INVESTMENT DECISIONS NEED TO BE TAKEN IN NEXT TWO-THREE YEARS
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RPI-X@20
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What is RPI-X@20?
RPI-X has been used to regulate GB energy networks for nearly 20 years RPI-X@20 is our detailed review of the regulatory frameworklaunched in February 08Biggest review since RPI-X was introduced for British Telecom in 1984
Drivers
New and emerging challenges Good housekeeping Simplification
Delivery targets
More sustainable energy sector Value for money for consumers
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Current GB regulatory framework (stylised)
Control on ‘revenue’ set
upfront, including return on asset base
Focus on (operating) cost
efficiency incentives
Five-year price control
periods, with some mid-
period changes
Recently, incentives to
meet specific new challenges
Reductions in network charges
Improvements in operating efficiency
More efficient financing
Improved quality of service
Increased investment
Networks focused on 5 year price cycles
Networks focused on Ofgem not their customers
Limited consideration of innovation and ‘how best to deliver’
But critics have suggested it has led to:
Potentially limited appetite for risk Limited focus on ‘cross-sectoral’ interactions
RPI-X has delivered significant benefits for consumers:
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Why? – The case for change
But: Future energy services will be different to the past
Low carbon energy sectorUncertainty Security of supply
We are looking to the future to assess whether existing 'RPI-X' frameworks will remain fit for purpose
RPI-X has delivered significant benefits to consumers
Reduced network charges
Greater operating efficiency
Improved quality of service
Increased investment
More efficient financing
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Networks face uncertainty about how to deliver
Big transmission and distribution Micro-grids
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Emerging Thinking: New regulatory framework
What would remain the same?
What would change?
Enhanced engagement
Outcomes-led Longer term thinking
New business plans
Network companies who deliver efficiently will remain financeable
Ex ante price controlBuilding blocks
approach
Incentives
Rewards for efficient delivery
Use of tendering
Facilitating competition in energy services
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An outcomes-led framework
Focus on delivery of outcomes through six output categories
ReliabilitySafetyEnvironmental targets
Network service connections
Customer satisfaction
Social obligations
Consistent with engagement and external requirements Ofgem set final outputs reflecting stakeholder engagement Rewards for output delivery Punishments for non-delivery
Output measures in each category determined at price control reviewsThe level of each output proposed by network companies
Outcome delivery Delivery of outcomes used to measure performance Anticipating future needs Differential treatment of networks
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Incentivising efficient long-term delivery: Length of price control
Partial lengthening: Commit to some elements of price control for longer than others Balance benefits of long term review and regular reviews Provide clear financial incentives for longer term thinking Time periods may vary from sector to sector and develop over time
Monitoring of outputs: Regular and transparent monitoring of output delivery Provide understanding of delivery progress and risks May trigger discussions and detailed assessment of approach to delivery Implementation of rewards and penalties
Provisions for re-opening certain aspects of control: For example, used for change in circumstances or changing requirements Generally expect companies to manage risks they face and re-openers to be limited
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Incentivising efficient long-term delivery: Other measures
Specific innovation stimulus
High level of innovation needed in short/medium term Encourage innovative approaches to challenges Build on Low Carbon Networks fund developed in DPCR5 Applicable to all network sectors Open to non-network parties Available for all phases of innovation
Strong incentives for
efficiency
Differential treatment
Reflect differences in performance between companies Lower regulatory burden for ‘best’ performing companies Differences in plan assessment and incentive setting Transparent and credible approach Enhance comparative competitive pressures
Focus on delivery of outcomes, not business plan Package of balanced incentives to provide lowest cost long term solution Encourage companies to anticipate future needs Interactions between charging and efficiency incentives
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Tendering
Benefits of tendering certain aspects of delivery
Expose actual efficient costs
Deliver innovative solutions
Third party involvement
Strengthen network incentives
We recognise concerns over the use of tendering Clear principles for use of tendering would be developed
We also intend to explore use of our ability to revoke network licences If licence revoked, we may franchise some, or all, operations of a licensee
Only tender projects with certain characteristics
Large: justify transaction costs
Technically appropriateInnovation opportunities e.g. in
financing
Tenders may be network or Ofgem led Look at whole life costs and benefits, and the costs of running a tender
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New Business PlansLonger term focus
Consulting on which aspects of plan should be lengthened What should the time horizon be? Companies would need to provide evidence of learning over time
Link between outcomes and costs
Greater onus on benchmarking and efficient procurement
Consideration of multiple options
Evidence of stakeholder engagement
Take account of range of delivery options and future scenarios
Effective engagement on options presented in plan Evidence of incorporating stakeholder’s views
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Facilitating competition in energy services
Ensure the regulatory framework is not a barrier to viable ESCo development
New framework will encourage networks to provide fair access terms Consider whether obligations on access conditions are sufficient Action may be taken if ESCos cannot gain these terms We may force network companies to lease/sell assets such as distribution wires/ pipes at community level
Energy service companies (ESCos) offer broad range of low carbon energy solutions at community level
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Timetable to RPI-X@20 implementation
Oct 08 Apr 09 Oct 10Jan 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10
Throughout 2009:
Working groups and stakeholder
engagement on key emerging issues
End 2008 / Early 2009:
Initial stakeholder engagement
Winter/Spring 2010:
Stakeholder engagement on
emerging thinking/ initial
recommendations
Spring 2009:
Principles, process and
issues consultation
Winter 2009/10: Emerging thinking
consultation
Summer 2009: Current thinking working papers
Autumn 2010: Recommendation
s document
2011: TPCR5
and GDPCR2 reviews begin
Jan 11
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