Interim Update 28 th July 2020 A webinar with experts from the - - PowerPoint PPT Presentation

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Interim Update 28 th July 2020 A webinar with experts from the - - PowerPoint PPT Presentation

Interim Update 28 th July 2020 A webinar with experts from the Sector ReSHAPING REGULATION POWERING FROM THE FUTURE By Laura Sandys, Dr Jeff Hardy & Professor Richard Green Su Support orters & & Co Co-Cr Creator ors


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SLIDE 1

REGULATION

ReSHAPING

By Laura Sandys, Dr Jeff Hardy & Professor Richard Green

POWERING FROM THE FUTURE

Interim Update 28th July 2020 A webinar with experts from the Sector

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SLIDE 2

Su Support

  • rters &

& Co Co-Cr Creator

  • rs

Supporters:

  • UKPN
  • Octopus
  • Centrica
  • RenewableUK
  • RES
  • Energy UK
  • LCCC
  • Elexon
  • Xoserve
  • ENA
  • Orsted
  • ESO
  • REA
  • SPEN
  • Ohme
  • WPD
  • Vector (New Zealand)
  • Arup

Co-Creators:

  • Thomas Pownall
  • PwC
  • Energy Systems Catapult
  • Professor Catherine Mitchell
  • Nigel Cornwall
  • Dr Jeff Hardy
  • Frontier Economics
  • LCP
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SLIDE 3

Demand and Supply equally valuable Free feedstock, high CAPEX, low OPEX

Ca Capital As Assets changing the COST base of

  • f energy

th throughout th the system

Blended Assets & Service ces th the new VALUE Consumer Models ch changing how how e ene nergy i is P PRI RICED ED Tailored Services & Products replacing commodity pricing

The Challenge: A New Cost, Value & Price

Blended Assets Varied Business Models Multi-actor Management

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SLIDE 4

Optimising the System

Unlocking the value

  • f all demand actions

Unlocking the value trapped within the system Unlocking the capital to invest in the right things

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SLIDE 5
  • 50.00

0.00 50.00 100.00 150.00 200.00 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19

Lots of commodity not enough storage and processing Depressed price requiring more and more public support Rising system management costs paid for by consumers Still supporting Fossil fuels Kill value in digitalisation and smart system Much more Network Optimisation needed Unequal access to negative pricing

2019 - £1.2bn

Th The Smoldering Platform

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SLIDE 6

Th The Missing Prizes

Demand and Supply are Equal Blended & Processed Energy Wasted Energy & Capital Customers Value Marginalised Limited Optimisation Manage Peaks NOT Meet Peaks Unlocking total flexibility value Deeper Utilization of all Network Assets

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SLIDE 7

No Now is the Mom

  • ment to
  • Get

th this is Righ ight

Before decarbonizing heat, transport and wider industrial

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SLIDE 8

Dec ecarbo boni nisati tion Divi vidend: dend: An n Op Optimise sed Sy System

Optimise the 5 C’s

Significant but Efficient Capital Demand and Production Competing Unlock the System Value

Carbon Capital Capacity Cost Customers

Citizen Dividend Citizens should explicitly benefit from decarbonisation

  • Sized around Optimised Demand
  • Value & reward more from less
  • Unlock new system tools, data, demand

and blended assets

  • System risks internalized not

socialized

  • Blending assets and actions
  • Manage peak not meet Peak
  • All responsible to maximise total

energy utility

  • Demand Equal in markets, policy &

regulation

  • Focus on permanent demand reduction

as much as flexibility

  • Fair access to demand assets & actions
  • Metric for Avoided Cost & Carbon
  • Derisk Capital not Price
  • Incentivize processed energy
  • Demand assets equally important
  • Stop Waste
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SLIDE 9

Unlo Unlocking king the he va value of all de demand mand act actio ions ns

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SLIDE 10

Wh What is s Op Optimised Dema Demand?

Mainframe PC

Cloud / Data Centres / Broadband/ Mobile From Mainframe to in home first responder N a t i

  • n

a l S e r v i c e s

Sized around Demand

Choice

Optimised Supply Chain Tesco

Special Supply Core demand delivered by an optimized Supply Chain

Consumer Choice

Self Service

Choice & Competition

Optimized Utility across complex system options

Regulator Role

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SLIDE 11

CfDs: £600m Balancing & System Costs: £1.94bn Capacity Market: £3.85 bn Network Reinforcement : £2bn Balancing : 0.29% DSR Customer Assets Energy Efficiency

Demand Assets & Actions

Capacity Market: 5.6% storage / 2.35% DSR

Supply Assets

Avoided Cost of Peak Energy Networks : limited & tactical

Demand & Supply of Equal Value

All demand actions, assets and actions throughout the system must receive equal access to markets, support, focus of regulation and policy attention.

Full Value of Avoided Cost

  • f Energy (based on US metric)

Integrate a discounted value to Avoided Cost of Energy & Carbon into all policy and market design. ACE is the fully loaded cost of generating, managing & distributing energy & is excellent for valuing energy efficiency

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Self Supply

Capital Assets delivering flexibility or generation

Demand Shifting

Assets or actions contributing value to the system

Energy Efficiency

Permanent reduction of total energy needs

Balancing Costs Increase access to all demand shifting assets & actions Capacity Market Increase access for efficiency, all storage types, self-supply & DSR

First Steps: Democratise the System

Customers & their “agents” need equal access to derisk capital investment & markets as much as large developers

Consumer Contracts for Difference Contract for Difference miniaturized Permanent Demand Reduction Fully loaded value of Avoided Cost of Energy and Carbon Real Time Tariffs

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SLIDE 13
  • £150
  • £100
  • £50

£0 £50 £100 £150 CCGT Nuclear Gas CCS Biomass CCS Onshore wind Offshore wind Solar - large £/MWh

Technology direct costs Capacity adequacy costs Balancing costs Network costs Displaced generation costs

Energy efficiency DSR Blended assets

Chart includes illustrative cost benefit estimates developed for the ETI in 2017/18.

Self Supply

New Metrics

De Demand & Supply Compared: Fu Fully loaded costs s between demand and su supply actions Da Data to be delivered to the project ct by mid August

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SLIDE 14

Un Unlo lockin ing th the e va value trapped wi withi hin t n the he s system

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SLIDE 15

Optimised Demand

Unlocks the new customer capabilities delivering a downward cost pressure changing the demand curve from security of supply to security of service.

Processed Supply

The delivery of utilizable energy

  • ptimising its “processing”,

“dispatch” and “stability”. Moves from a “commodity” to a full “service” and breaks down the artificial silos.

New System Tools

Significant focus on system tools, delivery optimization, data and digitalization transforming system stability, active network management & market design

Optimised Utilisation: Reward More from Less

Reversing regulatory incentives to unlock new innovative business models and reduce overall

  • costs. Without “normal” supply chain pressures regulation and mandate needs to drive

efficiency, productivity and optimization of all assets, actions and actors.

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Penalty for accessing balancing market No Curtailment Payments

  • 50.00

0.00 50.00 100.00 150.00 200.00 J a n

  • 1

9 F e b

  • 1

9 M a r

  • 1

9 A p r

  • 1

9 M a y

  • 1

9 J u n

  • 1

9 J u l

  • 1

9 A u g

  • 1

9 S e p

  • 1

9 O c t

  • 1

9 N

  • v
  • 1

9 D e c

  • 1

9 Energy Imbalance Operating Reserve STOR Constraints Negative Reserve Fast Reserve

Some system services need to stay with ESO Cost reallocated where possible for businesses to manage

Reallocate Risk & Reward

All market players should own as much of their system risk as possible and benefit from the rewards. But penalised for “socializing” the risk

££ for Optimised Demand

Penalty for accessing balancing market – not socialised

££ for “Processed” Energy Enabled by Data Flow, Optimization Technology & Digitialised Markets

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SLIDE 17

A&E

£££££

Hospital

£££

Consultant

££

GP

£

Self Help/Pharmacy/Online

Whe Where do do you u start fr from?

Which end to you start from?

D a t a R i s k

Role for the ESO

  • Surveillance role of system stability
  • Develop IP address equivalent “plug & play”

to enable data flows

  • Drive as much balancing and stability into

the businesses themselves

  • Penalise businesses, not consumers for

requiring their intervention

  • Role to maximise the overall optimization of

the system not just stability

  • Avoided Cost of Energy metric part of their

competitive calculations

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SLIDE 18

Un Unlo lockin ing th the e ca capital to invest in in th the rig ight t th thin ings

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SLIDE 19

Fr From Commodity dity to Capit apital al & & Ser ervic vices es

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SLIDE 20

Mandated Decarbonized Supply Demand & long term certainty Revenue Stacking & Blended Assets More revenue

  • ptions

Driving Storage Unlocking investment drivers for all storage needs Change Merit Order Reduce competition from fossil generation CfD / CM Amalg Increased support mechanisms Demand Action Competing Limited but important competitor to supply No Constraint Payments Driving greater utilization of assets Citizen Dividend Once capital has been recouped Fair & Equitable De-Risking Through Market Measures REGOs Make Regos much more robust What role for the public good? Counterparty Risk Maturity of Technology Construction Risk Reducing Cost of Capital Operational Risk Planning Risk Risk sitting with the investors

Immediate Actions to Unlock Investment

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SLIDE 21

How to unlock them together!

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SLIDE 22

Competition

ACE

% ECO/ WHD / supplier/ network

  • bligations

Flexible Demand Delivery Flexibility Actions Demand Purchase Agreements Energy Efficiency Demand First Productivity Regulation

Optimized Demand

Demand Purchase Agreements ACE PACE

Permanently Avoided Cost of Energy

Demand Purchase Agreements

Demand Reduction ACE SPAs from Generators / Suppliers Commodity Producers Flexible Supply Mature Tech Immature Tech PPAs with guaranteed low floor price Commodity + Storage Service Purchase Agreements Contracts for Difference Stand Alone Storage ACE

Optimized Supply

Avoided Cost of Energy Service Purchase Agreements Avoided Cost of Energy Avoided Cost of Energy Avoided Cost of Energy

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SLIDE 23

Dec ecarbo boni nisati tion Divi vidend: dend: An n Op Optimise sed Sy System

Optimise the 5 C’s

Significant but Efficient Capital Demand and Production Competing Unlock the System Value

Carbon Capital Capacity Cost Customers

Citizen Dividend Citizens should explicitly benefit from decarbonisation

  • Sized around Optimised Demand
  • Value & reward more from less
  • Unlock new system tools, data, demand

and blended assets

  • Regulation driven by getting more from

less

  • System risks internalized not

socialized

  • Blending assets and actions
  • Manage peak not meet Peak
  • All responsible to maximise total

energy utility

  • Demand Equal in markets, policy &

regulation

  • Focus on permanent demand reduction

as much as flexibility

  • Fair access to demand assets & actions
  • Metric for Avoided Cost & Carbon
  • Derisk Capital not Price
  • Incentivize processed energy
  • Demand assets equally important
  • Stop Waste
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SLIDE 24

Ques Questi tions ns

Push back Push forward Agree Disagree

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SLIDE 25

Appendices

A regulatory Model for Doing More with Less – the Optimiser Regulatory and System Stability Roles Vulnerability

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SLIDE 26

Procure Energy Services, nationally & locally Incentivise Demand Responses

More from Less

££ £ £

Data Flows

System Optimiser

Getting More From Less Insurance penalties for imbalance Energy “budget” Auction Rewards for reducing energy consumption Blending and Optimizing all energy assets & services at lowest price Rewards for DSR & EE part of Suppliers energy package

Data Flows

£ £

The Optimiser

Performance Based Regulation

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SLIDE 27

Re Regulation and System Stability

REGULATION

  • Fully Costed System: All actions within each of

the existing silos has to be audited for any knock on cost in other parts of the system. There are misalignments in the current regime that kicks cost and operational responsibility to another part of the system

  • Devolution Menus: The current regulatory

model treats every part of the country more or less in a similar manner. With greater nuance locally and devolved administrations, regulation needs to develop optionality and regulatory menus offering tailoring to locality.

  • Risk based Regulation: With the complexity of

the new system, multiple actors, interacting with each other regulation needs to focus on both outcomes and where risk lies rather than “process” regulating the whole system SYSTEM OPERATOR

  • Security of Service not Supply: With new assets in all

parts of the system, security of the service that might be provided behind the meter, needs to set the new metric for a secure energy system

  • System Stability: A&E Department: Going forward

these risks and mitigations should sit within the businesses themselves with the ESO picking up the extreme misalignments with the ESO acting as the A&E department rather than the GP in every neighborhood

  • Reallocation of Funds: the cost of system stability is

growing and will increase significantly all of which is passed onto the consumer. A % of these funds should be reallocated to incentivizing the risk makers to design out these risks

  • Data Flow and Supervision: the key role for the ESO

would be to develop the appropriate data flow mechanisms and ensure that it has oversight of potential risk, detriment and instability

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“V “Vulnerable” Consumers

PROBLEMS

  • Most customers feel alienated from the energy market:

Whether technically vulnerable or not, most consumers don’t feel in control due to how & what is “sold”

  • Most consumers have less problems with other markets:

Buying mobile “ceiling” packages embedded in exciting products, or leasing cars, or buying basic service broadband.

  • Suppliers with less capacity to deliver social policies: The

changing market and fragility of many of the suppliers, delivering social obligations will become a real challenge.

  • Social actions smeared across the system with little

accountability: As social actions are distributed across the system there is muddled accountability for outcomes and these responsibilities need to be consolidated around

  • ne set of actors. In addition this “smearing” has

inhibited the commercial supplier sector from behaving truly commercially inhibiting competition.

POLICY OPTIONS

  • New Incentives at the heart of the System: By changing

incentives from delivering more, to optimized utility the drivers to reduce consumption through energy efficiency will be significantly increased

  • Consolidate all social actions: Use the “benefit” of

having a highly regulated element of the sector to consolidate accountability, deliver coherent and locally designed focus on the execution of social policies.

  • Clear Accountability: This would ensure that there was

clear responsibility and evaluation of impact on key target groups

  • Added Value: As network capacity issues become more
  • f an issue, social intervention can also include

delivering neighborhood system optimization assets such as localized storage, PVs and EV charging

  • Devolved and Tailored Responses: As the networks have

local knowledge devolved nuances can be developed working with local authorities and housing bodies