Adapting energy markets to a low- carbon future David Newbery 12 th - - PowerPoint PPT Presentation

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Adapting energy markets to a low- carbon future David Newbery 12 th - - PowerPoint PPT Presentation

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Adapting energy markets to a low- carbon future David Newbery 12 th ACCC Regulatory Conference Brisbane 28 th July 2011 http://www.eprg.group.cam.ac. uk Outline The Challenge: climate change What is needed to deliver low-C electricity?

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Adapting energy markets to a low- carbon future

David Newbery 12th ACCC Regulatory Conference Brisbane 28th July 2011

http://www.eprg.group.cam.ac. uk

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D Newbery ACCC 2011 2 Newbery IIB 1 2

Outline

  • The Challenge: climate change
  • What is needed to deliver low-C electricity?

– What is wrong with carbon trading as in ETS?

  • Delivering low-C at reasonable cost

– Contracts to lower cost of capital – address carbon pricing – care in designing renewables support

  • UK’s Electricity Market Reform and Ofgem’s

Low Carbon Network Fund

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D Newbery ACCC 2011 3

http://www.withouthotair.com/

Height is emissions/head, areas give total emissions (MacKay, 2008)

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D Newbery ACCC 2011 4

1 2 3 4 5 6

0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

cumulative post-1750 emissions (trillion tonnes carbon) peak CO2-induced warming relative to 1750

.

Low High Oil Gas Coal reserves Unconventional oil and gas Coal resource Now Median prediction most model predictions in this range unlikely

If we want a 50% chance of less than 2C rise we can only emit another 500 Gt C ever

After MR Allen et al. Nature 458, 1163-1166 (2009) doi:10.1038/nature08019

Peak CO2-warming vs cumulative emissions 1750–2500

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D Newbery ACCC 2011 5

Total cumulative emissions determines global warming

  • Delaying peak

requires a faster subsequent decline

  • peak should be

before 2020

Source: ENEP Emissions Gap Report 2010

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D Newbery ACCC 2011 6 Newbery IIB 1 6

Policies to mitigate climate change

  • GHG emissions are a global stock public bad

– uncertain distant damage with uneven impacts

=> very hard to agree coordinated policies

– damage regardless of emissions location, persistent

=> damage moderately independent of date of emission

– much irreversible over historical time scales

  • Solution: uniform charge for GHG emissions,

– rising at discount rate: Australia has right approach – reset in light of new information

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D Newbery ACCC 2011 7

Failures of EU emissions trading

  • Current ETS sets quota of total EU emissions

– Weitzman argues for tax/charge not quota

  • EU Renewables Directive increases RES

=> increased RES does not reduce CO2 => reduces price of EUA => prejudices other low-C generation like nuclear

  • Risks undermining support for RES

Solved by fixing CO2 price instead of quota

  • r choosing a carbon tax!
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D Newbery ACCC 2011 8

EUA price October 2004-May 2011

5 10 15 20 25 30 35

Oct- 04 Apr- 05 Oct- 05 Apr- 06 Oct- 06 Apr- 07 Oct- 07 Apr- 08 Oct- 08 Apr- 09 Oct- 09 Apr- 10 Oct- 10 Apr- 11

Euro/t CO2 OTC Index First Period Second period Dec 2008 Second period next Dec CER 09 CER 2010

start of ETS Second period

Crashed as no banking Crashed when use revealed Depressed by Renewables Directive and then recession

ETS is neither stable nor supports adequate carbon price

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D Newbery ACCC 2011 9 Newbery IIB 1 9

Start of ETS

Costs of errors setting prices or quantities

Reductions in emissions Correct MC MC Best estimate of Marginal Cost of abatement MB, Marginal benefit from abatement

£/tC

efficiency loss from tax efficiency loss from quota t

Q*

Q

t*

With tax would produce here at low cost With quota would produce up to here at high cost

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D Newbery ACCC 2011 10

2020 projected CO2 price

10 20 30 40 50 60 70

with 12.5% renewables with 20% renewables 2009 projections

Euros/tonne CO2

2008 projections 2009 projections after Renewables Directive and recession Renewables depresses C-price

Source: Committee on Climate Change, 2008 and 2009

Renewables target undermines CO2 price

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D Newbery ACCC 2011 11

Making carbon prices credible

  • Carbon taxes - can be readily changed
  • Emissions trading + banking=> rising price floor

– but vulnerable to shocks - credit crisis, Fukushima,.. => Carbon Bank trades EUAs to stabilise price?

  • need credible future C price over 20+ yrs

– €25/EUA 2010 => €34 in 2020, €61 in 2040 ... – Make it credible: write CfD on this path – or write a contract for low-C generation

make low carbon investments financable

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D Newbery ACCC 2011 12

Start of ETS

2020 CCC’s ESI carbon targets are challenging

183 Mt 100 Mt = 55% 2006

Almost decarbonised

  • France shows it is possible
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D Newbery ACCC 2011 13

Rapid decarbonisation of electricity is possible -

with nuclear power

CO2 emissions per kWh 1971-2000

100 200 300 400 500 600 700 800 900 1000 1970 1975 1980 1985 1990 1995 2000 gm/kWh

USA Italy UK Europe France

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D Newbery ACCC 2011 14

Background to EMR

  • Security of supply: reserve margin falling fast

– 12 GW coal decommissioned by 2015 because of LCPD (20% of peak demand) – 6.3 GW nuclear decommissioned by 2016 – extra flexible generation needed to handle wind

  • Climate change challenge: reach <100gm/kWh 2030

– Renewables falling short of targets – Nuclear not attractive at current CO2 price

  • Cost rising: 2020 targets might cost £200 bn

= £760 per household/yr, current elec bill = £450/yr

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D Newbery ACCC 2011 15

Start of ETS

More capacity needed by 2015

SKM (2008) mid-scenario projection

2020

10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 110,000

2020 middle interconnect

  • r
  • ther RES
  • ther

biomass

  • ffshore

wind

  • nshore

wind gas nuclear new coal

  • ld coal

demand

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D Newbery ACCC 2011 16

UK climate change policy

  • 2027 legal target: 50% C reduction from 1990
  • Zero-C generation faces more risk than fossil

– electricity price set by gas or coal

  • Renewables support is expensive
  • return depends on electricity price

– set by gas and carbon price – and scarcity of ROCs - rewards failure

need to de-risk zero C investment

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D Newbery ACCC 2011 17

UK price movements: 2007 to 2009 in € 20 40 60 80 100 120 1-Jan-07 1-Apr-07 1-Jul-07 1-Oct-07 1-Jan-08 1-Apr-08 1-Jul-08 1-Oct-08 1-Jan-09 €/MWhe Electricity forward 2010 (€/MWh) Gas cost forward (2010) + EUA Coal cost forward (2010) + EUA EUA price in €/tCO2

Correlation of coal+EUA on gas+EUA slightly higher at 96%

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D Newbery ACCC 2011 18

UK ROC, EUA, and electricity prices

£0 £20 £40 £60 £80 £100 £120

2 2 Q 3 2 3 Q 1 2 4 Q 1 2 5 Q 1 2 6 Q 1 2 7 Q 1 2 8 Q 1 2 9 Q 1 2 1 Q 1

£/unit ROC+RPD 1 yr centred MA RPD ROC

windfall profits ROC price stable

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D Newbery ACCC 2011 19

EMR White Paper 12/7/11

  • To de-risk and incentivise low-C investment

=> Long-term contracts for credibility => C-price floor to underwrite wholesale price

– ensures nuclear is not “subsidized”

=> Capacity payments - targeted or general? => EPS 450gm CO2/kWh to deter unabated coal

  • “technical update” by end of year

– details of capacity mechanism – “more details” on contracting institution

Aim at law on statute book by spring 2013

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D Newbery ACCC 2011 20

Long-term contracts

  • Electricity price is driven by fossil prices

– exposes nuclear and renewables to market risk

  • CO2 price unpredictable, not credible
  • => long-term contract enforceable in courts
  • but technologies differ and so should contracts

=> simple FIT for on-shore wind => auctions for off-shore wind? => Complex contract for nuclear?

Contracting institution left for consultation

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D Newbery ACCC 2011 21

Carbon price floor

  • Needed because EUA price is volatile, too low

and lacks longer-run credibility

– undermined by 20-20-20 Directive and recession

  • to bring C-price up to appropriate level

– reduce implicit subsidy to CO2 emissions

=> ensures wholesale electricity price adequate to support mature low-C investment

  • => nuclear power will not then be subsidized

Introduced in Budget March 2011

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D Newbery ACCC 2011 22

UK’s Carbon Price Floor

Source: EEX and DECC Consultation EUA price second period and CPS £(2009)/tonne

£0 £5 £10 £15 £20 £25 £30 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

£(2011)/EUA second period forward price Carbon Support Price

As at 1 Jun 2011 to £70/t by 2030

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Projected levelised generation costs 2017 NOAK

20 40 60 80 100 120 140 160 180

G a s C C G T N u c l e a r P W R C C G T + C C S A S C C

  • a

l + F G D A S C C

  • a

l + F G D + C C S C

  • a

l I G C C C

  • a

l I G C C + C C S O n s h

  • r

e w i n d O f f s h

  • r

e w i n d O f f s h

  • r

e w i n d R 3

£.MWh extra for DECC C02 central case extra for 10% interest CO2 costs £20/t CO2 T&S Decommiss- ioning fuel costs variable opex Fixed Opex Capital Cost 7.5%

CCGT at £20/t CO2

CCGT wins, nuclear (nth

  • f a kind) viable

Off-shore wind most expensive

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24

Projected levelised generation costs 2017 NOAK

20 40 60 80 100 120 140 160 180

G a s C C G T N u c l e a r P W R C C G T + C C S A S C C

  • a

l + F G D A S C C

  • a

l + F G D + C C S C

  • a

l I G C C C

  • a

l I G C C + C C S O n s h

  • r

e w i n d O f f s h

  • r

e w i n d O f f s h

  • r

e w i n d R 3

£.MWh extra for 10% interest extra for DECC C02 central case CO2 costs £20/t CO2 T&S Decommiss- ioning fuel costs variable opex Fixed Opex Capital Cost 7.5%

N-th of a kind Nuclear wins; CCS, on-shore wind close

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25

Projected levelised generation costs 2017 NOAK

20 40 60 80 100 120 140 160 180

G a s C C G T N u c l e a r P W R C C G T + C C S A S C C

  • a

l + F G D A S C C

  • a

l + F G D + C C S C

  • a

l I G C C C

  • a

l I G C C + C C S O n s h

  • r

e w i n d O f f s h

  • r

e w i n d O f f s h

  • r

e w i n d R 3

£.MWh extra for 10% interest extra for DECC C02 central case CO2 costs £20/t CO2 T&S Decommiss- ioning fuel costs variable opex Fixed Opex Capital Cost 7.5%

CCGT at £20/t CO2, 10% capital

Capital costs do not affect ranking if C price high

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D Newbery ACCC 2011 26

Levelised costs 2015, Australia

Source: EPRI (2010)

CO2 at $23/tonne CO2 at $45/tonne

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D Newbery ACCC 2011 27

Installed wind capacity

5,000 10,000 15,000 20,000 25,000 30,000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 MW

Denmark Germany Spain UK

CCC’09 UK 2020 target is 27,000 MW

UK wind very modest now at DE 2010 level UK’s target looks feasible at German roll-out rate

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D Newbery ACCC 2011 28

Variability and need for back-up

Source: Green and Vasilakos (2010) On-shore wind capacity factors 9-11 Oct 2003

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

hr 1 9- Oct- 03 3 5 7 9 11 13 15 17 19 21 23hr 1 10- Oct- 03 3 5 7 9 11 13 15 17 19 21 23 11- Oct- 03 hr 1 3 5 7 9 11 13 15 17 19 21 23

hours ending percentage

65% fall-off in 10 hrs = 18 GW 85% fall = 23 GW

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D Newbery ACCC 2011 29

Capacity mechanisms

  • Concern over backup needed for massive wind

– could have 7+ days of low wind at winter peak – demand side unlikely to help much here

  • such events are hard to predict

– so without a contract no-one would build just for that

  • Do we need it now? Wait and design carefully?
  • Is the US approach to a demand curve good?

Choice left for discussion - targeted or system wide; SO or contracting agency?

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D Newbery ACCC 2011 30

Flaws in wholesale market

  • Bilateral, thin illiquid markets that stimulated

extensive vertical integration

  • current design rules out pool & VOLL LOLP

– the old pool model now looks good

  • SO could run a voluntary pool for new entrants

and renewables?

  • Market coupling mandated by 2014

– could provide a better spot price

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D Newbery ACCC 2011 31 Newbery IIB 1 31

Regulation for low carbon

  • Generation needs incentives and standards- EPS
  • Networks are regulated

– have revenue stream, regulator can set rules

  • Challenge fund for innovation - the Low Carbon

Network Fund

– learn how to make distribution networks smarter

  • Transmission charges to influence location

– ensure renewables delivered efficiently

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D Newbery ACCC 2011 32

Low Carbon Network Fund

  • Ofgem’s LCN Fund = £500m 2011-2015

– for DNOs financed by customers – £150m divided among all DNOs for projects – £350m open competition, £64 m for first round

  • Aim: to stimulate DNOs innovation

– to facilitate move to low-carbon future – DNOs thought to be passive, regulated utilities – “oversize, bury and forget” rather than “optimize, monitor and control”

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D Newbery ACCC 2011 33

Ofgem concerned whether incentive regulation stimulates innovation

Rationale for LCNF

  • RPI-X for efficiency,

not innovation

  • DNs low risk - failure

not funded

  • No market reward from

innovation Value of LCNF

  • LCNF sufficient for several

flagship scale trials

  • leverage: trial results

disseminated to all DNOs

  • Competition mimics market

reward for innovation

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D Newbery ACCC 2011 34

LCN Fund structure

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D Newbery ACCC 2011 35

Criteria

  • Accelerates development of low-carbon future

– has direct impact on operation of DN

  • DNOs co-fund (>10%) for commitment

– involves other partners and external funds

  • Involves risk, generates new knowledge

=> disseminate all findings

  • demonstrates robust methodology, readiness,

relevance and timeliness

  • has potential to deliver customer benefits
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D Newbery ACCC 2011 36

LCNF results

  • First round: 11 bids (£180m) received , 4 chosen

– competitive bidding highly successful – innovative proposals with University analysis

  • CE Electric in NE England (£27m + £27m other

– flexible tariffs, advanced voltage control, storage

  • UK Power Networks in London (£24m + £12m)

– smart meters/tariffs, EVs, emulates 2020

  • Western Power in S Wales (£7.8m + £1.2m)

– monitor 1000 substations, 100k customers in real time

  • Central Networks in E Lincs (£2.8m+£0.7m)

– dynamic voltage control to increase wind access

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D Newbery ACCC 2011 37

Assessment

  • DNO’s proved very responsive

– incentives and competition matter

  • Wide range of partners involved

– encourages learning, integrates with smart meter trials and EV experiments – innovative ways of overcoming local inertia

  • Universities involved in data analysis

– ensures wide dissemination and independence

Network innovation needs regulatory encouragement

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D Newbery ACCC 2011 38

Conclusions

  • Central element is contracting

– need careful design and a commissioning body – wind needs location specific FIT

  • CPF underwrites CfD but distorts trade

– need to argue for EU carbon tax or equivalent

  • EPS rules out unabated coal
  • Capacity mechanism

– needed for peak and wind back-up – will depend on form of wholesale market

But EMR does not reform Market!

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D Newbery ACCC 2011 39

Supporting renewables

  • ROCs pay high price for generation

– but the support should be for delivering capacity not

  • utput as that is where the learning lies
  • At present wind pays higher annual costs in

distant locations to reflect transmission costs

– but Scotland is lobbying for a uniform charge

=> both greatly encourage v costly and distant wind farms FITs could handle this if sensibly designed

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D Newbery ACCC 2011 40

Location choices under LMP and spot pricing for wind

With ROCs wind farm inefficiently locates at N Pay wind for availability + spot price => efficient E

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D Newbery ACCC 2011 41

Acronyms-1

CfD contract for difference CCGT Combined Cycle Gas Turbine CCS carbon capture and storage CPF carbon price floor CCC Committee on climate Change DN(O) Distribution Network (Operator) EMR Electricity Market Reform EPS emissions performance standard ETS EU emissions trading system EUA EU Allowance for 1 tonne CO2 FIT Feed-in tariff: fixes price for power

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D Newbery ACCC 2011 42

Acronyms-2

GHG Green house gas (such as Carbon Dioxide, CO2) LMP Locational Marginal Price (nodal price as in the US) LNC(F) Low Carbon Network (Fund) LOLP Loss of Load Probability RES Renewable electricity supply ROC Renewable Obligation Certificate SO System Operator VOLL Value of Lost Load (now £9,999/MWh)

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D Newbery ACCC 2011 43 43

Estimated impact of EMR on averaged domestic retail gas and electricity prices (including VAT)

33% increase

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D Newbery ACCC 2011 44

Pessimistic

  • r realistic?

MacKay (2008)

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D Newbery ACCC 2011 45

5 plans “that add up” for 70kWh/d/p electricity

diversity Nimby LibDem Green Economic?

http://www.withouthotair.com/

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D Newbery ACCC 2011 46

Levelised costs, 2030

CO2 at $45/tonne