CBI Energy Conference Reforming the Electricity Market

Rupert Steele – Director of Regulation

14 June 2011

2

Investment Gap

The UK needs to attract investment funds into the power generation sector in the face of stiff international competition

Need for right investment climate and reduced regulatory risk

30GW+ investment by 2025 for security & decarbonisation

0102030405060708090

100

2010 2013 2016 2019 2022 2025

GW

Nuclear Coal CCGT

New CCGT OCGT & Oil Hydro

Renew Peak Demand Peak Dem + 20%

UK existing plant margin to 2025

UK situation more difficult due to age and mix of portfolio

Potential for rapid demand growth post 2020

3

EMR Headlines

Overall we welcome the focus on delivering new energy investment and believe we can work within the EMR framework

Policy intent is positive but really important to get the details right

2. FIT/CFD for low carbon generation1. Carbon price support

3. Capacity mechanism to support existing / new thermal generation 4. Emissions Performance Standard

• Need solid basis for new nuclear investment whilst supporting renewables

• A smooth transition for renewables is key -need to avoid investment hiatus

• Not a bankable mechanism• Adversely impacts UK industrial

competitiveness

• DECC consultation preferred a targeted scheme

• Strong case for market-wide scheme

• EPS levels must be realistic to avoid un-nerving investors

• Grandfathering principle essential and should be enshrined in primary legislation

4

Variable Premium FIT

A narrower band becomes very similar to a CFD

Market Price

Premium

Variable Premium FIT demands less precision from Government than a CFD: a band rather than a specific strike price

Market element in pricing gives some flexibility in setting support levels

Simpler settlement process than a CFD, as not a two-way mechanism

Premium FIT payment within band

Collar

Cap

5

Project TransmiT – flatter locational charges support renewables investment

Avoiding investment hiatus

Cutting support for onshore wind in the RO Banding Review would slow down Scotland’s renewables sector – negative impact on consumers

Adjustment to current incentives would slow rate of deployment in onshore wind

Net consumer cost could be £100s of millions per year by 2020

To maintain renewables progress, more would be needed offshore - at higher consumer cost

CCC report on renewables recognises need to maximise onshore delivery

Source: Oxera analysis for SP, March 2011

6

Really important to understand what problem we are trying to solve

Capacity Mechanism (1)

DECC consultation favoured a narrowly applied capacity scheme

Diagnosis of the capacity problem

0 – 8 hours 8 – 48 hours Days / weeks

Reserve Flexibility Investment

Having sufficient frequency response plant available to cover loss of wind, demand spikes or unplanned plant outages

Having enough flexible thermal plant to cover night and day-time load and similar predicted variations arising from wind patterns

Having enough spare capacity / reserve margin to ensure acceptable energy security of supply (eg. Winter cold snap / zero wind)

7

Narrowly designed scheme unlikely to resolve security of supply risk

Capacity Mechanism (2)

Alternative would be a market-wide capacity mechanism

Days / weeksPayments address ‘missing money’ problem

Need a clear timetable to promote upgrades and new investment

Downward pressure on electricity prices addresses ‘double reward’

770

Scheme must be stable to avoid stranding risk