Energy Market Liberalisation: UK Experience and Future Challenges Bulgarian Energy Forum, Sofia, 8 October 2013 Sue Harrison Head of European Energy Markets UK Department of Energy and Climate Change

Overview of Presentation 2 Overview of Presentation Background on EU energy legislation and objectives for liberalisation UK experience of liberalisation Case Study: experience of renewables investment Electricity Market Reform (EMR) in the UK

EU Legislation on Energy Markets Three key objectives Competition between producers/suppliers – main objective in 1990’s (First Package).   Security of supply – came into sharp focus in 2000’s => legislation on security of supply (gas and electricity). Sustainability and Climate Change – now one of the key drivers of energy policy. Transition to low-carbon economy a political priority => 2020 targets, 2050 road map.

Energy Market Liberalisation High-level Principles 4 Energy Market Liberalisation High-level Principles Competition - To reduce market power of incumbents, encourage new market entrants => independent system operation (unbundling), fair third party access to networks. Independent regulation – To protect consumers’ interests, reduce political interference in regulatory matters => provide regulatory certainty for investors. Market transparency – To improve market functioning and security of supply => price signals reflect underlying supply and demand, enables market players to take rational investment and trading decisions.

Liberalised Energy Markets UK Experience 5 Liberalised Energy Markets UK Experience   Reform of the UK electricity market has led to competition in production/supply, lower prices, stability for investors, and a reliable system. In March 2001, moved from Pool arrangements to a decentralised market – New Electricity Trading Arrangements (NETA). Between March 2001 and Oct 2002, wholesale prices fell by around 20%, attributed to increased competition, high capacity margins and falling fuel prices as well as introduction of NETA. Gas market reform has led to liquid and well functioning wholesale gas market with gas prices de-linked from oil prices. UK gas production decreasing (imports projected to be >50% of demand by 2020) but production remains significant and UK seen significant investment in import infrastructure (3 pipelines and 4 LNG terminals) with capacity of up to 153 bcm/y. Also, decision that no new subsidy needed for gas storage.

Lessons learned from UK experience 6 Lessons learned from UK experience Importance of diversity of energy supplies (types and sources/routes) and sufficient infrastructure to ensure security of supply. Need for stable, transparent and predictable regulatory regime to give investors confidence to invest. Need for well functioning and integrated energy markets to provide price signals for trade and investment. Need for (transitional) support for low-carbon investment but should be market-based to reduce costs to consumers. Importance of improvements in energy efficiency.  

Case Study The UK’s experience of investment in renewables In 2012 renewables accounted for around 11% of electricity generation. In Q2 2013, around 15%. World Energy Council: UK one of just five countries to receive a “AAA” rating for secure, affordable and environmentally-friendly energy. Renewables UK estimates the sector supports 270,000 direct and indirect jobs, and by 2020 up to 400,000 direct and immediate supply chain jobs. Since 2010 over £29 billion has been invested in renewables – potential to support around 30,000 jobs across UK. UK now rated in the top five for world wide destinations to invest in renewable energy (Ernst & Young). UK rated most attractive in world for offshore wind investment.

Addressing the UK’s Future Challenges: Electricity Market Reform Challenges ahead for the UK’s electricity market: Security of Supply - around a fifth of capacity in 2011 to close by end of decade. Much to be replaced by more relatively inflexible (eg nuclear) and intermittent generation (eg wind); Ambitious climate and renewable targets to build a cleaner energy future – legally binding 80% reduction in greenhouse emissions by 2050 (Climate Change Act) and 15% of energy from renewable sources by 2020; Demand for electricity is likely to grow over the next 40 years as UK increasingly turns to electricity for transport and heat sectors; Up to £110 billion investment in electricity generation and transmission required by 2020. July 2011 - White Paper - “Planning our electric future: a White Paper for secure, affordable and low-carbon electricity.”

Electricity Market Reform Main Features Feed-in tariffs with contracts for difference (FiT CfDs) - long-term contracts to provide stable and predictable incentives for companies to invest in low-carbon electricity generation. They give greater certainty and stability of revenues by removing exposure to volatile wholesale prices, and protect consumers from paying for support when electricity prices are high. Capacity market to provide security of electricity supply, by ensuring sufficient reliable capacity is available. The first Capacity Market auction will be run in 2014, subject to state aid approval. Capacity providers successful in this auction will be required to provide capacity from the winter of 2018-19. Carbon price floor provides greater certainty and support to the carbon price faced by the sector, thus giving a credible long-term signal that the Government is serious about encouraging investment in low-carbon electricity generation now. Emissions performance standard will provide a regulatory backstop on the amount of emissions that new fossil fuel power stations are allowed to emit.

Electricity Market Reform Long-term Vision Long-term vision - low-carbon generation to compete fairly on cost, without financial support and delivering the best deal for the consumer. However, technologies are at different stages of development, market failures mean low-carbon generation can’t compete fairly with fossil fuels, and we may not be able to rely on the market to deliver security of electricity supply. Therefore EMR is a set of arrangements to take us through this transition, working with the existing market and maintaining a liberal approach while addressing market failures.

Interaction of UK and EU direction of travel UK and EU objectives are identical: full support for completion of internal market; transition to low carbon and security of supply at lowest cost to consumers; active participation by consumers (smart meters, smart grids, demand side response); clear information for consumers to aid choice. High level approaches are compatible: market-based methods to reduce costs, eg CfDs for low carbon generation; Capacity Market – designed so that we can exit from it if the underlying market develops to the point where it is no longer required; carbon price signal, eg Carbon Price Floor and reform of the EU-ETS; well functioning wholesale markets to ensure electricity flows follow prices and market signals where investment is most efficient (implementation of target model); increased interconnection to increase security of supply and reduce costs to consumers.