Tim Stone. 28th January


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  • As Government we don’t try to determine or dictate what should be built, where or when, in order to meet future demand and reduce carbon emissions. We rely on private market principles, where underlying supply and demand mechanics will set price signals for new capacity additions.Others are better qualified and resourced to do that. So while security of supply is formally and legally the responsibility of the Secretary of State, our approach is not to discharge that responsibility by trying to run energy supply from Whitehall. Instead we rely on markets, we create the conditions in which they can operate effectively, establish regulation, and monitor to see where they may not be able to deliver all the results we need.
  • Liquid wholesale markets producing efficient energy pricesAllow participants to sell energy to counterparties who want energy and vice versaTraders can be financial and physicalMultiple trading options
  • Govt role transparent and stable regulatory environment – provide certainty to investors – cost of capital - prices. ensure price signals clear to ensure investment provide incentives to lead market to outcomes required by public interest where otherwise wouldn’t happenThe Government makes sure that the legal duties of the market regulators are clear and appropriate. The primary duty of Ofgem is to protect the interests of gas and electricity consumers, but it also has a range of secondary duties. Government should intervene only to address market failures.Protecting consumers is Ofgem’s first priority. Ofgem does this by:- promoting competition, wherever appropriate, and - regulating the monopoly companies which run the gas and electricity networks.Other priorities and influences include:- helping to secure Britain’s energy supplies by promoting competitive gas and electricity markets - and regulating them so that there is adequate investment in the networks, and contributing to the drive to curb climate change and other work aimed at sustainable development by, for example: helping gas and electricity industries to achieve environmental improvements as efficiently as possible; and taking account of the needs of vulnerable customers, particularly older people, those with disabilities and those on low incomes.Ofgem can be held to account for how well it fulfils its objectives in a number of ways: parliamentary scrutiny, appeals to the Competition Commission, judicial review, transparency through regulatory impact assessments, and consumer representation.While Ofgem is independent, Ofgem’s objectives apply to our Secretary of State as well: this ensures consistency.Ofgem administers licensing system for gas and electricity. Ofgem Licence conditions frequently require licensees to belong to various industry codes, which govern the interactions between energy businesses and the way they all contribute to the wider systems. Many aspects of gas and electricity markets, such as supply, are seen as fully competitive. Participants determine their prices in the context of their competitors, and competition prevents them from profiteering at the expense of customers. So in these areas Ofgem does not have a role in setting prices. But networks (pipes and wires) as I’ve said are necessarily monopolies – it would be impractical for competitors to set up alternative networks. So Ofgem agrees price controls with the network operators – these include allowances for maintenance of networks etc but limit the costs that can be raised through charges.Ofgem can fine a business up to 10% of its UK turnover for a licence breach. Under Competition powers, businesses can be fined up to 10% of group turnover. As energy regulator, Ofgem has a key role in contributing to the Govt’s energy goals. As well as these activities, it is also working with Govt on fuel poverty, deployment of renewables and other policy areas, and it administers renewable obligation on behalf of Govt – policies delivered by energy companies.National Grid must balance output and demand on a second by second basis. Electricity is bought and sold through a complex trading market. With a lot of generators feeding into a system.All involved parties are obliged to work effectively by the Balancing and Settlement Code. The BSC contains the rules and governance arrangements for electricity balancing and settlement in Great Britain, and a company named ELEXON is responsible for ensuring its proper, effective and efficient implementation.
  • Long-term certainty of the cost of carbonProvide further certainty on the regulatory environment for fossil fuel plant by offering clarity on the emissions cap from new non-abated thermal plants
  • Tim Stone. 28th January

    1. 1. HOW THE UK IS INNOVATING WITH ELECTRICITY MARKET REFORM The basis for major new nuclear investment January 2014 1 Presentation title - edit in the Master slide α⇒ n
    2. 2. Objectives and Agenda Overview of session • How the electricity market works in the UK • EMR – our strategic approach and objectives, what we are trying to achieve • EMR – relating to new nuclear, drawing on the key terms agreed with EDF 2 Electricity Market Reform Slide 2
    3. 3. UK‟s commitment to liberalised competitive markets The UK has led the way in the introduction of competition into electricity markets • Privatised gradually from 1990 • Significant generation investment in 1990s – in particular in CCGTs • Reform of the wholesale market – “New Electricity Trading Arrangements” (2001) • In 2005, NETA became BETTA incorporating the Scottish market • Unbundling and EU Third Package 3 Electricity Market Reform Slide 3
    4. 4. Size of the market 4 Electricity Market Reform Slide 4
    5. 5. Financial and physical markets Generators Transmission Distribution Suppliers (retail) Wholesale markets 5 Electricity Market Reform Slide 5
    6. 6. Generation Generators Transmission Distribution Suppliers Major players account for c.60% of market - E.On, EDF, RWE, SSE, SP, Centrica. Also small number of independents such as Drax, Independent Power etc. Competitive market, not subject to price regulation. Subject to environmental legislation to control Carbon emissions and the treatment of other by-products of Generation Accounts for approx 50% of final electricity bill. 6 Electricity Market Reform Slide 6
    7. 7. Transmission Generators Transmission Distribution Suppliers Winter peak demand c.60GW England and Wales owned and operated by National Grid plc. Scotland: system operated by National Grid but owned by Scottish Power and SSE. Natural monopoly: Subject to Price Controls set by Ofgem, the regulator Licence involves technical and contractual obligations to allow fair access by companies and effective operation of the system. 7 Electricity Market Reform Slide 7
    8. 8. Distribution Generators Transmission Distribution Suppliers Over 300,000km of overhead line and c.500,000km of underground cable Distribution is arranged into regions, but those are now owned by six main companies Like transmission, Distribution is a natural monopoly: Subject to Price Controls. Running it and maintaining it costs around 17% of each electricity bill. There are also smaller, independent distributors with slightly modified licences – currently 6 IDNOs. Those operate distribution networks to small housing developments and industrial estates etc eg. Manchester‟s Media City. 8 Electricity Market Reform Slide 8
    9. 9. Supply Generators Transmission Distribution Suppliers Competitive market with over 40 licencees 26m domestic electricity customers, over half dual fuel. Dominated by six (vertically integrated) companies: Npower (RWE), E.On, Centrica, SSE, SP and EDF Some small „niche‟ suppliers (in domestic market, mostly innovative or green suppliers) Supplier obligations to comply with licence within the regulatory framework. Rules to prevent anti-competitive action such as cross subsidy. 9 Electricity Market Reform Slide 9
    10. 10. How the system balances Generators System Operator (National Grid) Balances generation and demand efficiently Regulated by Ofgem Residual pool managed by System Operator through balancing mechanism Balancing mechanism Matches generation to demand Ensures delivery at times of system stress Costs recovered from generators through charges Suppliers 10 Electricity Market Reform Slide 10
    11. 11. ElectricityElectricity trading Trading Gate closure: positions notified to grid; open market trading ends Forward Trades Balancing Mechanism Prompt OTC and Bilateral, often via Brokers Delivery of electricity Exchanges Within -day hours ahead: Season ahead Month Ahead Week Ahead •Bulk of trading, to remove volatility, provide security •Reflects long term market fundamentals 11 11 December 2013 Day Ahead •Last minute adjustments, wind, peaking marginal plant •Reflects shorter term market fundamentals Electricity Market Reform 3 2 1 1hr 30 mins Distress markets Slide 11
    12. 12. Governance and operation of the system Government • Government establishes a transparent and stable legal framework, Decides which activities should be licensed Sets objectives of independent regulator • • Independent Regulator: Ofgem • • • • • 12 Protect the interests of consumers through competition. Administers licensing regime to achieve policy objectives. Regulates monopoly companies which run the gas and electricity networks – sets price controls Has role in enforcing competition law in energy sector. Independence is a part of EU law System Operator: National Grid • • • • Balances generation and demand efficiently Regulated by Ofgem Matches generation to demand on a second by second basis Ensures delivery at times of system stress (margin c. fifth of generating capacity) Costs recovered from generators through charges Electricity Market Reform ELEXON • • Effective and efficient implementation of the Balancing and Settlement Code. Rules and governance arrangements for electricity balancing and settlement in Great Britain. Slide 12
    13. 13. Agenda Overview of session • How the electricity market works in the UK including • EMR – our strategic approach and objectives, what we are trying to achieve • EMR – relating to new nuclear, drawing on the key terms agreed with EDF 13 Electricity Market Reform Slide 13
    14. 14. What we are trying to achieve • Decarbonisation, security of supply and affordability to consumers • Planned course of action to achieve 2020 targets, on path to 2050 • To meet these challenges an estimated additional 40 – 70GW of new low carbon capacity will be needed by 2030 • Energy is essential for economic growth – it‟s th biggest infrastructure sector • Current market arrangement and incumbent investors are unlikely to be able to deliver the required investments • Transition to a competitive market 14 Electricity Market Reform Slide 14
    15. 15. Electricity Market Reform Contract for Difference (CfD)     Long term price certainty (“strike price”), indexed to inflation Private law contracts with Government-owned counterparty 15-year contracts for renewables (except biomass conversion) CCS and nuclear projects also eligible Capacity Market    New contracts for capacity First auction in 2014 for delivery in 2018/19 Open to supply-side and demand-side measures including storage.    Long-term certainty of the cost of carbon Started April 2013 Price (in 2009 terms): £16/tCO2 in 2014 rising to c. £30/tCO2 by 2020   Regulatory cap restricting CO2 emissions from new power stations. 450g/kWh allows new CCGT but not new unabated coal-fired power Carbon Price Floor Emissions Performance Standard 15 Electricity Market Reform Slide 15
    16. 16. The complete market reform framework 16 Electricity Market Reform Slide 16
    17. 17. CfD introduces a number of benefits for developers 1 2 3 4 5 17  Reduced wholesale electricity price exposure by providing a fixed strike price to developers, therefore stabilising project revenue  Robust and reliable private law contractual arrangement providing developers with a clear set of rights and obligations, and recourse to arbitration/expert determination processes to resolve disputes  Robust single counterparty owned by government and set up as a limited liability company  Early certainty and security of support levels in the project development process  Provision of an element of protection against those risks that are outside the developer’s control (e.g. change in law, force majeure, grid connection delay) Electricity Market Reform Slide 17
    18. 18. Robust single contract counterparty Key characteristics Control over the CPB • Single counterparty body (“CPB”) set up as a UK limited liability company owned by UK government • Likely to have a settlement agent balancing payments between suppliers and generators • SoS has significant control up front over design of contracts, agreeing strike prices and setting maximum costs. • CPB will need to seek consent of SoS before agreeing to certain matters under the CfD • However, SOS has no rights under the contract and cannot impose any settlement or decision on the generator CfD levy CPB support mechanisms       18 CPB will have the duty to raise a levy from UK suppliers to fund ongoing obligations under the CfD Suppliers will be bound by a licence obligation to honour levy raising requests from the CPB Penalties or ultimately revocation of their supply licence for failure CPB levy powers will be set out in primary legislation CPB will be set up as an insolvency remote vehicle.   Notwithstanding the limited probability of default (given the remote risk of CPB insolvency), we have sought to design a system that limits any potential losses to generators The various lines of defence that protect the CPB from any unsecured losses upon a supplier default occurring are: Supplier Collateral, Mutualisation, Supplier of Last Resort, Energy Supply Company Administration regime and potentially an insolvency reserve fund. Electricity Market Reform Slide 18
    19. 19. Sustainable framework: Stability for investors and protection of the consumer LCF trajectory 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 £4.30bn (2011/12 prices) £4.90bn £5.60bn £6.45bn £7.00bn £7.60bn  Levy Control Framework (“LCF”) is a budget which sets out the maximum support for low carbon generation on an annualised basis. This include obligations under CfDs. The LCF is sized to enable us to meet our 2020 renewables target.  Transparency provides clarity for investors about the likely availability of support for a project commissioning in a particular year.  It is likely that regular information on remaining CfD budget will be available once allocation is under way.. 19 Electricity Market Reform Slide 19
    20. 20. 20 Electricity Market Reform Slide 20
    21. 21. Stage 1: Administrative price setting Stage 4: Lowcarbon investment driven by high, sustainable carbon price Long-term vision is for low-carbon technologies to compete on cost Stage 2: Technology specific competition Stage 3: Technologyneutral competition 21 Electricity Market Reform Slide 21
    22. 22. Timetable Final design Legislation Publications  Consultation on EMR implementation  Final Delivery Plan 22  Energy Act 2013  Secondary legislation laid in Spring 2014 Electricity Market Reform System  Contract for Difference, including payments and settlements goes live before end 2014  Capacity Market, including auction design Electricity Market Reform Slide 22
    23. 23. … and it‟s happening The first practical point is that this is the year that EMR really happens. We are on track for our delivery timescales. We have already published draft secondary legislation (in October). In December we finalised the strike prices for the CfDs and published 300+ pages of near-final contract. In the next few months we will be: • putting our finalised secondary legislation into the House and seeing it take effect (by the end of July, when the House rises); • at that point seeing the counterparty body go live; • we are in the midst of the process to appoint a Chair to the CPB; • we will be ready to sign investment contracts under the FIDeR programme around Easter; • the first allocations of contracts under the enduring regime will happen in October or November; and • the first capacity auction will take place in December 23 Electricity Market Reform Slide 23
    24. 24. … and it‟s happening Second, and perhaps more interestingly, it’s not just a story about jam tomorrow. The investment is starting to happen now. In particular: • EMR underpins the Hinkley deal, as you know. The fact that EDF are prepared to commit to a multi-billion pound project is a massively positive sign for the arrangements we‟re setting up; • similarly the very high level of interest in the FIDeR programme – including some very big projects in offshore wind and biomass – shows that we are at the point where EMR is starting to unlock investment in renewables; and • while this isn‟t something the Government would take a view on a number of analysts I‟ve spoken to have commented on the activity around projects changing hands with interested developers taking projects off those who aren‟t going to take them up – we‟ve already seen Horizon and more recently Race Bank, and there are a number of others in the ether. 24 Electricity Market Reform Slide 24
    25. 25. Objectives and Agenda Overview of session • How the electricity market works in the UK • EMR – our strategic approach and objectives, what we are trying to achieve • EMR – relating to new nuclear, drawing on the key terms agreed with EDF 25 Electricity Market Reform Slide 25
    26. 26. New nuclear and CfDs • The UK Government‟s intention is that future Contracts for Difference (CfD) allocation for nuclear projects takes place through competitive project selection processes, wherever practical and effective. • This is in line with the UK Government policy of increasing competition within and between low-carbon technologies, which over time will assist with meeting Government‟s goals for least-cost decarbonisation of the power sector over the longer term, and should also facilitate more effective management of the Levy Control Framework. • Bilateral negotiation remains an alternative for nuclear CfD allocation where competitive processes are not practical. In such circumstances, any final allocation decision would still be subject to strict value for money considerations and an assessment of overall budget constraints. It is open to Government to amend any budget allocation between technologies, which may be an important way to foster inter-technology competition and maximise value for money. 26 Electricity Market Reform Slide 26
    27. 27. Bilateral negotiation – Hinkley Point C • During the transition from the existing market to CfDs under Electricity Market Reform, the UK Government has been aware of the risk of an investment hiatus whilst the institutions and legal framework necessary to manage CfDs are established. • To avoid an investment hiatus, the UK Government introduced a „final investment decision enabling‟ (FIDe) process under which developers whose projects were at serious risk of significant delay or cancellation, to approach the UK Government with the aim of receiving an „Investment Contract‟ which would be an early form of CfD. • For nuclear, EDF Energy approached us about an Investment Contract for its new nuclear project at Hinkley Point C. Since March 2012 the UK Government has been in discussion with EDF about the terms of an Investment Contract suitable for Hinkley Point C. We have been clear that an investment contract must be value for money and affordable to energy bill payers. • On 21 October 2013, the negotiations were sufficiently far advanced to announce that there had been agreement with EDF on the key commercial terms including Strike Price and duration of the proposed contract. • This agreement remains subject to further negotiation on the investment contract itself, EU State aid clearance and the passing of the Energy Bill through the UK Parliament. 27 Electricity Market Reform Slide 27
    28. 28. Hinkley Point C agreement • A “Strike Price” of £89.50/MWh fully indexed to the Consumer Price Index. • This price benefits from an upfront reduction of £3/MWh built in on the assumption that EdF will be able to share the first of a kind costs of the EPR reactors across the Hinkley Point C and Sizewell C sites. If EdF does not take a final investment decision on Sizewell C, the Strike Price for Hinkley will be £92.50/MWh. The development of Sizewell C will be subject to relevant consent and regulatory and other approval procedures at the appropriate time. • A contract difference payment duration of 35 years, from the earlier of the point at which each reactor at Hinkley Point C becomes commercially operational and the last day of the target commissioning window for that reactor, subject to satisfaction of certain conditions. • A range of gain share arrangements, adjustment, re-openers and protections to reflect the fact that over the 35 year duration the market, legal and political contexts are likely to change, and to prevent the developer either being overcompensated or undercompensated. • We believe that an investment contract based on this agreement will be value for money, fair and affordable as well as consistent with EU State aid rules. 28 Electricity Market Reform Slide 28
    29. 29. Links to policy detail Publications relating to policy decisions about the CfD and draft strike prices; and the Capacity Market https://www.gov.uk/government/news/new-energy-infrastructure-investment-to-fuel-recovery Publication of the draft delivery plan for consultation https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/223650/emr_d elivery_ plan_consultation.pdf Publication of CfD contract details and allocation process https://www.gov.uk/government/publications/electricity-market-reform-contracts-fordifference Department of Energy and Climate Change 3 Whitehall Place London SW1 2AW https://www.gov.uk/government/organisations/department-of-energy-climate-change 29 Electricity Market Reform Slide 29
    30. 30. Dr. Tim Stone CBE tim@alpha-n.co.uk 30 Presentation title - edit in the Master slide α⇒ n