State Aid Analysis for Electricity Market Reform

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1 State Aid Analysis for Electricity Market Reform Richard Green and Iain Staffell Imperial College Business School 1

2 Background UK government wanted to sign a 35-year Contract for Differences with EdF for the output of Hinkley Point C per MWh ( if Sizewell C is built) EU law prohibits State Aid to industry unless it meets strict criteria Lawful objective (something worth doing) Effective (changes decisions) Proportionate (no undue profits) DG Comp of the European Commission had to investigate and decide whether it was lawful State Aid How can you investigate effectiveness unless you can predict what would otherwise have happened Imperial College Business School 2

3 MOSSI model structure Plant capacities Demand profile Plant utilisation, revenues and profits, wholesale prices, welfare and surpluses Dispatch module Simulate plant operation within the year to give lowest cost of electricity Renewable output profile Plant data Fuel prices Market rules Imperial College Business School 3

4 Load duration curve, merit order stack and prices GW OCGT /MWh Marginal Cost of Demand Response. CCGT. Coal. Nuclear Hours Marginal Cost of CCGT Marginal Cost of Coal Marginal Cost of OCGT Hours Imperial College Business School 4

5 Load duration curve, merit order stack and prices GW OCGT /MWh Marginal Cost of Demand Response. CCGT. Coal. Nuclear Hours Marginal Cost of CCGT Marginal Cost of Coal Marginal Cost of OCGT Hours Imperial College Business School 5

6 Load duration curve, merit order stack and prices GW OCGT /MWh Marginal Cost of Demand Response. CCGT. Coal. Nuclear Hours Marginal Cost of CCGT Marginal Cost of Coal Marginal Cost of OCGT Hours Imperial College Business School 6

7 Fuel Price Assumptions (courtesy of DECC) Imperial College Business School 7

8 Generator Cost Assumptions (courtesy of DECC) Capital Cost ( /kw) Nuclear Thermal Efficiency CCGT CCGT CCS Coal CCS Coal Coal CCGT CCS CCGT OCGT Nuclear Coal CCS OCGT Imperial College Business School 8

9 MOSSI model structure Plant capacities Demand profile Plant utilisation, revenues and profits, wholesale prices, welfare and surpluses Dispatch module Simulate plant operation within the year to give lowest cost of electricity Renewable output profile Plant data Fuel prices Market rules Imperial College Business School 9

10 MOSSI model structure Available technologies Capital costs Discount rates Plant utilisation, revenues and profits, wholesale prices, welfare and surpluses Investment module Build and retire capacity so that all technologies cover their costs Loop over each decade until investment decisions reach equilibrium Proposed plant capacities Dispatch module Simulate plant operation within the year to give lowest cost of electricity Enter if you make money now and over your lifetime Shut down if you make losses over the rest of your lifetime, ignoring sunk investment costs Demand profile Renewable output profile Plant data Fuel prices Market rules Imperial College Business School 10

11 Capacity mix over time Market without government interventions Imperial College Business School 11

12 Generation over time Market without government interventions Imperial College Business School 12

13 Prices and costs Market without government interventions Imperial College Business School 13

14 Investment versus costs Market with no government interventions Nuclear Fossil WACC: Weighted Average Cost of Capital Imperial College Business School 14

15 Prices versus costs Market with no government interventions Imperial College Business School 15

16 Capacity mix over time Market without government interventions Imperial College Business School 16

17 Capacity mix over time Market with the proposed 35-year CfD Imperial College Business School 17

18 Generation over time Market without government interventions Imperial College Business School 18

19 Generation over time Market with the proposed 35-year CfD Imperial College Business School 19

20 Prices and costs Market without government interventions Imperial College Business School 20

21 Prices and costs Market with the proposed 35-year CfD Imperial College Business School 21

22 Investment versus costs Comparing the market and the proposed CfD Nuclear Fossil WACC: Weighted Average Cost of Capital Imperial College Business School 22

23 MOSSI model structure Available technologies Capital costs Discount rates Investment module Build and retire capacity so that all technologies cover their costs Proposed plant capacities Plant utilisation, revenues and profits, wholesale prices, welfare and surpluses Loop over each decade until investment decisions reach equilibrium Dispatch module Simulate plant operation within the year to give lowest cost of electricity Demand profile Renewable output profile Plant data Fuel prices Market rules Imperial College Business School 23

24 MOSSI model structure Available technologies Capital costs Discount rates Investment module Build and retire capacity so that all technologies cover their costs Proposed plant capacities Risk premia Plant utilisation, revenues and profits, wholesale prices, welfare and surpluses Loop over each decade until investment decisions reach equilibrium Dispatch module Simulate plant operation within the year to give lowest cost of electricity Demand profile Renewable output profile Plant data Fuel prices Risk module Test alternate forecasts, assess profit variance and impact on discount rates Run stochastic trials on each decade s equilibrium capacity Parameter distributions Fuel prices and renewable profiles Market rules Imperial College Business School 24

25 Risks once fuel prices vary Market with no government interventions Returns over and above the cost of capital Wholesale price X X X X Imperial College Business School 25

26 Risks once fuel prices vary Market with the proposed 35-year CfD Returns over and above the cost of capital Wholesale price X X X Imperial College Business School 26

27 Outcome Report published alongside Commission decision to initiate the formal investigation procedure in March 2014 Further analysis and negotiations (we were not involved) Commission approved a revised contract in October Claw-back term if the station cost less than expected was strengthened, potentially reducing cost to UK consumers Claw-back if the station makes more than expected over its lifetime (60-year psuedo-cfd?) Imperial College Business School 27

28 Thank you Iain will now answer questions Imperial College Business School 28

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