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www.cornwall-insight.com Tim Dixon James Brabben HELPING YOU MAKE SENSE OF THE HELPING YOU MAKE SENSE OF THE www.cornwall-insight.com ENERGY AND WATER SECTORS ENERGY AND WATER SECTORS Tim Dixon Analyst Title slide James Brabben Head of

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HELPING YOU MAKE SENSE OF THE ENERGY AND WATER SECTORS HELPING YOU MAKE SENSE OF THE ENERGY AND WATER SECTORS

Tim Dixon James Brabben

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Title slide Tim Dixon Analyst James Brabben Head of Training

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Change form Last Report Reason CP16 CP17 CP18-25 Roc supply

  • 5.0mn Rocs banked into CP16, and higher forecast Roc issue

from fuelled and offshore wind technologies (up 2.0mn)

  • A higher capacity forecast for fuelled technologies

Demand

  • We have made a reduction to our electricity demand forecast

from CP16 – CP25

  • We expect EII exemptions to be implemented from 1 April

2018 RO targets

  • CP16 RO target down on EII delay, all other CPs have risen

Costs to suppliers

  • Delay in the implementation of energy intensive industry

exemptions to CP17 has lowered CP16 costs

  • Higher-than-forecast RO target set for CP17 than forecast
  • A rise in forecast Roc issue, and therefore higher forecast RO

targets for all other compliance periods Roc values

  • CP16 down due to the addition of 5.0mn Rocs banked from

CP15 and an uplift in our Roc issue forecast

  • CP17 down on an increased Roc issue forecast coupled with

a reduction in our electricity demand forecast

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  • BEIS published its response to its consultation on Implementing an Exemption for

Energy Intensive Industries

  • The response applies to the RO scheme only, and confirmed its intention to exempt up to

85% of electricity supplied to eligible EIIs from the indirect costs of the RO

  • An updated note was issued from BEIS claiming it expects exemptions to be implemented

from 1 April 2018. This was followed by confirmation with the revised RO for 2018-19

  • BEIS published a consultation on controlling the costs of biomass conversion and

co-firing under the RO

  • The consultation looks to gather views on two proposed options: an annual generator cap
  • r an adjustment to the support level for non-grandfathered units
  • BEIS announced the RO for 2018-19, and issued a revised RO on 18 December
  • BEIS set the RO (before EII exemptions) at 129.7mn Rocs, or 0.452 Rocs/MWh in GB and

0.185 Rocs/MWh in NI. With EIIs, the GB RO for CP17 is now confirmed at 0.468 Rocs/MWh

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  • Demand forecast has fallen by 1.0% for all years on our last report
  • Average annual reductions for the UK from CP17 to CP25 are forecast at 0.2%. UK demand

is expected to fall from 290.1TWh in 2017-18 to 286.9TWh in 2026-27 (not accounting for EII exemptions)

  • We now expect EII exemptions to commence from 1 April 2018. A maximum exemption rate
  • f 85% means that EII exempt volumes are forecast as 9.9TWh for 2018-19 to 2026-27

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RO-liable Demand Forecasts (before and after EII exemptions)

264 268 272 276 280 284 288 292 GB Demand (TWh) GB (Q417 forecast, before EII exemptions) GB (Q417 forecast, after EII exemptions)

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  • CP15 capacity forecast at 28.2GW,

1.0GW above our last report

  • CP16 forecast at 31.5GW, 0.1GW

above our last forecast

  • CP17 projected at 31.7GW,

unchanged on our last report

  • Capacity expected to accredit

through grace periods until 2019

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Capacity Forecast – This Report vs Last Report (MW) End of CP16 capacity – Q417 forecast End of CP17 capacity – Q417 forecast End of CP17 capacity – Feb 17 baseline forecast Fuelled 3,693 3,768 3,517 Hydro 721 721 730 Landfill gas 869 844 837 Offshore wind 6,439 6,555 6,500 Onshore wind 12,584 12,628 12,465 PV 7,174 7,174 7,549 Wave/tidal 37 37 14 Total 31,516 31,726 31,612

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Capacity Forecast by Technology (CP15-CP26)

5,000 10,000 15,000 20,000 25,000 30,000 35,000 CP15 CP16 CP17 CP18 CP19 CP20 CP21 CP22 CP23 CP24 CP25 Installed capacity (MW) ACT Biomass Biomass conversion Enhanced co-firing Hydro Landfill gas Offshore wind Onshore wind PV Sewage gas + EfW Wave/tidal

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  • The total number of Rocs presented by suppliers for compliance in CP15 came to

90.2mn, despite the total number of Rocs available for compliance in CP15 at 95.2mn Rocs

  • This represents a supplier compliance levels of 89.5%, with 5.0mn Rocs banked into CP16
  • Roc supply for CP16 is now forecast at 107.3mn, 7.0mn above the value stated in
  • ur report
  • Largely due to suppliers banking 5.0mn Rocs from CP15 into CP16
  • Our Roc supply forecast for fuelled technologies for CP16 has risen by 2.0mn, and our

forecast for offshore wind by 0.5mn

  • This has been partially offset by a 0.4mn reduction in our Roc issue forecast for onshore

wind, and a 0.1mn reduction for landfill gas

  • Roc issue forecast for CP17 to CP25 up by an average of 3.5% (or 3.9mn Rocs) on
  • ur last report. Roc issue is expected to peak in CP18 at 118.3mn
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  • BEIS already set targets for CP16 and CP17
  • CP16 target 0.409Rocs/MWh in GB and 0.167Rocs/MWh in NI
  • CP17 target 0.468Rocs/MWh for GB and 0.185Rocs/MWh for NI
  • The GB RO target forecast (CP17-CP25) has increased by 4.6% on

average on our 2017 baseline forecast

  • Due to a reduction in our RO-liable demand forecast and a rise in our Roc

issue forecast

  • The GB RO target is forecast to peak at 0.479Rocs/MWh in CP20
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Roc Supply, Target and Value Forecast (CP15-CP25)

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40 60 80 100 120 140 CP15 CP16 CP17 CP18 CP19 CP20 CP21 CP22 CP23 CP24 CP25 Roc issue (mn Rocs) Fuelled Offshore wind Onshore wind Photovoltaics Landfill gas Eligible hydro Wave/tidal Banking from previous Compliance Period Drax co-fired Rocs Renewables Obligation (with headroom)

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  • The initial recycle value in CP15, including buy-out payments only, came to

£4.89/Roc

  • There was a combined shortfall of £18.7mn in the buy-out funds due to 16 suppliers owing

late payments. This will add an additional £0.21/Roc to the recycle value

  • The final recycle value is expected to outturn at £5.10/Roc
  • CP16 value (with recycle) forecast at £49.58/Roc in our Central Scenario––the buy-
  • ut price of £45.58/Roc and a recycle of £4.00/Roc (2017-18 money)
  • £4.00/Roc lower than our previous long-term report, due to a 7.0mn (7.0%) rise in forecast

Roc issue for CP16, following high levels of banking and an increase in forecast Roc issue

  • CP17 values (with recycle) forecast at £49.88/Roc
  • £0.23/Roc below our last forecast, due to a 4.1mn rise in forecast Roc issue for CP17
  • CP18 – CP25 values (with recycle) forecast to be stable at £50.10/Roc - £50.11/Roc
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Roc Value Forecast (CP15-CP25) 49.3 49.4 49.5 49.6 49.7 49.8 49.9 50.0 50.1 50.2 CP15 CP16 CP17 CP18 CP19 CP20 CP21 CP22 CP23 CP24 CP25 Roc value (£/Roc) (with recycle)

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  • CP16 costs for GB are expected at £18.64/MWh, £0.17/MWh under our last

forecast due the delay in implementing EII exemptions (2017-18 money)

  • CP17-CP25 costs have risen by 4.6% (£0.91/MWh for GB customers), in line

with the lift in our RO target forecast

  • GB costs are forecast to rise to a maximum of £21.85/MWh in CP20, before

declining to £19.36/MWh by CP25

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  • Government announced that it will consult on widening the eligibility criteria for the EII

exemptions in the Industrial Strategy, published on 27 November 2017

  • However, the magnitude of the change will not be known until government issues guidance on

the likely volume of electricity that will be exempt

£/MWh impact of additional exempt supply on consumer bills (annual, CP18 – CP25)

  • In this sensitivity, we show

the cost impact for every additional TWh of exempt supply is £0.08/MWh (from CP18 to CP25)

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1 2 3 4 5 6 7 8 9 10

Additional RO cost (£/MWh) Additional exempt demand (TWh)

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Historic Banking Levels

  • It is possible that a further coal-fired unit is considering converting to biomass to exploit

subsidies it has already secured

  • We believe the unit considering converting to biomass is likely to be a Drax unit
  • However, this unit would not be grandfathered under its current Roc award and would

therefore receive an award that is subject of the outcome of the consultation on controlling the costs of biomass conversion and co-firing under the RO

  • We show the impacts if an additional unit is converted to biomass, but has its Roc award

reduced to 0.1 Rocs/MWh. We consider this an unlikely scenario

  • In this scenario, the unit would add 0.4mn Rocs per year to the market. This would

increase costs of the scheme 0.4% (£0.08/MWh) from CP18 for every year it operated under the scheme

  • Our Roc value forecast for CP17 would also fall to £49.70/Roc (including a recycle value
  • f £4.12/Roc), down £0.18/Roc on our Central Forecast, due to higher Roc issue in the

compliance period

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Contact Tim and Alex t.dixon@cornwall-insight.com 01603 959881 a.wynn@cornwall-insight.com 01603 959881