Transcript Ensuring the adequacy of Future Energy Systems 26 May 2010 Stephen Smith Senior Partner, Local Grids and RPI-X@20

Ensuring the adequacy of
Future Energy Systems
26 May 2010
Stephen Smith
Senior Partner, Local Grids and RPI-X@20
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
Gas import
dependency
The low
carbon
challenge
Wind
variability
SECURITY OF
SUPPLY
New
Government
intervention
The financial
crisis
Accelerated
plant closures
6
Ofgem’s global scenarios
Economic recovery
Rapid
Slow
Rapid
Green Transition
Green Stimulus
Slow
Dash for Energy
Slow Growth
Environmental action
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Our approach
We cannot predict the future…
•
Our scenarios are intended to be plausible and internallyconsistent 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
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OCTOBER CONSULTATION DOCUMENT
Respondent 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
1200
Gas
1000
Decline in natural gas
demand in green
scenarios due to:
energy efficiency;
biogas; and alternative
heat technology
assumptions
600
Electricity
400
200
Green Transition
Green Stimulus
Dash for Energy
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
0
2009
TWh
800
Slow Growth
10
GB import dependence
100
90
80
bcm/yr
70
60
50
40
30
20
10
Green Transition
Green Stimulus
Dash for Energy
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
0
Slow Growth
IMPORT DEPENDENCE INCREASES IN ALL SCENARIOS, BUT BY VARYING
DEGREES
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GB electricity de-rated capacity margins
35%
30%
25%
20%
15%
10%
5%
Green Transition
Green Stimulus
Dash for Energy
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
0%
Slow Growth
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GB generation output and carbon dioxide
emissions from the generation sector
Green Stimulus
500
200
400
150
400
150
50
100
Coal
50
CCS
0
CCGT
2025
2023
2021
2019
2009
0
2025
2023
2021
2019
2017
2015
2013
2011
0
2009
0
200
2017
100
100
2015
200
300
2013
100
2011
300
Nuclear
mtCO2
200
TWh
500
mtCO2
TWh
Green Transition
CHP
Wind
Slow Growth
Other renewables
200
Other
400
150
400
150
Net imports
2025
2023
2021
0
2019
0
2017
2025
2023
2021
2019
2017
2015
2013
0
2011
0
CO2 emissions
50
100
2015
50
100
100
200
2013
200
300
2011
100
2009
300
mtCO2
500
TWh
200
mtCO2
500
2009
TWh
Dash for Energy
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February 2010 – update on scenarios
Green Transition
Key supply risk:
Green Stimulus
Generation variability
Generation variability
CO2 impact:
Down 33% by 2020
Down 46% by 2020
Impact on bills:
Up by 23% by 2020
Up 13% by 2020
£194bn
£190bn
Invt required:
Dash for Energy
Key supply risk:
CO2 impact:
Impact on bills:
Invt required:
Slow Growth
Gas import dependency
Deferred investment
Down 14% by 2020
Down 19% by 2020
Up 26% by 2020 (52% by 2016)
Up 19% by 2020
£110bn
£95bn
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February 2010 – update on stress tests
Stress test
Period
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
Low impact
Today
Moderate impact
Green
Transition
Green
Stimulus
Dash for
Energy
Slow
Growth
High impact
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Key findings from the appraisal
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.
Up to £200bn of
investment required
by 2020
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.
Significantly higher
emissions or reduced
capacity margins
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.
Greatest risk in
scenarios with high
gas imports & wind
generation
Finding 4: Interdependence with international markets exposes GB to
a range of additional risks that may undermine GB security of supply.
Greatest risk in
scenarios with
highest gas import
dependence
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 bills
could rise by up to
50%
COMBINATION OF FACTORS CAUSES CONCERN
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Range of possible policy measures to deal
with issues
Scale and timing of investment
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•
•
•
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Improve price signals
Supplier obligations
Centralised renewables market
Capacity tenders
Central energy buyer
Uncertain future carbon price
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•
•
Risks from inconsistencies
with international
arrangements
Weakness of short term signals
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•
•
•
•
•
Improve price signals
Supplier obligations
Improve ability f or DSR
Short term capacity auctions
Liquidity measures
Central energy buyer
Carbon price intervention
Tender f or low carbon plant
Central energy buyer
•
•
•
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Improve price signals
Supplier obligations
Storage capacity tenders
Central energy buyer
MEASURES CAN BE PACKAGED IN VARIETY OF WAYS
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Options for consultation
A
Targeted
Reforms
B
Enhanced
Obligations
(EO)
C
EO &
Renewables
Tenders
D
Capacity
Tenders
E
Central
Energy
Buyer
Minimum carbon price
Improved ability for demand side to respond
Improved price signals
Central buyer of
energy
(including
capacity)
Enhanced obligations on suppliers
and system operator
Centralised renewables market
Replace RO with
renewables
tenders
Tenders for all
capacity
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Key timings
Gas
storage
UKCS supplies fall below
25% of winter demand
Lead times
Gas
ballasting
(to address
gas quality
issues on
imports)
Imports exceed 50% of
peak day demand
Lead times
Lead times
CCGT
Nuclear/
CCS
LCPD closures
Nuclear and
IED related
closures
Lead times
Lead times
Annual deployment
must be at least
double current rate
Wind
Policy
packages
2010
Lead times
2011
2012
EU 20-20-20
targets
2013
2014
2015
2016
2017
2018
2019
2020
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?
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RPI-X has been used to regulate GB energy networks for nearly 20 years
RPI-X@20 is our detailed review of the regulatory framework
launched in February 08
Biggest 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
Five-year price
control
periods, with
some midperiod changes
Focus on
(operating) cost
efficiency
incentives
Recently,
incentives to
meet specific new
challenges
 RPI-X has delivered significant benefits for consumers:
Reductions in
network charges
Improvements in
operating efficiency
More efficient
financing
Improved quality
of service
Increased
investment
 But critics have suggested it has led to:
Networks focused on
5 year price cycles
Networks focused on
Ofgem not their customers
Potentially limited appetite for risk
Limited consideration of innovation
and ‘how best to deliver’
Limited focus on ‘cross-sectoral’ interactions
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Why? – The case for change
RPI-X has delivered significant benefits to consumers
Reduced network
charges
Greater operating
efficiency
Increased
investment
Improved quality
of service
More efficient
financing
But: Future energy services will be different to the past
Uncertainty
Low carbon energy sector
Security of supply
We are looking to the future to assess whether existing
'RPI-X' frameworks will remain fit for purpose
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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?
Ex ante price control
Building blocks
approach
Rewards for efficient
delivery
Network companies who deliver efficiently will remain financeable
What would change?
Outcomes-led
New business plans
Longer term thinking
Enhanced engagement
Incentives
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
Environmental targets
Safety
Customer satisfaction
Reliability
Social obligations
Network service
connections
Output measures in each category determined at price control reviews
The level of each output proposed by network companies
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
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Consistent with engagement and external requirements
Ofgem set final outputs reflecting stakeholder engagement
Rewards for output delivery
Punishments for non-delivery
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
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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
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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
Strong
incentives for
efficiency
 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
Specific
innovation
stimulus
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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
Differential
treatment
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
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
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
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Tendering
Only tender projects with certain characteristics
Large: justify transaction
costs
Technically appropriate
Innovation 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
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
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New Business Plans
Longer 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
 Take account of range of delivery options and future scenarios
Evidence of stakeholder engagement
 Effective engagement on options presented in plan
 Evidence of incorporating stakeholder’s views
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Facilitating competition in energy services
Energy service companies (ESCos) offer broad range of low carbon energy
solutions at community level
Ensure the regulatory framework is not a barrier to viable ESCo development
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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
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Timetable to RPI-X@20 implementation
End 2008 /
Early 2009:
Initial
stakeholder
engagement
Oct 08
Jan 09
Throughout 2009:
Working groups and
stakeholder
engagement on key
emerging issues
Apr
09
Spring
2009:
Principles,
process and
issues
consultation
Jul 09
Oct 09
Summer
2009:
Current
thinking
working
papers
Winter/Spring
2010:
Stakeholder
engagement on
emerging
thinking/ initial
recommendations
Jan 10
Winter
2009/10:
Emerging
thinking
consultation
Apr
10
2011:
TPCR5
and
GDPCR2
reviews
begin
Jul 10
Oct 10
Jan 11
Autumn 2010:
Recommendations
document
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