The Government will publish the draft EMR Delivery Plan in July 2013. This sets out the Government’s proposed draft strike prices for renewable projects and the plans for a capacity market. Everyone with an interest will have the opportunity to respond to the consultation before final strike prices are set at the end of the year.
In preparation for this DECC has produced an explanation of the methodology underlying the analysis being undertaken to help inform Ministers’ decisions on strike prices.
The explanation is designed to help prepare stakeholders for the consultation in July 2013, enabling them to better understand and respond to the content.
The consultation events held during the summer 2013 will be interactive sessions, during which there will be ample opportunity to raise any queries which these slides may generate.
3. Workshop Programme
3
Item Content Lead
1 Welcome and introduction
Q&A
Mark Holden
2 The analytical approach
Q&A
Alon Carmel
3 The dynamic dispatch model
Q&A
James Steel
4 Any further questions Mark Holden
5 Closing remarks Mark Holden
4. EMR – Key components and milestones
Date Milestone
May/June 2013 Capacity Market final design proposals published
July 2013 CfD contract terms published
July 2013 Draft delivery plan, including draft strike prices for renewable projects,
published for consultation
July 2013 Further detail on CfD allocation and price setting processes for CCS and
nuclear projects after close of CCS completion / FID
October 2013 onwards Government consultations on Secondary Legislation for EMR
By the end of 2013 Energy Bill receives Royal Assent, subject to Parliamentary time and the
will of Parliament
By the end of 2013 First delivery plan, including final renewable CfD strike prices published
(subject to Royal Assent)
2014 EMR Delivery mechanisms up and running
4
5. 5
Content of the first EMR delivery plan
Description
1. Executive summary:
Introduction to EMR and the Government’s objectives
2. Introduction: Purpose and role of the Delivery Plan; Ongoing Delivery Plan process
3. CfD:
Introduction and cross reference to relevant documents (eg CfD terms)
CfD Strike Prices for 2014/15 – 2018/19
Decisions on any further cost-control mechanisms
4. Capacity Market:
Introduction and cross reference to relevant documents about the capacity mechanism
Reliability standard for the Capacity Market
5. Forward look to 2030:
A summary of anticipated technology mix to 2030 based on CfD and Capacity Market
decisions
Annex A Explanation of the analytical process followed in reaching the decisions
Annex B National Grid analysis, demonstrating the impact of the decisions above on Government’s
objectives
Annex C Detailed explanation of the capacity assessment
Annex D Methodology underlying the reliability standard
Annex E Updated EMR Impact Assessment
Annex F Prices and Bills analysis
Annex G Scrutiny report from the Panel of Technical Experts
6. Future Delivery Plans
Administrative price setting for
renewables and tailored
arrangements for certain projects,
competitive price setting expected
for some technologies.
Some technology specific
auctions or tenders,
administrative price setting for
others, tailored arrangements
for certain projects if required.
Technology specific auctions for all
technologies where ready (with
tailored arrangements for certain
projects), moving to technology
neutral auctions when possible.
Fully competitive and open
electricity market
2013 Delivery Plan
(2014-2018 outlook to 2030)
2018 Delivery Plan
(2019-2023 with longer term
outlook)
2023 Delivery Plan
(2024-2028 with longer term
outlook)
Expected phase
of EMR
No delivery plan
Delivery plan
content:
Annual update
content
Expect need for Government
intervention in electricity
market to be significantly
reduced.
The wholesale electricity price
and a sustainable carbon price
determine the technology mix.
Enduring CfD contracts
managed by the CFD
Counterparty with EMR
delivery body as necessary.
Capacity Market agreements
managed by the EMR delivery
body.
Updated analysis and delivery
information provided on
enduring CfD and Capacity
Market agreements.
Outcome from Capacity Market auction, if initiated, the associated delivery year and the indicative capacity to
contract for in the next auction
Future CfD decisions (e.g. 2015 annual update renewable strike prices for later years of decade);
Forward look and signposting of the timeline for key changes in the operation of the mechanisms, e.g. the timing of
the move to competitive price setting for CfDs;
Delivery information and updated analysis as necessary.
Illustrative scenarios including
pathways for meeting objectives
and low carbon technology mix to
2030.
Impact analysis of policy decisions
on Government’s objectives.
Government’s objectives;
CfD strike prices for renewables
for 2014/15 - 2018/19;
Long-term reliability standard for
Capacity Market, if initiated.
Government’s objectives;
The information needed for
competitive price setting
processes.
Government’s objectives;
CfD strike price for renewables or
the necessary information
required for competitive
processes.
Investment in low-carbon generation also be supported by the Carbon Price Floor & Emissions Performance Standard. EMR mechanisms
work within the current electricity market, including the Renewables Obligation and the small-scale Feed-in Tariffs.
Whenmarketconditionsallow
Delivery plan
analysis:
Supporting analysis to
Government’s decisions e.g.
impact analysis of policy decisions
on Government’s objectives.
Supporting analysis to
Government’s decisions e.g.
impact analysis of policy decisions
on Government’s objectives.
6
8. • National Grid have modelled a range of different policy choices (CfD strike prices for
renewables and Capacity Market reliability standard)
• The analysis shows the impacts of these different policy choices on the Government’s
objectives
– Decarbonisation
– Renewable energy target
– Affordable energy
– Security of supply
• The modelling (using an updated version of the DDM model) shows
– What capacity gets built
– How much electricity is generated by different technologies
– What the wholesale price is
– What the LCF costs are
– What the system balancing, network and inertia costs are
8
2. The analytical approach
9. • National Grid have also conducted sensitivity analysis to illustrate how resilient
performance against the Government’s objectives, including on:
– Technology costs: high and low
– Fossil Fuel Prices: high and low
– Electricity Demand: high and low
9
2. The analytical approach
contd.
10. a) Decarbonisation – the UK is on a pathway to reduce its greenhouse gas
emissions by at least 80% by 2050 and meet its carbon budgets;
b) Renewables target – there is sufficient investment in sustainable low
carbon technologies to accelerate deployment and put the UK on the
path to achieving existing legally binding targets including the 2020
renewables target, and the 2050 economy wide emissions reduction
target, while driving down the cost of energy over time;
c) Affordable energy – the EMR policies are implemented in a manner that
maximises the benefit and minimises the cost and other potential
negative impacts of the mechanisms to consumers; and
d) Security of supply – there is a secure electricity supply with sufficient
investment in reliable capacity to minimise the risk of blackouts.
The Government’s Objectives for the EMR Delivery Plan
(from Annex E – The Delivery Plan November 2012)
2
12. The DDM is an electricity supply model, which
allows analysis of the impact of different policy
decisions on dispatch and investment decisions
12
For electricity, supply must equal demand at every instant.
Supply side: In real world and model, power stations are turned on
(‘dispatched’) in order of their short run marginal cost (SRMC), which is defined
by fuel, carbon and other operational costs (all of which can change over time).
It is measured in £/MWh.
This results in a generation merit order, effectively a within year cost
minimisation.
Matching supply and demand: The system SRMC is calculated by
matching
demand against the merit order and taking the SRMC of the marginal plant to
meet demand. The wholesale price is equal to the system marginal price
plus the value of capacity (mark-up).
13. Taking into account dispatch, retirement and
investment decisions, the model derives the
merit order.
13
0
20
40
60
80
100
120
140
160
180
0 10 20 30 40 50 60
Meritorderprice(£/MWh)
Cumulative capacity (GW)
Annual merit order
CCGT
CHP
Coal
GT
Oil_steam
Wind_Onshore
Wind_Offshore
Nuclear
Large_Biomass
Demand
Illustrative Annual merit order
14. The DDM is an electricity supply model, which
allows analysis of the impact of different policy
decisions on dispatch and investment decisions
14
Dispatch over time also needs to consider changes to the stock of power
plants (‘dynamic’ element) due to regulatory/economic retirements and new
build
In investment decision making the model considers an example plant of each
technology and estimates revenue and costs in order to calculate an IRR,
which is then compared to the technology’s hurdle rate. Plant clearing by
most is built first and the process continues until no more plant clears its
hurdle rate.
Plant cashflows can be influenced through policy tools, resulting in lower/higher
IRRs and therefore impacting on investment and dispatch decisions.
Limitations to investments can be entered into the model such as minimum
and maximum build rates per technology, per year, and cumulative limits.
15. A summary of the workings of the
DDM and the resulting outputs
15
Commodity prices
Sample day data
Demand
Plant availability
Plant data
New plant data
Construction costs
Hurdle rate
Investor
behaviour
Policyimpacts
Dispatch
module
New plant
module
Investment
decisions
New build
Retirements
Security of supply
Wholesale prices
Emissions
Policy costs
Investors appraise
potential investment
looking at what will
happen to fuel cost,
prices, demand, the
generation mix etc over
next [five] years.
The rate of return required by an
investor to make an investment.
Can be adjusted if policies change
the riskiness of investments.
Strike prices,
Capacity
Mechanism
At half-hourly
resolution
16. 16
Plant Data & Availability
• Assumptions on:
• Existing Plant
• Pipeline Plant
• IED and LCPD Plant (including running hour restrictions)
• Biomass conversions (+cost/technology information)
[INPUT FILE: Existing Plant]
• New Plant [INPUT FILE: Data]
• Interconnectors [INPUT FILE: Interconnectors]
• Autogeneration [INPUT FILE: Autogeneration]
Note: DDM is non-spatial (NG has done supplementary work on networks)
Dispatch Module
17. 17
Demand & Sample Day Data
• DDM runs on sample days (a set of typical types of days in each quarter for both
domestic/non-domestic sector)
• Business days
• Non-business days
• Low demand days
• Peak
• Superpeak
• Hyperpeak
• Demand load curves are at half-hourly intervals.
• 3 levels of wind load factor data applied to the sample days to reflect the
intermittency of on- and offshore wind.
[INPUT FILE: Demand projections and Daily Load Curves (new)]
Dispatch Module
18. 18
New Plant Data & Construction Costs
• Costs and technical information
• Renewables: RO Banding Review Government Response
• Non-renewables: PB (2012) [INPUT FILE: Data, New Plant]
• Note: Costs have been updated for the Delivery Plan analysis
• Maximum build rates
• Renewables: Annual build constraints from RO Banding Review Government
Response (based on Arup 2011) as updated for the Delivery Plan analysis
• Non-renewables: Annual build constraints from DECC technology offices,
based on industry engagement [INPUT FILE: Maximum build limits]
• Supply curve approach
• Renewables are modelled using a supply curve, i.e. combining
low/medium/high cost data points with build constraints, to reflect site specific
variation in cost and load factors.
New Plant Module
19. 19
Hurdle rates & Investment behaviour
• Hurdle rates: RO Banding Review Government Response and Oxera (2011) as
updated for the Delivery Plan analysis
[INPUT FILE: VIU Assumptions, Merchant Assumptions]
• Investment behaviour
• 5 year foresight on fuel cost, wholesale prices, demand, generation mix etc
• Economic retirements [INPUT FILE: Endogenous closures]
• Forward looking
• Once made 2 years of losses, plant considers retiring by looking over next 5 years
• Capacity payments [OUTPUT FILE: CM Auction]
• Eligible plants look five years ahead. If loss making bid in cost that needs to be
covered through CM. If profit making bid in zero.
Investment Decisions
20. Analysis of policy options
Policy options that can be modelled include
General
•Carbon price floor
•Emissions performance standard (bubble/kWh limit)
Technology specific
•Contracts for Difference (with day ahead and seasonal/annual
reference prices)
•ROCs
•LECs
•Capacity Mechanism (new/existing plants)
21. 21
Wholesale prices
• Mark-up:
• Reflects historic data
• Generally difficult to measure accurately as high margins over the last
years which complicates extrapolation to periods of tight margins.
• Impact limited due to capacity mechanism and high margins currently
Outputs
22. Network Modelling
22
National Grid have developed additional
modules linked to DDM outputs to cover
• Network Costs
• Calibrated against the Transmission costs and TNUoS modelling for their Gone
Green scenario
• Constraint Costs
• Calibrated against Plexos outputs for a number of scenarios
• Inertia Costs:
• Estimates of Inertia costs are also included