www.cornwall-insight.com The Post-Election Energy Markets New - - PowerPoint PPT Presentation

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HELPING YOU MAKE SENSE OF THE ENERGY AND WATER SECTORS

The Post-Election Energy Markets

New Consensus or Continuing Paradox?

20 June 20 17

Gareth Miller

www.cornwall-insight.com

HELPING YOU MAKE SENSE OF THE ENERGY AND WATER SECTORS

Balancing Fairness and Competition in the Retail Energy Markets

20 June 20 17

Robert Buckley

www.cornwall-insight.com

New Consensus or Continuing Paradox?

• A market in transformation …
• … with policy needing to adapt
• It will adapt
• But how?

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The New Terms of Debate

• Where are we starting from?
• What do we want to achieve?
• What are we deciding on?

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• Policy focussed around the “energy

Trilemma”

• Reduction of GHG emissions
• Ensuring energy security
• Tackling affordability (business

competitiveness and fuel poverty)

• Promoting competition to deliver the above
• Framework incorporated into policy since

1998

• Successive governments have focussed on

certain areas

• Recent shift to affordability and security

Affordability

Security Sustainability Competition

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Sustainability

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 100 200 300 400 500 600 700 800 900 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (p) Renewable energy contribiution CO2 eq (mn t)

UK GHG emissions and renewable energy contribution

Energy supply Business & public sector Residential Transport Other CO2 Other GHG Renewable energy contribution

• Strong momentum built in electricity, but heat and transport

are lagging behind

Source: Cornwall

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Security

• The lights have stayed on
• Market has delivered plenty of gas
• Demand has been weak
• But no more just in time CCGT

investment by the Big Six

• EMR Capacity Market intended to

address

• Embedded generation has offered

quick, flexible capacity

• Capacity and flexibility are the

concerns

Capacity margins 2010-11 to 2016-17

0.0% 5.0% 10.0% 15.0% 20.0% 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 Winter spare generation capacity margins Spare Capacity Margin (%) Spare Capacity Margin inc. National Grid contingency measures (%)

Source: Cornwall analysis of National Grid data

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Affordability

• Consumer costs escalate since

2000

• Vulnerability and competitiveness
• Mitigations paid for by other bill

payers

• Times of significant political interest
• Labour Price Freeze 2013
• Price caps proposed 2017

2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

£mn

UK domestic expenditure on energy

Gas Electricity

Source: Cornwall

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Markets Transformed

• Technology and innovation

significantly reshaping the sector

• Wholesale, retail and

networks

• New business models
• Community energy
• Flexibility and DSR
• Changing regulatory model
• Principles based regulation
• Smart, Flexible Energy

System Call for Evidence

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Wholesale Transformation (1 )

50 100 150 200 250 300 350 400 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

TWh/year

UK generation volumes

Nuclear Renewables Gas Oil and coal Other

• Stagnant demand
• Low-carbon progress
• Imports and embedded on

the rise

• Conventional (fossil fuel)

wholesale volume down 100TWh in 10 years

• Where to go from the

baseload squeeze?

Source: Cornwall

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Wholesale Transformation (2)

• Must run generation is

changing the shape as well as volume

• Summer peaks are shorter

and more frequent

• Challenge for the TSO and

what about the DSOs?

20 25 30 35 40 45 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46

Days in May, GB power transmission demand

11/05/2011 08/05/2013 13/05/2015 10/05/2017

Source: Cornwall

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Retail Transformation

• Vigorous market in support services has transformed

prospects for SaMS

• No sign of the flow of new entry ceasing
• Bipolar market continues to emerge

All Suppliers Large Suppliers (>3mn accounts) Medium Suppliers (250k-3mn accounts) Small Suppliers (<250k accounts) Q117 Suppliers 51 6 9 36 Energy accounts (k) 50,740 42,380 6,905 1,455 Energy share 100.0% 83.5% 13.6% 2.9% Q217 Suppliers 57 6 10 41 Energy accounts (k) 50,830 41,715 7,335 1,780 Energy share 100.0% 82.1% 14.4% 3.5% Change Suppliers +6

• +1

+5 Energy accounts (k) +90

• 665

+430 +325 Energy share

• 1.4pp

+0.8pp +0.6pp

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Smart transformation

• Smart meter roll out now under way
• Different strategies by different

companies

• Market rapidly developing to

support suppliers

• But 2020 deadline is very tough

and settlement solution needed for full benefits

British Gas E.ON UK SSE EDF Energy Scottish Power npower First Utility Ovo Energy Utilita Utility Warehouse Other

Proportion of Smart Meter Roll-out by Supplier Source: Cornwall

Our new smart market report will track the key trends

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Policy and Regulatory Transformation

Regulatory Risk Smart metering Network Charging Faster Switching SCR Price Caps CMA Principles Based Regulation Project Nexus

• Increasing regulatory

interventions in the energy sector in recent years

• Driven by political pressure

(further price cap?), market transformation (network charging review), and need for innovation (smart meters)

• Leads to an ever more
• perationally complex market
• Investor uncertainty
• Resource requirements

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And Now Election 201 7

16 Liberal Democrats The cost of heating and lighting an average home in the UK is too high, this can be addressed by improving home insulation and encouraging small-scale, community renewable schemes. Conservatives Energy policy should be focused on outcomes rather than means. Would commission an independent review into the Cost of Energy to ensure low costs and meet 2050 carbon reduction objectives. Labour Take energy back into public ownership to deliver renewable energy, affordability for consumers, and democratic control. Green Party investing in an energy system fit for the 21st century with investment directed towards a smarter, networked grid, with battery-storage, demand-side measures, and interconnection SNP SNP MPs will work to ensure low cost green energy schemes get the long term certainty needed to support further development and reductions in cost UKIP The Climate Change Act should be abolished

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The Future (as we saw it)

2017 2018 2019 2020 2020s

Wholesale & Transmission Retail & Distribution Capacity Market Review of RIIO-T1 RO closes HH settlement 24 hr Switching Smart Meter Roll-Out Commences New Nuclear Coal Closure Single European Market Electrification of heat & transport Smart meter roll-out complete ssFiTs Close Review of RIIO-ED1 DSR accounts for 50% of balancing New Interconnectors Electricity Storage Active Network Management HH settlement for mass market? ECO 3 WHD 2 Low-Carbon Subsidy @£7.6bn PAR 1 Imbalance Low gas driven power prices? Changes to embedded benefits? BREXIT

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The Future (as seen in the Manifestos)

• Conservatives, Labour and the

SNP pledging a cap of some form in the domestic energy market

• Despite speculation,

consensus around decarbonisation and the Climate Change Act remains strong

• Energy efficiency retains cross

party backing

• Community energy and smart

energy increasingly entering the mainstream

• Consensus between Labour

and the Conservatives on the need to support the North sea

• il and gas sector

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The Additional Trilemma?

• Trust
• How to reset expectations around

future costs and rising consumer prices?

• Certainty
• How to restore investment

confidence in the sector?

• Continuity
• Managing Brexit

Certainty Continuity Trust

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Domestic Smart Metering Market Report

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Contact Details

Robert Buckley Director r.buckley@cornwall-insight.com

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HELPING YOU MAKE SENSE OF THE ENERGY AND WATER SECTORS

The Impact of Non-wholesale Costs

• n Future Energy Bills

20 June 20 17

Jonathan Davison

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What We Will Cover

• The role of policy in energy bills
• What are third party charges and how are they set?
• Why are they changing?
• Can we change the cost pathway?

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The Growing Importance of Policy

Year Policy Objectives

1994 EESoP, NFFO Household energy efficiency & contracts for renewables 2001 Climate Change Levy/ CCAs Tax carbon element of business energy, discounts for energy intensive industry 2002 Renewables Obligation Subsidise large scale renewables 2002 Energy Efficiency Commitment Household energy efficiency 2005 EU ETS, EEC2 European carbon trading, household energy efficiency 2008 CERT/ CESP, smart meters Household energy efficiency 2010 Carbon Reduction Commitment Business energy efficiency 2010 Small scale feed-in tariffs Sub 5MW renewables subsidy 2011 Warm Homes Discount Social tariffs, rebates for vulnerable households 2013 Green Deal, ECO Energy efficiency (ECO household only) 2013 EMR Carbon tax, CfD FiTs, capacity market 2015 RO, FiTs, Green Deal, CCL Reduction of subsidy and tax relief for renewables 2016 CMA, embedded benefits, coal closure CMA whole market review and recommendations, review of network charging principles, coal closure consultation

Sustainability focus Security focus Affordability focus

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• Budget and monitor the costs of

policies in the consumer bill

• Households and business users
• Nothing in place (yet) beyond 2020-21
• Included
• RO
• Small-scale FiT
• CfD FiT
• Excluded
• Renewable Heat Incentive
• Warm Homes Discount

The Levy Control Framework

LCF Projected Funds £bn 2011-12 Prices 2011- 12 2012- 13 2013- 14 2014- 15 2015- 16 2016- 17 2017- 18 2018- 19 2019- 20 2020- 21 Total “budget” 1.61 2.36 2.97 3.50 4.30 4.90 5.60 6.45 7.0 7.60 Forecast consumer spend 1.61 2.37 3.03 3.56 4.26 5.19 6.38 7.35 7.88 8.43

Source: BEIS

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Supplier’s

• wn costs

Wholesale Energy Customers Price offer in market Sourced from markets, regulated businesses and government policy Networks Environment & Efficiency

What are Third Party Charges?

Third Party Charges

26 5 10 15 20 Gas Electricity

p/kWh

Domestic Energy Costs Supplier costs and VAT Environment and efficiency costs Network costs

Source: Ofgem SMI

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0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 p/kWh Transmission Distribution BSUoS AAHEDC RO FiTs CfDs CCL

TPC Trends - Key Events

FiT costs become material Distribution costs fall in first year of RIIO-ED1 Step in transmission costs with RIIO-T1 RO costs increase at 15%-35% a year

27 Rising Cost of TPCs

Source: Cornwall

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How do Consumers see Charges

Pass-Through (I&C)

• Charges billed at prevailing rates

levied on suppliers

• Can be itemised on the bill
• Bills can be volatile in line with

pass-through cost volatility Fixed (Homes and SME)

• Charges included within pre-

determined rates

• Risk premium
• The supplier may make additional

charges to cover costs in case of unfavourable changes

• 1 April is critical date for new charges to apply
• New time for SVT increases rather than autumn ?
• Most charges are volumetric

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Why are TPCs Changing?

Transmission networks Distribution networks Balancing services AAHEDC Renewables Obligation Feed-in Tariffs Contracts for Difference Capacity Market Climate Change Levy

Price controls and embedded benefits reforms (electricity only) Price controls and industry code changes (eg. DCP 228 for electricity) Growth of renewables development Largely static but could include a future Shetland subsidy Level of Obligation placed on suppliers by government Renewables capacity accrediting under scheme Capacity awarded contracts (pre-2020). Full post-2020 costs still to be determined Clearing price in auctions - will include behaviour of coal fired generators and embedded generators Rebalancing of the CCL and inclusion of CRC costs

Drivers of TPC Change

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What Direction are Costs Moving?

Domestic Customer Forecast of Electricity TPCs (March 2017)

• Between 2017-18 and 2021-22, we forecast the total cost of these domestic electricity

third-party charges to rise by 18.3% (the equivalent for gas is 2.9%)

Main driver of electricity change in the next two years is the cost of CfDs and the Capacity Market

1 2 3 4 5 6 7 8 9 10 2017-18 2018-19 2019-20 2020-21 2021-22

p/kWh Year

Transmission Distribution System balancing (BSUoS) AAHEDC (HDCA) Renewables Obligation (RO) Feed-in Tariffs (FiT) Contracts for Difference (CfDs) Capacity Market (CM) Warm Home Discount (WHD) Energy Company Obligation (ECO) Fuel Poverty Obligation (FPO)

Source: Cornwall

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What Could Change this Direction?

Known

• Network price controls set

beyond 2020

• LCF is set to 2020-21

Unknown

• Smart metering programme on

tough trajectory for 2020

• ECO successor under

development

• Triad charge rebalancing

through CMP264/265

• Charging base as demand

declines

Basic framework is set to 2020-21 , but nothing for policy costs thereafter

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PPM Electricity Cap and Future Bills

100 200 300 400 500 600 2016-17 Summer 2016-17 Winter 2017-18 Summer 2017-18 Winter 2018-19 Summer 2018-19 Winter 2019-20 Summer 2019-20 Winter 2020-21 Summer 2020-21 Winter

£ Per Year

Wholesale energy Network Policy Other

• With no changes to current policy £100/year of networks and policy costs

in electricity bills by 2020-21

Annualised Delivered Cost of Power, Calculated Every Six Months

Source: Cornwall

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• Funding policy programmes

through bills is a longstanding choice

• Many schemes, much

complexity and rising costs despite efforts to rein them in:

• FiT degressions, RO early closure
• ECO scaling back
• Political concern about overall

level of bills unlikely to dissipate

• Price caps could have impacts

along the value chain

Conclusions

33

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Contact Details

J

• nathan Davison

Wholesale Team Lead j.davison@cornwall-insight.com

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HELPING YOU MAKE SENSE OF THE ENERGY AND WATER SECTORS

Can the Market Still Innovate?

20 June 20 17

Anna Moss

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Can the Market Still Innovate?

• What innovation have we seen so far?
• What about “fair” markets?
• Can innovation and fairness co-exist?
• Can the market still innovate?

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What Do We Mean by Innovation?

• Traditionally a homogenised product, but
• Is the proposition changing?
• How are customers buying?
• Who is selling to them and how are they doing it?
• What else are these companies doing?

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Is the Proposition Changing?

50% 60% 70% 80%

Rising proportion of dual fuel customers

0% 10% 20% 30% 40% 50% 60% 70% 80% Large Suppliers Small and Medium Suppliers

Jan 2008 Jan 2017

Rising proportion on fixed tariffs Smart Tariff progression Variable Fixed Source: Cornwall

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What About the Prepayment Market?

Smart Fixed

Tariff progression

Variable

• Prepayment now ~ 1 in 6 households
• Concerns about equity trigger CMA

PPM cap

• To go when SMETS2 complete
• SaMS bring innovation
• e.g. Online top-up
• Matched by some large suppliers

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How Are Customers Buying?

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Who Are They Buying it From?

0% 5% 10% 15% 20% 25% 5 10 15 20 25 30 35 40 45 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Small and Medium Supplier Dual Fuel Share at 30 April Dual Fuel Suppliers Large suppliers Small and medium suppliers SaMS dual fuel share at 30 April

58 fully licensed domestic suppliers 72 including white labels

Source: Cornwall

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Identi-kit Suppliers?

1 2 3 4 5 6 7 8 9 10 Q213 Q313 Q413 Q114 Q214 Q314 Q414 Q115 Q215 Q315 Q415 Q116 Q216 Q316 Q416 Q117 Q217 New entrants Self-managed Pre-accredited Supply White Label Acquisition

• Supplier in a box provides easier route to entry
• White labels now popular with local councils
• First acquisition happened in 2017

Source: Cornwall

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Rising Interest in Multi Utilities

19 19 18 19 19 20 21 26 29 30 30 37 40 43 5 6 7 7 8 9 9 11 11 11 11 11 12 15

20 40 60 Q114 Q214 Q314 Q414 Q115 Q215 Q315 Q415 Q116 Q216 Q316 Q416 Q117 Q217 Energy Only Other Services

• With a few exceptions (e.g.

BG, Utility Warehouse), suppliers have struggled to diversify

• But increasingly energy

suppliers seek new markets:

• Acquisitions
• Partnerships
• Direct entry

Source: Cornwall

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Summary of Main Points

• Is the proposition changing?
• Often led by SaMS new

products are being developed and adopted by consumers

• How are customers buying?
• Online successfully engages

consumers

• Who is selling to them and how

are they doing it?

• New entry shows no signs of

abating

• What else are these companies

doing?

• Existing competitor are

seeking new markets

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But What About Fair Markets?

• Political focus has increased in parallel with competition
• Concerns centre on price especially for prepayment and SVT
• 2015-16 wholesale slump increased benefits for engaged
• 2017 SVT increases for the disengaged
• Fixed prices rose from summer 2016
• Bifocal market
• Suppliers to the engaged and disengaged are different

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Can Innovation and Fairness Co-exist?

£300 saving SVT to fixed Large supplier discounts attract media concern

Fairness has supplier and consumer perspectives

Source: Cornwall

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SaMSand Large Suppliers Compete in Different Markets

15.0% 27.3% 12.6% 16.1% 12.8% 18.1% 10% 15% 20% 25% 30% Q315 Q415 Q116 Q216 Q316 Q416 Q117 Q217 SaMS Churn Large Supplier Churn Total Churn Source: Cornwall

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Can Innovation and Fairness Co-exist?

• Innovation is about more than price (even online fixed)
• Industry systems and regulatory rules (have held product

development back

• Smart metering seen as the enabler
• But needs better settlement
• Project Nexus offers capability in gas
• Voluntary electricity HH settlement
• Suppliers own systems

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What Have We Learned So Far?

Source: Cornwall

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Can the Market Still Innovate?

• Those who cannot engage in

the market are disadvantaged, and there also concerns about large/SaMS competitive dynamic

• Record supplier numbers
• Four year high engagement

through switching

• Since last price rises
• Suppliers entering new

markets and adding new propositions

• Large suppliers are having to

respond

• Early signs that smart is having

an effect

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Contact Details

Anna Moss Domestic Retail Team Lead a.moss@cornwall-insight.com

www.cornwall-insight.com

52

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HELPING YOU MAKE SENSE OF THE ENERGY AND WATER SECTORS

Debate: Regulation, Engagement and the Political Agenda

20 June 20 17

www.cornwall-insight.com

The Panel

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55

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HELPING YOU MAKE SENSE OF THE ENERGY AND WATER SECTORS

Unravelling the Paradox

20 June 20 17

Gareth Miller

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Low-carbon Revolution

Current renewable capacity (MW) Source: BEIS to 2016, Cornwall capacity estimates 2016-17

• 5,000

10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 forecast Hydro Onshore wind Offshore wind Solar PV Biomass Landfill gas Sewage & EfW AD & ACT Wave & tidal

Source: BEIS Emissions Projections March 2017 Total renewable generation capacity to 2035 (GW)

10 20 30 40 50 60 70 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Renewables (reference case) Gas Nuclear 46% 13% 36% 5% Renewables Gas Nuclear Other

Total renewable generation output 2025 and 2035 (TWh)

40% 42% 14% 3% Renewables Gas Nuclear Other

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Old and Shrinking Thermal Fleet

Fuel Net change in capacity (GWs) Gas + 2GW Coal

• 12GW

Nuclear

• 1GW

Total

• 11GW

Net change in thermal generation 2012-16 (GWs) Source: Cornwall Fuel Average age Coal 46 years Nuclear 43 years CCGT 15 years

• 6%
• 3%
• 2%

1%

• 7%
• 6%
• 5%
• 4%
• 3%
• 2%
• 1%

0% 1% 2% Nuclear Coal + biomass OCGT CCGT

Changes in availability, National Grid, 2014-15 to 2016-17 Average age of thermal capacity

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Demands for Flex Increasing

200 400 1000 2000 Inertia (GVAS) Capacity (MW) Primary requirement Secondary requirement EFR requirement Inertia RoCoF trajectory Primary and high frequency Upward and downward reserve Regional Blackstart requirements

Source: National Grid Systems Needs and Product Strategy

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The Trilemma in Theory

Trade offs in policy decisions: Security of supply whilst considering emissions Decarbonisation whilst considering security of supply and costs Costs whilst recognising the balance between security of supply and decarbonisation is not free

Affordability Security Sustainability Long term Trade-offs

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Politics Gets in the Way

Importance to success Time to achieve

Action inevitable – “Do now” Plan & consult- “Do next” Delay and defer – “Deal with later” Rhetoric only – “Timed out” Reduce bills Keep lights on Meeting carbon budgets Smart & Flex/innovation Appeal to heartland Heat and transport Industrial strategy

This Parliament Next Parliament Politically vital Politically tradeable

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Resulting in Paradoxes

Reduce bills Keep lights on Appeal to heartland

Policy set to meet immediate priorities

Smart & Flex Meeting carbon budgets Heat and transport Industrial strategy

Meeting long term challenges

Drives reactive policies

Regulating retail prices Capacity market to get new large gas Embedded benefit reforms Hit onshore renewables Prioritise inflexible nuclear

Which increases the costs of…

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Capacity/Carbon Paradox

Source: Cornwall Source: CCC progress report to Parliament 2016 Carbon intensity of procured generation mix, Capacity Market T-4 auctions Power sector carbon “gap” against carbon budgets

10 20 30 40 50 60 70 2018-19 2019-20 2020-21

MtCO2e

gas reciprocating reciprocating coal CCGT Diesel Reciprocating CHP interconnector OCGT Energy From Waste BEIS estimates

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Low-carbon Flex Shortcomings

0.30% 1% 2.61% 0.95% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 2014 T-4 2015 T-4 2016 T-4 DSR Batteries

DSR and batteries new build capacity in T-4 capacity auctions (% of capacity procured) Source: EMR Delivery Body

8.9 6.4 5.9 5 4.1 3.9 1.7 1 2 3 4 5 6 7 8 9 10 ISONE PJM MISO CAISO NYISO NEM GB

% of peak demand Market/system operator

Load reduction DSR as percentage of peak demand, 2014-15 Source: Green Alliance, Smart Investment report 2016

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Undelivered new capacity and new embedded at risk from embedded benefit changes (% and GWs) Source: Cornwall analysis of EMR Delivery Body data 24.3% 54.3% 21.4%

Trafford failure Total new embedded "Safe" new build

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Unnecessary Costs for Low-carbon

£- £2.00 £4.00 £6.00 £8.00 £10.00 £12.00 £14.00 £16.00 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Annual customer bill (£)

Customer Bill Offshore wind Customer Bill Onshore & Solar

Domestic bill impact of offshore-only world Source: Cornwall

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Long-term Uncertainties for Investment

Policy Up to 2015 2015-2020 After 2020 Low-carbon support RO, ssFiTs and CfD, FIDeR Broad basket of techs EU ETS and CPS CCS programme Carbon budgets set LECs RO closed, ssFiTs constrained LECs removed One further CfD auction committed Onshore wind and PV solar left “subsidy free” EU ETS until Brexit CPS firm until 2021 CCS programme discontinued Carbon budgets met up the 3rd New accounting measures for low carbon unknown CfD auction frequency and regularity not firmed up Clean Growth Plan unpublished EU ETS unknown CPS post 2021 unknown 4th and 5th carbon budgets not being met Capacity and flexibility Capacity Market & CBR Wide array of relatively sable balancing services CBR ended Capacity Market brought forward T-4 auctions progressing But changes to procurement method Potential changes to de-rating CPS uncertainty a problem Thorny issue of new gas unresolved Impact of carbon budgets on power policy in medium to long term? Reforms of balancing services under SNaPs Brexit impacts on interconnectors and Project TERRE Just don’t know! But with generation mix changing and new disruptors (Electric Vehicles for example) likely to be significant Networks, settlements and charging Project transmit Settled system of imbalance priciing Embedded benefits relatively stable Access to connections supported – “connect and manage” P305 staged sharpening of imbalance 2015-2018 Network charging review, focus on embedded benefits Prospect of delay and legal challenge in network charging Uncertainty as to scope and scale of changes in network charging Genuinely little idea!

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The Additional Trilemma

• Trust
• How to reset expectations

around future costs and rising consumer prices?

• Certainty
• How to restore investment

confidence in the sector?

• Continuity
• Managing Brexit and near

constant political upheaval

Certainty Continuity Trust But to balance all three, as with the

• riginal trilemma, it will require a whole-

system re-think that creates long term and common objectives across capacity, flexibility and low-carbon policies

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Contact Details

Gareth Miller Chief Executive g.miller@cornwall-insight.com

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HELPING YOU MAKE SENSE OF THE ENERGY AND WATER SECTORS

Charting the Least Cost Pathway to 2030

20 June 20 17

Tom Edwards

www.cornwall-insight.com

• Reaching 2030 will require GB

to pay something…

• Meeting carbon targets will

require additional investment

– Low-carbon power

▪ Which technologies?

– Networks – Replacing aging assets

▪ New nuclear ▪ New gas ▪ Peaker’s

• New system balancing needs

will arise

– Increases in peak load

▪ EVs & Heat pumps

– Back up for renewables – Inertia – Voltage

• Policy needs to unpick and

balance all these variables

Low Cost Paths to 2030

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Expected Progress Against Carbon Budgets

500 1000 1500 2000 2500 3000 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

Emissions MTC02e

2nd carbon budget 3rd carbon budget 4th carbon budget 5th carbon budget Cumulative budget emissions BEIS reference Cumulative budget emissions BEIS baseline

Source: Cornwall

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• Offshore wind world
• Expensive – offshore

wind 1/3rd more expensive than

• nshore wind - £4.8bn

for new projects by 2030

• Needs expensive

transmission infrastructure

Who (What) Will Step Up? (1 )

• 2000

2000 4000 6000 8000 10000 12000 14000 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Spend (£mn)

Offshore only LCF and CM spend

CM Spend Committed SSFiT Committed RO Committed CfD New CfD

Source: Cornwall

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• Onshore wind and solar

may rise to the occasion

• Tantalisingly close to grid

parity

• A lower cost trajectory -

£3.9bn for new projects by 2030

Who (What) Will Step Up? (2)

• 2000

2000 4000 6000 8000 10000 12000 14000 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Spend (£mn)

Alternative technologies LCF and CM spend

CM Spend Committed SSFiT Committed RO Committed CfD New CfD

Source: Cornwall

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• By 2030 there is a £0.9bn premium for the offshore only strategy
• That is a £9.90 increase an average annual household bills

Who (or What) is Best?

• 2000

2000 4000 6000 8000 10000 12000 14000 All technologies Offshore only All technologies Offshore only All technologies Offshore only All technologies Offshore only All technologies Offshore only All technologies Offshore only All technologies Offshore only All technologies Offshore only All technologies Offshore only All technologies Offshore only All technologies Offshore only 2020 2020 2021 2021 2022 2022 2023 2023 2024 2024 2025 2025 2026 2026 2027 2027 2028 2028 2029 2029 2030 2030

Spend (£mn)

Comparison of Offshore only vs alternative scenarios

CM Spend Committed SSFiT Committed RO Committed CfD New CfD

Source: Cornwall

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Offshore Wind 2030 value of firm access to national market (£/kW/year)

Location, Location, Location

• Major network investment

will be needed to ensure access to the market for all generators

• This will be most expensive

for generators connected at periphery of networks

• Interconnectors and nuclear

will have significant effect

• n flows

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• Nuclear and CCS can provide

baseload low carbon power

• Most expensive option

– Strike price of £89.5/MWh for nuclear – Estimated levelized cost for CCGT CCS between £85/MWh and £130/MWh

• How does this fit in with a world of

more variable and more distributed energy?

• Baseload gas generators are

already expected to be at low load factors by 2021

• By 2026 we estimate 3% of the

year there will be periods where new nuclear power stations are constrained

• Nuclear and CCS also have

attendant flexibility problems

• EPR estimated to be able to
• perate at 60% load
• With solar and wind approaching

subsidy free these technologies find it hard to react to changes in

• utput

Can Baseload Technologies Help? (1 )

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Can Baseload Technologies Help? (2)

Source: Cornwall

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• More intermittent asynchronous

plant on the network brings increasing challenges

• Frequency become harder to

manage as inertia falls

• This means increased requirement

for investment in flexibility

• Batteries
• Gas and diesel peakers
• Interconnectors
• Probably not CCGT

Not J ust Cost and Carbon Need Balancing

50 100 150 200 250 200 400 600 800 1000 1200 1400 1600 1800 2000 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Inertia (GVAS) Capacity (MW)

Falling inertia and Grids frequency reserve requirement

Primary requirement Secondary requirement EFR requirement Inertia

Source: Cornwall

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• The digital tide is washing
• ver the electricity market
• How will networks and the

large generators at the

• ther end of them cope

when consumers appliances are trading directly with embedded storage and PV?

• Is storage a niche application

for short-duration & high

• utput or is it an efficient and

economic long duration battery?

• When will it transition?

The Known Unknowns

80

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Planning Rapidly Becomes Complicated

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• Policy has to balance

competing pressures of cost, security, stability and sustainability

• Need to be honest there is

no perfect solution

• Policy needs to pick

winners from the above list and legislate to incentivise delivery

• Things are changing anyway

the rise of digital technologies and decentralised generation may render whole sections

• f the market obsolete

Policy Conclusion

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Contact Details

Tom Edwards Senior Consultant t.edwards@cornwall-insight.com

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HELPING YOU MAKE SENSE OF THE ENERGY AND WATER SECTORS

Contribution

20 June 20 17

Gareth Miller

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Capacity Prices Have Been Low

T-4 auction clearing prices

Auction Price/kW

2014 £19.40 2015 £18.00 2016 £22.50 EA £6.95

Amount procured (GW) and clearing price (£/KW)

Auction GWs

2014 49.3 2015 46.4 2016 52.4 EA 54.4

£0.00 £5.00 £10.00 £15.00 £20.00 £25.00 42 44 46 48 50 52 54 56 2014 T-4 2015 T-4 2016 T-4 EA Amount purchased (GW) Price/KW

Source: Cornwall

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Existing Plants Have Dominated

10 20 30 40 50 60 EA 2017 T-4 2014 T-4 2015 T-4 2016 De-rated Capacity - GW Diesel Reciprocating Reciprocating Gas Reciprocating Hydro Energy From Waste Battery Pumped storage OCGT CHP Coal CCGT Interconnector Nuclear Pre-qualified Existing Generation Capacity & Target Procurement Volume Source: EMR Delivery Body

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New Capacity is Required

Current capacity by year commissioned

10 20 30 40 50 1960 1970 1980 1990 2000 2010 De-rated Capacity - GW Year Commissioned CCGT Coal/Biomass Nuclear Interconnectors

Average age of thermal capacity

Fuel Average age Coal 46 years Nuclear 43 years CCGT 15 years

Source: Cornwall

Net change in thermal generation 2012-16 (GWs)

Fuel Net change in capacity (GWs) Gas + 2GW Coal

• 12GW

Nuclear

• 1GW

Total

• 11GW

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Some Delivered, But Not Large Gas

Source: Cornwall based on EMR Delivery Body data

New large gas vs total new build CMUs T-4 auctions

5.0% 4.2% 6.5% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% New build % 2016 T-4 2015 T-4 2014 T-4

Percentage of cleared capacity from new build

2.6 1.7 0.0 1.9 0.8 0.8 0.0 2.5 0.6 0.6 0.6 0.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 Total new build New large gas Net of delivery failure Net of prior FID & delivery failure Net of effective refurbs 2014 T-4 2015 T-4 2016 T-4

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New Embedded Success?

Source: EMR Delivery Body

New embedded vs total new build CMUs T-4 auctions Resilience to Triad & Defra?

2.6 0.9 1.9 1.1 2.5 1.8 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 Total new build New Distribution 2014 T-4 2015 T-4 2016 T-4

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Undelivered new capacity and new embedded at risk from embedded benefit changes (% and GWs) Source: Cornwall analysis of EMR Delivery Body data

24.3% 54.3% 21.4% Trafford failure Total new embedded "Safe" new build

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Incompatible With Decarbonisation

T-4 Capacity auction clearing price projection

10 20 30 40 50 60 70 2018-19 2019-20 2020-21

MtCO2e

gas reciprocating reciprocating coal CCGT Diesel Reciprocating CHP interconnector OCGT Energy From Waste BEIS estimates

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Innovation Not Being Fostered

DSR and batteries new build capacity in T-4 capacity auctions (GWs) Source: EMR Delivery Body

0.17 0.37 1.39 0.45 0.0 0.5 1.0 1.5 2.0 New build T-4 2014 New build T-4 2015 New build T-4 2016 Battery DSR

0.30% 1% 2.61% 0.95% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 2014 T-4 2015 T-4 2016 T-4 DSR Batteries

DSR and batteries new build capacity in T-4 capacity auctions (% of capacity procured) Market DSR penetration at peak GB 3.6% ERCOT 3.2% PJM 9.1% Source: EPRG, May 2016

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No Sign of Higher Prices

T-4 Capacity auction clearing price projection Source: Cornwall

• 5.00

10.00 15.00 20.00 25.00 30.00 35.00 40.00 2021 2022 2023 2024 2025 2026

£

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Drivers of Change

It is here to stay – difficult to withdraw even if desired Carbon intensity of mix out of step with ambition – compatible with carbon budgets and clean growth plan? Existing plant bed-blocking carbon neutral & flexible innovation – compatible with smart markets work? Procurement cycle deficient in keeping step with pace of technological and policy change – stranded asset risk inherent? Technology neutrality/cheapest MW approach leads to unpredictable

• utcomes- drives policy intervention to correct?

Signposts for change

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Aligning to Decarbonisation

• BEIS could consider the introduction of an EPS qualification for

participation for CM auctions

• Expressed Co2g/KWh – set at a level to capture coal plants in initial T-4

at least

• Taper downwards for each auction to allow for soft-landing into

trajectory of intensity implied by Carbon budgets

• 500 hours a year running hours exemption but explicit carve out of coal
• Grandfather EPS for length of agreement secured in a particular

auction – delivers investment certainty for new build plant, whilst reducing carbon intensity over time

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New Build and Fostering Innovation

• BEIS could examine splitting
• ut existing and new capacity

auctions, allowing for the total amount of desired new capacity as a proportion of the procurement envelope to be more precisely set by National Grid’s modelling

• The new plant auction would

still see new plant competing with each other on the grounds

• f cost, so an efficient outcome

could still be achieved

• Avoids “windfall” to existing

plant that would run anyway

• BEIS might consider consulting
• n the term necessary to

support the development of DSR (5 years), removing the capex threshold for new build qualification and replacing it with evidence of a long term contract for demand control

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But Only Part of the Story

• Delivering secure, low-carbon

flexible energy systems requires thinking beyond the policy silo’s

• It requires a reworking of the

market - from the centralised to the decentralised and local models of energy production and consumption, taking advantage of technology innovations

• The challenge is the development
• f real time markets, and also the

implementation of automated, real- time energy trading technologies

• Parallels here with smart call for

evidence

• Already the market is grabbing

hold of these themes through acquisitions and partnerships between utilities and technology enabling and data companies

• The question is whether the

Capacity Market, like so many of current code and regulatory paradigms, is a facilitator or a barrier to these forces

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Contact Details

Gareth Miller Chief Executive g.miller@cornwall-insight.com

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HELPING YOU MAKE SENSE OF THE ENERGY AND WATER SECTORS

Balancing Services Fit for the Future

20 June 20 17

Tom Palmer

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Market for Balancing Services (1 )

Source: Cornwall

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Market for Balancing Services (2)

Source: Cornwall

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Developments

EFR Tender in 2016 Demand Turn-up in 2017 Black Start

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Aggghhhhhhhhh

103

Source: National Grid

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Where Do I Go?

Source: National Grid

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Balancing Service Requirement growth

Future Need

Source: National Grid

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Growing Concerns The Big Five (1 )

Inertia

Source: National Grid

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Growing Concerns The Big Five (2)

Frequency Response

Source: National Grid

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Growing Concerns The Big Five (3)

Reserve

Source: National Grid

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Growing Concerns The Big Five (4)

Reactive Power

Source: National Grid

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Growing Concerns The Big Five (5)

Black Start

Source: National Grid

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The Way Forward

• Rationalisation
• Old products
• Standardisation
• Clear parameters that are consistent
• Improvements
• Single product versus standardised

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Easy?

Source: National Grid

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Market for All

Source: National Grid

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Optionality

114

Source: Cornwall and National Grid

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Route to Market

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Contact Details

Tom Palmer Senior Consultant t.palmer@cornwall-insight.com

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117

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HELPING YOU MAKE SENSE OF THE ENERGY AND WATER SECTORS

What is a Credible Policy framework for Long-term Investors in the Sector?

20 June 20 17

Peter Atherton

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HELPING YOU MAKE SENSE OF THE ENERGY AND WATER SECTORS

Debate: Where Next for the Low- carbon Agenda

20 June 20 17

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The Panel

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Our Next Conference

The Future of the Retail Energy Market 22 November 201 7

With a range of expert speakers from government, regulator and key businesses alongside Cornwall’s expert team we will focus on key issues impacting both the domestic and non domestic energy markets. To pre-register for the event and take advantage of the early bird rate of £495 (+ VAT) contact Richard on training@cornwall-insight.com

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