overview of the uk electricity market. structure part 1: some general context part 2: the retail...
TRANSCRIPT
Overview of the UK Electricity Market
Structure
Part 1: Some general context
Part 2: The retail market
Part 3: The networks
Part 4: The wholesale market
Part 5: Thinking system wide
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Who are Ofgem?
About us•Office of Gas and Electricity Markets (Ofgem)•Regulator for both gas and electricity markets in Great Britain (separate regulator for Northern Ireland)
Our statutory Principal Objective and general duties•Protect the interests of energy consumers
– Existing and future consumers – Environmental objects – Security of supply – European objectives
National Regulatory Authority and National Competition Authority •Regulation of the network monopolies through licences and domestic and EU legislation; price controls; economic and efficient tests.•Suppliers in competitive market. No price controls but some regulation of behaviours through licences.
Key characteristics of the energy sector
Energy characteristics influence design and effectiveness of the markets:
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Essential product: cost and security of supply / carbon = public policy issues
Highly regulated sector
Monopoly networks with technical complexities
Complex / detailed market rules
Challenges to differentiate products
Consumer engagement weak
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Bills & the breakdown of bills
Bills & the breakdown of bills
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UPSTREAM PRODUCTION
WHOLESALE MARKET
TRANSMISSION NETWORKS
DISTRIBUTION NETWORKS
RETAILMARKET
CONSUMER
GAS
ELECTRICITY
Offshore production, LNG,
pipelines and interconnectors
sell their outputs on the
wholesale market
Electricity generators and interconnectors sell their output
on the wholesale
market
Bilateral and exchange
trading between producers, suppliers,
traders and larger
consumers
Bilateral and exchange
trading between generators, suppliers,
traders and larger
consumers
High-pressure gas network owned and operated by
National Grid Gas (NGG)
High pressure electricity
network owned and operated by
National Grid Electricity
Transmission (NGET)
8 regional gas distribution
networks (GDNs)
14 regional electricity
distribution network
operators (DNOs)
Suppliers purchase energy in the wholesale market for their
consumers.
Suppliers purchase energy in the wholesale market for their
consumers
REGULATED MONOPOLIES
The supply chainElectricity and gas
Part 2: What is the retail market?
The retail market is:•The place were energy companies sell energy to consumers and businesses•The only interaction between consumers and the marketWho are the participants•Generally perceived as the Big 6 and independents •Price comparison websites and intermediaries•Consumers
The Big 6’s joint market share, which had been relatively stable during 2009-early 2012, has fallen 6% as a consequence of independent suppliers’ steady growth from mid 2012. In June 2014 their market share was 7%, about four times the market share they had in 2012
How is the retail market changing?
Switch & save
The retail challenges
Part 3: The networks
Network Costs post privatisation
Network costs are determined via periodic price controls.Our RIIO framework focusses on what customers value.Network costs recovered from system users via charges.
Network Challenges
And the role of the SO will need to evolve.
Part 4: The wholesale market
Part 1: The industry structure, roles & responsibilities.
Part 2: The retail market
Part 3: The networks
Part 4: The wholesale market
Part 4: The wholesale market
The wholesale market is:
•The place where generators sell their energy •The place where suppliers buy their energy•Supply and demand must be matched, or balanced, at all times (in the case of electricity in real time). The market incentivises suppliers and electricity generators to balance their own supply and demand positions.•Overall responsibility for balancing supply and demand sits with the System Operator.
Who are the participants•The Big 6 and independent suppliers•Generators, Interconnector/LNG operators•Banks and financial institutions, Hedge funds•Exchanges•Brokers•National Grid, as system operator•Elexon as the BSC Company
Wholesale market design
- The NETA/BETTA market which replaced the Electricity Pool is based on the following principles
- The market should incentivise parties to trade as they wish to manage their risk (with prices set based on the cost of the marginal plant).
- The role of the SO should be minimised – “residual balancing”.
- Parties which causes costs should face the costs they cause .
- Market rules should be capable of being changed by market players.
- There should be a single GB price/ bidding zone.
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Sources of supply
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Sources of supplyElectricity
• Power generation in recent years dominated by coal, gas and nuclear• Coal has been providing majority of seasonal swing, as plant look to save running hours
under environmental legislation• Gas generation expected to play a key role providing flexibility going forwards
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The timescales for power trading
• Bilateral agreements• Opaque market• Facilitated by brokers and Price
Reporting Agencies• Counterparties won’t necessarily
post collateral
• Act as an intermediary between parties
• Transparent market• Counterparties have to post
collateral
Over-the-Counter (OTC) Exchanges
Party A Party B
Financial flow
Delivery of commodity
Party A Party B
Exchange
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Trading gas and power
Costs of production mainly determined by:•Cost of plant•Commodity prices•Plant reliability and efficiency•Government policies e.g. carbon price floor/Contracts for Difference
Costs of production mainly determined by:•Cost of interconnector•Prices in other markets•Exchange rates•Interconnector reliability and efficiency
Price Formation
Coal
Oil
Gas
Nuclear
Wind
Hydro
Generators Interconnectors
Conventional
Low carbon
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Supply curve:Combining the costs on the previous slide gives a supply curve…
Price Formation (2)
Renewables&
Nuclear
Coal Gas
Supply
Renewables&
Nuclear
Inte
rcon
nect
ors O
il
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Demand curve:Demand, on the other hand, is determined by:•Temperature•Light•Weekday/weekend•Over the long-term: GDPDemand is quite inelastic, i.e. not very responsive to changes in price, and therefore has a steep curve:
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Balancing the system
Gate Closure – trading stops
Settlement period (30 mins)
Balancing MechanismBalancing Mechanism
Parties submit:To National Grid1.Final Physical Notifications (FPNs)2.Bids and OffersTo Elexon3. Contract notifications
tt-1
Forward trading
NG accepts bids/offers to balance the system
t+0.5
Ele
ctric
ity
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Wholesale Challenges
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It’s all about the system!
We can think about individual parts of the electricity sector.
But it’s all part of one very complex system.
A tweak in one place can have big consequences in another.
The biggest challenge is ensuring coherence.
We at a point where lots is changing.
Ensuring security of supply, keeping costs down & decarbonisation rely on getting things right!
ScopeScope
Supply of gas & electricity to GB households and small businesses Features of the market that could harm competition Recognising Ofgem’s RMR remedies and future developments
ProcessProcess Jul/14-Jan/16: CMA market investigation – 18 months, can add 6 months Jan/16-Jul/16: CMA remedies (if required) – 6 months, can add 4 months
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Why?Why? “Reference test” threshold met: reasonable grounds to suspect features of
market restrict/distort competition
MIR now will lead to faster conclusion to market uncertainty
Still expect RMR reforms to directly address market failings, but investigation will clear the air and allow CMA to ensure right industry structure is in placeWhy now?Why now?
Market Investigation Reference (MIR)