Progress on market reform: EMR, the I-SEM and the TEM

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1 Progress on market reform: EMR, the I-SEM and the TEM David Newbery Electricity Market Reform Belfast 28 th March

2 Disclaimer Although I am an independent member of the SEM Committee these are my personal views and should not be interpreted as reflecting any current or future view of the SEM Committee. I have been on the Panel of Technical Experts for the EMR but speak entirely in my own capacity. Newbery

3 Outline Progress with UK s EMR Mismatches between TEM and SEM energy-only market, simple bids to PXs vs complex bids vs centralised dispatch with capacity payments Active consultation on SEM market design For the wholesale market For capacity payments to address high wind penetration Aim to deliver the Integrated SEM: I-SEM Newbery

4 Progress with the EMR Energy Act 18 December 2013 to address: Security of supply and carbon/res targets problems with EU ETS market failures To deliver secure low-c in UK affordably => capacity payments => Carbon Price Floor de-risk investment => Contracts to lower cost of capital Problems with contract design Problems with finance Newbery

5 Little recovery after backloading and tightening post 2020 Source: EEX

6 UK s Carbon Price Floor - in Budget of 3/11 30 EUA price second period and CPF (2012)/tonne to 70/t by 2030 (2012)/tonne CO second period price Carbon Price Floor As at 1 Jun 2011 Corrective tax Corrective tax Forward prices 0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Source: EEX and DECC Consultation D Newbery

7 Long-term contracts CO 2 price unpredictable, CPF not credible Need to attract new sources of finance balance sheet of incumbents inadequate Market risky to new entrants in non-fossil gen but attractive to incumbents with retail customers hedges some of wholesale volatility => long-term contract-for-difference (CfD) enforceable in courts D Newbery 7

8 CfD in Energy Act 2013 Government announces strike prices and annual subsidy limit (Levy Control Framework) uniform by technology (except Island wind), set runs in parallel with ROCs (pfits) to 2017 => has to be made as attractive as ROCs => comparable rate of return (rather high for on-shore wind) => undermines logic of lowering cost by lowering risk => relies on locational grid signals (still under review) may lead to tender auctions if levy control breached => could then lead to better market-led outcome D Newbery 8

9 Conclusions on EMR Low-C generation needs long-term contracts needed as no credible futures markets for corrective carbon tax FiTs make sense for unreliable RES (wind etc) need to avoid exposure to balancing etc. EMR hampered by existing RO scheme will be more expensive than intended Should move to auctions asap Subsidies should come from general taxation D Newbery 9

10 Problems with the SEM Prices high because of high wholesale prices inevitable in small peripheral system? => Need to insulate prices from RES charges Interconnectors inefficiently dispatched will be resolved by market coupling in 2016 Capacity payments poorly targeted DG COMP hostile to poorly justified CPs N-S transmission links need strengthening Gen TUoS charges not adequately spatially varied? Vary from 385 in NI to 535/MWmnth ( /kWyr) High wind requires DS3 reforms Newbery

11 Build-up of final retail domestic price 2012 Eurocents/kWh renewables charge taxes network margin day-ahead price 5 0 France Greece Finland Luxembourg GB Sweden Netherlands Belgium Austria Portugal Spain Ireland Italy Germany Denmark Source: DECC 2013 at https://www.gov.uk/government/uploads/system/uploads/.../qep551.xls Source: Derived from the International Energy Agency publication, Energy Prices and Taxes

12 Advantages of current SEM Efficient dispatch: unit commitment central dispatch lowers cost compared to self-commitment and energy-only trading benefits larger in small systems will increase as wind penetration rises BCoP mitigates market power: remains a problem in near term at least provides comfort for new entrants Capacity payments necessary to mitigate political and regulatory uncertainty problem is their efficient design and stability Newbery

13 Adapting to TEM Central issue is market coupling DA bids/offers for interconnectors submitted to central auction office => prices in each zone prices on PXs and use of ICs simultaneous => efficient use of ICs price zones defined by congestion not borders To do: intra-day and balancing trades over ICs What is it worth?how might it be done in SEM? Newbery

14 One-third of the time flows are perverse Wholesale prices and percent economic imports % % 60% 40% 20% 0% -20% -40% -60% -80% -100% Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct euros/mwh percent imports when prices higher in SEM SEM weekly av price UK RPD weekly av percent time flows economic 28-day MA of econ flows

15 Annual benefits from coupling Moyle and EWIC (950/910MW imports, 580MW exports) Note: Deadband is the remaining price difference below which traders are too risk averse to risk trading Source: SEM

16 Capacity payments GB will have capacity payments from 2018 in return for capping wholesale price at 6,000/MWh VoLL taken as 17,000/MWh, LoLE = 3 hours Efficient trade over interconnectors requires efficient scarcity pricing => LoLP*(VoLL - SMP) => reform SEM capacity payment to this? But SEM price cap of 1,000 far below this Newbery

17 SEM Capacity Payments 2012 and % % 60% 40% 20% 0% Average 7/MWh 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% % time Euros/MWh percent of total capacity payment % 0.2% 0.4% 0.6% 0.8% 1.0% percent of total cap pay

18 Ti Would have paid 218% of the available pot Source: Poyry: Capacity Payment Mechanism Medium Term Review

19 Ti Scaled to pay the actual capacity pot in

20 Day-ahead pricing SEM sets price on basis of ex-post dispatch DA markets set price on ex-ante bids Intra-day markets will allow adjustments I-SEM design will need to adapt to his DA dispatch provides prices for DA trading Adjusted in light of wind, demand, outages => revised dispatch and intra-day/balancing prices (effectively ex post prices) for deviations from initial dispatch Who chooses initial and revised dispatch? Newbery

21 Conclusions TEM improves use of interconnectors realises value to SEM consumers who own ICs GB market changing coupled on Continent, has CPF and CP from 2018 price cap to be raised to 6,000/MWh => could increase SEM exports when GB stressed => care designing SEM CPM Central dispatch probably more efficient If kept need to devise efficient intra-day trading Newbery

22 Spare slides David Newbery Electricity Market Reform Belfast 28 th March

23 Acronyms BCoP Bidding Coide of Practice CfD Contract for difference CP(M) Capacity Payment (Mechanism) CPF carbon price floor DA Day ahead EMR (UK) Electricity Market Reform ETS Emissions Trading System EUA EU Allowance for 1 tonne CO 2 EWIC East-West Interconnector FiT Feed-in tariff IC Interconnector LCF Levy Control Framework LoLE Loss of Load expectation (expected number of hours of LoL) LoLP Loss of Load Probability RES Renewable energy supply RO(C) Renewable Obligation (Certificate) TEM Target Electricity Market TUoS Transmission use of system (charge) VOLL Value of Lost Load 23

24 Euros/MWh SMP+CP 2013 SMP+CP 2012 SMP 2013 SMP 2012 SMP+CP 2009 SMP 2009 Ti Price duration curves at 2013 prices SMP+CP 2012 SMP+CP 2014 SMP 2012 SMP 2013 SMP 2009 SMP+CP % 2% 4% 6% 8% 10% 0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% percence price higher than 24

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