Memorandum submitted by Dr Barrie Murray |
This memorandum advocates the establishment of a
centralised procurement agency for low carbon energy sources as
the only viable option to secure an optimal least cost development
whilst managing the many new and diverse issues associated with
alternative energy sources.
The previous efforts to promote competition in the
electricity sector have moved the country into a position where
we no longer exercise control over a key part of our national
infrastructure. We are left with attempting to seduce potential
generators with incentives under the guise of market reforms to
build new capacity. The industry is controlled by foreign utilities
whose only interest is profit and they use the threat of future
shortages to extract more subsidies and are in a position to blackmail
us. This contrasts with our neighbouring European partners who
have retained national champions that have enabled them to thrive
whilst maintaining an ability to exercise control. Given the wide
range of issues that the sector faces over the coming years it
will not be possible to effect an optimum development strategy
through market mechanisms and some form of central planning and
control needs to be implemented. End users and industry have to
be able to input their needs and concerns. It is likely that the
escalation of energy prices associated with the proposed EMR will
put some companies out of business and reduce electricity demand.
The proposals can only lead to higher end user prices and the
government has to evidence why it believes prices will be lower
than they would otherwise have been. How reliable is this assertion
without knowing what investors plan to do when they will seek
to maximise profit? Can we be certain what the rest of Europe
will be doing during this period and why investors in new plant
would choose the UK? Where are the academic economists that said
that the market would solve all including the provision of adequate
levels of investment? It is naive to believe that the targets
and the required optimal outcome will all be delivered through
manipulation of a carbon floor price. Nuclear must be the most
cost effective way of meeting requirements to reduce emissions
because of its high load factor producing three to four times
more energy than the equivalent wind capacity. Nuclear should
form a dominant proportion of the future plant mix and its contribution
to reducing emissions should be recognised. But, how will its
provision be made competitive when we purposely and openly disadvantage
the alternatives of coal and gas generation. A further consequence
of the proposed CCL on fuel will be to encourage energy intensive
users to locate outside the UK. The current government agencies
that exercise authority to commit the nation to crippling subsidies
were not constituted with the necessary skills for their current
engagements in negotiating and establishing an optimal way forward.
1. What should the main objective of the Electricity
Market Reform project be?
- (a) The aim has always been to minimise the
overall energy cost to end users whilst maintaining accepted levels
of security. The end user payments also include a significant
proportion to cover transmission and distribution as well as metering,
administration and regulation and they can be expected to add
significant extra costs to accommodate renewable sources. What's
missing in the current debate is how the optimum development is
supposed to be established. The procedure prior to restructuring
was to establish optimal coordinated generation and transmission
development plans that took account of all the requirements including
cost minimisation security, fuel diversity, operational efficiency
and minimum risk. This was achieved using large scale LP formulations
of the problem which over the years had become highly developed.
It is to retain this ability to coordinate development that many
informed countries have chosen the Single Buyer market model where
a central procurement agency acts on behalf of all customers to
establish supplies and facilities to meet their agreed needs.
This enables overall government strategy to be incorporated with
competitive tenders for new capacity aimed at developing an appropriate
plant mix. It is difficult to see how this can effectively be
managed by tinkering with current market arrangements were each
player has the option to pursue their own plans. The long lead
times for development confound the problem and introduce risk
that has to be covered through market prices. It is a delusion
to think that DECC or Ofgem are going to establish an optimal
way forward by tinkering with market arrangements and CO2
prices. The costs involved and implications of failure are too
great to rely on ad hoc trials of different market arrangements
and someone needs to take control of the situation. A centralised
market to coordinate the development of low carbon sources offers
the best approach to deal with the many abnormal issues surrounding
renewable development. This approach offers more scope and flexibility
to address some of the technical problems associated with renewable
integration and has parallels with the centrally managed balancing
market. It must be arranged to foster competition through competitive
tender in all time frames. Amongst the many other issues that
need to be addressed are:
- Should renewable energy sources receive special
treatment related to balancing?
- Should this balancing treatment be differentiated
by renewable energy sources?
- The market time frames that should apply recognising
- The degree of optionality available to market
- The requirements to realise competition and liquidity
including, tenders and auctions in different timeframes.
- Avoiding market distortions and maintaining compatibility
with current market arrangements.
- The potential role of capacity payments.
- The importance attached to establishing an appropriate
level of system security.
- Avoiding undue complexity, implementation delays
and operating costs.
- The governance of the market.
- Consideration of associated storage options.
2. Do capacity mechanisms offer a realistic
way of achieving energy security, low-carbon investment and fair
- (a) The problems with capacity payments are
well known in that the expectation is that they should be paid
to all generators, including those that are already there, even
if they are not used. The calculation of the justifiable charge
to end users is usually based on the overall LOLP (Loss of Load
Probability) and VLL (Value of Lost Load). The optimum arrangement
is where the likely cost to end users of loss of supply is in
balance with the fixed annual cost of new generation. Where these
payments are spread between all generators they make only a small
contribution to the fixed costs of a particular new entrant and
there is no guarantee that any new plant will be built. In a Single
Buyer model the exact amount of new capacity would be established
through a competitive tender and contract process.
- (b) The suggestion of capacity payments has
been prompted by the concern to retain marginal peaking generation
to cater for wind output variation. With the large volumes of
wind proposed mid merit and even base load generation will also
see a reduction in utilisation. Any mechanism would have to recognise
the different impact on generation and added wear and tear costs
incurred by generation in regulating to follow the net demand.
There should be the option to meet the regulating requirement
from other sources like Scandinavian hydro which is likely to
prove cheaper. A new North Sea super-grid extension should be
actively promoted to facilitate competition between the various
options. These options are best coordinated and developed as part
of a centralised procurement function for low carbon energy embracing
the procurement and contracts for provision of balancing energy.
3. What is the most appropriate kind of capacity
mechanisms for the UK?
- (a) Any capacity payment should be self correcting
and not encouraging new entry when sufficient capacity is already
in place. In some implementations the payment has been geared
to the overall plant margin (a measure of excess capacity over
demand). Other implementations have proposed payments according
to technology type to encourage an appropriate plant mix. The
question also arises as to the credit to firm capacity that should
be given to wind generation and other marine sources.
- (b) There are two issues involved; one is
ensuring sufficient capacity is available to meet future needs
recognising onstruction timescales; the other is securing availability
in operation on the day. The requirement to manage the intermittency
of generation ultimately rests with the System Operator (part
of NGC). They are best placed to determine need and should be
incentivised to contract for capacity considering all options
including demand side management and import/export. The SO should
also be incentivised to coordinate wind and marine output forecasting
as part of a centralised management function. In operational time
scales the original UK Pool model aimed to achieve availability
through a LOLP increment to the marginal price when capacity was
in danger of being short of that required to maintain security.
It was considered that market spot prices provided an adequate
mechanism through price spikes to secure capacity in the short
term. Price spikes can be minimised by better forecasting and
control. The requirements for balancing are most easily coordinated
4. Should the system of Feed-in Tariffs be
focused on particular technologies or maintain a wider technology-based
- (a) The world is full of examples where long
term commitments to power purchase agreements have proved a subsequent
burden when developments have changed the situation. The tariffs
should be linked through contracts to general market prices and
available to any source to promote the least cost abatement for
emissions. They should be linked to the price of CO2
to enable nuclear, coal and gas with CCS to compete on an equal
basis. It is dangerous to set tariffs artificially high to promote
industrial development as this sets expectations that are not
5. Will it be feasible to deliver EMR in one
go, or will regulations and implementation be spread over time?
- (a) There is insufficient time to agree and
establish a whole set of new regulations that have to be judged
and analysed by the market. It is also expected that they will
be wrong given the difficulties associated with this sector. A
centralised procurement agency would have the flexibility to respond
and adjust on a continuous basis as issues arise and circumstances
6. Will market reform increase political risk
for investors or create certainty?
- (a) Uncertainty will still surround what
plant will actually get built. Claims by DECC and the Scottish
Executive about the proportion of renewable energy in the future
plant mix are fanciful. However, they do deter investors because
of the potential impact on the utilisation of their conventional
generation. There is also uncertainty about how the REFIT will
vary in future. Investors prefer an unbiased market where real
costs affect market potential rather than price fixes and subsidies
and attendant regulatory risk that cannot be predicted. There
is also uncertainty as to what new directives may emanate from
7. Will the Government's proposed package
of carbon price floor, EPS, FITs and capacity mechanism provide
sufficient transformation to achieve goals on climate change,
security of supply and affordability?
- (a) Offshore wind is unlikely to be built
without a subsidy of 2 ROCs or an equivalent feed in tariff resulting
in wholesale prices three times equivalent gas and coal. In addition
off shore transmission will increase the capital cost around 50%.
They will contribute very little to the security of supply because
of their intermittency, with only 10% of their installed capacity
being regarded as firm. There are also hidden costs in managing
intermittency and ensuring backup capacity is available through
capacity payments. Given the scale of developments in Asia the
UK contribution to climate change amelioration is likely to be
- (b) The government should make its goals
clear in terms of how they expect the target to be met. What is
the optimum mixture of technology that would meet the requirement
at minimum cost? How is it expected the intermittency of renewable
sources will be managed and what will be the added cost to consumers?
It is not acceptable to state that it will be less than otherwise
would be the case without evidence. What scenarios have been advanced
and studied. What assumptions have been made about fuel prices,
demand side management, energy efficiency, CCS, imports/exports
and electric vehicles? These require detailed analysis given the
potential impact on consumers and industry and should be preceded
by a statement of strategy.
8. What synergies and conflicts will there
be between proposed mechanisms and policies already in place?
- (a) The EU has set a number of Directives
aimed at promoting the development of renewable energy sources.
Most countries in Europe use feed in tariffs to promote renewable
development. What is proposed to ensure that the optimal level
of transmission is in place to ensure timely connection?
9. Will a carbon floor price be feasible in
the context of EMR and at what level should it be set?
- (a) It is difficult to see how this proposal
is supposed to operate alongside the European Emission Trading
Scheme designed to achieve least cost abatement. There will inevitably
be public and political outcry from attempts to distort the market.
There will be a particular problem if alternative abatement options
around Europe lead to lower costs and carbon prices. The carbon
price should not be fixed but developments should be promoted
through a centralised competitive market for low carbon sources
able to establish power procurement contracts on case by case
10. What effects will EMR have on the development
of capacity for electricity storage and the development of interconnectors
between the UK and other electricity markets?
The development of a European wide EHV super-grid
is essential to promote the pan European market and offers the
best defence against the abuse of market power. It also offers
the best option to accommodate renewable energy sources enabling
advantage to be taken of flexible European wide hydro sources.
This should be actively promoted through the EU with the North
Sea as a starting point. If wind is to be built in Europe it makes
sense to build it where it is windiest. The added CCL to fuel
used to support generation exports will be counter-productive
to encouraging trade and unlikely to be acceptable to the EU.
It is likely to encourage more imports and external dependency.
Why should European generators generate in the UK when they can
generate abroad with no CCL charge but benefit from higher UK
The EMR proposals appear ill considered and will
result in billions of pounds of extra costs to consumers and industry
during a difficult financial period. More in depth analysis is
required to determine the optimum strategy and then propose how
it might be implemented. I would be pleased to provide oral evidence
if it is considered that the Committee may derive benefit and
can confirm that I have no vested interests outside of being a
Barrie is a chartered engineer with more than 30
years' experience working in the electricity energy sector and
is the managing director of Electricity Market Services Limited.
He has worked around the world on consultancy projects since 1998.
He specialises in the provision of consultancy services to major
players in deregulated electricity markets including market operators,
regulators, investors and traders. Skills include the development
of business processes and procedures necessary to support electricity
trading and system operation, including regulations and commercial
agreements associated with the Independent System Operator (ISO)
function. He also analyses market operation and develops models
and forecasts to support trading and investment appraisal and
Prior to working as a consultant, Barrie gained over
thirty years' experience in the electricity supply sector having
worked in senior positions with ABB, the Central Electricity Generating
Board and the National Grid Company plc (NGC). He was the Senior
Manager in NGC responsible for establishing the processes and
systems necessary to support system operation at the National
Control Centre. Barrie played a lead role in enabling restructuring
in the UK, having been involved since the inception of the market
in 1990, and was responsible for developing systems to support
market operation and pricing. He has advised the Regulatory and
Consumers Groups on the review of pricing and trading in England
and Wales, Belgium, Oman and Ireland. He has advised on electricity
restructuring and market development options in South Africa,
Abu Dhabi, Sri Lanka, Namibia, Ireland, Bosnia and Hertzgovina
and the UK. He has also advised banks, generators and electricity
suppliers in the UK, Czech Republic, Holland, Norway, Italy and
Ireland on market development and investment opportunities in
Europe and Eastern Europe. He has undertaken some 50 consultancy
projects around the world and has established an international
He has a first class honors degree in electrical
engineering, a PhD in Energy Markets, he is the author of two
books published by J Wiley on Electricity Markets (Power Markets
& Economics 2009, and Electricity Markets 1998), and is a
Fellow of the Institution of Electrical Engineers.