Transcript The changing policy environment

The changing policy environment
- what about the market?
Nigel Cornwall
UKELA CCEWP Round up
10 October 2012
What I will cover …
• Describe market context
– tri-lemma but should be “quad-lemma”
• Explain how the design of some of these instruments
is dependent upon efficient markets existing
• Identify problems with current market structure
– are these being exacerbated by EMR?
• Market analysis is a real weakness of the proposals at
least so far
– some suggestions about how these conflicts might be
managed
Where it all started
• Utilities Act 2000
• Set tone of interventions on
– supply-side with Renewables Obligation
– demand-side with Energy Efficiency Commitment
• Also provided legal basis for New Electricity Trading
Arrangements – later BETTA
– BETTA is NETA wrote large
• Subsequently all policy statements have emphasised
the efficacy of markets
– interventions to address market distortions not replace
them
BETTA now
 A bilateral contractual model
– all must use contracts to manage own risk
– market prices emerge with no central mechanism to manipulate
 Liquid traded markets critical to avoid stranded buyers/sellers
 Imbalance prices to recover costs of uncontracted trades
– crucially creates the incentive to trade and balance
 penalise parties who do not contract or contract badly or are small or
are one-sided
 EMR assumes this template is functioning as intended
 But the market will need more than a couple of tweaks
4
EMR—market impacts
Keeps low carbon
generators interested
in wholesale markets
with top-up premiums
Changes the merit
order by increasing
costs to fossil fuel
generators
Carbon price
support (CPS)
Feed-in tariffs
(FiT)
Electricity
Market
Reform
Keeps fossil fuel on
the system for when
the wind won’t blow
Capacity
mechanism
Emissions
Performance
Standard (EPS)
Backstop to direct
fossil fuel mix if market
mechanisms don’t
work
Implies a world of higher and more volatile prices, but
supplementary, not an alternative to the market
But the market doesn’t like instability…
Generation
75
25
-75
Other suppliers
Drax
Total Gas & Power
International Power
Scottish Power
Energy
Scottish and Southern
British Gas
EDF Energy
RWE npower
E.ON UK
Other generators
-50
Conoco Philips
-25
BNFL
0
Intergen
Volume TWh
50
Supply
Nuclear
CCGT
CHP
Coal LCPD Opt-in
Coal LCPD Opt-out
Other fossil fuel
Other
Embedded
Domestic
Non domestic
Market structure and market design
have been mutually reinforcing
Data sources: Generation = CVA settlement. Non-Big 6 supply = SVA settlement. Big 6 supply = segmental accounts
… and despite Ofgem’s efforts …
 Ofgem wants to incentivise engagement with market through
sharpening imbalance signals
 Several reviews of cash-out but salami slice changes
 Spreads wider than on the Continent and prices more volatile
 Significant Code Review is imminent
… liquidity remains a significant problem
 Low liquidity in electricity in
contrast to gas—possibly
due to:
– vertical integration
– confidence in market
– no reference prices and slow
exchange development
– cost and complexity
– few intermediaries
– credit
 Limited routes to market
– offtake market also
dominated by Big Six
Liquidity in GB wholesale markets, Ofgem (June 2009)
What EMR doesn’t say
• If it is a success EMR will:
– boost power prices overall by increasing costs to fossil fuel
generators through carbon price support:
• stimulate investment in new low carbon
– increase the proportion of low carbon generation via CfD
FiTs
• increasing the proportion of inflexible (price-taking)
generation
– ensure flexible fossil fuel generation is there for when the
wind doesn’t blow
• implies comfort with sporadically very high prices
Actively traded long- and short-term markets will be critical
PPA call for evidence – a timely move
• Recognises problems faced in sub 100MW market
• Canvases views on regulatory interventions
– obligation to offer terms
– purchaser of last resort
– but without much enthusiasm
• But what about:
– guaranteed market/ purchaser of first option
– raising fixed Fit thresholds
One possible solution
• A green power market
• Based around established NFPA auction
– six monthly tranches
• but can evolve
• Uses reference price out of auction
– mitigates basis risk
• Fixed FiT threshold could be raised but for specific
types of project
– e.g. community energy
• While we sort this out, retain RO at least to 2020
Thank you
Nigel Cornwall
[email protected] 079000 92524
@spectrumvoice
Reference slides
Market framework
14
Making Betta better
Networks
EDCM
demand
EDCM
generation
Changes
arising from
Transmit
Project
Transmit
2012
Energy Bill
Finance Bill
Liquidity
proposals
Ofgem smarter
market strategy
New RIIO-T1
price controls
April 2013
AMR rollout
complete
2014
2013
New RO bands
Smart meter
rollout begins
Mandatory
auctions?
Ofgem
balancing SCR
concludes
CfD FiTs
Capacity
market design
New RIIO-E1
price controls
April 2015
2015
2 years remain
for RO
Use of smart
meter/ AMR data
in settlement?
Carbon Price Support
Wholesale markets
Let’s not forget the customer!
Estimated impact of energy and climate change policies on average non-domestic retail gas and
electricity prices
Different support levels (1)
Potential yearly income (£/MWh) 2014-17 for
6MW wind
120
100
£/MWh
80
60
40
20
0
Flex PPA 1
Flex PPA 2
2014-15
Fixed
contract
2015-16
CfD FiT 1
2016-17
CfD FiT 2
Fixed FiT
Different support levels (2)
Potential yearly income (£/MWh) 2014-17 for
20MW AD
180
160
140
£/MWh
120
100
80
60
40
20
0
Flex PPA 1
Flex PPA 2
2014-15
Fixed
contract
2015-16
CfD FiT 1
2016-17
CfD FiT 2
Fixed FiT