HC 742 Electricity Market Reform

House of Commons Energy & Climate Change Select Committee Inquiry into Energy Market Reform

Written Evidence from Good Energy

January 2011

Good Energy: An introduction

Good Energy is unique. Our position as Britain’s only dedicated 100% renewable electricity supplier means that we have a unique body of expertise and experience related to renewable energy generation, and supply, in the UK. We supply more than 26,000 homes and businesses across the UK and source the majority of our customers’ needs from a community of more than 1,500 independent renewable generators.

As part of our work, we have developed an unmatched level of experience in trading a renewable energy portfolio, and have undertaken significant research using DECC’s 2050 pathway, which demonstrates how we think the UK can be 100% renewable by 2050.

Figure 1: Good Energy’s vision of future electricity supply

Executive Summary

In order to reach the legal targets for renewable energy in the UK the Electricity Market Reform must go further than just incremental changes to the current system. It will be critically important to get the right market structure and grid infrastructure in place. Radical reform is required to enable the grid to support a minimum of 20% of energy from renewable sources, both physically and commercially. In this paper we have laid out four key areas, each requiring major change to encourage the initial growth of carbon reductive technologies and then allow these technologies to operate long term in a market which provides for energy security by supporting both demand and supply side flexibility.

Renewable energy has a significant role to play in the future decarbonised energy market. The four key areas that we believe that the Electricity Market Reform project must deliver in are as follows.

1. Support for emerging low-carbon technology through an expanded Feed-in Tariff scheme;

2. A carbon price that levels the playing field for carbon based energy and non-carbon based energy sources;

3. A capacity management mechanism that supports demand-side management and storage;

4. A network structure, both physical and commercial, that supports decentralised generation and demand side response.

The current market structure was designed to support large, centralised, predictable fossil-fuelled generation, remote from the users it serves. Existing renewable generation is there in spite of the market structure not because of it. This results in additional costs for decentralised renewable energy sources.

For example, the current approach depends on predictable generation which delivers precise MWh agreed several years in advance on long-term contracts. This is then fine-tuned closer to delivery as actual demand becomes clearer. Wind power is predictable and can be forecast accurately in the near term, but it cannot be guaranteed for a particular half-hour months or years ahead.

A new market structure should recognise the need to generate energy from zero-carbon sources, and use technology to allow real-time balancing using both supply and demand side management.

Because of the pace of change, support is needed to deliver the new zero-carbon energy market. This support should be transparent for all technologies, rather than the system which currently exists ranging from upfront to more covert support, which can be financial, logistical or by market design.


Four key areas for Government action

Figure 2: Key areas for the Electricity Market Reform project to address

1. Support for Low Carbon technologies

Any market subsidy (beyond R&D, to prove a technology works), should be for the purpose of encouraging short-term growth in new technology. The current Renewable Obligation and Feed-in Tariff do just that. Both have a finite life with the view that renewables should be able to compete without subsidy in the longer term. The RO will cease in 2037, whilst the Feed-in Tariff has an element of digression on the prices available, thus reducing the level of support for new sites as time goes on.

Currently there are several different support mechanisms, and in some cases no support for emerging low carbon technology. Apart from the RO and the FiT, there is the Climate Change Levy, the Fossil Fuel Levy, the proposed CCS Levy, as well as the Low Carbon Network Fund and research grants supporting storage and demand side response. This support is by no-means unique to low carbon generation; there has also been considerable support over the years for nuclear and for gas fired technology.

New technologies need support, but the current system lacks transparency and therefore there is a lack of understanding about the level of support given by the taxpayer. This in turn leads to debate about whether this support is justified. All too often that debate focuses solely on the support renewable generation receives, without acknowledging the assistance given to other more carbon intensive forms of generation. A simpler system is needed where all technologies are managed under a broad-based Feed-in Tariff mechanism that would include all low carbon solutions, including storage and demand side technologies, as well as new zero carbon generation technologies.

This mechanism should be transparent, not just in terms of how much support is given to each solution, but also in terms of offering certainty that support will be available over time, in order to help secure the vital investment that is needed.

Good Energy believes that the Committee should make the following recommendations:

· The simplification and transparency of energy support around a broadened Feed-in Tariff mechanism

· The inclusion of storage and demand side solutions in addition to generation

· A commitment to the Feed-in Tariff mechanism over time to support investment.

2. A carbon price that ensures carbon sourced energy is properly costed for its impact on the environment over non carbon based solutions

The purpose of a carbon price is to create a market framework which means that the lower the carbon intensity of the energy source, the cheaper it is. A premium should be payable for high carbon energy sources because of the damage they do to the environment.

In contrast to the Feed-in Tariff, which is a mechanism for supporting emerging technologies, an effective carbon price is a mechanism for levelling the playing field between zero-carbon and carbon-based energy sources. Therefore in an effective and efficient carbon market, the zero/low carbon option will be preferable to high carbon generation.

An effective carbon price represents the next stage. As emerging technologies, such as onshore wind, mature and their support under the Feed-in Tariff diminishes, then they should be able to compete fairly in the market with other energy sources. While existing mature technologies would not receive a Feed-in Tariff, a fair carbon price will ensure that those with a greater environmental benefit which don’t emit greenhouse gases are recognised.

Under an effective carbon price mechanism, energy under storage would be priced according to its carbon intensity, whereas demand side reduction would be recognised as carbon free. There would therefore be a greater incentive to reduce demand than to store carbon-based energy sources.

Good Energy believes that the Committee should recommend that the Government introduce the following:

· A carbon price which reflects the environmental costs of carbon emitting energy sources

· A scheme that will support emerging technologies as they mature out of the Feed-in Tariff mechanism to create a level playing field

3. A capacity element that includes support for demand side and storage

Under the old Pool trading arrangements capacity payments were designed to keep rarely run plants available and encourage generators to be available as much as possible around system demand peaks or in areas of network constraints; or in the case of fast-responding plant, to come online when a fault develops or a generator fails. It is now widely accepted that the in the future, the UK will have a greater reliance on a more diverse portfolio of energy sources than at present. As a result, the use of one specific technology is likely to become more intermittent, the need for additional capacity is also likely to change. Rather than meeting system peak demand in winter, capacity will be needed to manage the margin between demand and supply when certain forms of generation are unavailable. A mechanism built around total available capacity is of limited use if a significant proportion of it is unavailable when the demand is required. More fundamentally, there needs to be a demand side element to capacity where demand has potential to be reduced as well as additional generation. This will require a more dynamic arrangement whereas additional demand side "availability" can be created with higher capacity payments when required.

Figure 3: Good Energy’s proposed demand side response solution

In the short term, as traditional carbon-sourced generation diminishes and low carbon technologies take precedence, the capacity element will enable them to stay financially viable until the additional capacity can be provided by a mixture of renewables storage and demand-side response. The carbon price discussed above should favour non-carbon sourced capacity, however the mechanism may need enhanced capacity payments to ensure rarely used non-carbon based energy is able to compete with carbon-based energy.

Figure 4: Good Energy’s proposed storage solution

If this is correctly managed it will result in much greater energy security, not just in the period of transition, but beyond in the zero-carbon future.

Good Energy believes that the Committee should recommend that the Government introduce the following:

· A dynamic capacity mechanism that can create additional demand-side response

· A mechanism that supports capacity from non-carbon-based energy sources

4.
A network structure, both physical and commercial, that supports decentralised generation and demand-side response.

Distribution networks, like the energy market, were designed to move energy passively from large fossil-fuelled stations to the point of demand. Until recently, embedded generation was primarily the preserve of on-site supply, and could occasionally spill onto the network. Local network operators do not act as system operators attempting to balance their network, other than by local constraints.

As more renewable energy generation comes online embedded within the local networks, then the network operator will need to adapt to managing their system. In essence, they should try as far as possible to balance their network through embedded renewable generation, demand side management, storage and then drawing on energy from the transmission network for the remaining supply.

The transmission system is dynamically managed, but its focus is the efficient management of constraints, and gives no thought to the carbon intensity of the generator it may either constrain off, or call upon to manage the system. Although carbon pricing will help, the network operator should also be obliged to take into account the carbon intensity of plant when deciding what to constrain off, and what additional load to call upon. This would help drive down the carbon emissions of the system. Ideally, zero carbon based generation should be the last to be constrained off after all relevant carbon-based generation has been constrained.

Good Energy believes that the Committee should recommend that the Government introduce the following:

· The dynamic management of local networks to self balance

· That carbon intensity be factored into constraint decisions on all networks

Conclusion

The Government’s Electricity Market Reform programme needs to be radical but enduring. Its ambition should be not only to encourage low carbon energy sources, but also to offer a lasting system based on a future zero-carbon energy market. Time-limited support must lead to a market-based mechanism in which carbon-sourced energy carries a significant premium.

To conclude, Good Energy believes that the House of Commons Energy and Climate Change Committee should recommend that the Electricity Market Reform programme should include the following:

· The simplification and transparency of energy support around a broadened Feed-in Tariff mechanism

· More use of storage and demand side solutions in addition to generation

· A clear Government commitment to the mechanism over time to support investment

· A carbon price to reflect the environmental costs of carbon emitting energy sources

· A scheme that will support emerging technologies as they mature out of the Feed-in Tariff mechanism onto a level playing field

· A dynamic capacity mechanism that can create additional demand-side response

· A mechanism that supports capacity from non-carbon-based energy sources

· The dynamic management of local networks to self-balance

· That carbon intensity be factored into constraint decisions on all networks

January 2011