1. The changing policy environment - what about the market? Nigel Cornwall UKELA CCEWP Round up 10 October 2012

2. What I will cover … Describe market context – tri-lemma but should be “quad-lemma” Explain how the design of some of these instruments is dependent upon efficient markets existing Identify problems with current market structure – are these being exacerbated by EMR? Market analysis is a real weakness of the proposals at least so far – some suggestions about how these conflicts might be managed

3. Where it all started Utilities Act 2000 Set tone of interventions on – supply-side with Renewables Obligation – demand-side with Energy Efficiency Commitment Also provided legal basis for New Electricity Trading Arrangements – later BETTA – BETTA is NETA wrote large Subsequently all policy statements have emphasised the efficacy of markets – interventions to address market distortions not replace them

4. 4  A bilateral contractual model –all must use contracts to manage own risk –market prices emerge with no central mechanism to manipulate  Liquid traded markets critical to avoid stranded buyers/sellers  Imbalance prices to recover costs of uncontracted trades –crucially creates the incentive to trade and balance  penalise parties who do not contract or contract badly or are small or are one-sided  EMR assumes this template is functioning as intended  But the market will need more than a couple of tweaks BETTA now

5. EMR—market impacts Electricity Market Reform Carbon price support (CPS) Feed-in tariffs (FiT) Capacity mechanism Emissions Performance Standard (EPS) Changes the merit order by increasing costs to fossil fuel generators Keeps fossil fuel on the system for when the wind won’t blow Keeps low carbon generators interested in wholesale markets with top-up premiums Backstop to direct fossil fuel mix if market mechanisms don’t work Implies a world of higher and more volatile prices, but supplementary, not an alternative to the market

6. Data sources: Generation = CVA settlement. Non-Big 6 supply = SVA settlement. Big 6 supply = segmental accounts But the market doesn’t like instability… Market structure and market design have been mutually reinforcing

7. … and despite Ofgem’s efforts …  Ofgem wants to incentivise engagement with market through sharpening imbalance signals  Several reviews of cash-out but salami slice changes  Spreads wider than on the Continent and prices more volatile  Significant Code Review is imminent

8. … liquidity remains a significant problem  Low liquidity in electricity in contrast to gas—possibly due to: –vertical integration –confidence in market –no reference prices and slow exchange development –cost and complexity –few intermediaries –credit  Limited routes to market –offtake market also dominated by Big Six Liquidity in GB wholesale markets, Ofgem (June 2009)

9. What EMR doesn’t say If it is a success EMR will: – boost power prices overall by increasing costs to fossil fuel generators through carbon price support: stimulate investment in new low carbon – increase the proportion of low carbon generation via CfD FiTs increasing the proportion of inflexible (price-taking) generation – ensure flexible fossil fuel generation is there for when the wind doesn’t blow implies comfort with sporadically very high prices Actively traded long- and short-term markets will be critical

10. PPA call for evidence – a timely move Recognises problems faced in sub 100MW market Canvases views on regulatory interventions – obligation to offer terms – purchaser of last resort – but without much enthusiasm But what about: – guaranteed market/ purchaser of first option – raising fixed Fit thresholds

11. One possible solution A green power market Based around established NFPA auction – six monthly tranches but can evolve Uses reference price out of auction – mitigates basis risk Fixed FiT threshold could be raised but for specific types of project – e.g. community energy While we sort this out, retain RO at least to 2020

12. Thank you Nigel Cornwall nigel@cornwallenergy.comnigel@cornwallenergy.com 079000 92524 @spectrumvoice

13. Reference slides

14. 14 Market framework

15. Making Betta better Carbon Price Support Finance Bill Energy Bill New RIIO-T1 price controls April 2013 201220132015 Wholesale markets Networks Changes arising from Transmit Ofgem balancing SCR concludes Project Transmit Liquidity proposals CfD FiTs Mandatory auctions? EDCM demand 2 years remain for RO EDCM generation Smart meter rollout begins 2014 Capacity market design AMR rollout complete Ofgem smarter market strategy New RIIO-E1 price controls April 2015 New RO bands Use of smart meter/ AMR data in settlement?

16. Let’s not forget the customer! Estimated impact of energy and climate change policies on average non-domestic retail gas and electricity prices

17. Different support levels (1) Potential yearly income (£/MWh) 2014-17 for 6MW wind

18. Different support levels (2) Potential yearly income (£/MWh) 2014-17 for 20MW AD