Evolution and Challenges for the Post –Liberalised British...
Transcript of Evolution and Challenges for the Post –Liberalised British...
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Evolution and Challenges for the
Post –Liberalised British
Electricity Market
Derek Bunn
“Surprises are foolish things; they are frequently inconvenient
and the pleasure is not enhanced” Jane Austen, Emma
Long-term Plans &
Uncomfortable Surprises
A Big Ask?
For many years, policy has sought to manage prices and competition
Now, policy is seeking to manage investment and competition
The evidence on policy interventions has been one of unintended
consequences, surprises and successive reforms……
………here is a flavour >>>
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A Decade of Surprises
1988, The Secretary of State for Energy introduces the Government’s White Paper on Privatisation
“It will create a customer-led industry…..a new industry will evolve and be
shaped by the needs of the customers”
1998, The Secretary of State for Trade and Industry presents the Conclusions of the Pool Review:
“The Pool was a club in which customers could not participate…”
(And even more surprising after a decade of duopoly market power……)
“The uniform Pool price….gives a positive advantage to smaller players…the rate
of new entry exceeds what would be expected from the underlying economics….it
is not in the interest of larger generators..”
Another Decade of Surprises
1998, The Director General of Electricity Supply states
“Capacity Payments …provide a poor signal with regard to the longer term
need for capacity”
2012, The Secretary of State for Energy and Climate Change states
“a Capacity Market .. will be designed to provide investors with the
certainty they need to put adequate reliable capacity in place, and protect
consumers against the risk of supply shortages”
1998, The Secretary of State for Trade and Industry states
“A related distortion has been the use of long-term Contracts-for-
Differences…this gives a positive incentive to bid zero to run”
2012, Energy Bill introducing the EMR
“CfDs improve long-term revenue certainty, lowering the cost of capital for
low-carbon generators”
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A UK Electricity Market has not Existed
Gen.
TSO
Dist.
Great Britain (England & Wales and Scotland) Northern
Ireland
Interconnectors
14 Regional Distribution Cos. (6 owners)
NIE
Scottish Power / SSENational Grid Electricity Transmission
IPPsEON
RWE
EDFCentrica SSE
Iberdrola
Supply EON RWE EDF Centrica SSE Iberdrola
6 principal supply companies
(vertically integrated with generators)
Market Power in Generation is not
a Major ConcernCentrica
5%E.ON
12%
EDF
21%
RWE
14%Scottish Power
7%
SSE
14%
Interconnectors
3%
Independent
and Joint Ventures
24%
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Wholesale Power Prices
Carbon Price
Floor has an
effect.
20
30
40
50
60
70
80
90
2010 2011 2012 2013 2014 2015
(€/MWh)
German Power 1-Y Fwd (€/MWh) French Power 1-Y Fwd (€/MWh)
Italy Power 1-Y Fwd (€/MWh) Spain Power 1-Y Fwd (€/MWh)
Nordic Power 1-Y Fwd (€/MWh) UK Power 1-Y Fwd (€/MWh)
Moody’s Investors Service
Forward Trading is Moderate
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And Actually Decreasing
Technological Change is Disruptive
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Transmission is an
Emerging Issue
Generators do not
face nodal prices,
but annual
connection charges
(£/kW) vary by
zones.
More interconnection
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Moyle +/- 500MW
E-W +/- 500MW
BritNed +/- 1000MW
NEMO +/- 1000MW
Norway +/- 1000MW
Now: +/-3500MW
2020: +/-7000MW
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And More
Offshore
Connections
The Regulator would like to
see more competition in
transmission ownership
NG >>> Demerge TO & SO
The DNOs may then follow.
40
50
60
70
80
90
100
110
120
Ind
ex (
19
89
/90
= 1
00
)
Year
Real Movement in Electricity Network Prices since Privatisation
NGC Av E&W EDNO Sweb Yorkshire
DNOs
TSO
Network
Regulation has
been Effective
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Comparative Retail Prices do not look Extraordinary
But Ofgem is Concerned with Retail
Profits of the “Big Six” have Increased
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Domestic Electricity Market Shares
have remained rather stable
With Low Monthly Switching by
Consumers
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Retail Price Co-ordination
Retail Prices and Wholesale Costs
Average for Big Six: Ofgem note that total costs underestimate by £150
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Asymmetric Monthly Changes
The cost data displays monthly wholesale cost for electricity and gas from Ofgem’s SMI Database for
the period January 2004 and December 2013.
Effective Regulation should be enough….
Why is there now so much policy intervention?
• 2008 Climate Change Act of Parliament >>>defined plan and
budget to 2050
• Incentives needed for renewables – green certificates did not
seem to be as good as FiTs
• Asset impairments for incumbent generators and emission
directives, plus intermittent technologies posed a question of
resource adequacy >>capacity payments.
• The EUAs were not doing enough work >>>carbon price
floor
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Reserve Margin is a Concern
Moody’s Investors Service
Capacity Margin Forecasts0%
10%
20%
30%
40%
50%
60%
70%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
UK Germany Spain Nordics Italy France
Ofgem Reliability Standard
LOLE £3hrs /yr
Target
And European Utilities face difficulties
Earnings Per Share Decline
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They Have Seen Significant
Ratings Migration» Moody’s rates 87 groups > €450 billion of debt
» Over the last fifteen years the ten largest European utilities have seen a
deterioration in credit ratings from the Aa/high single A rating level to mid
single A to Baa.
EMEA Electric & Gas Utilities: Ratings Migration
Source: Moody‘s Investors Service
Equity Providers want more than Lenders
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The Value Chain is Changing
• Generation– Asset Performance risk ; more joint ownerships; policy risk
• Transmission– New Infrastructure . SO responsibilities for delivering policy.
Emerging conflicts of interest. Potential Split.
• Distribution– Distribution system operators (“DSOs”) may have to emerge
• Retail– chronic public scrutiny with increased expectations for consumer
engagement, energy efficiency and new services.
Main Reforms
• Capacity Payments for resource adequacy through
competitive auctions
• CfDs for carbon-free technologies through
competitive auctions
Plus:
• A carbon price floor to support EUAs
• Performance standards on new generation
• Energy efficiency standards (including smart
meters)
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GB Capacity Mechanism
Annual capacity adequacy study by Ofgem indicates Capacity Requirement Criterion is Loss of Load Expectation (LOLE) < 3 hrs per yr.
Annual Auction for new and existing plant. New plant will be given 15 year contract; existing plant 1 year. Plant getting CfDs/ROCs cannot enter. Demand-side can.
Plant with contracts can be called at 4 hour notice.
GB Capacity Mechanism
Penalties if unavailable when called set at VLL – SBP,
capped at 200% of monthly income & 100% of annual income
(VLL = £17,000/MWh; SBP capped perhaps at £6,000/MWh)
Auction is a mult-round decreasing auction with a pre-defined demand curve:
CONE = annuitised cost of an OCGT = £47,000/MW/yr
Net Cone = CONE – estimated annual revenue of an OCGT = £29,000/MW/yr
Cap = £75/MWh
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Capacity Auction Outcome
Low clearing price of £19.4
for 49.3 GW for 2018
Only 2.6 new build
and 0.2 DSR
But 12.9 refurbished (eg IED)
And 33.6 existing
Some of the large facilities did
not succeed. Some plants are
closing.
Interconnectors in the Next
Auction. De-Rating Factors?
Is it £1Bn well-spent?
The quantity purchased in capacity auctions is
a concern to the market
The GB capacity assessment for LOLE:
�Half-hourly independent simulations of demand,
supply and duration of outages.
�Loss of Load defined at the point Grid has to take
actions, not disconnections
�The operational reserve (largest infeed loss) is
never used
�Demand-side activity is cautiously estimated
�Very cautious view on contribution from Imports
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CfD Auctions
How can a government
� Provide Early Technology Support selectively
� Have a technology neutral policy
� Use competition for price discovery
Contracts for Differences (CfDs)
Curtailment Risk and Output RiskBasis Risk. Reference price is daily for wind and quarterly for nuclear
Counterparty is the Government but cashed–out on a monthly basis, >>extra risks for suppliersMax payment to generators is the strike price, but generators can offer negative to run
CfD strike prices are administered caps Quantity constraint (Levy Control) on amount of CfDs issued per year >>>> Auctions
CfD
Removes
Price Risk
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CfD Administered Strike Prices
Hinkley Nuclear Strike price …..£92.5, …………expected to be £121 in 2023
2015 CfD Auctions
Composite auction for 4 years;
Separate yearly clearing prices
Flexibility alternatives for Projects
Interyear budget carryovers
27 Projects Successful,
Mostly below ASTs
Onshore £79 - £82.50
Solar PV £50 - £79
Offshore wind £114- £119
EfW £80
Winner’s Curse for £50 PV
(13 month Penalty for Walkaway)
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Policy
Initial policy reviews have been cautiously favourable, but:
Complex annual auctions do not favour smaller new entrants
Capacity markets may not be helping the low carbon transition
Interconnector participation in capacity auctions needs more
detailed multiregional resource adequacy analysis
The carbon price floor is more of a tax than a remedy for EUAs
CfDs may not be the least cost subsidy mechanism
End
Related publication:
“The progressive inefficiency of replacing renewable
obligation certificates with contracts-for-differences in
the UK electricity market” Energy Policy 2015