financing new electricity supply in the uk market with carbon abatement constraints keith palmer 08...
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Financing new electricity supply in the UK market with carbon abatement constraints
Keith Palmer
08 March 2006
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Objectives
Lowest cost energy supply consistent with other objectives
Deliver environmental goals – carbon and other
Acceptable risk – security of supply and other risks
Timelines – supply increases to match rising demand and meet government carbon reduction targets
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Electricity supply investment decisions
Future electricity demand (UK, connected markets)
Fuel costs
What will oil and gas prices be over next 30-40 years?
How will coal prices change as oil/gas prices change?
Conversion costs
What productivity ‘progress’ is likely for ‘old’ and ‘new’ technologies?
What is the cost of capital for different technologies?
Carbon costs
What will be the costs to generators of emitting carbon over next 30-40 years?
What we need to know…
Strapline
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Marginal plant - mediumcarbon emitting
Non-carbon emitting High carbon emitting
£/M
Wh
Impact of carbon abatement policies on investment decisions
Carbon ‘premium’ determined by carbon abatement costs of marginal plant
Non-carbon emitting technologies capture carbon premium
EU Emissions Trading Scheme (ETS)
Electricity price with ETS costs
Electricity price – no ETS costs
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Gas fired CCGT is the least cost fossil fuel plant before accounting for carbon abatement costs
Expected cost of new electricity supply
CCGT
CO2 price (£/te)
20
30
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5 10 15 20 25 30 35 40 45 50 55 60 65 70
Lo
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m p
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(£/
MW
h) $40/bbl$40/bbl
$30/bbl$30/bbl
$20/bbl$20/bbl
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Key determinant of nuclear cost is cost of capital
Cost of capital is function of ability to manage market risk
Expected cost of new energy supply
Nuclear
CO2 price (£/te)
20
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40
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5 10 15 20 25 30 35 40 45 50 55 60 65 70
Lo
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m p
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(£/
MW
h) $40/bbl$40/bbl
$30/bbl$30/bbl
$20/bbl$20/bbl
Viable nuclear new build
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Offshore wind and marine renewables very expensive way of abating carbon
Expected cost of new electricity supply
Other carbon abatement technologies
CO2 price (£/te)
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30
40
50
5 10 15 20 25 30 35 40 45 50 55 60 65 70
Lo
ng
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m p
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(£/
MW
h) $40/bbl$40/bbl
$30/bbl$30/bbl
$20/bbl$20/bbl
Medium coal-Medium coal-CCGT switchingCCGT switching
Onshore Onshore windwind
Cos Cos sequestrationsequestration
Offshore Offshore windwind
Viable nuclear new build
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Acceptable risk for public
Many dimensions of risk
– Security of supply risk (physical availability, price volatility)
– Nuclear accident risk
– Economic risk (uncompetitive energy users, energy poverty etc.)
– Climate change risk
Need to adopt a portfolio approach to risk management and define ‘acceptable risk’ – as has always been done in electricity industry
Mostly to do with resilience and flexibility of supply side and retention of adequate ‘planning margins’
Issue is whether market rules are compatible with retention of desired resilience and flexibility
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Gas dependence and security of supply
Gas remains at margin in all plausible energy futures
Electricity price dependent on international gas price
More coal/nuclear/wind will not reduce much the link between electricity and gas prices
Physical gas availability risks are low
Reducing dependence on CCGT by increasing supply of expensive energy sources will raise cost of energy for consumers
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30%30%
70%70%
CC
GT
de
pe
nd
en
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Load duration curve
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Timing issues
New nuclear capacity
– Even if ‘go’ in 2006 first output unlikely before 2013
– Aggregate new nuclear capacity of 5000 MW very challenging before 2016
Before 2013 key to CO2 reduction is more coal to gas switching.
Coal is 2.3x more carbon polluting than gas. Switching 60TWh coal to gas would reduce CO2 emissions by 35mte CO2 (=predicted 2010 target shortfall)
Many proposed carbon abatement ‘solutions’ either still in development phase and/or hopelessly uneconomic (carbon sequestration, marine renewables). Reliance on these solutions is very high risk for carbon abatement targets
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Delivering the desired energy future
Can the new supply be financed?
‘Shortage’ of capital is not an issue
The issue is whether the energy and carbon markets (net of government policy interventions) offer investors an expected return commensurate with the risks (after risk management strategies)
Cost and performance risks can and should remain entirely with the private sector
Two areas of concern:
– Whether NETA will deliver timely adequate new capacity
– Whether the carbon market risks are manageable
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Is electricity market fit for purpose?
Absence of buyers offering long term contracts increases investor risk and therefore the cost of capital
Will NETA give price signals to deliver sufficient timely new capacity? Is absence of capacity price a problem?
Integrated generation / supply companies best placed to manage the market risks
Renewable obligation mechanism further complicates the picture. If RO capacity not delivered is there sufficient conventional capacity to meet peak demand?
All these issues favour new CCGT because it can be installed quickly in ‘small lumps’ and at low capital cost per MW
Same issues increase risk and cost of capital of capital intensive technologies such as nuclear
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Is the carbon market fit for purpose?
Viability of almost all low carbon emitting technologies depend on a minimum ‘carbon premium’ over whole asset life
But carbon premium is:– Determined by governments– Known for only a short period ahead
No mechanism currently exists to manage carbon price risk over medium and longer term:– ETS– RO obligation
Investors in low carbon emitting technologies will be very slow to invest where viability can be destroyed after capital is ‘sunk’ by changes in government policy– Major impediment to investment in all carbon abatement
technologies – Important reason why offshore wind is developing slowly
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Key policy challenge is to reduce risk around future carbon price
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Some propositions and questions for discussion
New nuclear is the lowest cost of the low carbon emitting technologies. Offshore wind is very much more expensive and has high security of supply risks
New coal-fired plant has no (significant) place in a low carbon energy future
Will the electricity market as currently designed deliver the ‘right’ amount of new capacity on a timely basis??
Unless the ‘carbon price risk’ issue is addressed, the default outcome will be lots more gas-fired CCGTs and failure to meet the carbon reduction targets
Unless ‘new’ nuclear sufficient to replace closing ‘old’ nuclear is built, it is very unlikely that the long term carbon reduction targets can be met
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Financing new electricity supply in the UK market with carbon abatement constrains
08 March 2006