Electricity Market Reform - How government electricity market reform could impact supply companies Robert Groves Chief Executive Officer SmartestEnergy Limited Suppliers Forum, London 12 th October 2011
Contents SmartestEnergy and what we do; A day in the life of a small, (electricity) supply company; The key issues in Electricity Market Reform (EMR) affecting supply companies; A day in the post EMR life of a small supply company; What does it all mean for small, supply companies? 2
Contents SmartestEnergy and what we do; A day in the life of a small (electricity) supply, company; The key issues in Electricity Market Reform (EMR) affecting supply companies; A day in the post EMR life of a small, supply company; What does it all mean for small, supply companies? 3
SmartestEnergy and what we do - integrated but without the assets Our generation business buys the electricity and renewable outputs produced by British generators; Our generation customers thereby avoid the cost of trading systems/staff and the need to provide the financial collateral to hedge their forward sales; We then supply British industrial and commercial electricity consumers with their electricity; We also act as the wholesale supplier to independent, (electricity) supply companies (4) managing their supply, hedging and imbalance; We do not own generating assets and instead rely upon on the wholesale market to manage the differences in timing and volumes between our generation and supply portfolios. 4
SmartestEnergy and what we do our generation business A typical SmartestEnergy generation customer is: embedded (connected to the distribution system); renewable; and independent (not owned by a vertically integrated utility). Launched in 2001, our generation business is now the largest purchaser of British electricity and renewables from embedded generation with: 1700MW+ of installed capacity contracted with; contracted with 600+ British generation sites; generation purchased from sites varying from 50kW to 420MW; and all technologies included in that generation portfolio except nuclear. 5
SmartestEnergy and what we do our supply business Launched in 2008, our supply business offers a non premium priced, renewable supply with industry leading levels of customer service: focus on supplying renewable power 1 to industrial and commercial business customers in the half hourly (metered) market; 2TWhs currently supplied representing approximately 1-2% of the metered business market 2 ; 429 customers and 2,038 sites now supplied or to be supplied; ranked No1 for customer satisfaction in 2010 by the independent Datamonitor Major Energy User Customer Satisfaction Survey 3. 1 Reference SmartestEnergy 2010/11 Fuel Mix Disclosure where 39% of volumes supplied were from renewable sources vs UK average of 7.9%; 2 Cornwall Energy Business Electricity Market Share Survey Q2 2011 with the UK half hourly (metered) business market representing 132TWhs of consumption across 111,000 meter points; and 3 Datamonitor Major Energy User Customer Satisfaction Survey H2 2010. 6
Contents SmartestEnergy and what we do; A day in the life of a small, (electricity) supply company; The key issues in Electricity Market Reform (EMR) affecting supply companies; A day in the post EMR life of a small, supply company; What does it all mean for small, supply companies? 7
A day in the life of a small, (electricity) supply company A typical small, (electricity) supply company uses SmartestEnergy to: Supply. Procure the customised electricity supply (shape, etc.) it supplies its customers from the wholesale markets; Hedge. Fix the forward price it buys that electricity at; Manage imbalance. Fix the cost or manage the risk between the volume it procures and the volume its customers consume. To do this SmartestEnergy requires the following: Trading Service Fees. A fee for facilitating the supply company s access to the traded markets and the procurement of their supply; Credit Support. Collateral to access the futures and forwards markets to hedge the price of their purchased power; and Imbalance Fees. An additional fee for managing the supply company s imbalance risk. 8
A day in the life of a small, supply company today collateral is the key issue As a small supply and generation business ourselves, we have to provide collateral to support our wholesale trading operations and the credit support commitments required by platform operators; These are a considerable burden for any company that does not have a strong balance sheet. Using SmartestEnergy as an example: Our current hedged forward position is 6-7TWhs; 101mm of collateral is required to support that hedge; This equates to 14 or credit support per MWh hedged in the wholesale markets. The collateral support requirements made of a small, supply company in the current markets is therefore difficult (or impossible) for companies with small balance sheets to support and is the major restriction on their successful growth. 9
Contents SmartestEnergy and what we do; A day in the life of a small, (electricity) supply company; The key issues in Electricity Market Reform (EMR) affecting supply companies; A day in the post EMR life of a small, supply company; What does it all mean for small, supply companies? 10
The key issues in EMR as they affect small, supply companies increasing price volatility Intermittency means higher volatility; Inventing a new capacity mechanism is risky: A Strategic Reserve does what it says but doesn t manage day to day volatility; A new Reliability Mechanism has uncertainties and risks being expensive or creating windfalls gains for incumbents; STOR is a proven market based solution that works. Retail market reforms are welcome: Mandatory Auctions and Market Making will increase liquidity and reduce transaction costs; and But collateral will still be required bilaterally or on an exchange. 11
Contents SmartestEnergy and what we do; A day in the life of a small, (electricity) supply company; The key issues in Electricity Market Reform (EMR) affecting supply companies; A day in the post EMR life of a small, supply company; What does it all mean for small, supply companies? 12
A day in the life of a small, supply company in the post EMR future A typical small, supply company will continue to use SmartestEnergy to supply, hedge and manage imbalance. But to do this in a more volatile market, SmartestEnergy will require: Higher Trading Services Fees. Increased Credit Support. Collateral to access the futures and forwards markets to hedge the price of their purchased power; and Higher Imbalance Fees. An additional fee for managing the supply company s imbalance risk. Will the small, supply company be able to provide these and remain competitive? 13
Contents SmartestEnergy and what we do; A day in the life of a small, supply company today; The key issues in Electricity Market Reform (EMR) affecting supply companies; A day in the post EMR life of a small, supply company; What does it all mean for small supply companies? 14
What does it all mean for small supply companies? Intermittency means volatility. The transition to a UK generation mix more dependent on intermittent generation will increase the cost of imbalance and the credit support requirement for supply companies; Reform in EMR risk risks not managing volatility. Using a market based mechanism to ensure we price flexible generation correctly is the best mechanism for managing volatility caused by intermittency. Collateral will still be required whatever happens. The mandatory auctions and market making obligations will improve liquidity and reduce transaction costs but will not remove the need for collateral; A market for big balance sheets and aggregators. Only the most credit worthy supply companies or those that use aggregators will succeed. 15
Electricity Market Reform - How government electricity market reform could impact supply companies Robert Groves Chief Executive Officer SmartestEnergy Limited Suppliers Forum, London 12 th October 2011