EMR Delivery Plan

Methodology Workshop

20 June 2013

Welcome and introduction

Mark Holden

Workshop Programme

3

Item Content Lead

1 

Welcome and introductionQ&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

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

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

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 mechanismswork within the current electricity market, including the Renewables Obligation and the small-scale Feed-in Tariffs.

Whe

n m

arke

t con

ditio

ns a

llow

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

The modelling process

Alon Carmel

• 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

• 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 approachcontd.

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

The Dynamic Dispatch Model

James Steel

The DDM is an electricity supply model, which allows analysis of the impact of different policydecisions 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).

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

Mer

it or

der

pric

e (£

/MW

h)

Cumulative capacity (GW)

Annual merit order

CCGT

CHP

Coal

GT

Oil_steam

Wind_Onshore

Wind_Offshore

Nuclear

Large_Biomass

Demand

Illustrative Annual merit order

The DDM is an electricity supply model, which allows analysis of the impact of different policydecisions 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.

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

Pol

icy

impa

cts

Dispatch module

New plant module

Investment decisions

New buildRetirements

Security of supplyWholesale 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

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

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

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

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

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

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

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

Summary and further questions

Mark Holden