Electricity Market Reform: Catering for smaller players and onsite generation under EMR. REA 27 March 2013 Chris Hemsley, DECC

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1 Electricity Market Reform: Catering for smaller players and onsite generation under EMR REA 27 March 2013 Chris Hemsley, DECC

2 Overall objectives and the role of independent renewables The Government s energy and climate change goals are to deliver secure energy on the way to a sustainable, affordable, low-carbon energy future and drive ambitious action on climate change at home and abroad. In the renewable sector, independent developers have played an important role in delivering new capacity and we expect them to continue to make a material contribution to delivering investment and meeting our targets. Independent developers are responsible for over 70% of all capacity in planning in onshore wind, and around 4.5GW of offshore capacity. We need to ensure that independent renewable developers are able to play a full part in contributing to least cost de-carbonisation.

3 The CfD supports investment in Low-Carbon Generation: relevant to generators large and small CfD Removes Long-term Price Risk from Investors Earlier allocation of CfDs, reducing risk to developers Lowering the cost of investing in low-carbon Generation Support payments backed by a robust payment scheme Clear set of roles and responsibility between Government and Delivery Body

4 Different routes to market meet different needs and carry different risks Merchant Trading Third party trading service Business to Business sales Short-term PPAs Long-term PPAs Open market trading and hedging strategy OTC, broker, exchange In-house trading capability Trading/ hedging strategy through a third party; no direct trading May include profit share Long or short term sales from generators to larger consumers Supplier typically provides balance of consumer s demand Examples: Tesco, Sainsbury's, McDonalds 1-5 yr off-take deals Wide range of off-takers e.g. Smartest, Good Energy, large utilities year deals Discounts reflect risk - long-term risk premium Narrower range of counterparties e.g. large utilities Market participants need to have options that meet their differing needs.

5 The CfD supports PPAs that are simpler to offer One form of CfD PPAs might offer fixed prices CfD Contract CfD Counterparty Generator PPA contract Fixed Price for Output Electricity Data Collateral PPA Provider CfD Payments (nominated by generator to go to PPA provider) Sell Power Revenue CfD PPAs do not need to deal with: - Valuing and monetising ROCs - Long-term price risk no need for floor prices - Some change in law risks CfDs also support PPA s linked to reference prices. Wholesale Market

6 Last summer we issued a call for evidence to investigate reports of problems in the PPA market. The call for evidence showed that the current long-term PPA market has deteriorated Some of the problems are temporary and/or relate to the RO: PPA providers unwilling to take long-term price risk. Under the RO generators typically seek price floor to transfer price risk, which is reflected in discount. CfD provides a long-term price guarantee PPA providers unwilling to contract long-term for ROCs (uncertainty over ROC values, particularly as we approach 2017). CfD removes need to value and market ROC. But there are potential enduring concerns: Some market participants are concerned about the level of competition in the PPA market under CfD. The difficulty of assessing long-term imbalance risk and associated costs. The timely transition to the CfD regime and potential barriers or increased costs for first-movers. Our initial assessment: imbalance is likely to be the key issue.

7 The switch from the RO to CfD will have impacts on the PPA market these act to reduce PPA discounts ROC value discounted Power price discounted Power price discounted ROC discount ROCs Power discount Power CfD top-up Power discount Power PPA under RO - before discounts PPA under RO - after discounts PPA under CfD - before discounts PPA under CfD - after discounts Power ROCs Power CfD top-ups Floor price Price risk Floor price Price risk Change in law Change in law Change in law Change in law Imbalance cost Imbalance cost Trading Trading Forecasting Forecasting

8 It is important to understand the impacts of the switch to CfDs Price floors important for investors, but costly in three ways, all removed by CfDs: Direct cost in terms of price risk discount to cover cost of years of price risk Credit requirements of the counterparty fewer available counterparties less competition / higher discounts Impact on counterparty credit rating limits number of PPAs counterparty can provide less competition / higher discounts Change in law risk also a factor in current PPA costs, and will be reduced under CfDs But, whilst CfD has positive effects, will these be sufficient?

9 Assessing the impact of imbalance costs Three approaches under consideration Green Power Auction Market A short-term PPA auction CfD reference price set by the auction on a project by project basis Requires sufficient certainty that the auction will run and every project will sell A strong package of measures within CfD framework Remove wholesale price risk through CfD Mitigate long-term imbalance uncertainty Ofgem-led work to improve liquidity Steps to ease the transition to CfD Consider merits of supplier obligation if necessary Raise the ssfit level Increase ssfit level above current 5MW We are actively considering the amendment to increase the FITs scheme maximum capacity which was proposed by the opposition during the Committee stage of the Bill. We have commissioned advice to assess evidence in relation to imbalance risk, risk mitigation and barriers to entry to the PPA market.

10 Imbalance costs act to provide incentives to market participants to manage and mitigate costs to consumers Electricity Developer Decisions on: - Operation - What to build - Where to build - Whether to build Imbalance Risk Priced & cost met by developer Purchaser GPAM rules would pass these costs to consumers, insulating developers from the cost of their imbalance Under CfD, GPAM and Imbalance Indexation approaches, imbalance is passed to parties better placed to manage it. Key difference is that GPAM does not expose developers to imbalance costs. Government continues to work to understand the importance of these incentives and what the impacts might be of removing them

11 Way forward on Route To Market work Results of expert advice shared with industry: April Work with industry to ease transition to CfD: from April Code of conduct Develop model PPAs Energy Bill Commons Report Stage: April/May Ministers will give an update on progress in developing policy in this area. Energy Bill Lords: June/July. Opportunities for amendments, if needed EMR Delivery Plan: June/July Government will give more detail on the overall approach, including progress on the development of voluntary market approaches.

12 CfDs will be available for a broad range of developers Government set out principles that would apply for the majority of generators: CfD payment based on loss adjusted net metered energy For most, this means that plant output would be measured at the network boundary point Seeking to use existing processes, where possible, to measure output and to process data The high-level arrangements for the majority of potential developers was set out in November: Transmission-connected: BSC data Distribution-connected: BSC data (where registered with Central Meter Registration Service) Or, will need to register (via offtaker) an Additional BM Unit under BSC Private Wire / On-site generation: DECC/NG/Expert Group working group