Presentation to Fifth Green Growth Knowledge Platform Annual Conference
Sustainable Infrastructure World Bank, Washington DC, 27-28th November 2017
Michael Grubb
Professor of Energy and Climate Change,
University College London (UCL) – Institute of Sustainable Resources & Energy Institute
Chair, UK Panel of Technical Experts on Electricity Market Reform
UK Electricity Market Reform: Lessons from a policy and regulatory journey
• Broad evolution of UK policy & regulation
• EMR reforms: instruments & emerging results
• Lessons & regulatory journey
Figure 1 The dash for gas the decline of coal, a competitive market & Elec Market Reform
Source (data): Digest of UK Energy Statistics, various years
Figure 1: UK electricity generation by fuel, 1970-2016
Policy environment Regulatory remit
1990s
First liberalisation- Competition through electricity pool- System marginal price + capy payment “Dash for gas”, based on Long term
contracts (PPAs) with distribn companies Some contract support for renewables Collapse of R&D
“Promote competition”
Concerns about oligopolistic power
2000s
Bilateral trading market (NETA/BETTA)- No pool, pure marginal cost pricing- Vertical integration of generators with
supply companies; Limited investment Market certificate trading (ROCs) support
for renewables
“Protect interests of consumers”
Growing concerns about lack of investment or new entry, transmission connection & bottlenecks, and short-termism
2010s
Electricity Market Reform (EMR)+Climate Change Act
“Protect interests of present and future consumers”
UK electricity journey – overview
• Academic struggles between idealised theory and emerging evidence around overall investability
• Nuclear & renewables seen as key to future• Energy transition estimated to involve over £100bn
investment during 2010s – beyond the pockets of incumbents, terms of finance crucial
• Political evolution: Rising energy prices Climate Change Committee (2008) concern around low
carbon / capital intensive investment, amplified by inadequate C price
Ofgem (regulator) concern around security
UK Electricity Market Reform - Background
• Controversial step for a pioneer of electricity liberalisation
• Ofgem’s Project Discovery (2009) – Regulator’s detailed study of the future challenges of the electricity market
• Addressing key risks identified became the three aims of EMR:
5
Electricity Market Reform (EMR)
Reduce the risks to security of
supply
Support progress
towards climate change targets
Reduce costs to consumers
1 2 3
Presentation to Fifth Green Growth Knowledge Platform Annual Conference
Sustainable Infrastructure World Bank, Washington DC, 27-28th November 2017
Michael Grubb
Professor of Energy and Climate Change,
University College London (UCL)
Chair, UK Panel of Technical Experts on Electricity Market Reform
UK Electricity Market Reform: Lessons from a policy and regulatory journey
• Broad evolution of UK policy & regulation
• EMR reforms: instruments & emerging results
• Lessons & regulatory journey
7
Contracts for Difference
(fixed-price 15-yr contracts)
Capacity Mechanism
(capacity payments on availability)
Carbon floor price
Emissions Performance
Standard
4 Key Policies
EMR brought major changes to the market. Main regulatory input on design of Capacity Mechanism and overall institutional
Security of Supply
Low Carbon Support
No new coal
What is EMR?
Initial gain from auctions followed by huge offshore wind cost reduction
Source: From M.Grubb and D.Newbery (2017), ‘UK Electricity Market Reform and the Energy Transition:
Emerging Lessons’, MIT working paper (submitted) * 15-yr Contract prices
£0
£20
£40
£60
£80
£100
£120
£140
£160
£180
Str
ike
Pri
ce
(£
/MW
h)
2013/14 2015/16 2017/18 2019/20 2021/22
Round 1 Admin Strike Price (Offshore Wind)
Round 1 Contracts - Offshore Wind / ACT
Round 2 Contracts - Offshore Wind
£155 £155£150
£140 £140
£57,50 (Hornsea II, Moray East)
£74,75 (Inc. Triton Knoll)
£114.39 (Inc. Neart Na Gaoithe)
£119,89 (Inc. East Anglia 1)
2014, administered CfD prices, £140-£150 /MWh*
2015, first auction, offshore wind price: £114.39/MWh2017, second auction, two projects at £57.50/MWh Competitive CfDs drive down cost – hardware,
supply chain & finance (Newbery (2015) estimates CfDs reduced WACC by 3 % points – saving > £2bn/yron estimated cost of energy transition).
boost to UK low-carbon supply chain, as part of government’s emerging ‘Clean Growth Plan’
Delivery years(to first generation)
Allocation / auction rounds
prices halve
4 years difference in delivery years
strike price for five offshore wind farms depending on completion date
Gains from auctioned contracts
Why
How
10
2. Capacity Mechanism / Market(to reward ‘firm’ generating capacity)
• Ensure market can deliver security of supply• Payment for availability to encourage investment
• Market wide auction of capacity obligations, run by National Grid• Successful bidders get fixed revenue additional to wholesale market• Obligated to deliver capacity when needed or face penalties• Technology neutral – but those receiving CfDs are not eligible• Pilot scheme to help Demand Side Response (DSR)
Reduces price volatilityInsurance against blackoutsEncourages demand side - somewhat? Expected cost – estimate required for new CCGTs, around £50/kw/yr Would give £2.5bn/yr into market, much expected to pass through ? Less peaky prices – impact on interconnector / other investment× Design makes it very difficult for DSR to participate equally
Effect
Lots of bids, low prices, new options, lots of angst ..
(b) Successful New Build capacity by fuel and technology type in the T-4 auctions
First main capacity auction (Dec 2014)
Almost 50GW awarded, clearing price 19.40/kW/year*
Mix of 1-year, 3-year (refurbishment) and 15 year
(2.5GW of new build out of 10GW bid) contracts
Mainly existing nuclear, gas and coal generators
One new CCGT (1,650MW) wins an agreement – but
failed to raise final investment
Only 174MW of demand side response
2.5GW of capacity reserved for 2017 1-year ahead
auction
Second main capacity auction (Dec 2015)
Clearing price £18.00/kW/year
46.35GW awarded – new options replace retiring coal
Interconnectors, 1GW of small reciprocating engine
Concern about diesel
Third main capacity auction (Dec 2016)
Clearing price £22.50/kW/year
52.43GW awarded, inc 3.4 GW new capacity – over
500MW batteries
New diesel largely excluded, but wider concern about
‘embedded benefit’ exemptions from transmission
0
500
1000
1500
2000
2500
3000
3500
2014 for 2018 2015 for 2019 2016 for 2020
MW
New build in Capacity Auctions
Battery Reciprocating engine CHP Waste CCGT OCGT CCGT Withdrawn
Capacity: be careful what you ask for …
Floor price designed to give market value to the government’s Social cost of carbon, through top-up to EU ETS price
- Quickly renamed ‘Carbon Price Support’ (CPS)
Combined with the Emissions Performance Standard, effectively bans new coal and improves economics of gas vis-à-vis existing coal plants
Carbon price floor – compelling economics
Beihang: Planetary Economics and the Political Economy of Energy & Climate ChangeMission accomplished .. ?
Likely to overdeliver on the UK renewables targetDramatic (80%) fall since 2012: first hours / days without coal power for over a Century Driven as declining gas price meets rising carbon price, and renewables + (2016) gasNov 2017: carbon price ‘about right’ till coal phased out Carbon Price Support
£/tCO2, added to EU ETS30
15
£4.94/tCO2
£9.55/tCO2
£18/tCO2
C-Price support doubled to £18/kWh
CPS
0-
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
Gen
erat
ion
fro
m c
oal
, TW
h/y
r
GB coal power generation, 2012 - Q2 2017
Presentation to Fifth Green Growth Knowledge Platform Annual Conference
Sustainable Infrastructure World Bank, Washington DC, 27-28th November 2017
Michael Grubb
Professor of Energy and Climate Change,
University College London (UCL)
Chair, UK Panel of Technical Experts on Electricity Market Reform
UK Electricity Market Reform: Lessons from a policy and regulatory journey
• Broad evolution of UK policy & regulation
• EMR reforms: instruments & emerging results
• Lessons & regulatory journey
Three Components of Impact Assessment
Impact Assessment
Strengthening analysis of these issues is designed to more systematically represent issues related to the interest of future consumers, complementary to a monetised CBA
Improved consistency
Increased transparency
Monetised aggregate Cost-Benefit Analysis
Social & distributional
impacts
Explicit consideration of
strategic & sustainability
issues
Regulatory dimensions includeRemit (future consumers?) and metrics
• For Strategic (“Third Domain”) investments – eg security and sustainability inc emerging renewables - a role for government is inescapable– The public benefits exceed any risk-adjusted return in spot market
• Can shifting some risk to government (eg. long term contract) be good? Yes if– the risks arise from private perception of policy risk;
– markets (particularly capital markets) are myopic; or
– the benefits are partly public (eg. Due to inadequate environmental pricing, or innovation / learning, etc)
• Do we need a Capacity Mechanism in addition to low carbon supports?– Yes in UK conditions – but scope is crucial, so too is design
• Auctions are very valuable – competitive pressures remain important– Better than government decision at cutting costs / finding options
• Institutional complexities – contracting bodies and their governance
• Transmission and distribution – new frontiers?
UK Electricity Market Reform - Key lessons
• Does the EMR takes us back towards public control or new forms of competition arising from auctions?– More State involvement – but still using competition, in more efficient
way?– Some risks of perverse incentives remain (eg. Metered output)– “Subsidising” coal (CM) whilst trying to phase it out (C price)
• As renewables grow, will need more time- and location- market signals
• “Exit Strategy?” - Revolution or evolution? – May be an evolving revolution – New market structures needed for time and locational signals for
investment and ‘distributed service providers’ ?– Can / should we move towards a “contracts market” (eg. long term
green consumer contracts, community energy, bundled service contracts) as renewables costs fall?
EMR - Some outstanding questions