EMR Delivery Plan: Methodology workshop


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The Government will publish the draft EMR Delivery Plan in July 2013. This sets out the Government’s proposed draft strike prices for renewable projects and the plans for a capacity market. Everyone with an interest will have the opportunity to respond to the consultation before final strike prices are set at the end of the year.

In preparation for this DECC has produced an explanation of the methodology underlying the analysis being undertaken to help inform Ministers’ decisions on strike prices.

The explanation is designed to help prepare stakeholders for the consultation in July 2013, enabling them to better understand and respond to the content.

The consultation events held during the summer 2013 will be interactive sessions, during which there will be ample opportunity to raise any queries which these slides may generate.

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EMR Delivery Plan: Methodology workshop

  1. 1. EMR Delivery PlanMethodology Workshop20 June 2013
  2. 2. Welcome and introductionMark Holden
  3. 3. Workshop Programme3Item Content Lead1 Welcome and introductionQ&AMark Holden2 The analytical approachQ&AAlon Carmel3 The dynamic dispatch modelQ&AJames Steel4 Any further questions Mark Holden5 Closing remarks Mark Holden
  4. 4. EMR – Key components and milestonesDate MilestoneMay/June 2013 Capacity Market final design proposals publishedJuly 2013 CfD contract terms publishedJuly 2013 Draft delivery plan, including draft strike prices for renewable projects,published for consultationJuly 2013 Further detail on CfD allocation and price setting processes for CCS andnuclear projects after close of CCS completion / FIDOctober 2013 onwards Government consultations on Secondary Legislation for EMRBy the end of 2013 Energy Bill receives Royal Assent, subject to Parliamentary time and thewill of ParliamentBy the end of 2013 First delivery plan, including final renewable CfD strike prices published(subject to Royal Assent)2014 EMR Delivery mechanisms up and running4
  5. 5. 5Content of the first EMR delivery planDescription1. Executive summary:Introduction to EMR and the Government’s objectives2. Introduction: Purpose and role of the Delivery Plan; Ongoing Delivery Plan process3. CfD:Introduction and cross reference to relevant documents (eg CfD terms)CfD Strike Prices for 2014/15 – 2018/19Decisions on any further cost-control mechanisms4. Capacity Market:Introduction and cross reference to relevant documents about the capacity mechanismReliability standard for the Capacity Market5. Forward look to 2030:A summary of anticipated technology mix to 2030 based on CfD and Capacity MarketdecisionsAnnex A Explanation of the analytical process followed in reaching the decisionsAnnex B National Grid analysis, demonstrating the impact of the decisions above on Government’sobjectivesAnnex C Detailed explanation of the capacity assessmentAnnex D Methodology underlying the reliability standardAnnex E Updated EMR Impact AssessmentAnnex F Prices and Bills analysisAnnex G Scrutiny report from the Panel of Technical Experts
  6. 6. Future Delivery PlansAdministrative price setting forrenewables and tailoredarrangements for certain projects,competitive price setting expectedfor some technologies.Some technology specificauctions or tenders,administrative price setting forothers, tailored arrangementsfor certain projects if required.Technology specific auctions for alltechnologies where ready (withtailored arrangements for certainprojects), moving to technologyneutral auctions when possible.Fully competitive and openelectricity market2013 Delivery Plan(2014-2018 outlook to 2030)2018 Delivery Plan(2019-2023 with longer termoutlook)2023 Delivery Plan(2024-2028 with longer termoutlook)Expected phaseof EMRNo delivery planDelivery plancontent:Annual updatecontentExpect need for Governmentintervention in electricitymarket to be significantlyreduced.The wholesale electricity priceand a sustainable carbon pricedetermine the technology mix.Enduring CfD contractsmanaged by the CFDCounterparty with EMRdelivery body as necessary.Capacity Market agreementsmanaged by the EMR deliverybody.Updated analysis and deliveryinformation provided onenduring CfD and CapacityMarket agreements.Outcome from Capacity Market auction, if initiated, the associated delivery year and the indicative capacity tocontract for in the next auctionFuture CfD decisions (e.g. 2015 annual update renewable strike prices for later years of decade);Forward look and signposting of the timeline for key changes in the operation of the mechanisms, e.g. the timing ofthe move to competitive price setting for CfDs;Delivery information and updated analysis as necessary.Illustrative scenarios includingpathways for meeting objectivesand low carbon technology mix to2030.Impact analysis of policy decisionson Government’s objectives.Government’s objectives;CfD strike prices for renewablesfor 2014/15 - 2018/19;Long-term reliability standard forCapacity Market, if initiated.Government’s objectives;The information needed forcompetitive price settingprocesses.Government’s objectives;CfD strike price for renewables orthe necessary informationrequired for competitiveprocesses.Investment in low-carbon generation also be supported by the Carbon Price Floor & Emissions Performance Standard. EMR mechanismswork within the current electricity market, including the Renewables Obligation and the small-scale Feed-in Tariffs.WhenmarketconditionsallowDelivery plananalysis:Supporting analysis toGovernment’s decisions e.g.impact analysis of policy decisionson Government’s objectives.Supporting analysis toGovernment’s decisions e.g.impact analysis of policy decisionson Government’s objectives.6
  7. 7. The modelling processAlon Carmel
  8. 8. • National Grid have modelled a range of different policy choices (CfD strike prices forrenewables and Capacity Market reliability standard)• The analysis shows the impacts of these different policy choices on the Government’sobjectives– Decarbonisation– Renewable energy target– Affordable energy– Security of supply• The modelling (using an updated version of the DDM model) shows– What capacity gets built– How much electricity is generated by different technologies– What the wholesale price is– What the LCF costs are– What the system balancing, network and inertia costs are82. The analytical approach
  9. 9. • National Grid have also conducted sensitivity analysis to illustrate how resilientperformance against the Government’s objectives, including on:– Technology costs: high and low– Fossil Fuel Prices: high and low– Electricity Demand: high and low92. The analytical approachcontd.
  10. 10. a) Decarbonisation – the UK is on a pathway to reduce its greenhouse gasemissions by at least 80% by 2050 and meet its carbon budgets;b) Renewables target – there is sufficient investment in sustainable lowcarbon technologies to accelerate deployment and put the UK on thepath to achieving existing legally binding targets including the 2020renewables target, and the 2050 economy wide emissions reductiontarget, while driving down the cost of energy over time;c) Affordable energy – the EMR policies are implemented in a manner thatmaximises the benefit and minimises the cost and other potentialnegative impacts of the mechanisms to consumers; andd) Security of supply – there is a secure electricity supply with sufficientinvestment in reliable capacity to minimise the risk of blackouts.The Government’s Objectives for the EMR Delivery Plan(from Annex E – The Delivery Plan November 2012)2
  11. 11. The Dynamic Dispatch ModelJames Steel
  12. 12. The DDM is an electricity supply model, whichallows analysis of the impact of different policydecisions on dispatch and investment decisions12For electricity, supply must equal demand at every instant.Supply side: In real world and model, power stations are turned on(‘dispatched’) in order of their short run marginal cost (SRMC), which is definedby fuel, carbon and other operational costs (all of which can change over time).It is measured in £/MWh.This results in a generation merit order, effectively a within year costminimisation.Matching supply and demand: The system SRMC is calculated bymatchingdemand against the merit order and taking the SRMC of the marginal plant tomeet demand. The wholesale price is equal to the system marginal priceplus the value of capacity (mark-up).
  13. 13. Taking into account dispatch, retirement andinvestment decisions, the model derives themerit order.130204060801001201401601800 10 20 30 40 50 60Meritorderprice(£/MWh)Cumulative capacity (GW)Annual merit orderCCGTCHPCoalGTOil_steamWind_OnshoreWind_OffshoreNuclearLarge_BiomassDemandIllustrative Annual merit order
  14. 14. The DDM is an electricity supply model, whichallows analysis of the impact of different policydecisions on dispatch and investment decisions14Dispatch over time also needs to consider changes to the stock of powerplants (‘dynamic’ element) due to regulatory/economic retirements and newbuildIn investment decision making the model considers an example plant of eachtechnology and estimates revenue and costs in order to calculate an IRR,which is then compared to the technology’s hurdle rate. Plant clearing bymost is built first and the process continues until no more plant clears itshurdle rate.Plant cashflows can be influenced through policy tools, resulting in lower/higherIRRs and therefore impacting on investment and dispatch decisions.Limitations to investments can be entered into the model such as minimumand maximum build rates per technology, per year, and cumulative limits.
  15. 15. A summary of the workings of theDDM and the resulting outputs15Commodity pricesSample day dataDemandPlant availabilityPlant dataNew plant dataConstruction costsHurdle rateInvestorbehaviourPolicyimpactsDispatchmoduleNew plantmoduleInvestmentdecisionsNew buildRetirementsSecurity of supplyWholesale pricesEmissionsPolicy costsInvestors appraisepotential investmentlooking at what willhappen to fuel cost,prices, demand, thegeneration mix etc overnext [five] years.The rate of return required by aninvestor to make an investment.Can be adjusted if policies changethe riskiness of investments.Strike prices,CapacityMechanismAt half-hourlyresolution
  16. 16. 16Plant Data & Availability• Assumptions on:• Existing Plant• Pipeline Plant• IED and LCPD Plant (including running hour restrictions)• Biomass conversions (+cost/technology information)[INPUT FILE: Existing Plant]• New Plant [INPUT FILE: Data]• Interconnectors [INPUT FILE: Interconnectors]• Autogeneration [INPUT FILE: Autogeneration]Note: DDM is non-spatial (NG has done supplementary work on networks)Dispatch Module
  17. 17. 17Demand & Sample Day Data• DDM runs on sample days (a set of typical types of days in each quarter for bothdomestic/non-domestic sector)• Business days• Non-business days• Low demand days• Peak• Superpeak• Hyperpeak• Demand load curves are at half-hourly intervals.• 3 levels of wind load factor data applied to the sample days to reflect theintermittency of on- and offshore wind.[INPUT FILE: Demand projections and Daily Load Curves (new)]Dispatch Module
  18. 18. 18New Plant Data & Construction Costs• Costs and technical information• Renewables: RO Banding Review Government Response• Non-renewables: PB (2012) [INPUT FILE: Data, New Plant]• Note: Costs have been updated for the Delivery Plan analysis• Maximum build rates• Renewables: Annual build constraints from RO Banding Review GovernmentResponse (based on Arup 2011) as updated for the Delivery Plan analysis• Non-renewables: Annual build constraints from DECC technology offices,based on industry engagement [INPUT FILE: Maximum build limits]• Supply curve approach• Renewables are modelled using a supply curve, i.e. combininglow/medium/high cost data points with build constraints, to reflect site specificvariation in cost and load factors.New Plant Module
  19. 19. 19Hurdle rates & Investment behaviour• Hurdle rates: RO Banding Review Government Response and Oxera (2011) asupdated for the Delivery Plan analysis[INPUT FILE: VIU Assumptions, Merchant Assumptions]• Investment behaviour• 5 year foresight on fuel cost, wholesale prices, demand, generation mix etc• Economic retirements [INPUT FILE: Endogenous closures]• Forward looking• Once made 2 years of losses, plant considers retiring by looking over next 5 years• Capacity payments [OUTPUT FILE: CM Auction]• Eligible plants look five years ahead. If loss making bid in cost that needs to becovered through CM. If profit making bid in zero.Investment Decisions
  20. 20. Analysis of policy optionsPolicy options that can be modelled includeGeneral•Carbon price floor•Emissions performance standard (bubble/kWh limit)Technology specific•Contracts for Difference (with day ahead and seasonal/annualreference prices)•ROCs•LECs•Capacity Mechanism (new/existing plants)
  21. 21. 21Wholesale prices• Mark-up:• Reflects historic data• Generally difficult to measure accurately as high margins over the lastyears which complicates extrapolation to periods of tight margins.• Impact limited due to capacity mechanism and high margins currentlyOutputs
  22. 22. Network Modelling22National Grid have developed additionalmodules linked to DDM outputs to cover• Network Costs• Calibrated against the Transmission costs and TNUoS modelling for their GoneGreen scenario• Constraint Costs• Calibrated against Plexos outputs for a number of scenarios• Inertia Costs:• Estimates of Inertia costs are also included
  23. 23. Summary and further questionsMark Holden