UK Electricity Market Reform & Energy Transition

UK Electricity Market Reform and Energy Transition

• The UK, similar to other nations, had an electricity system dominated by coal and nuclear power, centralized and state-owned until 1990
• Privatization of the electricity market in 1990 drew global interest and set a precedent
• The UK government started radical reform two decades later, called the Electricity Market Reform (EMR), which was enacted in 2013
• The EMR raised intense debate due to its motivations, components, and consequences
• A study summarizes the UK's electricity policy evolution from 1990, explaining the EMR's origins, rationales, characteristics, and results
• EMR was caused by issues with liberalization post-2000 and the need to maintain system security, reduce CO2 emissions, and provide affordable electricity

Historical Context

• Electricity bills fell mostly for 15yrs post-privatization, however sharply rose around 2004
• Factors causing a rise in bills were increasing fossil fuel prices, investments, and inefficient renewable policies
• The four EMR instruments revolutionized the electricity sector, combined with technological and structural changes
• Prices were lower than expected in competitive auctions for capacity and renewable energy
• Fixed-price auctions for renewable sources projected savings of over £2 billion/year compared to the previous support system
• A minimum carbon price level has promoted cleaner gas and displaced coal

Recent Changes

• Electricity prices may have peaked beginning in 2015 due to lower consumers bills thanks to energy efficiency
• Renewable electricity grew from under 5% of generation in 2010 to almost 25% by 2016
• Renewable projection are expected to reach over 30% by 2020, despite banning onshore wind
• Environmental consequences were dramatic: a decline in coal generation and a halving of power generation CO2 emissions over 25 years.
• The Capacity Mechanism was ill-suited for demand-side response, highlighting transmission pricing issues with growing renewables
• Future contracts may reform to improve siting efficiency and avoid wholesale market impacts as variable renewables increase.
• EMR represents progress, but challenges remain
• The UK was a leader in electricity deregulation in the early 1990s
• The UK government started a fundamental reform of electricity regulation starting in 2010
• EMR legislation led to radical change, prompted by investment concerns, decarbonization goals, and rising energy prices
• The UK's electricity liberalization attracted world attention

Aims of the Paper

• Summarize the evolution of the UK electricity system, including institutional and political aspects
• Explain why the UK pursued EMR by highlighting key intellectual debates and institutional proponents
• Explain the basic EMR structure following the 2013 legislation
• Show contract and auction results up to mid-2017, addressing EMR's return to central planning
• Reflect on future challenges and prospects for the UK electricity market structure

Electricity Supply Industry Origins

• In England and Wales after 1947, the public Central Electricity Generating Board owned generation and transmission.
• The CEGB sold to 12 Area Boards under a Bulk Supply Tariff
• Scotland's had 2 integrated companies, and Northern Ireland had 1
• Coal supplied nearly all output until 1955 when pressure from the Treasury led to oil-fired and gas-cooled nuclear stations
• Nuclear share rose to 20% by 1990
• Oil peaked at 34% before 1972 then coal and nuclear replaced it, down to 1% by the century's end.
• Margaret Thatcher's government in 1979 pledged to reverse Economic decline, roll back state frontiers, and reduce labor power
• Between 1979 and 1992, 39 firms were privatized, including British Telecom (1984), British Gas, water companies (1989), and electricity utilities (1990-1995).
• Conventional thermal generation was coal based at 90% by 1989
• Coal quickly declined after privatization due to improved nulear power and competition with "dash for gas," with falling consumption, deindustrialization, and demand efficiency
• Shares of gas and coal shifted based on the spark spreads margin between wholesale price, fuel, and CO2 expenses
• After privatization, England and Wales replaced state companies with two fossil and one nuclear company under a national grid owned by Regional Electricity Companies

Electricity Policy

• National Grid firms and RECs were regulated, large customers could buy from the Electricity Pool wholesale market
• Centrally dispatched a System Marginal Price SMP set by the most expensive, with a capacity payment added
• Gas generation grew in 1992-2000 due to outside electricity market reasons
• North Sea gas saturated markets
• Gas power generation lifted legal ban
• Conservative government favored less coal through CEGB break-up
• Government encouraged new players from CEGB
• Low gas prices aided high Pool prices while low-capital CCGTs improved quickly.
• 'Independent' Power Producers (IPPs) entered with energy policy guiding decisions
• IPPs entered with long-term fixed price contracts with RECs, who passed expenses to the franchise domestic market

Early Market Power

• All risk was reduced via long-term contracts, regulated pass-through, and CCGT guarantees
• There was new REC incentive to use independence from centralized generation.
• Negotiated domination of the England & Wales Pool by two fossil generators was negotiated down to divesting 6 GW of coal plants.
• The resulting triopoly constrained market power, with the urge divest coal plant before gas eroded their share.
• Coal fell by over a third and imports increased by 2000
• Generation firms could buy supply originally integrated with RECs after divesting plants
• The market trended to the "Big Six" generators and retailers.
• An increased cost-price difference in the Pool and excess capacity inspired the government to replace the Pool with New Electricity Trading Arrangements (NETA) by 2001
• NETA used an energy-only market (abolishing capacity payments in place of central dispatch and the Pool from1996-2000, due to triopoly

Flaws of NETA

• The direct bilateral trading to meet physical supply and demand would increase competition
• NETA created a two-priced Balancing Mechanism
• Logic for reform was self-dispatch requiring a balance output with matching purchase contracts, removing spot market manipulation
• NETA's balancing mechanism proved flawed, requiring modifications to make the market efficient.
• Clear incentive for vertical integration: the merger of retailing and generation firms, protecting them from price uncertainties
• The market created barriers to entry and an oligopoly of power firms
• The EU Target Electricity Model mandates price zones are created for key constraints, where NETA principles were expanded in 2005
• Scottish consumers would find lower prices than GB, and redispatch expenses were avoided
• Annual savings amount to million of pounds

Electricity Demand and the Retail Market

• Electricity usage patters is more stable than fuel
• Fuel use dominated by industry and domestic use, declining with services increasing
• Demand on the grid has declined over the past decade
• Electricity demand has peaked through household uses
• 2016 showed industrial and household electricity demand
• Improved energy efficiency, slowed financial growth after the 2008 crisis, and rising prices lowered electricity use by 21% and 14% respectively between households and industrialized sectors
• The decline in electricity demand (in 2013 Ofgem had to revise down its definition of 'standard' domestic consumption to 3,300 kWh/yr per household) helped to contain electricity bills
• Electricity prices, especially for the poor and industrial, became a major political concern during EMR
• Rise lead to politicians calling for intervention, price caps, etc., and Ofgem started An investigation in 2008 Energy Supply Probe and Investigation in 2014

Electricity Market Reform

• EMR was intellectually conceptualized due to intertwining worries of investment, the environment, and prices
• Investability and security is a theoretical and growing worry
• Energy market would offer lower rates at scarcity, reflecting last Pool price with high scarcity that investors predict to encourage current investments
• Investors can predict scarcity and anticipate high price to invest now for guaranteed delivery of future energy
• Future markets for electricity are illiquid or absent, while plant to commissioning takes 4-8 years.
• Market conditions must are predictable in terms of policy for investors to be confident

Risks

• Rising electricity prices would be subject to cutting political pressures to reduce them
• Turmoil of policy post-1997 period
• Four white papers occurred from to 2003-2011 that included discussion on coal, gas, and renewables
• Brave Investors wanted to forecast interventions in the future electricity market
• Carbon pricing's growing requirements on the theory of Environment should include increased de-carbonization
• Model of competition in the UK market has become dominated by discourse and Europe's market requirement with need to externalize price
• System of S Trading of ES in Europe has failed to deliver a credible low CO2 prices signal
• Short and long-term goals both aim to be sustainable
• Choice of economic investment depends on level of carbon prices, investors and EU prices, and investments
• Broader environmental policy was unstable at the domestic UK policy
• EU 2009 Directive raised required share of Renewables to 20% by 2020, creating an unstable domestic UK climate
• The domestic UK 2008 Act is a legal framework to tackle climate and emissions
• Britain faced with two additional problems.
• EU Directive Emission Standards limit set limits
• Britain 1st and second Generations where coming to an end for GW electricity
• The model in two official assessment
• The UK Climate Change Commitee found buy and sell electrons won't deliver low carbon investment
• 2008 is the UK electricity models seemly
• Inadequacy carbon prices is driven by short-run of generating low sources prices
• This investment would able to pass threw fuel prices into into the market
• UK is in direct conflict with the fundamental to give strategic for carbons.

History of UK Renewables Policy before EMR

• First embrace in the form of non-fossil energy in 1990 at a point markets
• Civil Servants slipped renewable energy for "non-fossil"
• Invitation to tender bid for auction risks, leading some winers to never procede to complete
• Change fuel desired led to by Continent to change at auctions
• Changed US Portfolio with mandate and increased source from 2002
• Retailers source the increase to 30% buy-out source wind
• The most effective support led up mainly and losing of of support
• The 199 UK Domestic that lead up mostly
• European ranking bottom in 2008

4 Legged Beast

• Lack of Credit made this through march in March to fossil fuels to create electricity to bring minimum
• 2010 is consult on electricity
• electricity that the government adopted a Social Cost
• Fossil Fuel general had to pass the cost with little security for them to grow renewable

CfD and Auctions

• Nuclear and renewables industry's were impatient and wanning to change
• Legisalate government was already negotiating
• Renewbales energy prices is with 98/ MWh which was three times
• EMR overall low carbon clear and long saga Hinkey Point C contract in price
• Overestimate the 30 % over estimating the costs

Capacity Concerns and Potential Solutions

• The first AU in electricity to make about 52 GW 200 •