Investment & Performance Board (IPB)

Transcription

1 Investment & Performance Board (IPB) Date of meeting: 19 January 2016 Title of paper: Developing a New Junior Electricity Supply Licence - Progress Report To be presented by: Cleared by: Classification: Patrick Feehily, Assistant Director, Environment Matthew Pencharz, Deputy Mayor, Environment and Energy Fiona Fletcher-Smith, Executive Director, Development, Enterprise and Environment Public with appendix 2 reserved from publication (as it contains commercially sensitive information) 1 Executive Summary 1.1 This is an update report requested by the IPB on the licence lite project. The purpose of the project is to enable existing and new decentralised energy providers who generate low and zero carbon electricity in London, to sell their electricity at proper market prices, rather than be impeded from taking full advantage of the market because of its risks and complexities. 1.2 Formal application for the junior electricity supply licence (known as licence lite ) was made to the electricity regulator Ofgem on 1 March During 2014 and 2015 specialised market services required were procured under a public procurement exercise, the successful tenderer being RWE npower. A public procurement process has also been carried out (and now completed to the evaluation stage) to obtain sources of low and zero carbon electricity for the GLA to supply to consumers under its licence lite operations. The initial consumer is planned to be Transport for London (TfL). 1.3 No new barriers to completion of the project have arisen, nor have the risks materially altered and the prospects of delivering licence lite remain positive. However, there have been very substantial delays in implementing the project caused by the time taken in completing the two public procurement processes involved, particularly the procurement of the electricity generating capacity. 1.4 It is apparent from the responses to the Invitation to Negotiate issued to electricity generators that a quantity of solar generated electricity is likely to be available which will be useful in servicing continuous day time electricity demand and assist in maintaining the balance between the generators output and the electricity demand the GLA is serving. 1.5 Providing price negotiations with the electricity generators and TfL as the first consumer proceed in accordance with current estimates of market prices, the objective is for an application for a Mayoral Decision to be made during February 2016.

2 1.6 Expenditure on the project remains within budget, although there may be a need for some final commercial and financial due diligence which has not been budgeted for. 2 Recommendation 2.1 That the Board notes the report. 3 Introduction and Background 3.1 The licence lite model involves the GLA obtaining a junior electricity supply licence whereby, with the support of a fully licensed electricity supplier, it can purchase the output from low and zero carbon electricity generators in London and supply the electricity produced to public and commercial electricity users in London, whose volumes and timing of electricity consumption offer the optimal income to the generators, relative to their costs. The GLA in effect acts as a facilitator, securing the best market for the electricity at the best available price, in return for taking a margin on the income received to cover its costs and retain a surplus. Appendix 1 illustrates the principles of the GLA licence lite model. 3.2 The financial efficacy of the model has been tested recurrently, in the light of fluctuating market conditions, during the currency of the project and remains positive. It should be noted that the accuracy of the financial model in assessing the feasibility of the project remains subject to some assumptions on current pricing in the market remaining broadly correct. These assumptions will be tested during the course of negotiations with the electricity generators appointed to the GLA s framework. These negotiations will be taking place during the next month and the Board will be given an oral update. 3.3 The risks of the project being unviable have diminished since the last progress report to the Board in December That is because the third party fully licensed electricity supplier required to provide the specialised market services has now been appointed under the tendering exercise and the GLA has received a sufficient number of responses from low and zero carbon electricity generators to its Invitation to Negotiate. Those responses are currently under formal evaluation. However, as stated above, until successful negotiation with generators on actual prices has been completed during January 2016, there remains the risk of assumptions made regarding prices attainable by generators being inaccurate. 3.4 In addition to maintaining an updated financial model for the project, a risk matrix of the risks associated with operating the licence lite model has been maintained and developed as the project has progressed. A high level summary of the prospective operational risks is contained in Appendix 2 and is commented upon below (Risks arising / mitigation). A full risks register is in course of preparation and will form part of the GLA s operational manual for licence lite (see paragraph 6 below).the risks are seen as manageable within the GLA s capacity and skills. That is because the functions requiring

3 specialised market knowledge and management capacity are carried out by the third part fully licensed supplier (RWE npower) under a market services agreement. 3.5 The major unexpected factor in the progress of the project has been timing, caused by the length of time involved in the public procurement processes, most notably in respect of the electricity generating capacity needed. Those process are however now complete, apart from the final evaluation stage of the generators tenders which is currently in progress. 3.6 The spend to date on licence lite is as follows DEPDU (Arup) - 192,323 Cornwall Energy (electricity market advisers) - 30,500 Legal advice (Nabarro and then Temple Bright) - 38,157 4 Progress since the last report and steps to completion 4.1 The principal steps completed since the last report to the Board in December 2014 are as follows appointment of RWE npower as market services provider; planning with npower of operation requirements for licence lite, notably invoicing / data collection processing /metering / service level arrangements; public procurement of electricity generating capacity. This is complete, subject to evaluation of tenders received. 8 tenders have been received, including 5 from London boroughs, one major housing association and 2 national providers and operators of low and zero carbon energy generating schemes, with investments in London; preparation of a form of power purchase agreement with generators and supply agreement with GLA licence lite customers; recurrent updating of financial model and risk matrix, in the light of how the project has developed and changes in market conditions; resolution with Ofgem of outstanding regulatory issues and operational requirements. 4.2 The principal steps required to be completed prior to application for a Mayoral Decision to approve the project / start of operations are as follows completion of evaluation of tenders from the electricity generators; settlement of pricing terms with generators and TfL (as the GLA s supply customer) and of the forms of power purchase agreement with the generators and supply agreement with TfL; completion of service level and operational arrangements with npower, concurrent with agreeing operational /invoicing arrangements with the generators and TfL; finalisation of financial model and risk matrix; completion of business plan and GLA operational handbook; grant of electricity (licence lite) supply licence by Ofgem.

4 4.3. As stated above, the timing of progress has hitherto been dictated and constrained by the public procurement exercises. However, subject to the completion of the evaluation of the tenders from generators, there are now no procurement exercises to constrain the timing. The remaining tasks listed above mainly have to be progressed and delivered in parallel, since they are interdependent. Substantial progress will have been made by the 19 January IPB meeting and an update of progress will be made then. An estimated timetable for completion of the remaining stages is as follows 7 January - completion of evaluation of generator tenders. This will mean that all the parties to operating licence lite will have been assembled, subject to agreeing pricing terms with the generators and TfL; 28 January pricing terms agreed in principle with TfL and the generators; February commercial / financial due diligence; - request for Mayoral Decision approving the project; 28 February forms of agreement settled with generators and TfL; 14 March - licence lite licence granted; 31 March - ready to commence operations 4.4 The actual date for commencement of operations will depend upon the timing of the availability of the electricity generating capacity contracted and arrangements for TfL premises being available to take the electricity supplies from the licence lite operation. The introduction of electricity generating capacity to the licence lite project and the making available of TfL s electricity consumption meters to be supplied under the project will need to be a phased process during the first year. For example, combined heat and power plants may be subject to existing export arrangements and only available when those arrangements expire. Conversely, some solar power may be available immediately and other new generating plant available immediately following its commissioning being completed. 5 Equality Comments 5.1 Equality issues have been considered. Most notably the project when complete will involve contracts with parties, all of whom have accepted responsibility for equality issues in terms acceptable to the GLA, in addition to which the GLA will be carrying out its electricity supply activities under regulated terms that include provisions regarding those with protected characteristics. The outcome is expected to be positive. 6 Key Risks and Issues 6.1 The risk of the project not proceeding has diminished, insofar as the procurement process for acquiring generating capacity has had a positive outcome. The principal risk remaining is that the assumptions made in the financial model regarding the pricing expectations of smaller electricity generators are inaccurate and assume lower prices than those actually attainable. The effect would be to reduce or remove the financial margin in the

5 model. The position will crystallise when the GLA negotiates prices with the generators appointed to the framework during January. 6.2 Now that we will be obtaining actual prices from the generators, the current financial model which has been used to monitor the financial feasibility of the project, will be converted into an operational model, within which all aspects of the day to day financial performance of the project can be assessed. 6.3 There are risk issues attached to operating the licence lite project, as distinct from the risks of the project not proceeding. The significant risks in this area revolve around two areas of exposure first, purchasing electricity from the generators and selling it to GLA consumers (notably TfL). This gives rise to the risk of the purchase price paid by the GLA rising, without the sale price to TfL doing so or doing so to the same extent; or falls in price similarly affecting the GLA s margin. This risk is contained by arranging for fixed terms for purchase of electricity from the generators and supply to TfL, so that market fluctuations only affect price when both sides of the arrangement come up for re-negotiation; second, generators failing to produce the electricity the GLA has contracted for on time and in the quantity required. This could cause the GLA to be short relative to its commitment to supply TfL and incur a high penalty price in the electricity market (passed through by npower) for replacement of the missing power, if it has not made other arrangements. This risk is managed and mitigated by an arrangement with npower to sell substitute power to the GLA if it is given due notice. Where due notice is not possible, the GLA regulates the position by passing all or part of the extra cost incurred back to the generator who is at fault. Also, the GLA will normally buy more electricity than it needs, so there is an excess available. 6.4 A GLA licence lite operational manual is in course of preparation to establish the risk register and specify the measures to manage those risks. 6.5 Appendix 2 contains a high level summary of the operational risks and the means of management and mitigation of them. 7 Financial comments of the Executive Director Resources 7.1 The spend detailed in paragraph 3.6 is expenditure since 2013 and has being funded as follows; Spend Amount Funding DEPDU (Arup) 192,323 European Local Energy Assistance (ELENA) EU funded Cornwall Energy (electricity market advisers) 30,500 Licence Lite and budget Legal advice 38,157 Licence Lite 2014-

6 (Nabarro and then Temple Bright) 15 and budget 7.2 Financial modelling for establishing financial feasibility is currently being developed to determine the expected income and expenditure. IPB will be informed of these figures once the financial model has being developed. 8 Legal Comments 8.1 No MD or DD is required 9 Next steps 9.1 The next steps following consideration/in-principle approval by IPB are summarised below: Activity Pricing agreed in principle between GLA /TfL /generators Announcement of construction of licence lite business MD approving project Forms of agreement settled between GLA/TfL/generators Grant of supply licence by Ofgem Ready to commence operations Timeline 20 January January February March March 31 March Appendices: Appendix 1 Diagram of Licence Lite Electricity and Payment Flows Appendix 2 Summary of Operational Risks (Reserved)