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The changing policy environment
- what about the market?
Nigel CornwallUKELA 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
4
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
BETTA now
EMR—market impacts
Electricity Market Reform
Carbon price support (CPS)
Feed-in tariffs (FiT)
Capacity mechanism
Emissions Performance
Standard (EPS)
Changes the merit order by
increasing costs to fossil fuel generators
Keeps fossil fuel on the system for
when the wind won’t blow
Keeps low carbon generators
interested in wholesale markets
with top-up premiums
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
-75
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me
TW
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Nuclear CCGT CHP Coal LCPD Opt-in Coal LCPD Opt-out
Other fossil fuel Other Embedded Domestic Non domestic
Generation
Supply
Data sources: Generation = CVA settlement. Non-Big 6 supply = SVA settlement. Big 6 supply = segmental accounts
But the market doesn’t like instability…
Market structure and market design have been mutually reinforcing
… 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
Reference slides
14
Market framework
Making Betta better
Carbon Price Support
Finance Bill
Energy Bill
New RIIO-T1 price
controls April 2013
2012 2013 2015
Wholesale markets
Networks
Changes arising from
Transmit
Ofgem balancing
SCR concludes
Project Transmit
Liquidity proposals
CfD FiTsMandatory auctions?
EDCM demand
2 years remain for
RO
EDCM generation
Smart meter rollout begins
2014
Capacity market design
AMR rollout complete
Ofgem smarter market
strategy New RIIO-E1 price
controls April 2015
New RO bands
Use of smart meter/ AMR
data in settlement?
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)
0
20
40
60
80
100
120
Flex PPA 1 Flex PPA 2 Fixedcontract
CfD FiT 1 CfD FiT 2 Fixed FiT
£/M
Wh
2014-15 2015-16 2016-17
Potential yearly income (£/MWh) 2014-17 for 6MW wind
Different support levels (2)
0
20
40
60
80
100
120
140
160
180
Flex PPA 1 Flex PPA 2 Fixedcontract
CfD FiT 1 CfD FiT 2 Fixed FiT
£/M
Wh
2014-15 2015-16 2016-17
Potential yearly income (£/MWh) 2014-17 for 20MW AD
