Investment & Performance Board (IPB)

Transcription

1 Investment & Performance Board (IPB) Date of IPB meeting: 18 December 2014 Title of paper: To be presented by: Cleared by: (name Adviser & Director) Classification: Junior Electricity Supply Licence Update Stephen Tate, Assistant Director - Environment Matthew Pencharz, Senior Adviser Environment and Energy and Fiona Fletcher Smith, Executive Director Development Enterprise and Environment Public (Appendix reserved to due to commercial sensitivity) 1. Executive Summary 1.1 This is an update report requested by the IPB. 1.2 Formal application for the junior electricity supply licence (known as licence lite ) was made to the electricity regulator, Ofgem, on 1 st March The purpose is to enable existing and new decentralised energy providers in London to sell their electricity at proper market prices rather than be excluded from the market because of its costs, risks and complexities. 1.3 No barriers or risks have arisen that have not already been reported in the paper presented to the IPB at its meeting of 23 rd October 2012 and the programme remains on track, although there has been a change in order of activities and timing. 1.4 The draft business model has been produced and is prima facie viable. 1.5 The procurement of the market services needed to enable the GLA to operate as a junior electricity licensee is nearing completion and a provider of the services has now been selected following public tender. The name of the successful tenderer is contained in the Appendix to this report. No announcement has yet been made of the tender award. 1.6 The remaining major stages are constructing the operational arrangements with the fully licensed supplier appointed by the GLA to provide the market services and procuring the electricity generated by decentralised energy providers in London which must be a formal procurement process. Although there is a substantial interest amongst decentralised energy generators, procuring sufficient volume initially is not a foregone conclusion. 1.7 The timing is for the remaining arrangements for licence lite operation to be put in place for a request for a Mayoral Decision to proceed to be made in February 2015, with a view to operation beginning in May 2015, subject to the decision being positive.

2 1.8 The project remains within budget and the Decentralised Energy Project Delivery Unit has also provided support. The project has a budget of 90,000 for the financial year 2014/15 for legal and commercial work. 1.9 There continues to be strong support from government and the regulator Ofgem for the project and also press interest. 2. Recommendation That the Board notes this progress report. 3. Introduction and Background 3.1 Licence Lite is a new form of junior electricity supply licensing, designed to enable organisations that are not resourced to manage the costs risks and complexities of the electricity market and to whom electricity supply is not a core function, to supply electricity in order to support their business or policy objectives. In the case of the GLA, the objective is to enable decentralised energy generators to receive better value for the electricity they generate and thereby to support the development of decentralised energy systems in London. 3.2 An application for a licence lite licence was made on 1 st March 2013, IPB approval being on the basis that on or before the completion of the licence application process, when the terms of the grant of the licence and detailed business case are known, a Mayoral Decision is obtained before any commitment is accepted. 3.3 Since IPB approval was obtained progress has been made as follows - detailed regulatory arrangements have been settled with Ofgem; a detailed financial model has been prepared by GLA external advisors, consulted upon by TfL (the planned first consumer of electricity supplied under the GLA s licence) and delivered to Ofgem; following an Industry Day to attract interest in May 2014, tenders were invited from established fully licensed electricity suppliers to provide the specialist market services needed to operate the licence lite licence. A short list of tenderers has been made and the appointment of the GLA s preferred supplier of the services is due within the next two weeks. The Appendix contains the names of the shortlisted suppliers; decentralised energy providers in London have been invited to express interest in participating in licence lite with a view to enhancing their revenue earning capacity. There is a risk that there could be insufficient interest from decentralised energy generators initially to meet licence lite requirements, although generators holding generating capacity in excess of twice that needed to start licence lite operations have currently expressed interest. 3.4 The principal steps required to bring the project to a conclusion are final selection and announcement of the GLA s preferred market service provider;

3 proceeding with and completing the formal procurement processes required to contract with decentralised energy generators in London for the provision to the GLA of the electricity to be supplied to GLA s customers (initially TfL); settling with the GLA s preferred market service provider the operational arrangements for licence lite, including the required data flows and day to day running of the system; making a request for a Mayoral Decision to approve the project proceeding to completion; subject to a positive decision, commencement of operations The Government has shown increasing interest in the GLA s progress on the licence lite project. In May 2014 the Mayor s Senior Advisor for Environment & Energy and a GLA officer attended a round table discussion on licence lite chaired by the Secretary of State for Energy and Climate Change, Ed Davey to discuss progress of licence lite. 3.6 The press has been briefed on the application. An article on the Mayor s licence lite application appeared in the Guardian newspaper in May. 3.7 The proposed timetable is for the licence to be granted to the GLA in March 2015 and for operations to commence in May The proposed timetable is referred to below. 4. Issues for consideration 4.1 No new barriers or risks have arisen during the course of the progress made and the risk of the market not being willing to provide the market services on acceptable terms required to operate the licence lite system is now slight. 4.2 Decentralised energy generators have expressed interest in making use of the support offered to them by the GLA s licence lite initiative, but they will be required to respond to a formal procurement exercise. There is a risk that despite the potential financial advantages of joining the licence lite system, the novelty of it and fear of risk may discourage some of them. However initial reaction from them is promising. 4.3 There is also a risk of the GLA being unable to conclude arrangements with TfL as the first consumer of decentralised electricity supplied by the GLA, notwithstanding TfL s interest in principle. 4.4 Timing has altered from that estimated in October 2012, for the following reasons - in the course of consultation with the GLA on the regulatory arrangements for the GLA s licence application, Ofgem also followed a wider objective of reviewing means of access to the electricity market generally, in order to stimulate more competition in it. The Mayor s licence lite application plays an important part in that. The effect was that the pace of progress with Ofgem was initially slow as a result of the licence lite project being part of this wider initiative.

4 the procurement route that the GLA is advised to follow for procuring the market services meant that invitations to tender could not be sent out until all the terms and conditions for the provision of the services have been scrutinised by Ofgem. The result is that the invitations to tender waited upon the detailed discussions with Ofgem reaching an advanced stage. That having happened, substantial progress has been made, as described above Now that short listed bidders have made their pricing proposals for the market services needed by the GLA, the draft financial model for licence lite is largely confirmed as viable. However, it remains contingent upon the margins in the model enabling the GLA to offer the price benefits intended after the financial model is further tested in conjunction with the GLA s preferred market services provider. 4.6 The target timings for proceeding to operational start date are as follows appointment of market services provider - 21 st November 2014 completion of operational arrangements for beginning licence lite electricity supply end - January 2015 request for Mayoral Decision to proceed to grant of licence and to begin operations - February 2015 subject to positive Mayoral Decision, signature to power purchase arrangements with decentralised energy providers and supply agreement with TfL - April 2015 commencement of operations - May Equality comments Equality issues have been considered. Most notably the project when complete will involve the GLA carrying out its electricity supply activities under the regulated terms of an electricity supply licence. These terms include provisions regarding those with protected characteristics. 6. Risks arising / mitigation 6.1 There remain uncertainties regarding the timing of the licence application process, since the type of electricity licence application is new to all parties involved. The order of the processes and resulting timing considerations therefore remain difficult to predict. However, these timing issues do not materially alter the outcome and no new barriers to progress have emerged. 6.2 There has been no change in the risks already reported to the IPB or in how they may be mitigated, but they are now substantially reduced as a result of progressing to near conclusion the appointment of the supplier of the important market services.

5 7. Financial comments of the Executive Director Resources 7.1 At IPB on 23rd October 2012 the project quoted a budget of; 20,000 for consultancy fees and the licence application fee met from Environment Programme budget). A further 72,000 was spent in from the Environment Programme budget on risk analysis, legal advice and evidence gathering A budget of 90,000 has been allocated for the year ,000 of that budget has been allocated to payment of consultancy fees for market and legal advice connected with selecting the preferred provider of market services to the GLA, as described above. 7.3 Any changes to this proposal must be subject to further approval via the Authority s decision-making process. 7.4 The Environment Programme Delivery Team within the Development and Environment Directorate is responsible for managing this project. 8. Legal Comments Not applicable - No MD or DD is required. 9. Next steps 9.1 The next steps following report to IPB are summarised below: Timeline Activity Appointment of supplier of market services 21 st November 2014 Issue of Invitation to decentralised energy generators 30 th November 2014 Settlement of operational arrangements with market services 31 st January provider 2015 Submission for MD February 2015 Licence granted March 2015 Commencement of operations May 2015 Appendices: Appendix 1 Confidential information relating to procurement