Is the UK still leading power sector reform? Theory and the real world

Transcription

1 ICEA discussion meeting Is the UK still leading power sector reform? Theory and the real world Art Workers Guild, London, 22 January 2014 ECONOMIC CONSULTING ASSOCIATES 41 Lonsdale Road London NW6 6RA UK tel +44 (0) fax +44 (0) Ray Tomkins, ECA

2 Introduction to ECA Experience in electricity, gas, water and other infrastructure sectors, including Gas and power markets Infrastructure economics Sector planning Regulatory advice Energy policy advice Market studies and due diligence Prices and tariffs Renewable energy and low carbon International scope with particular experience in Europe, Africa and Asia Clients include World Bank, EBRD, ADB, other banks, regulators and private sector ECA has carried out projects in electricity, gas and other infrastructure sectors in over 50 countries in Europe, Africa, Middle East, Asia and S America Economic Consulting Associates Ltd

3 What will be discussed A short history of UK electricity market reform What drives it Why did it work? Why didn t it work? Other countries followed The plight of small countries Decarbonisation Some disasters I have known Power market reform. still a work in progress Economic Consulting Associates Ltd

4 What is the problem? In the news UK prices, energy bills, too high Are electricity prices too high? What is your monthly electricity bill? Do you have solar PV cells on your roof? Public perception is part of the problem Policy tinkering is another part ED Davey (Dec 2013) it is right that people ask whether these rises are justified and what the Government is doing to keep energy bills affordable now and in the long-term Economic Consulting Associates Ltd

5 A tale of two countries Cambodia and Laos are two of the lowest income countries in Asia In 2001examined problems of energy investment and rural electrification There was no direct relationship between power prices and price complaints in fact, the opposite 2c/kWh 50c/kWh Economic Consulting Associates Ltd

6 The economic drivers Power plants are dispatched according to their marginal costs (or bids) the merit order or dispatch curve Any market should be able to recover marginal costs But how to recover fixed costs capital costs are the problem (and lead to market fixes) Hourly dispatch curve Hourly demand Economic Consulting Associates Ltd

7 UK Pool The UK pool was introduced in 1990 Mandatory pool, all plants bidding at marginal prices Thermal generation was privatised with (only) 2 generators Pool had high liquidity (all power bid into pool) Stranded assets leading to levies for coal and nuclear plant, as their fixed costs could not be fully recovered in pool price Investments appeared largely because of dash for gas gas was cheap enough and faster to build than coal Economic Consulting Associates Ltd

8 Demise of the pool Difficulty to recover fixed costs was alleviated by a capacity payment mechanism (LOLP x VOLL) This became heavily gamed due to withholding of capacity Vertical integration appeared as Distcos invested in generation They became less sensitive to the spot price Economic Consulting Associates Ltd

9 Was NETA BETTA? The new market design, NETA, introduced in March 2001, mimicked the trading arrangements in other commodity and financial markets a mixture of spot and long term contract trading The basis was bilateral contract trading outside the central market (balancing market) Low liquidity in the balancing market Problems: DECC and Ofgem did not appear to see the oligopoly coming Complex rules created opportunities for gaming Economic Consulting Associates Ltd

10 Chicken or egg... What comes first? Privatise and then create a market But can only privatise with predictable and adequate prices Establish market with transparent prices, then privatise But governments cannot resist manipulating prices when they own the assets UK (pool) tried to do both at once big bang NETA tried to improve both simultaneously, but failed to prevent oligopoly in a thin market Greece tried the second route market first Economic Consulting Associates Ltd

11 Greece beating the market PPC generation Market (pool) PPC distribution The Greek market started in 2005 as a mandatory power pool (ala UK pool) But the national power company PPC was on both sides, so competition failed If a power company is on both sides of the market, they are indifferent to the market price New entrants could not compete Hellenic Petroleum CCGT was not able to be profitable T-Power merged - competing suppliers could not compete The pool did not transfer successfully to Greece (a small market) Economic Consulting Associates Ltd

12 Turkey better late than never 2001 Electricity law proposed balancing market 2013 final stage of market structure implemented Economic Consulting Associates Ltd

13 Turkey s market structure Turkey works (so far!) because market is growing fast and power plant efficiencies are increasing (new CCGT now 60%) Government still intervenes to protect price through state owned assets Economic Consulting Associates Ltd

14 Turkey capacity market proposal Suppliers must hold firm capacity certificates (FCCs) from generators equal to their demand (ie obligation is on suppliers) When a capacity shortage is forecast, an auction is held for new capacity Energy Contract Auction Winning generators receive energy contracts and FCCs Demand Supply Economic Consulting Associates Ltd

15 What of the smaller countries? - Zimbabwe Chronic power shortage with limited large customers for underpinning financing of private investment Hybrid market proposal to facilitate private sector generation investment Risk of crosssubsidy Economic Consulting Associates Ltd

16 Alternate Zimbabwe model Separate balancing market to avoid cross-subsidisation Economic Consulting Associates Ltd

17 UK Electricity Market Reform (EMR) Proposed EMR has 4 main elements: Fixed prices for low carbon generation (CfD FiTs) Renewables especially solar and wind Nuclear a 40 year CfD Carbon price support (CPS) Capacity Market (CM) Emissions Performance Standards (EPS) What are the market elements of EMR? Economic Consulting Associates Ltd

18 Contract for Differences (CfD) A highly flexible (financial) contract Provides guaranteed revenues with good incentives Does not require a market price prediction p/kwh Contract (CfD) Price Spot Market (Pool) Price Price Difference Paid to Seller Price Difference Paid to Buyer Economic Consulting Associates Ltd Time

19 Will EMR work? Doubtful though it depends what work means Coal being phased out (unlike Germany or the poorer countries of SE Europe using lignite ) Nuclear and RES - with high guaranteed prices Gas older plant cannot compete at current gas prices (spark-spread is only 10/MWh) Gas generation stranded assets to the value of 6Bn being phased out in UK, Europe Only gas plant will compete for dispatch in the competitive part of the market UK is leading countries into large subsidies Economic Consulting Associates Ltd

20 Capacity markets why? Future security of supply concern as nuclear plants reach endof-life and 12GW of coal, oil and gas plants retire under LCPD DECC : there is a need for unprecedented levels of investment to be sustained over many years to ensure security of supply, we will need to replace a quarter of our existing capacity by 2020, which are ageing and unlikely to meet environmental regulations Capacity markets around the world Economic Consulting Associates Ltd

21 What s changed? Capacity costs as % share of system total Energy cost Capacity cost Strongly growing share of capacity costs in total costs from 2020 High capital cost new generation Increasing role for thermal generators to provide flexibility and reserve, with low load factor Growing renewables share, pushing thermal generators down the merit order subsidies to renewables impact of increasing carbon prices on costs Potential for prices to become increasingly volatile and often negative high share of capacity costs in total costs for renewables means low marginal costs spilling of excess wind output will lead to low prices Economic Consulting Associates Ltd

22 The slippery slope and EMR CM proposal Slippery slope EMR CM proposals Peak market prices are capped Volume based (not price) Missing money Headroom falls for private investment returns Central body (not market) Targeted (not paid to all) Private capacity investments reduced Last resort dispatch (>slippery slope) Market prices rise Economic Consulting Associates Ltd

23 Policy questions for EMR EMR is a bolt-on which distorts prices and squeezes out private investment Will it lower prices? Does it reduce risk ( and help financing)? Is EMR a model for other countries to follow? Economic Consulting Associates Ltd

24 Gas to power got more difficult Small countries in Asia, Africa, South America, Europe struggling to invest in G2P (gas to power) Gas to power value chain comprises Upstream gas E&P Pipelines or LNG to country In-country pipelines and/or LNG terminals Power plants and transmission lines Requires very credit-worthy offtakers to guarantee the financing of the whole value chain = exporters! Examples: Sub-Saharan Africa, South East Europe/Balkans, Central America Strongly suggests need for continuing SOEs in power sector Economic Consulting Associates Ltd

25 G2P in Sub-Saharan Africa 24 countries are likely to have some gas Proven and contingent gas resources are well over 300 Tcf, mainly in Nigeria, Mozambique and Tanzania G2P is almost non-existent, but large exports anticipated Credit-worthy power offtakers required to guarantee the financing of the value chain Financing may dictate the power market structure Economic Consulting Associates Ltd

26 G2P concepts in main producers Nigeria and WAGP Mozambique Tanzania Economic Consulting Associates Ltd

27 Tanzania's power transmission lines, gas pipelines and power demand centres D 330 MW (2014) J Kagera I H G F E Dodoma B A C Key issue for development is coordination of investments and financing or gas will go to exports K Economic Consulting Associates Ltd

28 SE Europe the EC Gas Ring concept Lots of gas flowing past/nearby, including new Southern Corridor (Azeri gas) Very little gas development, minimal G2P 6.5 bcm/yr Operational?? bcm/yr 20xx (?) Existing Planned Power demands are small; infrastructure costs are high 2 bcm/yr 2015 Coordinated approach has attractions since large power offtakers required for financing 0.8 bcm/yr Operational 10 bcm/yr Economic Consulting Associates Ltd

29 Central America introducing gas to power 7 countries with small demands and very expensive generation A regional power interconnector (SIEPAC) G2P concepts based on LNG (or pipeline) imports and aggregating power demands Economic Consulting Associates Ltd

30 The Real World : Driven by bureaucrats The EU renewable energy (RES) country targets are imposed on power sectors and need to be managed within the reform process No relation to least cost or to maximising welfare benefits EU RES targets to 2020 (for meeting the overall 20% target): UK 15% Bulgaria 16% Moldova 17% Serbia 29% Montenegro 33% Economic Consulting Associates Ltd

31 What could countries do? RES Supply curve could be used for least cost planning Example for Serbia additional biomass is uncontrollable or encourages growth of illegal logging Biomass Economic Consulting Associates Ltd

32 What can go wrong? Bulgaria has largely tried to follow UK market approach Bulgaria has the lowest electricity prices in Europe But high feed-in tariffs especially for solar, wind Failed to align falling capital costs with FiTs Meeting RES target too quickly, with no caps Lack of regulatory independence, political interference Economic Consulting Associates Ltd

33 Crisis in Bulgaria over electricity prices (but lowest electricity prices in Europe!) Economic Consulting Associates Ltd

34 Supply curve least cost Based on the least average cost options, disregarding must run constraints including FiTs But RES is outside the market dispatch Economic Consulting Associates Ltd

35 Is the. UK still leading power sector reform? Actual dispatch with must-run plants High cost RES and other plants dispatched before lower cost plants Nuclear power plant Kozloduy cannot be fully dispatched Electricity costs (and prices) rising fast Political interference, conflicts of interest and regulatory failures Extra cost Economic Consulting Associates Ltd

36 Is the UK still leading power sector reform I hope not! Nobody is likely to copy the EMR Market reform models must be fit-for-purpose and countries differ substantially Power markets are a WIP; continuous redesign as companies work out how to manipulate the rules to their advantage (and regulators invent new rules) Economic Consulting Associates Ltd

37 ICEA discussion meeting Is the UK still leading power sector reform? Theory and the real world Art Workers Guild, London, 22 January 2014 ECONOMIC CONSULTING ASSOCIATES 41 Lonsdale Road London NW6 6RA UK tel +44 (0) fax +44 (0) Ray Tomkins