Capacity market design for demand-side participation: EMR proposals

Transcription

1 Capacity market design for demand-side participation: EMR proposals Stephen Woodhouse D3 Expert Stakeholder Workshop 3 March 2011

2 Pöyry what do we do? employees across 49 countries

3 Pöyry is Europe s leading energy management consultancy Europe s leading management consultancy company specialising in the energy sector Offering expert advice from strategy to implementation on policy, regulation, business operations, financing and valuation and sustainability Providing in-depth market intelligence across Europe Pöyry offices Pöyry Management Consulting energy offices (c) grafikdienst.com Over 200 energy market experts in 14 offices across Europe: Oxford Düsseldorf Helsinki London Madrid Milan Moscow Oslo Zurich Paris Stockholm Stavanger Vienna Villach 3

4 Agenda 1. Why introduce a capacity mechanism (CPM)? 2. Overview of CPM proposals 3. Participation of demand-side in CPM 4

5 Decarbonisation of generation will significantly change the dispatch pattern of generation in coming decades Generation (GW) 50 Intermittent generation Electricity price ( /MWh) Generation (GW) ElectricityPrice Nuclear Biomass CCSCoal Coal CHP CCGT Other renewables Demand Peaking plants Imports 0 01-Jan 04-Jan 07-Jan 10-Jan 13-Jan 16-Jan 19-Jan 22-Jan 25-Jan 28-Jan 31-Jan Charts show January 2030 in GB, wind pattern based on 2000 (Pöyry intermittency study for GB and Ireland)

6 Returns on capital will be squeezed into a few hours a year Capacity margins in GB Hours of significant fixed cost recovery Capacity margin 30% 25% 20% 15% 10% 5% 0% 0% 5% 10% 15% 20% -5% -10% Number of periods No. hours/yr return on capital is made 1,

7 EMR proposals seek to improve investment environment for a sustainable generation mix using four central policy instruments A carbon price underpin to reduce downside carbon price volatility, making low carbon investments more attractive Carbon Price Support Feed-in Tariff Long-term contracts to remunerate low carbon generators at a defined tariff (in addition to, or instead of, energy market revenue) EMR To remunerate capacity providers based on their availability, allowing investment in flexible plant Capacity Mechanism Emissions Performance Standard A regulated limit upon point CO 2 emissions allowed from new (or life extended) power stations 7

8 Agenda 1. Why introduce a capacity mechanism (CPM)? 2. Overview of CPM proposals 3. Participation of demand-side in CPM 8

9 What are the details of capacity payment mechanism? CPS FIT CPM EPS RO Design Scope Procurement Market interaction Quantity-based mechanism with the desired volume (and possibly mix) of capacity determined by central body The capacity price will be common to all with a contract (but not to all capacity providers), rather than set through bilateral trade Mechanism will be targeted, rather than market wide Focused upon peaking/flexible capacity required to make-up anticipated capacity shortfall Demand side, storage and interconnection may be eligible not easy to achieve Central body tenders to secure capacity to offset an anticipated shortfall Different resource types can be secured, with different payments and contract lengths potentially Tender process will determine the level of the capacity payment Two options for dispatch 1. Last resort dispatch 2. Economic dispatch Aim to minimise distortion linked to capacity utilisation and payments Day-ahead reserve market? Cashout reform? 9

10 What key questions/uncertainties remain? CPS FIT CPM EPS RO 1 Capacity requirement Market interaction 4 How will capacity requirements (mix) be set, over what timescales and by whom? Regulatory risk? Criteria to determine utilisation / dispatch? Impact of capacity contracts on market prices? Cost recovery? Reserve market? 2 Capacity type What capacity capability required? Will smart energy, DSM, storage and interconnection be eligible? CPM Contracting How will tendering operate, what time horizon and by whom? Contract structure (duration, pricing)? Existing/prospective capacity eligible? 5 3 Interaction with SEM Will Moyle and E-W capacity be eligible for GB capacity payment? Will the GB CPM affect price relativities between markets? Reliability How will non-delivery or nonavailability be treated? 6 10

11 How the CPM might be implemented and its impacts CPS FIT CPM EPS If the CPM led to 5GW of OCGTs, how these plant are used in the BM could have a significant impact on market prices at the top part of the price duration curve RO No Option OCGT BM price bid OCGT BM operation Imbalance price Effect on market price Effect on build VoC 0 Status quo ~SRMC (if on STOR) Some Slight distortion Slight distortion No merchant build of OCGTs High 1 Last resort VOLL bidding VOLL 10,000/MWh Virtually none Reflects VOLL: no distortion No distortion 5GW OCGT CCGTs still built High 2a High LRMCs* in imbalance High LRMC say 1000/MWh Some Reflects LRMC: Some distortion Limited distortion: Possible price cap at 1000/MWh? Some OCGTs CCGTs still built High 3a SRMCs give some distortion ~SRMC say 200/MWh Lots Reflects LRMC: More distortion More distortion Possible price cap at 200/MWh? 5GW OCGT No new CCGTs Med/ Low? * LRMCs are a function of the load factor of the plant, so can vary significantly depending on the load factor 11

12 If the market prices in the additional 5GW of OCGTs, the effects could be significant CPS FIT CPM EPS RO Option 1 (Last Resort) has the same price profile as the Baseline. This is because the OCGTs only bid into the BM at very high prices to prevent distortion of the wholesale price 7,000 6,000 Baseline Option 1 Option 2a Option 3 Option 2a (High LRMCs in imbalance) could have no effect on most of the price profile, but lead to a cap on market prices Wholesale price ( /MWh) 5,000 4,000 3, , ,000 Wholesale price ( /MWh) % 0.1% 0.2% 0.3% 0.4% 0.5% In Option 3a (modelled as the Preferred scenario), market prices are distorted by the OCGTs, as participants are willing to go short in imbalance % 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% Baseline Preferred This could also lead to implicit price caps if the imbalance price never exceeded the BM bid price (~SRMC) of plants under contract. 12

13 Agenda 1. Why introduce a capacity mechanism (CPM)? 2. Overview of CPM proposals 3. Participation of demand-side in CPM 13

14 There are a number of options for the provision of flexible capacity Flexible Generation Increased interconnection Demand Side Response Peaking capacity for low wind periods Interconnection to neighbouring markets Incentives for peak demand reduction Flexible plants to deal with short-term variability Storage at point of generation e.g. CAES/batteries/PS Full utilisation of existing network to reduce wind curtailment Transmission reinforcement to link wind to demand Flexible charging patterns from electric vehicles Heat electrification with storage potential CPM should encourage efficient provision of capacity that is flexible, responsive, reliable 14

15 Material deployment of DSR could be valuable for managing capacity on both the wholesale market and the networks Demand shifting can provide real benefits Demand (GW) Inflexible Flexible heat Flexible appliances Flexible EV 0 24-Jan Lower and more stable generation costs Management of peaks to minimise network investment Networks and markets can both see the DSR benefits 15

16 CPM contracting horizon will affect ability of DSR to participate There remains significant uncertainty about amount of renewable deployment flexibility of low-carbon generation development of networks construction of interconnection changes in demand-side flexibility This means that there are benefits of procuring capacity closer to real-time when volume and type of capacity requirements known with greater certainty trade-off against stability and certainty needed to support investment and financing A key question is how close to real time? when does capacity provision stop and ancillary services start? 16

17 Stephen Woodhouse +44 (0) , Pöyry Management Consulting King Charles House Park End Street Oxford, UK OX1 1JD +44 (0) Pöyry Management Consulting (UK) Ltd. Registered in England No King Charles House, Park End Street, Oxford OX1 1JD.