APEx Conference 2014 October 26-28, Krakow, Poland. Capacity is Capacity is Capacity Mike Thomas October 2014

Transcription

1 APEx Conference 2014 October 26-28, Krakow, Poland Capacity is Capacity is Capacity Mike Thomas October 2014

2 Capacity is the ability to avoid involuntary curtailment of load Capacity is a feature of just about everything

3 Capacity is just one part of a complex overall equation What would your fee be if you paid what it costs when you got sick? Cost determined by whether you got sick on a busy day? Cost of a rare and unusual treatment? Cost of special emergency care? What if your diagnosis (forecast) was wrong? Who pays for the specialist you later found out you didn t need? If you don t have enough time to shop around when you are sick, how do you get competitive pricing? How would the cost of disaster or pandemic preparedness be recovered? What if Cost, you didn t reliability, /couldn t responsiveness, pay your share? and risk management are clearly also key 2

4 Capacity can be measured and valued over different timescales Should capacity be priced on same timescale as energy? Clearly values use rather than existence Can the volatile prices that result from inelastic supply or demand be tolerated by the competition authorities or other stakeholders? If capacity is priced separately, what timescale should be used? The longer the timescale, the less volatility, but the more risk a price that is too high or too low will endure much longer If capacity is targeted for some future point in time, the pricing may need to be done early enough to maximise competition for supply More elastic supply means less volatile prices But greater exposure to forecasting risk 3

5 4 Everyone has their own special problem

6 Asian countries have many different arrangements to support capacity The Single Buyer market model is the most prevalent market structure in the region The Energy only market design is found in Eastern Australia, New Zealand, Singapore and the Philippines. An Energy + Capacity design is found in South Korea (SK) and Western Australia (WA) And China neither energy nor capacity nor PPA. Just a standing, periodically changed on grid price PPAS with Contractual Capacity Payments Central Planning Bid-based above SRMC Merchant Dynamic Capacity Payment Merchant / Government Standing Buy Price Planned / Merchant Hybrid China Vertically Integrated Market Single-buyer Market Energy + Capacity Market Energy-only Market Each has its strengths and weaknesses for different times and different contexts 5

7 What s going on in some of the regional markets? EO Markets with Price Caps that are Too Low Singapore (EO E+C???) New capacity not needed for many years, but analysis suggests significant increase in volatility will be needed to support new investment when it is eventually needed Government has had problems accepting price spikes in the past Philippines (EO E+C???) Severe price caps Energy crisis? Persistent or Increasing Concern about Market Power and Bidding? Stakeholder Concern About Policy Risk? Eastern Australia (EO E+C???) Stalled South Korea (E+C) Is the Grass Greener Elsewhere? Western Australia (E+C EO???) Some interesting trends and concerns that may support future pressure for new capacity markets 6

8 7 Big destabilising challenges

9 Four major stress points emerging Fuel markets Role of coal and carbon Net Demand Growth Volatility of outcomes due to external events Each market has been affected differently 8

10 Why so much concern? Fuel markets have been pretty disruptive COAL WINDOW 1991 Discovery of Malampaya gas field 1997 NPC/FirstGen sign GSPAs with SPEX/OXY COAL WINDOW 2006 Singapore commits to LNG imports 1992 Singapore first gas unit commissione d 2001 Commission of Malampaya 1995 Hong Kong first gas unit commissione d We re in a coal window and many Asian countries had previously committed to natural gas 9

11 Why so much concern? Shift in demand growth in the Western Australian SWIS increased excess capacity, and launched an industry review by government Change in Successive Forecasts WA: SWIS 2006 to to 2013 The underlying capacity mechanism did not adjust enough to reflect changed market conditions 10

12 Why so much concern? Severe price spikes in the Philippine WESM during a prolonged gas supply outage spooked government and regulators Average monthly WESM spot settlement price* ( ) PhP/kWh Gas scheduled outage and plant outages Transformer breakdown and San Jose substation congestion Plant outages and coal limitations Plant outages Gas curtailments and low hydro Low hydro Plant forced maintenance outages and HVDC link maintenance Gas curtailments and plant outages ERCregulated price reduction Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Note: * Buying price (with 100% surplus) Source: PEMC; TLG analysis 11

13 sty-50 lis-51 wrz-53 lip-55 maj-57 mar-59 sty-61 lis-62 wrz-64 lip-66 maj-68 mar-70 sty-72 lis-73 wrz-75 lip-77 maj-79 mar-81 sty-83 lis-84 wrz-86 lip-88 maj-90 mar-92 sty-94 lis-95 wrz-97 lip-99 maj-01 mar-03 sty-05 lis-06 wrz-08 lip-10 maj-12 Why so much concern? Weather effects vary widely over time the Philippine WESM to deal with strong swings between El Nino and La Nina NOAA Oceanic Niño Index (ONI) Deg. C 3,0 El-Nino 2,5 ONI measures average surface sea temperatures and it is used by the US National Oceanic and Atmospheric Administration (NOAA) for their operational definition of El Nino and La Nina 2,0 1,5 1,0 0,5 0,0 (0,5) (1,0) (1,5) (2,0) La Nina (2,5) Source: NOAA 12 Volatile outcomes increase government concern over the market

14 13 It s about risk management not just efficiency

15 Peak Demand (GW) Can these substantial forces be managed cost-effectively in competitive but very small markets? WA (SWIS) SG (NEMS) PH (WESM) New Zealand Ireland (SEM) Canada (AIS) EA (NEM) South Korea US (PJM) E+C 14 EO

16 Smaller markets, particularly energy-only markets, face several difficult challenges Competitive structure vs scaled-up businesses Transparency and depth of contracting Challenge of managing evolution (avoiding re-concentration) Lumpiness difficulty supporting the most efficient larger-scale technologies due to a bigger gap between post-entry prices and pre-entry prices Lumpiness impacts on ancillary services costs and cost allocation mechanisms Closer proximity and thinner skin relative to government An EO market design places greater demands on stakeholders to develop and manage their sufficient risk management strategies and instruments (contracts) 15

17 Risk mitigants Significant hydro storage mitigates sharp spikes and reduces volatility Large number of players and competitive structure enhances contracting, trading, transparency, and information content of spot market Less peaky load growth and load shape reduces likelihood of deep disruptions Larger markets can absorb similarly sized mistakes (too much or too little) all else equal over a give timeframe with less price impacts Markets can experience many years where supply exceeds demand due to historical investment, new policies, or fuel-market shifts that support investment independent of a fully properly functioning EO or E+C market Predictable, steady, (not surging) growth These are just some features that alter the characteristics of risk in different markets 16

18 17 Key threshold questions for deciding how to remunerate capacity in your neighborhood

19 Key prerequisite is to recognise that it takes all three main markets to determine what type of capacity you get Capacity what is the least expensive way to avoid involuntary curtailment of load at peak Energy what determines whether to build something other than that which is the least expensive form of standing capacity to avoid involuntary curtailment of load at peak Reserves / Ancillary Services what determines whether to pay to secure additional capabilities / responsiveness beyond what capacity and energy payments support All sources of capacity have the same value Trade off higher capital cost for improved energy conversion efficiency Trade off higher capital costs or reduced energy conversion efficiency for other valuable response characteristics Determines Optimal Short, Medium, and Long- Term Investment Mix 18

20 The capacity price is the same for all types of capacity-providing technologies How different market designs work to produce equivalent results Suppose the price of natural gas falls, relative to coal OCGT CCGT TENDENCY COAL ENERGY PLUS CAPACITY The energy price must fall but by less than the fall in fuel costs to red hurting blue while leaving red and gold better off. The capacity price must increase to signal more gold, but not by enough to offset the loss of value to blue. The capacity payment does not cover the full cost of red, so red enters only as a combination energy + capacity play. ENERGY ONLY The energy price must get more peaky and volatile to signal more gold. But the higher peak prices are offset by much lower off-peak prices to discourage blue. The shoulder prices must be high enough to justify the increased energy conversion efficiency of red vs gold away from peak Blue loses unless previously contracted Blue loses unless previously contracted CURRENT OPTIMAL 19

21 Second prerequisite: determine what reliability means to your market Frequency how often? Duration how long? Depth how many MW? Systems with infrequent but deep and long shortage risk have very different capacity capability requirements than systems with short and shallow interruptions. You can import another market s design, but not the local context in which it operates 20

22 SGD/MWh Third prerequisite: only consider an EO market if you can tolerate a price cap fully consistent with your definition of reliability Required prices and capacity factors for OCGT fixed cost recovery OCGT LRMC Fewer than 20 hours / year OCGT operation NEMS Price Cap hours / year OCGT operation OCGT SRMC on Liquid % 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% Australian NEM price cap Singapore Price Cap Philippines Price Cap Aligned Not Aligned Low price caps lower reliability unless something else lucky happens 21

23 Fourth prerequisite be clear about how you will distinguish scarcity pricing from market power abuse Market concentration How to limit it Level of cross-ownership Control of portions of the load curve Simple metrics miss some of the richness of the problem Local regulatory definition of market power Acceptable margins above SRMC? Degree of understanding of investment incentives and risk When investments have long lead times, clarity becomes more important Scarcity pricing is essential in well-functioning EO markets, but can be easily confused with market power abuse leading to increased regulatory risk or loss of confidence in the market 22

24 Fifth prerequisite recognise that capacity is about avoiding involuntary load shedding, not just about meeting peak demand Average monthly WESM spot settlement price* ( ) Planned Malampaya Gas Supply Outage PhP/kWh Jan-07 Transformer breakdown and San Jose substation congestion Plant outages and coal limitations Jul-07 Jan-08 Note: * Buying price (with 100% surplus) Source: PEMC; TLG analysis Plant outages Jul-08 Jan-09 Gas curtailments and low hydro Jul-09 Low hydro Jan-10 Jul-10 Plant forced maintenance outages and HVDC link maintenance Jan-11 Jul-11 Jan-12 Jul-12 Gas scheduled outage and plant outages Gas curtailments and plant outages Jan-13 E+C markets can need design features to focus more on shoulder and off-peak supply shocks (EO markets tend to do this more naturally) Jul-13 ERCregulated price reduction Jan-14

25 Sixth prerequisite understand exposure to energy constraints Some markets become energy constrained before they become capacity constrained if, for example, they run out of fuel (hydro), leaving ample capacity without ability to generate sufficient energy Capacity value must reflect the relative level of constraint on supply a pure unconstrained capacity resource has greater value than a capacity resource whose operation cannot be sustained Constrained capacity resources still have value just want to avoid paying extra for the unconstrained value if they cannot provide it Hydro constrained resources Demand response These can be particularly vexing issues in both EO and E+C markets 24

26 Summary Capacity is capacity. It is simply an attribute that is associated with the ability to keep the lights on. Other features and sources of value work together with capacity to shape investment and outcomes If we say not all capacity is the same, we are confusing capacity and some other thing. Capacity -- the least cost option to meet load at a point in time Energy the trade-off between capital costs and energy conversion efficiency Ancillary/other services the tradeoff between capital and fuel costs and the cost of enhanced flexibility and response Choosing between market designs is not a question of whether one is better than the other, but rather which one fits the circumstances 25

27 Thank you For more information please contact us: Power Utilities Energy By Insight Rigour Value Mike Thomas By phone (mobile) By mail Tower 1, Metroplaza 223 Hing Fong Road, Kwai Fong, Hong Kong Online 26