Transcript TITLE OF THE POWER POINT PRESENTATION IN ARIAL 40 PT., …

ELECTRICITY
MARKET REFORM (EMR)
EXPLAINED
June 2013
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The energy trilemma
AFFORDABILITY
>
The UK has set some very challenging climate
change targets – 80% reduction in carbon emissions
in 2050 based on 1990 levels
>
In order to meet these targets, the UK will need to
decarbonise in a number of sectors, a key one of
which is electricity generation
>
A number of initiatives are already in place to
discourage generation types that produce high
carbon emissions, e.g. the Large Combustion Plant
Directive means that coal-fired power stations will
need to become much more sustainable by 2015
or close down
>
This allows low carbon generation forms to play
a bigger part in meeting UK demand
>
The “trilemma” for government is how as a nation
we adhere to our sustainability targets whilst
retaining security of supply and ensuring that
electricity is affordable for consumers
Social
pressures
Capacity
Mechanism
SECURITY OF SUPPLY
CfD
Carbon tax
EU ETS
SUSTAINABILITY
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The size of the challenge
The UK’s 2050 target
International aviation & shipping
Agriculture non – CO2
Other non – CO2 and LUC
670 MtCO2e
42
49
44
Industry (heat and industrial processes)
125
Residential & commercial heat
103
Domestic transport
134
76% cut
(=80% vs.1990)
159 MtCO2e
Power generation
173
2008 emissions
2050 objective
Electricity Market Reform (EMR) is the key way in which the UK intends to hit
the 2050 target in the power generation sector
SUSTAINABILITY
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The electricity market will change fundamentally
over the coming years as demand increases and
supply changes
Demand for electricity is increasing
Whilst supply (power generation
capacity) is decreasing and
becoming more intermittent
> The Department for Energy & Climate
Change (DECC) forecast an increase in
demand from the 350 TWh per year to
around 550 TWh per year by 20301 driven
by the electrification of vehicles and heat.
> Older, more polluting plant has to close
Development of future peak demand 2
Development of GB Generating Capacity 2
> Existing nuclear plant expected to close
by 2020
> Renewable supply is intermittent, meaning
that alternative standby is needed.
Source: 1: DECC Pathways to 2050 Report
Building additional fossil fuelled
power generation is not an option
due to environmental constraints
> Government has set legally binding
CO2 reduction targets
> Target of 15% of energy from renewable
sources by 2020
Decarbonisation trajectory to 2030 3
2: Statutory Security of Supply Report
3: EMR White Paper
SECURITY OF SUPPLY
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The Electricity Market Reform (EMR) has 4 pillars
Low Carbon Generation Feed In Tariffs/ Contracts
for Difference (CfD)
Low carbon generators are guaranteed a fixed price for
power generated, but have to pay back if the market price
goes above the fixed price.
Carbon
Floor Price
to 2020
Operation of
Contracts for
Difference
ENERGY
Emission Performance Standard (EPS)
Clearly defined set of emission levels to prevent
investment in carbon intensive power stations
(i.e. coal without Carbon Capture and Storage (CCS)).
EPS = 450g CO2 / kWh
- only applicable to new plant
BILL
Capacity Mechanism
Market wide mechanism designed to ensure adequate,
reliable power generation capacity is in place to meet peak
demand.
Peak De-rated
Capacity Margin
Expected to appear as line items on business bills, similar to FiT
Carbon Price Support
Tax to ensure generators pay a minimum price for their
carbon emissions.
SUSTAINABILITY | SECURITY OF SUPPLY
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Low Carbon generators will receive a fixed price for
their electricity going forward, funded by suppliers
CONTRACTS FOR
DIFFERENCE
POLICY AREA
KEY POLICY UPDATES
IMPACT
> Guarantees a fixed price (strike price)
for low carbon generation above which
generators have to pay the revenue back
> CfD costs likely to start in 2015, ramping
up over time
> Fixed price is wholesale market price and
“top up” CfD cost
> Single Counterparty Body will sit
between the generators and suppliers
to manage funds
> Levy Control Framework (LCF) sets
a cap on costs at £7.6bn (2012 real
prices) in 2020
> Funds raised via a compulsory levy
on suppliers
> Expect CfD costs to be between
£5 and £10/MWh by 2020, ramping up
over time
> We expect that the full Levy Control
Framework will be spent
> Final decision on Supplier Obligation not
due until Autumn with final strike prices
available in December 2013
> More accurate cost impacts due in
Autumn 2013
SUSTAINABILITY | SECURITY OF SUPPLY
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We expect CfDs to add £5 – £10 /MWh
to customer bills by 2020
CONTRACTS FOR
DIFFERENCE
POLICY AREA
KEY POLICY UPDATES
IMPACT
> 2 Supplier Obligation options on the table:
> Variable rate obligation will result in:
Variable rate: Based on actual monies
(based on actual generation) owed in a
defined period according to market share
by consumption
> Highly volatile monthly costs and
Fixed Rate: Central forecast translated
into a fixed p/kWh and paid on a defined
basis according to market share
> More frequent price changes
> Energy Intensive Industries will be exempt
from CfD payments (subject to State Aid
clearance and consultation)
> Likely addition of a risk premium to
cover forecasting error
> We are therefore lobbying
for fixed CfD
> Additional administration may be needed
for Energy Intensive users due to the
anticipated exemption
SUSTAINABILITY | SECURITY OF SUPPLY
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A capacity mechanism will be introduced to ensure
adequate reliable generation capacity is available
to meet peak demand
CAPACITY
MECHANISM
POLICY AREA
KEY POLICY UPDATES
IMPACT
> Secretary of State (SoS) will announce
decision to hold an auction based on
Ofgem’s Capacity Adequacy report
> Initial Capacity Mechanism costs from
2015/16 from DSR pilot
> Descending clock, pay as clear auction
held in Autumn for delivery 4 years hence:
> Costs likely to be visible up to 4 years
out (due to auction lead time) and more
transparent than CfD costs
> First auction for supply in 2014 for
2018/19 delivery
> Costs will be capped by Secretary
of State (but will not be part of the LCF)
> First Demand Side Response (DSR)
pilot auction held in 2014 for 2015/16
delivery
> Capacity Mechanism will result
in a reduction in wholesale prices
(£5-£10/MWh)
> Different contract length for new, old and
refurbished plant and likely that RO Plant
will not be allowed to participate
SECURITY OF SUPPLY
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Reductions in wholesale electricity prices as a
result of the capacity mechanism will be more than
offset by the price of capacity
POLICY AREA
KEY POLICY UPDATES
IMPACT
> Penalties for non-delivery of capacity
> However, this will be more than offset
by cost of Capacity Mechanism of
between £7 - £20/MWh
CAPACITY
MECHANISM
> Electricity Demand Reduction to form part
of capacity mechanism (but exact details
not clear)
> Supplier Obligation likely to be different
from CfD Supplier Obligation
> Current inefficiencies in design likely
to cost consumers more (contract
length, over-procurement)
> Current thinking share of peak demand
(as at Triads)
> Depending on design of Supplier
Obligation, there may be an opportunity to
limit exposure by not being there at peak
> Potentially share of total consumption
over year by market share
> Lack of clarity as to how penalties
will be treated
> Opportunity to participate in DSR and
reduce demand in periods of system
stress
SECURITY OF SUPPLY
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Final Policy details are expected in Autumn 2013
CM Policy
Update due
Draft Delivery Plan including
draft strike prices
CfDs
available
Decision on
capacity auction
1st capacity
auction
Final Delivery Plan
Jun 13
Dec 13
Draft secondary
legislation and
final Policy
details available
3rd Reading of
Energy Bill
Policy
FINAL POLICY PREPARED
Legislation
DRAFT SECONDARY
LEGISLATION PREPARED
Implementation
CONSULTATION
Jul 14
Secondary
legislation comes
into force
Royal Assent
of Energy Bill
(expected)
LEGISLATION
UPDATED
COLLABORATIVE
DEVELOPMENT
Dec 14
LEGISLATION BEFORE
PARLIAMENT
FINAL PREPARATION FOR
IMPLEMENTATION
STATE AID CLEARANCE PROCESS
npower will be running webinars & producing update packs in July & August 2013 once
more price & design decisions are known
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