UK Electricity Markets: A Journey of Discovery

Transcription

1 UK Electricity Markets: A Journey of Discovery Professor John Loughhead OBE FREng FTSE Chief Scientific Adviser

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3 Referenced from DUKES 2014

4 Progress against Carbon Budgets MtCO 2 e CB1 25% reduction on 1990 CB2 30% reduction on 1990 CB3 36% reduction on 1990 CB4 51% reduction on 1990 CB5 57% reduction on Where we need to get to by 2050 = c.160mt

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6 Renewable Electricity Generation achieved to 2015 and projected by BEIS to 2020

7 Great Britain s Energy Vectors in GWh per day 4500 GWh GWh per day 4000 GWh 3500 GWh 3000 GWh 2500 GWh 2000 GWh 1500 GWh Transport fuels = Aviation Fuels + DERV (Diesel) + Motor Spirit (Petrol) Electricity from Non PS Hydro + Wind + Solar 1000 GWh 500 GWh 0 GWh 30 GWh Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Data are from National Grid, Elexon and BEIS. Charts are licensed under an Attribution-NoDerivatives 4.0 International license Charts can be downloaded from by Dr Grant Wilson grant.wilson@sheffield.ac.uk

8 Electricity Act breaks up state generators Electricity trading introduced Climate Change Levy introduced - early UK version of carbon pricing Energy & Climate Change Ministries Merged UK, and EU, emissions trading introduced Climate Change Committee introduced to monitor targets Office for Nuclear Deployment Energy market reforms - contract for difference, auctions Cash grants are introduced for some innovative renewable projects Non Fossil Fuel Obligation mandates suppliers to source a given percentage of renewable energy Renewable Obligation Supports renewables with tradable certificates 2003 target 3% Renewable Obligation adjusted to support some technologies more generously than others UK agrees 2020 EU renewables target for 15% UK renewable energy Climate Change Act 2008 introduces binding 2050 target, and independent enforcement Carbon price floor is launched in the UK

9 The UK needs more generation Limited interconnection 5% of UK capacity 3,2% of total supply in 2012 Rapid decommissioning 75% of thermal capacity to be decommissioned by 2030 Tough climate targets 80% reduction in CO 2 emissions by GW Nuclear Gas Oil Coal 780 Mt CO 2 e Total CO2 emissions 9

10 What is a CFD? (A FiT with a CFD) Purpose: To support investment in new low carbon electricity generation. Achieved through providing stable and predictable revenue streams. Private law contract signed by the generator and the CFD Counterparty (a government-owned company). An instrument that regulates how payments are made and the rights and obligations that the parties to the contract agree. Standard contract term of 15 years. Agreements contain project-specific information to tailor the application of the Standard Terms and Conditions

11 Offshore Wind and Contracts for Difference (CFDs)

12 The CFD aims to make renewables investable Aims to bring low-cost capital in to projects that need large up-front investment. Previous Renewables Obligation scheme left low carbon generators with large up front spend, but uncertain forward price exposure Are essentially a 15-year power purchase agreement. CFDs are well-understood by the market; seen as good low-risk investments Consumer pay both the LCF top-up (shown in green) and the wholesale price (shown in blue). Contract for Difference offers an index-linked Per MWh level of income for 15 years Index linked income Surplus not retained 1

13 Annual budget Auctions have driven efficiency Periodic auctions force projects to directly compete for a finite budget (Levy Control Framework). Technologies compete with each other (e.g. onshore wind vs solar; offshore vs. anaerobic digestion). Budget being auctioned over 2 delivery years 6 th cheapest Sealed auctions the cheapest bids on a /MWh basis are offered CFDs, until the budget is spent. Marginal projects can offer to reduce size to fit in. 5 th cheapest 3 rd cheapest PV PV Competition has been fierce. 4 th cheapest 2 nd cheapest Cheapest bid Overall costs for some technologies have fallen steeply. Starting delivering in 2021 Starting delivering in 2022.supported income continues for 15 years 2

14 CFD regime is underpinned by a robust public & commercial law framework Energy Act & Regulations Allocation Framework Auction rules Eligibility and qualification requirements National Grid (EMR Delivery Body) runs auction process Ofgem hears appeals CFD Contract CFD Agreement CFD Terms and Conditions Low Carbon Contracts Company issues & is counterparty to CFDs 3

15 CFD regulates how payments are made CFD contract sets out Delivery conditions the generator needs to meet to receive payments How payments are calculated When payments are made Requires the generator to make certain representations, warranties and undertakings to enter into the contract and receive payments Measures to preserve the value of those payments How the contract can be terminated How disputes are to be resolved How the contract can be amended Sustainability & fuel measurement ATSE requirements

16 Role of the Low Carbon Contracts Company and Electricity Settlements Company LCCC is operationally independent from government Has an independent board Is the counterparty to CFDs Sets the Supplier Obligation to make payments to generators Has responsibilities under the Capacity Market 5

17 Contract delivery obligations Contract agreement date Soon after auction Milestone Delivery Date 12 months after contract signature Must demonstrate spend or commitment Can adjust capacity downwards < 25% Target Commissioning Window Long stop period Long stop Date CFD may be terminated if generator has not reached a start date for payments Some Force Majeure flexibility Lasts 1 year for all technologies, and depends on delivery year for auction. Payments can start at 80% capacity. 15 year CFD term starts at the end of the TCW, irrespective of whether you are generating. Depends on technology e.g. 2 years for offshore wind, 3 months for Solar PV Generator must deliver 95% or face termination (85% for offshore wind). 6

18 Why a Capacity Market (CM)? GB market has historically had high levels of security of supply but the market is changing Problem of missing money. The wholesale energy-only market failed to send the right signals to encourage investment: increasing renewables means load-factors and revenues become less predictable companies do not feel they can rely on infrequent scarcity rents, when prices spike at times of tightness. Capacity Market does not replace the energy market but operates alongside it. In future companies have two sources of revenue: selling their electricity in the wholesale market (price will fluctuate) selling their capacity in the capacity market (price fixed in advance)

19 CM Objectives Security of electricity supply: to incentivise sufficient investment in generation and non-generation capacity to ensure security of electricity supplies Cost-effectiveness: to implement changes at minimum cost to consumers Avoid unintended consequences: to minimise design risks and ensure compatibility with other energy market policies

20 CM - Auctions T4 Main auction (c 95%of total), four years ahead, e.g. auction December 2016 for delivery in winter 2020/21 All types of resources Three agreement lengths: one year (standard), three year (refurbishment), 15 year (new build) T1 Much smaller auction (c 5% of total), one year ahead, e.g. late 2019 for winter 2020/21 Adjusts procurement when exact demand and supply can be better predicted All types of resources (but not enough time for major new-build projects) Particularly suited for Demand Side Response (DSR) sector

21 Capacity Market - Design Capacity to procure Auction Trading Delivery Payment Forecast of future peak demand made, and translated into a target capacity requirement Technical process, but final decisions for Government. Target capacity is sold at auction. Companies bid their (derated) volume and their lowest price. Capacity providers may trade between auction and delivery but with restrictions Companies must be available in the delivery year, at the volume they bid, when called upon by the system operator with 4 hour warning, or face penalties. Companies receive regular payment (minus any penalties) throughout the delivery year. Costs are shared between suppliers, and passed on to consumers

22 Results of Capacity Auctions so far MW Capacity by Type Supplementary Capacity Auction (SCA) CCGT 22,259 21,808 22,596 22,062 Coal/Biomass 9,232 4,684 6,089 10,470 Nuclear 7,876 7,575 7,878 7,878 CHP and autogeneration 4,235 4,206 4,407 4,604 Interconnector - 1,862 2,342 2,362 Storage 2,699 2,617 3,201 2,710 OCGT & Reciprocating engines (inc. Diesel) 2,101 2,430 3,788 3,432 Hydro DSR , Oil-fired steam generators Total 49,258 46,354 52,425 54,433

23 Results of Capacity Auctions so far SUPPLEMENTARY CAPACITY AUCTION Delivery 2018/ / / /18 Participated 65GW 58GW 69.8GW 59.3GW Successful 49.3GW 46.3GW 52.4GW 54.4GW Clearing price 19.40/kw/y 18.00/kw/y 22.50/kw/y 6.95/kw/y Existing plant 39.4GW 42GW 44.5GW 50.1GW New Generation 2.6GW 1.9GW 4.8GW 1.7GW of which CCGT (1.6GW) (0.8GW) (1.5GW) - Refurbished plant 7GW - 0.8GW - Existing DSR 0.17GW 0.45GW 0.44GW 0.2GW Interconnectors - 1.8GW 2.3GW 2.4GW

24 Auction Total cost Gross impact on average annual household bills b Figure not available b (2015 prices) b 14 (2016 prices) SCA 0.38b 4.50 (2017 prices)

25 What could the future look like? Nuclear

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27 Our electricity system faces new challenges as we look ahead Increasing intermittency & inflexibility Increasing distributed generation Changes in consumer behaviour Delivering secure affordable and clean energy now and in the future Increasing demand EVs & heat

28 Fundamental Change A Future Power System Architecture BEIS asked for an independent review, led by IET, Catapult and Industry

29 Research Methodologies Evidence based from work from deep-knowledge stakeholders. Independent technical study. IET / ESC leadership. Special attention to engaging with new industry parties = very different perspectives identified Ability to develop and implement the new functionality.

30 Main stages and timeline Future Power System Architecture Programme NOW Power Network Joint Vision Problem Defini on FPSA1 Technical Gap Analysis Reported in July 2016 FPSA2 In-Depth Analysis and Development Repor ng June 2017 FPSA3 Specifica on and Valida on FPSA4 Innova on FPSA5 Demonstra on FPSA6 Transi on to Business as Usual Research Development Valida on Demonstra on Government Government with Stakeholders Government with Sector Business as Usual Sector leading

31 Key findings from FPSA 2 35 new technical/commerci al functions spanning ownership boundaries. The greatest drivers of change are from new developments 'beyond the meter' The change agenda is demanding: commercial and technical complexity is increasing Current industry change governance was not designed for this context: so delivery risk is elevated

32 FPSA analysis shows that the greatest sources of transformative change are: 1. likely to be from the Grid Edge, and 2. will have whole-system impacts. Beyond the Meter National Regional Commercial Local Communities Homes

33 Not the end, but perhaps the end of the beginning Under changing circumstances and new challenges the current UK electricity system and market is being managed Future developments, already happening, will change the game again. First steps to prepare are underway.

34 Thank you for your attention