progress on market reform: emr, the i-sem and the tem · progress on market reform: emr, the i-sem...

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Progress on market reform:EMR, the I-SEM and the TEM

David NewberyElectricity Market ReformBelfast 28th March 2014

http://www.eprg.group.cam.ac.uk

Imperial CollegeLondon

Newbery 2014 22

Disclaimer

Although I am an independent member of theSEM Committee these are my personal viewsand should not be interpreted as reflecting anycurrent or future view of the SEM Committee.

I have been on the Panel of Technical Experts forthe EMR but speak entirely in my own capacity.


Newbery 2014 33

Outline• Progress with UK’s EMR• Mismatches between TEM and SEM

– energy-only market, simple bids to PXs vs complexbids vs centralised dispatch with capacity payments

• Active consultation on SEM market design– For the wholesale market– For capacity payments– to address high wind penetrationAim to deliver the Integrated SEM: I-SEM


Newbery 2014 44

Progress with the EMR• Energy Act 18 December 2013 to address:

– Security of supply and carbon/RES targets– problems with EU ETS– market failures

• To deliver secure low-C in UK affordably=> capacity payments=> Carbon Price Floor– de-risk investment => Contracts to lower cost of

capital• Problems with contract design• Problems with finance


Little recovery after backloading and tightening post 2020

Source: EEX

66D Newbery 2013 6

UK’s Carbon Price Floor - in Budget of 3/11

Source: EEX and DECC Consultation

As at 1 Jun 2011

to £70/t by 2030

Corrective tax

EUA price second period and CPF £(2012)/tonne

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second period priceCarbon Price Floor

Forward prices

Corrective tax

D Newbery 7

Long-term contracts

• CO2 price unpredictable, CPF not credible• Need to attract new sources of finance

– balance sheet of incumbents inadequate• Market risky to new entrants in non-fossil gen

– but attractive to incumbents with retail customers• hedges some of wholesale volatility

=> long-term contract-for-difference (CfD)enforceable in courts


D Newbery 8

CfD in Energy Act 2013• Government announces strike prices and annual

subsidy limit (Levy Control Framework)– uniform by technology (except Island wind), set 2014-17– runs in parallel with ROCs (pFiTs) to 2017=> has to be made as attractive as ROCs=> comparable rate of return (rather high for on-shore wind)=> undermines logic of lowering cost by lowering risk=> relies on locational grid signals (still under review)

• may lead to tender auctions if levy control breached=> could then lead to better market-led outcome


D Newbery 9

Conclusions on EMR• Low-C generation needs long-term contracts

needed as no credible futures markets forcorrective carbon tax

• FiTs make sense for unreliable RES (wind etc)– need to avoid exposure to balancing etc.

• EMR hampered by existing RO scheme– will be more expensive than intended

• Should move to auctions asap

Subsidies should come from general taxation


Newbery 2014 1010

Problems with the SEM• Prices high because of high wholesale prices

– inevitable in small peripheral system?=> Need to insulate prices from RES charges

• Interconnectors inefficiently dispatched– will be resolved by market coupling in 2016

• Capacity payments poorly targeted– DG COMP hostile to poorly justified CPs

• N-S transmission links need strengthening• Gen TUoS charges not adequately spatially varied?

– Vary from £385 in NI to £535/MWmnth (£4.6-6.4/kWyr)• High wind requires DS3 reforms


Source: DECC 2013 at https://www.gov.uk/government/uploads/system/uploads/.../qep551.xlsSource: Derived from the International Energy Agency publication, Energy Prices and Taxes

Build-up of final retail domestic price 2012

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Newbery 2014 12

Advantages of current SEM• Efficient dispatch:

– unit commitment central dispatch lowers cost compared toself-commitment and energy-only trading

– benefits larger in small systems– will increase as wind penetration rises

• BCoP mitigates market power:– remains a problem in near term at least– provides comfort for new entrants

• Capacity payments– necessary to mitigate political and regulatory uncertainty– problem is their efficient design and stability


Newbery 2013 1313

Adapting to TEM• Central issue is market coupling

– DA bids/offers for interconnectors submitted tocentral auction office => prices in each zone

– prices on PXs and use of ICs simultaneous=> efficient use of ICs– price zones defined by congestion not borders

• To do: intra-day and balancing trades over ICs

What is it worth?How might it be done in SEM?


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One-third of the time flows are perverseWholesale prices and percent economic imports

€ 0

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SEM weekly av priceUK RPD weekly avpercent time flows economic28-day MA of econ flows

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AnnualbenefitsfromcouplingMoyleandEWIC(950/910MWimports,580MWexports)

Note: Deadband is the remaining price difference below whichtraders are too risk averse to risk tradingSource: SEM-11-023

Newbery 2014 1616

Capacity payments• GB will have capacity payments from 2018

– in return for capping wholesale price at £6,000/MWh– VoLL taken as £17,000/MWh, LoLE = 3 hours

• Efficient trade over interconnectors requiresefficient scarcity pricing

=> LoLP*(VoLL - SMP)=> reform SEM capacity payment to this?But SEM price cap of €1,000 far below this


Average €7/MWh

SEM Capacity Payments 2012 and 2013

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Ti

Source: Poyry: Capacity Payment Mechanism Medium Term Review 2011

Would have paid 218% of the available pot

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Ti

Scaled to pay the actual capacity pot in 2008

Newbery 2014 2020

Day-ahead pricing• SEM sets price on basis of ex-post dispatch• DA markets set price on ex-ante bids

– Intra-day markets will allow adjustments

• I-SEM design will need to adapt to his• DA dispatch provides prices for DA trading• Adjusted in light of wind, demand, outages

=> revised dispatch and intra-day/balancing prices (effectivelyex post prices) for deviations from initial dispatch

Who chooses initial and revised dispatch?


Newbery 2014 2121

Conclusions• TEM improves use of interconnectors

– realises value to SEM consumers who own ICs• GB market changing

– coupled on Continent, has CPF and CP from 2018– price cap to be raised to £6,000/MWh

=> could increase SEM exports when GB stressed=> care designing SEM CPM• Central dispatch probably more efficientIf kept need to devise efficient intra-day trading


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Spare slides

David NewberyElectricity Market ReformBelfast 28th March 2014

http://www.eprg.group.cam.ac.uk


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AcronymsBCoP Bidding Coide of PracticeCfD Contract for differenceCP(M) Capacity Payment (Mechanism)CPF carbon price floorDA Day aheadEMR (UK) Electricity Market ReformETS Emissions Trading SystemEUA EU Allowance for 1 tonne CO2EWIC East-West InterconnectorFiT Feed-in tariffIC InterconnectorLCF Levy Control FrameworkLoLE Loss of Load expectation (expected number of hours of LoL)LoLP Loss of Load ProbabilityRES Renewable energy supplyRO(C) Renewable Obligation (Certificate)TEM Target Electricity MarketTUoS Transmission use of system (charge)VOLL Value of Lost Load

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TiPrice duration curves at 2013 prices

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percence price higher than

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progress on market reform: emr, the i-sem and the tem · progress on market reform: emr, the i-sem...

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