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Electricity Market Reform Emma McGuire Office for Renewable Energy Deployment DECC 5 March 2013
The Challenge
Climate change • Carbon budgets and long term climate goals • 2020 target: 15% energy from renewables
Security of Supply • Keeping the lights on • Diversity of supply • Resilience • Electricity demand may double by 2050
Affordability • Costs to taxpayer • Keeping bills down
Long-Term Vision
An electricity market where low carbon technologies compete on cost and the cheapest win the biggest market share
Renewables
CCS
New nuclear power
Maintaining secure electricity supplies, seeking c.£110bn of new investment by 2020
Electricity Market Reform
Contract for Difference
Intended to provide long-term certainty and reduced volatility in revenue
Capacity Mechanism
Designed to help ensure security of supply
Set at affordable levels for taxpayers / consumers
Renewables Obligation Transition and Final Investment Decision Enabling will ensure the shift into EMR is structured and supportive to industry, with no investment hiatus.
Supported by: An Emissions Performance Standard will provide clarity on the cap on emissions from new non-abated thermal plants The Carbon Price Floor will provide long-term certainty about the cost of carbon in the UK electricity generation sector Measures to support market liquidity and access to market for independent generators
Electricity Demand Reduction
Contracts for Difference: What are they? • • •
CfD provides long-term revenue stability, lowering risk to investors and costs to consumers Generator sells power, but receives a ‘top-up’ payment Top-up pays the difference between the ‘Strike Price’ and the market price: • Generator paid when market price below strike price • But, generator pays back when market price is high
Contracts for Difference: Strike Prices • Strike prices will be set in advance for a five yearly period, providing visibility to developers on the strike price they can access in the year of commissioning of their project. • In its role as the delivery body for EMR, National Grid (“NG”) will be preparing the analysis to support strike price setting. • Panel of Technical Experts will quality assure this analysis. • CfD Strike prices will initially be set to reflect the construction, operating and financing costs of each technology. • We will consult on initial strike prices in July 2013. • Final strike prices will then be set out in the EMR Delivery plan by the end of 2013.
Contracts for Difference: Reference Price •
Key objectives in defining the reference price: – Allows generators to achieve a reasonable approximation of the price in the market; – Protects consumers and minimises costs by keeping generators exposed to normal price signals in the market; – Incentivises efficient operation.
•
The reference price for intermittent generation will be the hourly, day ahead, ‘GB Zone’ Price resulting from market coupling arrangements from 2013.
•
More analysis ongoing to determine the reference price for baseload generation.
Contracts for Difference: Benefits
1
Removal of wholesale electricity price exposure by providing a fixed strike price to developers, therefore stabilising project revenue
2
Robust and reliable private law contractual arrangement providing developers with a clear set of rights and obligations, and recourse to arbitration processes to resolve disputes
3
Robust single counterparty owned by government and set up as a limited liability company
4
Early certainty and security of support levels in the project development process
5
Provision of an element of protection against those risks that are outside the developers control (e.g. change in law risk, force majeure risk, risk of grid connection delay)
Contracts for Difference: Delivery Structure Government Sets overall policy direction and sets out key parameters
Delivery Body (National Grid) Provides analysis to allow Ministers to set key policy parameters
Runs allocation system
CfD Counterparty Enters into CfDs with developers
Collects supplier levy to fund CfDs
Contracts for Difference: Application Process
National Grid
Application 1. Project details (e.g. type of generation, capacity, company info) 2.
Planning Permission
3. Grid Connection Acceptance Letter 4. Target Commissioning Date.
• •
Check evidence provided Allocate contracts if capacity is available: • Firstly on first come first served basis • Then in allocation rounds
Possible further criteria
Counterparty Body
Contract •
Developer
Signs and administers contract
Contracts for Difference: Timescales Illustrative project timeline
•
• •
Subject to satisfying the eligibility criteria and there being budget availability, a project receives a signed CfD stipulating the following: • The Strike Price; • The Target Commissioning Date (“TCD”) specified by the developer and a “window” around the TCD; and • The Longstop Date by which the project must commission. As long as the project commissions within the Target Commissioning Window it will be able to access the full value of the CfD. The appropriate lengths of TCW and longstop date for each technology are currently being defined.
Route-to-Market: Power Purchase Agreements (PPAs) What is the problem? Responses to our call for evidence showed that the market has changed in recent years: – Generators are receiving fewer offers – Offers they do receive are on less favourable terms What are the drivers? Less clear what drivers for change are: – Lack of participation in the market (accounting, credit conditions and competition) – Impacts of the RO regime – Uncertainty around future costs of balancing/value of intermittent generation How will the CfD help? The move to CfDs will have some positive impacts on PPAs: – Removes the need for floor prices & reduces impact on balance sheets; – But, we are mindful of the transition from the RO to CfDs.
1. 2. 3.
Government way forward – 3 strands: Engaging with participants to ease the transition from the RO to CfD Exploring options available to Govt. to improve PPA market under EMR Taking powers to allow further action, if necessary, to improve liquidity
Route-to-Market: Liquidity Importance of liquidity: • Liquid markets support competition in generation and retail markets • Reliable pricing information and confidence about market access supports investment decision-making • Liquidity should improve market conditions for all generators and support PPA providers, including new entrants • Increases the robustness of the CfD reference price Process • Ofgem is taking forward proposals to increase liquidity in the wholesale market and remains the primary vehicle for delivering regulatory reforms. • Government has included backstop powers in the Energy Bill to promote market liquidity if industry and Ofgem do not deliver the necessary improvements. • Ofgem has always stated that industry is best placed to deliver improvements. We believe that is that is the case but there is a diminishing window of opportunity. Timing • Ofgem decision on whether to intervene and the shape of any intervention due before Summer 2013. Any changes to licence conditions would come in before the end of 2013. • DECC will make a decision on whether to intervene after Ofgem has reached a decision on how to proceed with their reforms.
RO Transition: Choice of Scheme
•
Eligibility •
•
Closure Arrangements (31 March 2017)
• •
Transition Period (2014-17)
RO Post-Closure (1 April 2017 ->)
Technology-Specific Measures
RO Transition: Fixed ROC •
•
•
Objectives: – Stabilise RO – Ensure existing PPAs can play out first Process: – shift from current ROC to fixed price certificates – intended for 2027 Mechanism: – Energy Bill -> Clause 37 – Secondary legislation • Consultation in 2014 • Laid in 2015
EMR: Short-Term Timetable Consultation (start date)
Delivery Plan and Strike Prices (renewables) Consultation
Capacity Market Design Proposals
May
Carbon Price Floor Introduced
Jun
Delivery
EMR Secondary Legislation Consultations
Choice of Scheme Consultation
Apr
Publication
Jul
Aug
CfD Final Contract Published
Sept
Oct
Nov
Dec
Energy Bill Receives Royal Assent Delivery Plan and Strike Prices (renewables) Published
Fixed ROC Consultation
2014 ->
EMR Delivery Mechanisms up and running
Choice of Scheme Secondary Legislation in place
EMR: Long-term Timetable Stage 1 (to 2017)
Stage 2 (2017 –20s)
Stage 3 (mid 2020s)
Stage 4 (late 2020s)
“Administrative price setting”
“Technology specific auctions”
“Technology neutral auctions”
“Wholesale market, and carbon price”
Running of new and existing scheme together
Long term contracts
Long term contracts
Possible capacity auction
Possible capacity auction
Possible capacity auction
Possible capacity auction
?
The Challenge
Climate change • Carbon budgets and long term climate goals • 2020 target: 15% energy from renewables
Security of Supply • Keeping the lights on • Diversity of supply • Resilience • Electricity demand may double by 2050
Affordability • Costs to taxpayer • Keeping bills down
Long-Term Vision
An electricity market where low carbon technologies compete on cost and the cheapest win the biggest market share
Renewables
CCS
New nuclear power
Maintaining secure electricity supplies, seeking c.£110bn of new investment by 2020
Electricity Market Reform
Contract for Difference
Intended to provide long-term certainty and reduced volatility in revenue
Capacity Mechanism
Designed to help ensure security of supply
Set at affordable levels for taxpayers / consumers
Renewables Obligation Transition and Final Investment Decision Enabling will ensure the shift into EMR is structured and supportive to industry, with no investment hiatus.
Supported by: An Emissions Performance Standard will provide clarity on the cap on emissions from new non-abated thermal plants The Carbon Price Floor will provide long-term certainty about the cost of carbon in the UK electricity generation sector Measures to support market liquidity and access to market for independent generators
Electricity Demand Reduction
Contracts for Difference: What are they? • • •
CfD provides long-term revenue stability, lowering risk to investors and costs to consumers Generator sells power, but receives a ‘top-up’ payment Top-up pays the difference between the ‘Strike Price’ and the market price: • Generator paid when market price below strike price • But, generator pays back when market price is high
Contracts for Difference: Strike Prices • Strike prices will be set in advance for a five yearly period, providing visibility to developers on the strike price they can access in the year of commissioning of their project. • In its role as the delivery body for EMR, National Grid (“NG”) will be preparing the analysis to support strike price setting. • Panel of Technical Experts will quality assure this analysis. • CfD Strike prices will initially be set to reflect the construction, operating and financing costs of each technology. • We will consult on initial strike prices in July 2013. • Final strike prices will then be set out in the EMR Delivery plan by the end of 2013.
Contracts for Difference: Reference Price •
Key objectives in defining the reference price: – Allows generators to achieve a reasonable approximation of the price in the market; – Protects consumers and minimises costs by keeping generators exposed to normal price signals in the market; – Incentivises efficient operation.
•
The reference price for intermittent generation will be the hourly, day ahead, ‘GB Zone’ Price resulting from market coupling arrangements from 2013.
•
More analysis ongoing to determine the reference price for baseload generation.
Contracts for Difference: Benefits
1
Removal of wholesale electricity price exposure by providing a fixed strike price to developers, therefore stabilising project revenue
2
Robust and reliable private law contractual arrangement providing developers with a clear set of rights and obligations, and recourse to arbitration processes to resolve disputes
3
Robust single counterparty owned by government and set up as a limited liability company
4
Early certainty and security of support levels in the project development process
5
Provision of an element of protection against those risks that are outside the developers control (e.g. change in law risk, force majeure risk, risk of grid connection delay)
Contracts for Difference: Delivery Structure Government Sets overall policy direction and sets out key parameters
Delivery Body (National Grid) Provides analysis to allow Ministers to set key policy parameters
Runs allocation system
CfD Counterparty Enters into CfDs with developers
Collects supplier levy to fund CfDs
Contracts for Difference: Application Process
National Grid
Application 1. Project details (e.g. type of generation, capacity, company info) 2.
Planning Permission
3. Grid Connection Acceptance Letter 4. Target Commissioning Date.
• •
Check evidence provided Allocate contracts if capacity is available: • Firstly on first come first served basis • Then in allocation rounds
Possible further criteria
Counterparty Body
Contract •
Developer
Signs and administers contract
Contracts for Difference: Timescales Illustrative project timeline
•
• •
Subject to satisfying the eligibility criteria and there being budget availability, a project receives a signed CfD stipulating the following: • The Strike Price; • The Target Commissioning Date (“TCD”) specified by the developer and a “window” around the TCD; and • The Longstop Date by which the project must commission. As long as the project commissions within the Target Commissioning Window it will be able to access the full value of the CfD. The appropriate lengths of TCW and longstop date for each technology are currently being defined.
Route-to-Market: Power Purchase Agreements (PPAs) What is the problem? Responses to our call for evidence showed that the market has changed in recent years: – Generators are receiving fewer offers – Offers they do receive are on less favourable terms What are the drivers? Less clear what drivers for change are: – Lack of participation in the market (accounting, credit conditions and competition) – Impacts of the RO regime – Uncertainty around future costs of balancing/value of intermittent generation How will the CfD help? The move to CfDs will have some positive impacts on PPAs: – Removes the need for floor prices & reduces impact on balance sheets; – But, we are mindful of the transition from the RO to CfDs.
1. 2. 3.
Government way forward – 3 strands: Engaging with participants to ease the transition from the RO to CfD Exploring options available to Govt. to improve PPA market under EMR Taking powers to allow further action, if necessary, to improve liquidity
Route-to-Market: Liquidity Importance of liquidity: • Liquid markets support competition in generation and retail markets • Reliable pricing information and confidence about market access supports investment decision-making • Liquidity should improve market conditions for all generators and support PPA providers, including new entrants • Increases the robustness of the CfD reference price Process • Ofgem is taking forward proposals to increase liquidity in the wholesale market and remains the primary vehicle for delivering regulatory reforms. • Government has included backstop powers in the Energy Bill to promote market liquidity if industry and Ofgem do not deliver the necessary improvements. • Ofgem has always stated that industry is best placed to deliver improvements. We believe that is that is the case but there is a diminishing window of opportunity. Timing • Ofgem decision on whether to intervene and the shape of any intervention due before Summer 2013. Any changes to licence conditions would come in before the end of 2013. • DECC will make a decision on whether to intervene after Ofgem has reached a decision on how to proceed with their reforms.
RO Transition: Choice of Scheme
•
Eligibility •
•
Closure Arrangements (31 March 2017)
• •
Transition Period (2014-17)
RO Post-Closure (1 April 2017 ->)
Technology-Specific Measures
RO Transition: Fixed ROC •
•
•
Objectives: – Stabilise RO – Ensure existing PPAs can play out first Process: – shift from current ROC to fixed price certificates – intended for 2027 Mechanism: – Energy Bill -> Clause 37 – Secondary legislation • Consultation in 2014 • Laid in 2015
EMR: Short-Term Timetable Consultation (start date)
Delivery Plan and Strike Prices (renewables) Consultation
Capacity Market Design Proposals
May
Carbon Price Floor Introduced
Jun
Delivery
EMR Secondary Legislation Consultations
Choice of Scheme Consultation
Apr
Publication
Jul
Aug
CfD Final Contract Published
Sept
Oct
Nov
Dec
Energy Bill Receives Royal Assent Delivery Plan and Strike Prices (renewables) Published
Fixed ROC Consultation
2014 ->
EMR Delivery Mechanisms up and running
Choice of Scheme Secondary Legislation in place
EMR: Long-term Timetable Stage 1 (to 2017)
Stage 2 (2017 –20s)
Stage 3 (mid 2020s)
Stage 4 (late 2020s)
“Administrative price setting”
“Technology specific auctions”
“Technology neutral auctions”
“Wholesale market, and carbon price”
Running of new and existing scheme together
Long term contracts
Long term contracts
Possible capacity auction
Possible capacity auction
Possible capacity auction
Possible capacity auction
?
