Memorandum submitted by InterGen UK |
1. InterGen welcomes the opportunity to respond
to the Energy and Climate Change Select Committee's enquiry into
the future of Electricity Market Reform ("EMR"). InterGen
fully supports the Government's commitment to achieving its climate
change, security of supply and affordability targets. InterGen
believes this can only be achieved by encouraging a diverse generation
mix operating within a truly competitive environment in order
to protect the interests of consumers.
2. InterGen would sincerely welcome the opportunity
to give oral evidence in front of the Committee, given it is one
of the few truly independent generators left in the UK which has
significant investment plans for flexible generating technology
in the UK in the next five years.
3. InterGen believes that:
3.1 Large-scale reform of the electricity market
is required to support the Government in meeting its long-term
three-fold objective of delivering a low carbon future, maintaining
security of supply and ensuring affordability for consumers.
3.2 The current market arrangements are not sufficient
to encourage significant investment in low carbon generation and
the flexible back-up capacity required to support the anticipated
changing generation mix in the UK.
3.3 At the conclusion of the EMR consultation
process, the Government must announce a complete and coherent
package of measures which will deliver its objectives, which are
robust and flexible enough to work in a wide range of demand and
fuel-price scenarios and are broadly supported by the industry
and mainstream political parties. This will provide a stable and
durable regulatory environment which is essential to secure long-term
3.4 The Government's proposed package of carbon
price support, FITs for low-carbon generation and a capacity mechanism
could form the basis of a stable environment in which its low-carbon
objective can be delivered. Such a package must include support
for flexible and efficient gas fired generation given that InterGen
firmly believes that it will give the desired flexibility to meet
peak demand and also demand requirements when renewables cannot
3.5 Long-term security of supply and the lowest
costs for consumers can only be delivered if a truly competitive,
liquid, rational and transparent wholesale market also exists.
InterGen welcomes Ofgem's continued focus on electricity wholesale
market liquidity and believes that action to improve liquidity
is an essential precursor to EMR. InterGen believes that vertical
integration is not compatible with a competitive and liquid market
and that steps must be taken to require vertically integrated
companies to trade all of their generation through the wholesale
3.6 Carbon price support needs careful implementation
and long-term clarity to ensure that market participants can continue
to manage carbon and electricity market price risk and that there
are no unintended consequences from interactions with the EU ETS.
3.7 The capacity mechanism should:
- address the issue of intermittency of renewable
generation by rewarding the provision of flexibility, rather than
just the additional capacity required to meet peak demand;
- ensure sufficient, though not excessive, returns
for existing flexible capacity, and;
- provide price signals to attract investment in
new flexible capacity.
3.8 The proposed FIT regime should:
- Allow low-carbon generation to be financially
supported in a transparent manner.
- Ensure such generation retains exposure to short-term
price signals in order to encourage efficient generator behaviour
and hence provide value to consumers.
4. InterGen is the UK's largest and most successful
new entrant independent generator, having invested £1.4 billion
in the UK since 1995. InterGen owns and operates three highly
efficient gas fired power stations in the UK totalling 2,490MW
and actively trades in the prompt and forward wholesale power
and gas markets. InterGen is currently pursuing a number of development
opportunities in the UK including two further 900MW CCGTs, representing
a further £1.2 billion of investment.
Question 1: What should the main objective of
the Electricity Market Reform project be?
5. Electricity Market Reform should principally
support the Government in meeting its long-term three-fold objectives
of delivering a low carbon future (and meeting its legally binding
2020 and 2050 targets), maintaining security of supply and ensuring
affordability for consumers.
Question 2: Do capacity mechanisms offer a realistic
way of achieving energy security, low-carbon investment and fair
6. An estimated 20GW of flexible fossil-fired
plant will close by 2020 due to age and environmental regulations.
As the penetration of intermittent renewable generation increases
(assisted by proposals to support investment in low-carbon generation),
existing low-carbon gas fired assets along with a significant
amount of new flexible back-up generation capacity will be required
to achieve an acceptable level of security of supply. Under the
present market arrangements, volatile cashflows at the reduced
load factors anticipated make the economics of existing and new
flexible generation uncertain. In these circumstances, existing
environmentally acceptable flexible plants are likely to retire
early and new build is unlikely.
7. New thermal generation such as gas-fired power
stations can deliver carbon savings by replacing older, less efficient
coal plants in the UK.
8. It is possible that the Big 6 vertically integrated
companies could build new generation without change to the wholesale
market, relying on revenue from elsewhere in their value chain
(eg some of the companies look at the whole value chain, effectively
subsidising generation investment through the value achieved from
their retail operations especially during periods of depressed
wholesale energy prices when retail margins often increase). However,
it has been widely reported that the Big 6 companies do not themselves
have sufficient resources to construct all the new generation
capacity required in the UK. Independent generators will also
be required to construct some of this capacity and bring much
needed competition to the electricity market, ensuring better
value for consumers in the long term. However, the current wholesale
electricity market currently does not provide the long-term robust
price signals necessary to encourage independent generators to
invest in back-up flexible generation with low load factors. To
address this, major reform is required in the manner in which
generation capacity is remunerated to ensure that the UK remains
an attractive place for industry to invest. InterGen believes
that a capacity mechanism is an essential part of this reform
and if appropriately structured can support the security of supply
Question 3: What is the most appropriate kind
of capacity mechanism for the UK?
9. InterGen is still considering the relative
merits of differing capacity mechanisms, and will address this
fully in its response to DECC's Electricity Market Reform consultation.
InterGen's initial view is that a market-wide scheme, in which
the volume of required capacity is centrally calculated but the
price is determined via a competitive process, is likely to provide
the best value to consumers in the long-term. Due to the predominantly
intermittent nature of renewable generation, the capacity mechanism
should reward the provision of flexibility rather than just that
additional capacity required to meet peak demand.
10. To prevent market distortion and ensure existing
plant can compete effectively with new plant, capacity payments
should be paid to both incumbent flexible capacity as well as
new plant. If capacity payments only apply to new plant, existing
flexible capacity will be forced to retire early due to the anticipated
reduced long term prices in the market as the proportion of low
carbon generation increases. Such artificial displacement of existing
plants by new build is inherently economically inefficient and
would undermine investor confidence in the UK electricity market
through impairment of existing plant investments. Hence InterGen
believes that capacity payments must be made to all flexible generation
whether existing or new.
Question 4: Should the system of Feed-in Tariffs
be focussed on particular technologies or maintain a wider technology-based
11. InterGen believes that any low-carbon support
mechanism (such as FIT's) should be designed to allow such generation
to be financially supported in a transparent manner whilst promoting
maximum wholesale market liquidity. To encourage efficient generator
behaviour the support mechanism should ensure that intermittent
generation retains its exposure to prompt price volatility through
full participation in the wholesale market, as the preferred FIT
with CFD option provides.
12. It is appropriate to support a wide range
of low-carbon technologies to ensure a diverse generation mix:
making access to Feed-in Tariffs open to any low carbon technology
will have the effect of a market which prioritises the most cost-effective
technologies, to the benefit of energy affordability.
Question 5: Will it be feasible to deliver EMR
all in one go, or will regulations and implementation be spread
13. It is appropriate for the implementation
of the reforms to be delivered in two or three rounds. Support
of the all-in carbon price, essential to improve the investment
case for low-carbon generation, and steps to improve wholesale
market liquidity can both be implemented in isolation and should
be introduced relatively quickly. The remaining reforms are likely
to take longer to design and implement and would best be implemented
Question 6: Will market reform increase political
risk for investors or create certainty?
14. There is broad consensus, backed-up by the
quantitative analysis undertaken by Redpoint, that the current
market structure is not capable of delivering adequate investment
in low carbon generation capacity and sufficient security of supply
in a cost effective manner over the long-term. As a result, there
is already a widespread expectation that large-scale reform of
the market will be forthcoming and this has created an investment
hiatus. Accordingly it is important that, at the conclusion of
the current EMR consultation, the government announces a complete
and coherent package of measures which will deliver its objectives,
are robust to a wide range of demand and fuel-price scenarios,
are broadly supported by the industry and mainstream political
parties and have a firm timetable for implementation. This will
provide a stable and durable regulatory environment which is essential
to secure long-term investor confidence.
15. The Government needs to ensure that in delivering
EMR it not only supports investment in new generation, but also
does not undermine the value of flexible and efficient assets
currently operating (or in construction) within the UK.
16. Many generation assets in the UK have associated
long-term electricity off-take or tolling contracts which will
require adaptation to account for the proposals under EMR. Furthermore
the government should be aware of the burden a regulatory change
of this magnitude will place on smaller, independent market participants.
An increase in administration costs will have a bigger impact
on small players; who are also likely to have less resource available
to participate fully in the development of the EMR proposals.
InterGen urges DECC and The Treasury to continue to consult fully
with all industry participants to ensure a smooth transition from
the current arrangements.
Question 7: Will the Government's proposed package
of carbon floor price, EPS, Fit's and capacity mechanism provide
sufficient transformation to achieve goals on climate change,
security of supply and affordability?
17. The Government's proposed package, if broadly
supported by all types of industry participants and mainstream
political parties, would form the basis of a stable and robust
regulatory environment in which its low-carbon objectives can
be delivered. However long-term security of supply and the lowest
costs for consumers can only be delivered if a truly competitive,
liquid, rational and transparent wholesale market exists.
18. New players will be encouraged to enter the
market if the current low levels of liquidity are improved. Improved
liquidity will make long-term price signals more robust and transparent
which will assist smaller players who rely on project finance
and investment from banks. InterGen is pleased that Ofgem have
committed to continuing their work in this area to complement
the EMR proposals.
19. Vertical Integration is not compatible with
a competitive and liquid market. InterGen believes that a self-supply
licence condition should be introduced requiring vertically integrated
companies to trade progressively increasing percentages (ultimately
100%) of their generation via the wholesale market, coupled with
progressively greater separation between the wholesale and retail
supply businesses. InterGen believes that a fully competitive
and liquid electricity market will be achieved only once this
process is complete.
Question 8: What synergies and conflicts will
there be between proposed mechanisms and policies already in place?
20. InterGen is currently considering the interaction
between new and existing mechanisms and policies and will address
this more fully in its response to DECC's Electricity Market Reform
consultation. InterGen's initial concerns are that carbon price
support needs careful implementation and long-term clarity to
ensure that market participants can continue to manage carbon
and electricity market price risk simultaneously and
that there are no unintended consequences from interactions with
the EU ETS
Question 9: Will a carbon floor be feasible in
the context of EMR and at what level should it be set?
21. InterGen supports the concept of a carbon
price floor to promote increased investment in low-carbon generation
and drive fuel-switching from higher to lower carbon emitting
22. The all-in price floor range of £20/t
to £40/t by 2020 is broadly in line with market commentators
views on the price needed to prompt sufficient change in operational
and investment behaviours to deliver the government's long-term
climate change targets.
Question 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?
23. InterGen has no specific views on this question.
24. InterGen acknowledges that there are many
challenges for both the Government and the industry in addressing
the three-fold objective of ensuring security of supply whilst
meeting climate change and affordability targets. InterGen believes
that support of the all-in carbon price, Feed-in tariffs which
are structured to ensure low-carbon generators participate in
the market and capacity payments for all flexible capacity are
the key elements of market reform needed to deliver the targets.
InterGen are keen to be given the opportunity to give oral evidence
to support the views expressed here.