Developments in the UK Electricity Market

Dr Aidan RhodesKnowledge Exchange Associate,

UK Energy Research Centre

Two organisations

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carries out world-class research

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Energy Policy Objectives

� EnvironmentalEnvironmentalEnvironmentalEnvironmental - 80% reduction of CO2 emissions* by 2050 (34% by 2022)� Renewables to supply 20% of EU energy by

2020

� 10% of road transport to be biofuel by 2020

� 20% improvement in energy efficiency by 2020

� SecuritySecuritySecuritySecurity - Maintain reliability of energy supplies

� EconomicEconomicEconomicEconomic - Promote competitive markets

� SocialSocialSocialSocial - Ensure every home is adequately heated

*Compared to 1990 levels

EU Strategic Energy Technologies Plan (SET-Plan)

2009

UKEnergy Act 2008

Climate Change Act 2008

Previous UK energy market liberalisation

1989: 1989: 1989: 1989: UK Electricity Act 1989: begins the process of privatising the UK electricity industry. This was done to make the system more cost-effective and efficient.

1990: 1990: 1990: 1990: Assets of nationalised Central Electricity Generation Board broken up into three private companies – two generating companies and National Grid, who own the transmission network....

2000: 2000: 2000: 2000: Utilities Act 2000 – Integrates regulation of gas and electricity markets, prevents distribution network operators from supplying electricity to customers, and brings in more comprehensive energy trading rules.

IPCC 2nd

report (1995)

US amendment to clean air act (1990)

UNFCCC mtg in Kyoto (1992)

Copenhagen –Kyoto II (2010)

IPCC 4th

report (2007)

1990 2000 2002 2006 2010

IPCC 1st

report

Policy

IPCC 3rd report (2001)

UK CCS competition launched (2007)

Kyoto Protocol comes into force (2005)

Total OECD (1990) installed electrical power plant = 1715GWWind power = 2.4GWSolar = 0.3GW

Total OECD installed electrical power (2006) plant = 2485GW (1653GW)PV = 6.23GWWind = 64GW

Kyoto Protocol established (1997)

EU ETS phase I (2005)

EU ETS phase II (2008)

PV record set at 46% efficiency (2008)

UK Energy White Paper (2003)

UK Climate Building regulations tightened (2006)

UK Energy White Paper (2007)

Pelamis wave power demonstrated in Portugal (2008)

Privatisation of UK electricity industry (1990)

Supplier obligations (1994)

Climate Change Levy (2001)

Mandatory condensing boilers UK (2005)

CFL phase out (2010)

Carbon reduction commitment (2010)

Renewables Obligation (2002)

UK CHP strategy (2004)

UK Micro-generation strategy (2006)

UK Biomass strategy (2007)

Years of policy experimentation and innovation

EU car fleet regulation (2008)

SET plan (2006)

Biofuels directive (2003)

UK biofuels = 1% (2007)

CO2 emissions from residential buildings = 80Mt (1990)

Average UK new vehicle CO2 emissions = 190g/km (1997)

2004 2008 2012

EU ETS Phase III (2013)

Heat and Energy Saving Strategy (2009)

UK Renewable Energy Strategy (2009)

Energy Technologies Institute launched (2006)

TSB launched (2007)

Research Council Energy Programme launched (2005)

ERP launched (2005)

Carbon Trust launched (2001)

UK RTFO (2008)

MAFF – Defra (2001)

Dept. Energy abolished (1992)

DTI – BERR and DIUS (2007)

DECC formed (2008)

Average UK new vehicle CO2 emissions = 160g/km (2008)

EU new vehicle CO2 emission = 130g/km (2012)

CO2 emissions from residential buildings = 82Mt (2006)

Total OECD installed (2000) electrical power plant = 2056GWPV = 1.1GWWind power = 15.3

Energy Savings Trust (1992)

Institutionallandscape

Committee on Climate Change (2008)

UK Energy Research Centre launched (2004)

UK Energy and Climate Change Acts (2008)

An Energy Policy for Europe (2007)

UK winter fuel payments introduced (1997)

Home energy efficiency act (1995)

US repudiates Kyoto Protocol (2001)

Sizewell B begins electricity generation (1995)

UK windfall tax (1997)

Brent crude $9 per barrel (1999)

10% renewable electricity by 2010 target (2000)

Hinkley Point closes (2000)

National Climate Change Programme (2000)

Home Energy Efficiency Scheme (2000)

Fuel Poverty Strategy (2001)

Bradwell closes (2002) Calder Hall

closes (2003)

Energy Efficiency Commitment (2002)

Chapel Cross closes (2003)

Energy Act (2004) Office of Climate Change formed (2006)

Brent crude $141 per barrel (2008)

Technical, social and economic

Scottish Government (1999)

Welsh Assembly (1998)

G8 agree 50% emission reduction target (2008)

EU FPIII (1991)

EU FPIV (1994)

EU FPV (1998)

EU FPVI (2002)

EU FP7 (2007)

UK Renewable Heat Incentive (2011)Electricity Market Reform (2011)Green Deal (2011)

Dash for gas (0-28% of UK electricity capacity)

OFFER & OFGAS merged (1990)

OFGEM formally named (1999)

Green Investment Bank (2012)

Global financial crisis (2009)

Conventional Electricity Value Chain

Energy Energy Energy Energy consumers consumers consumers consumers

DistributionDistributionDistributionDistribution• DNOs

• Utilities (ESCOs)

TransmissionTransmissionTransmissionTransmission• TSOs • GBSOs

LargeLargeLargeLarge----scale scale scale scale TraditionalTraditionalTraditionalTraditionalGenerationGenerationGenerationGeneration

Industry

Domestic use

Transport

Other uses

Effects of privatisation

� Since privatisation, energy prices in the UK have generally been lower than the rest of Europe.

� The system has stimulated considerable innovation in supply and tariff structures.

� Security of supply has remained very high, with few major incidents.

� However, investment has generally shifted towards low-capital, quick payback schemes such as CCGTs.

The electric economy

Electricity

Heat

Mobility

International aviation & shipping*

UK non-CO2 GHGs

Other CO2

Industry (heat & industrial processes)

Residential & Commercial heat

Domestic transport

Electricity Generation

* bunker fuels basis

2050 objective

159 Mt CO2e

695 Mt CO2e

The scale of the UK challenge

Transport accounts for 19% of UK CO2emissions

Source: Committee on Climate Change

Large amounts of low carbon generation neededLarge amounts of low carbon generation neededLarge amounts of low carbon generation neededLarge amounts of low carbon generation needed

By 2020 we see:

�23 GW new wind

�Up to 4 new coal CCS demonstrators

�Up to 2 new nuclear plants, with a third by 2022

By 2020 we see:

�23 GW new wind

�Up to 4 new coal CCS demonstrators

�Up to 2 new nuclear plants, with a third by 2022

-

10

20

30

40

50

60

70

80

90

100

2008 2020

GW

Capacity - today and 2020

Oil

Gas

Coal

Coal CCS

Renewables

Nuclear

A wide range of solutions are needed

11

Electricity Market Reform

Capacity market

Will provide incentives for adequate capacity to be available when needed. This includes generation, demand-side response and storage.

This market will be aimed principally at avoiding loss of supply, and will only be opened if the government believes it will be needed.

Feed-in Tariff – Contract for Difference

The current Renewables Obligation system will be replaced with a feed-in-tariff with long-term contracts for difference.

These would allow long-term investment certainty for low-carbon technologies such as nuclear, CCS and offshore wind

Tariffs will be set in 2013 for implementation in 2014. Initially set on cost of generation, with an aspiration to move to technology-specific and then technology-neutral auctions in the 2020s.

The system operator, National Grid, has been selected to manage these proposals.

Electricity Market Reform

Emissions performance standard

To reinforce the existing requirement that there will be no new coal-fired power plants built without carbon capture and storage. Level set at 450g/kWh.

Designed to encourage investment towards new gas plants in the short term, and CCS installations in the medium/long term.

Strategy and Policy Statement

A new statutory document that outlines the Government’s strategic priorities in the energy sector for the next five years, and outlines the split of responsibilities between Government departments affected by the energy sector and the regulator, Ofgem.

Distribution and transmission networks

� The networks, as natural monopolies, are regulated using a price control method.

� Previously, this followed an RPI-X formula, which led to cost efficiencies at the expense of innovation and high investment.

� This has changed to a RIIO formula (Revenue=Incentives+Innovation+Outputs, which is hoped to stimulate more innovative efforts on the networks. To further stimulate innovation, annual competitions will be run.

� The first of these, the Low Carbon Network Fund, will make £500 million available between 2010-2015 to trial new network technologies across the UK.

Feed-in Tariffs

� Designed to increase the uptake of micro generation and low-carbon heating technologies.

� Provides a financial incentive to installation, paying the ownerfor each unit of generated electricity.

� This is funded directly by consumers’ energy bills.

� The level has been dropped from 43.3p/kWh to 21p/kWh for installations completed after 3 March 2012

© Feed-in Tariffs Ltd

The Green Deal

� Legal framework to allow energy saving investment costs to be ‘attached to the property’and recovered from energy bills

� Obligation transfers to the next ‘energy bill payer’at sale or re-letting

� A ‘Golden Rule’ is in place to ensure that the benefits of installation are greater than the costs.

� In conjunction with the new Energy Company Obligation (ECO).

Renewable Heat Incentive

� Similar to Feed-in Tariffs, gives consumers a financial incentive for installing low-carbon heat sources.

� A tariff is paid per unit of renewable heat produced.

� Paid for by the Treasury - £680 million available.

� Covered technologies include solar thermal, biomass boilers, ground-source heat pumps and solid waste burning.

� Has launched for businesses – domestic launch expected this year.

Smart Meters Rollout

� The UK Government has plans to roll out gas and electricity smart meters to every property in the country by 2020.

� Led by the Department of Energy and Climate Change (DECC)

� This will be over 54 million smart meters.

� Deployment starts in 2014 – that’s 24,500 meters installed a day!

� The meters will have two-way communication links with energy suppliers, via a central Data Communications Company (DCC).

� Consumers will be able to see their energy usage.

� Technical specifications to be published by DECC before the end of March 2012.

Access to information on all public funding bodies including: Research Councils; TSB;

ETI; Carbon Trust; and DECC. Information includes technology strategy, funding

mechanisms, funding process and case studies.

An up to date list of open calls for RDD&D funding in the UK, the EU and

internationally. Information about future calls will also available.

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these technologies.

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