IEEJ: March 2015. All Rights Reserved.

Electricity Market Reform and theUK's liberalised energy market
The Institute of Energy Economics JapanTokyo
3 March 2015

Jim Skea
Research Councils UK Energy Strategy Fellow

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Structure of talkDrivers of Electricity Market Reform (EMR)
What problem is EMR intended to resolve?
Historical context
Elements of EMR
Future policy options

IEEJ: March 2015. All Rights Reserved.

The drivers of electricity market reform (EMR)

1) Climate change policy (Climate Change Act 2008)

2) EU Renewable Energy Directive 2009
• implies ~30% renewable electricity by 2020
• (15% energy including heat and transport)

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Changing energy policy priorities
climateaffordabilitysecurity

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UK carbon budgets

Source: UK Committee on Climate Change

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Progress in meeting carbon budgets

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Decarbonisation will require 30-40 GW new low-carbon
capacity through the 2020s

36 GW new capacity
in 2020s

Note: Intermittent technologies areadjusted to be baseload equivalentIEEJ: March 2015. All Rights Reserved.

Structure of talkDrivers of Electricity Market Reform (EMR)
What problem is EMR intended to resolve?
Historical context
Elements of EMR
Future policy options

IEEJ: March 2015. All Rights Reserved.

Low carbon electricity is capital intensive…..

Source: Mott McDonald

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But intermittent generation =volatile prices in an “energy only” market

Source: Committee on Climate Change

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EMR: What’s the problem?
•Low carbon electricity generation tends to be high capital cost/lowrunning cost (fossil plant with CCS excepted)•

Investment in such plant is exposed to additional market risk in avolatile “energy only” market•

Gas plant has a natural hedge because gas prices drive electricity
prices and hence has lower risk•

The cost of capital is therefore higher for low carbon generation•

The purpose of Electricity Market Reform is to reduce market risk for
low carbon generation by offering stable prices•

This also helps to contain the cost to consumers of low carbon
electricity supply

IEEJ: March 2015. All Rights Reserved.

Structure of talkDrivers of Electricity Market Reform (EMR)
What problem is EMR intended to resolve?
Historical context
Elements of EMR
Future policy options

IEEJ: March 2015. All Rights Reserved.

Historical context
Wholesale electricity

Retail electricity

1990

1990

Privatisation - 12 regional
supply monopolies. Loads over 1
MW can choose their supplier

1994.

Loads over 100 kW can choose
their supplier

1999

Full retail competition

2014

Competition and Markets
Authority (CMA) inquiry

2001

Privatisation - Unbundling, generation
duopoly, power pool arrangements,
but bilateral contracts for differences(CfDs) emerge
New Electricity Trading Arrangements(NETA) – bilateral contracts plus spot
market for imbalances

2005

British Electricity Trading
Transmission Arrangements (BETTA)– includes Scotland

2013

Electricity Market ReformIEEJ: March 2015. All Rights Reserved.

Initial privatised structure 1990 (England and Wales)
Supply12 regional companies

Regulated
GenerationNationalPowerPowerGen
Nuclear ElectricTransmission

Distribution

National Grid

12 regional
companies

Customer

initially the same…

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Great Britain today: concentration in supply and generation

integration ofgenerationand supply

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Structure of talkDrivers of Electricity Market Reform (EMR)
What problem is EMR intended to resolve?
Historical context
Elements of EMR
Future policy options

IEEJ: March 2015. All Rights Reserved.

Elements of the Electricity Market Reform
1. Carbon price floor
2. Feed-in-tariffs though contracts for difference (CfDs) for all
low carbon generation
3. A capacity mechanism
4. Emissions performance standard
Sits on top of, does not replace, the underlying wholesale market!
Sits on top of the EU Emissions Trading Scheme!

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Carbon price floor – the EU ETS context

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Evolving carbon price support
2011

2013

2014 - carbon price support frozen at £18/tCO2 till 2019-20

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Feed-in tariffs through contracts for difference (CfDs)

Source: UK Department of Energy and Climate Change

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The four stages of EMR –how strike prices are determined
NuclearStage 1To 2017

Stage 22017 – 2020s

Stage 32020s

Stage 4late 2020s/beyond

Current
arrangements
alongside newContracts forDifference withprices set
administrativelyTechnologies
mature (but atdifferent rates)and some areable to enter
competitive,technologyspecific auctions.

Growing maturityof technologies
and movement
towards
technology
neutral auctions.

Technologies are
mature enough andthe carbon price ishigh and sustainable
enough to allow all
generators to compete
without intervention

Mature renewables

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The Levy Control Framework (LCF) –capping costs to consumers• An annual cap on EMR costs incurred by consumers• Included: Renewables Obligation, Feed-in Tariffs and Contracts
for Difference• Excluded: capacity payments and energy demand measures• £5.3bn cap in 2015-16 rising to £7.6bn by 2020-21• 20% headroom for contingencies• Believed to be compatible with 30% renewables by 2020
• LCF costs will rise with: a) lower wholesale market price; b) lower
carbon price support; c) higher capacity mechanism priceIEEJ: March 2015. All Rights Reserved.

Nuclear progress – Hinkley PointEDF Energy•

Sites at Hinkley Point and Sizewell up to 6,400 MW•AREVA EPR Passed Generic Design Assessment and site
work started – but no Final Investment Decision (FID) as yet•

Strike price agreed for Hinkley Point - £92.50/MWh,£89.50/MWh if Sizewell developed•

35 year inflation-linked contract•

Gained EU State Aid approval but Austria may appeal

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Nuclear progress – other consortia
NuGen (Toshiba, GDF SUEZ)•Moorside up to 3400 MW•

Westinghouse AP1000•

Passed Generic Design Assessment

Horizon Nuclear Power (Hitachi)•Sites at Wylfa and Oldbury, 5400 MW•

Advanced Boiling Water Reactors•Going through Generic Design Assessment

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CfD administrative strike prices for renewables

2014-152015-16

2016-172017-18

2018-19

Biomass (with CHP)

125

125

125

125

125

Biomass Conversion

105

105

105

105

105

Hydro

100

100

100

100

100

Landfill Gas

55

55

55

55

55

Onshore Wind

95

95

95

90

90

Offshore Wind

155

155

150

140

140

Wave and tidal stream

305

305

305

305

305

Large Solar PV

120

120

115

110

100

15 year contracts….

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CfD auctions allocating the funds available
Three ‘pots’ – no fungibility between them
1. Established’ technologies (onshore wind, PV, energy from wastewith CHP, hydro (all >5 MW) + landfill gas and sewage gas
2. Less established’ technologies (offshore wind, wave, tidal streametc)
3. Biomass conversion.
• If pots are undersubscribed – all get the administrative strikeprice• If pots are oversubscribed, auction is triggered and all are paid
the price of the last successful bid• Current auction process under way

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Anecdotal observations on CfD process•

Cost of capital for completed projects has fallen as planned –projects can be attractive to long-term institutional investors (e.gfpension funds)•Cost of capital for developers has gone up compared to theRenewables Obligation. The ‘less established’ technologies ‘pot’
could be used up by a single offshore wind project … therefore
risk of over-subscription and wasted preparatory work fordevelopers

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Capacity mechanism•

A market-wide mechanism for all generation nor supported byRenewables Obligation or CfDs•

Four years ahead - first auctions held December 2014 for 2018-19•

Offers for 1 year, 3 years or 15 years of provision•

65,000 MW of bids submitted, of which 49,300 MW accepted, ofwhich 9,800 MW new/refurbished plant (174 MW demand side)•

Clearing price - £19.40/kW/year – lower than expectedIEEJ: March 2015. All Rights Reserved.

Emissions Performance Standard• 450 g/kWh for new or refurbished plant• Compare to 370 g/kWh for new combined cycle gas turbine
CCGT, 900 g/kWh for existing coal
• Effectively kills new coal without carbon capture and storage(CCS)• Negotiations on two CCS projects still under way (one coal,one gas)

IEEJ: March 2015. All Rights Reserved.

Structure of talkDrivers of Electricity Market Reform (EMR)
What problem is EMR intended to resolve?
Historical context
Elements of EMR
Future policy options

IEEJ: March 2015. All Rights Reserved.

Future policy options
Certainty beyond 2020
•Carbon intensity target (g/kWh) for electricity in 2030. May be set in2016 under the Energy Act 2013. Advocated by the Committee on
Climate Change to provide certainty beyond 2020.

Continuation of unabated coal
• Falling cost of compliance with the EU Industrial Emission Directive
which would otherwise have taken coal off the system in the early2020s. Could be operating at (low load factor) in 2030
•Beefed up emissions performance standard to take existing coal off
the system (application to existing plant, degression over time from450 g/kWh) – suggested by ‘think tanks’

Reform of the EU ETS• Market stabilisation reserve

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More information

https://www.gov.uk/government/policies/maintaini
ng-uk-energy-security--2/supportingpages/electricity-market-reform

Contact: report@tky.ieej.or.jp