Electricity Market Reform: does it add up?

1. Electricity Market Reform: does it add up? David Newbery IAEE International Conference Stockholm, June 20-22 2011 http://www.eprg.group.cam.ac. uk

2. Background to EMR • Climate changechallenge • ETS failing to give adequate credible CO2 price • Renewables falling short of targets, ROCs expensive • Nuclear not attractive at current CO2 price • elec prices set by coal/gas, fossil hedged, low-C risky • Security of supply: reserve margin falling fast • 12 GW coal decommissioned by 2015 (= 20% peak) • 6.3 GW nuclear decommissioned by 2016 • Current electricity market not fit for purpose • costs of meeting targets excessive £120 bn of ESI investment needed by 2020 D Newbery IAEE Stockholm 2011

3. ETS is neither stable nor supports adequate carbon price Crashed when use revealed Depressed by Renewables Directive and then recession Crashed as no banking

4. Fossil plant naturally hedged Gas and coal-fired generation costs move in line with electricity prices D Newbery IAEE Stockholm 2011

5. CCC’09 UK 2020 target is 27,000 MW UK wind very modest UK’s target looks feasible at German roll-out rate D Newbery IAEE Stockholm 2011 5

6. Electricity Market Reform • To de-risk and incentivise low-C investment => Long-term contracts for credibility => C-price support to underwrite wholesale price • ensures nuclear is not “subsidized” => Capacity payments for reserves? => Emissions Performance Standard deters coal • Does the package hang together? • Do we need all four elements? • Does it address all relevant issues? D Newbery IAEE Stockholm 2011

7. Long-term contracts • Electricity price is driven by fossil prices • exposes nuclear and renewables to market risk • CO2 price unpredictable, not credible => long-term contract enforceable in courts • but technologies differ and so should contracts => simple FIT for wind (payment to reflect cost) => auctions where possible, adjust support as needed => standard CfD for nuclear, cost-sharing for build? Emphasise institution for contracting D Newbery IAEE Stockholm 2011

8. Carbon price support • EUA price volatile, too low, lacks credibility • undermined by 20-20-20 Directive and recession • to bring C-price up to sensible level => ensures wholesale electricity price adequate to support mature low-C investment: i.e. nuclear • GB wholesale price set by coal or gas => nuclear power will not then be subsidized Gives windfall to existing zero-C plant D Newbery IAEE Stockholm 2011

9. UK’s Carbon Price Support plans As at 1 Jun 2011 D Newbery IAEE Stockholm 2011 Source:

10. Off-shore wind most expensive CCGT wins, nuclear (nth of a kind) viable CCGT at £20/t CO2

11. N-th of a kind Nuclear wins; CCS, on-shore wind close

12. Capital costs do not affect ranking if C price high CCGT at £20/t CO2, 10% capital

13. Problems and redundancy • Import electricity does not pay C-tax, exports do => distorts electricity trade at loss of HMT revenue • Does not apply to gas so distorts heat choice • Long-term contracts secure nuclear, renewables • so why do you need a carbon price support (CPS)? • A credible CPS rules out unabated coal • so why do you need an EPS? • Or why not just refuse to license unabated coal? Which to drop - CPS or EPS? Or both? D Newbery IAEE Stockholm 2011

14. Capacity mechanisms • Concern over backup needed for massive wind • could have 7+ days of low wind at winter peak • demand side unlikely to help much here • such events are hard to predict • so without a contract no-one would build just for that • Do we need it now? Wait and design carefully? • Is the US approach to a demand curve good? Choice should depend on wholesale market design which is not under discussion D Newbery IAEE Stockholm 2011

15. Flaws in wholesale market • Bilateral, thin illiquid markets that stimulated extensive vertical integration • Crazy two-price balancing mechanism • why not reintroduce pool model? • with VOLL*LOLP for availability? • GB may have to adapt to EU Target Model • market coupling, price zones where congestion reforms to be robust to market design changes D Newbery IAEE Stockholm 2011

16. Conclusions • Contracts sensible but Govt prefers CfD • need a commissioning body to tailor contracts • wind needs location-specific fixed FIT • CPS would underwrite CfD but raise prices • better to argue for EU carbon tax or equivalent • distorts trade, windfalls to existing zero-C plant • Capacity mechanism • needed for wind back-up • will depend on form of wholesale market But EMR does not reform Market! D Newbery IAEE Stockholm 2011

17. Electricity Market Reform: does it add up? David Newbery IAEE International Conference Stockholm, June 20-22 2011 http://www.eprg.group.cam.ac. uk

18. Acronyms-1 CCC Committee on Climate Change CCGT Combined cycle gas turbine CCS carbon capture and storage CfD contract for difference CHP combined heat and power plant CPS carbon price support EMR Electricity Market Reform EPS emissions performance standard ESI Electricity Supply Industry ETS EU emissions trading system EUA EU Allowance for 1 tonne CO2 D Newbery IAEE Stockholm 2011

19. Acronyms-2 FIT Feed-in tariff: fixes price for power HMT Her majesty’s Treasury LOLP Loss of Load Probability Low-C Low carbon (e.g. CCS) NOAK nth of a kind RES Renewable electricity supply ROC Renewable Obligation Certificate VOLL Value of Lost Load (now £9,999/MWh) Zero-C zero carbon (e.g. wind, nuclear) D Newbery IAEE Stockholm 2011