Memorandum submitted by the Institution
of Engineering and Technology |
1. The Institution of Engineering and Technology
(IET) is one of the world's leading professional bodies for the
engineering and technology community and, as a charity, is technically
informed but independent of network company, equipment supplier
or service provider interests. This submission has been prepared
on behalf of the Board of Trustees by the IET's Energy Policy
What should the main objectives of the EMR be?
2. The Electricity Market Review needs both to
facilitate the rapid move to deployment at scale of new large
scale generation to avoid supply shortfalls over the next 10 years
and also to enable the transition to a low carbon energy system.
It would be undesirable to have to introduce further large scale
reform to achieve the latter.
Requirements of Future Electricity Markets
3. In the short term, the main requirements are:
- (a) to encourage demand reduction;
- (b) to advance construction of mainstream
technologies: nuclear, gas, wind and biomass;
- (c) to facilitate large scale demonstration
of coal (and perhaps gas) with carbon capture, and also newer
renewable technologies; and
- (d) to facilitate the development of low
carbon energy solutions at community scale.
4. Key aspects of the longer term requirement
of the EMR are:
- (a) Full participation of all aspects of
demand in the market to allow the opportunities for management
of demand to balance supply to be fully realised.
- (b) Anticipation of massive scale-ups of
controllable demand (such as heat pumps, electric vehicle charging).
- (c) Incentivising reduced demand through
efficiency and time shifting of loads.
- (d) Providing sufficient clarity to allow
a smart grid to be deployed with confidence.
- (e) Dealing with a much more volatile generation
market with large amounts of highly variable wind generation,
and potentially significant contributions from sources such as
solar and tidal barrages.
- (f) Dealing with increasing amounts of both
nuclear and carbon capture-fitted thermal generation, whose dynamic
performance is currently untested.
- (g) Moving renewables and other low carbon
technologies from special support regimes towards the mainstream
as carbon becomes properly valued.
- (h) Enabling the build of significant amounts
of low cost peaking generation to provide cover for renewables
shortfalls and exceptional demand peaks.
- (i) Being adequately robust to both improvements
and further degradation in the funding climate.
- (j) Enable the wider integration of storage
in the electricity supply chain.
- (k) Adequately incentivise new interconnectors
with other European states where these can be shown to be economically
- (l) Delivering all this at costs acceptable
to consumers and in ways that give sufficient confidence to investors.
5. Capacity mechanisms are used successfully
in many countries to provide incentives for the construction of
power plant, and give confidence to investors by reducing or eliminating
The plant typically earns enough money to pay its fixed costs,
service its debts and produce a commercial return simply by being
available for service. Rewards for actual operation are typically
scaled for the marginal costs of so doing (typically fuel plus
6. This arrangement works best when the requirements
for capacity are centrally determined such that an optimal amount
of plant is built. The disadvantages of such a capacity mechanism
are (a) that it limits the extent to which competition can bring
innovation into the types of plant built and their operation in
a market, and (b) potentially also provides capacity payments
to fully depreciated generators who do not really need them.
7. The proposals currently being consulted on
by DECC seem to see a more limited role for capacity mechanisms.
They are to be used only when a proposed central body foresees
a shortfall of capacity being provided by the market, thus avoiding
the costs of making payments to all generators. The risk of this
arrangement, recognised in DECC's consultation document, is the
distortion it could introduce into the rest of the market. (For
example, will owners close plants deliberately to precipitate
a decision to make capacity payments available for getting new
plant built quickly?). The subject is complex and more work is
clearly needed. However whatever arrangement is adopted needs
to be transparent and sufficiently simple to send clear signals.
8. Ideally the market should determine the least
cost renewable solution, however there are wider issues to consider
- (a) technical maturity (mature technologies
are cheaper generally);
- (b) available land for onshore renewables;
- (c) the desire to create new green industries
and employment through supporting certain technologies;
- (d) the different generation characteristics
(for example wind has certain intermittency characteristics, solar
different intermittency characteristics, and that biomass is dispatchable);
- (e) The desirability to pursue solutions
at a range of scales (large plants, community energy schemes,
building scale schemes), to maximise the opportunity for decarbonisation
and to explore alternatives to find best options;
9. Given the scale of renewables deployment implied
by the EU 2020 targets, all technologies will need to be pushed
hard, and as such there seems little alternative to a technology
banded approach to the FIT.
Delivery in one go or over time
10. The proposed EMR introduces further uncertainty
for investors, who will tend to wait to understand clearly what
their project returns would be before committing. A key objective
should therefore be clarity over the total package at the earliest
opportunity, along with a very clear timeline for implementation.
This should be thoroughly "road tested" with investors,
noting, of course, their inevitable desire to obtain a more generous
result than strictly necessary.
11. Actual implementation of the market reform
process should be considered on the basis of a comprehensive risk
analysis. There are market confidence reasons for doing most or
all of it at once, but the enabling IT and other infrastructure
will carry implementation risks that need to be recognised and
managed or mitigated.
12. The UK has always been at the forefront of
electricity market reform and has over time made a number of major
market changes that have created substantial winners and losers,
and thus a perception of political risk. This latest EMR proposal
is no exception, although there seems to be an industry consensus
that change is needed, and cross party support for it.
13. The extent to which the result decreases
confidence depends on how it is implemented - avoidance of significant
financial loss for disadvantaged market participants is important,
as is very clear signalling of intent. As stated above, it is
important that the EMR addresses long- as well as short-term issues
to avoid a further revisiting of the rules and additional perceptions
of political risk in the future.
14. On the positive side this reform, if carried
through well, has the potential to be seen as a global template
and to be creating the clarity needed to invest the large amounts
Will the proposed package deliver the security/carbon
15. This will depend very much on how it is implemented.
The right issues are being considered and sensible solutions proposed.
The main risks seem to be excessive complexity resulting in a
lack of transparency and/or unforeseen consequences. DECC is aiming
to strike a balance between giving investors confidence and not
over-rewarding them. In the IET's opinion, the economic and political
costs of insufficient capacity to cover times when demand is high
and wind and other variable generation low seem to be rather higher
than the costs of slight overprovision. We are moving into a technologically
uncertain world given the high levels of intermittent renewables,
demand participation and other changes and it would seem to us
wise to err on the side of caution.
16. Affordability will be an issue into the future,
whichever forms of generation are built. All forms of power plant,
all fuels and also carbon emission will become much more costly.
In addition, network infrastructure will need heavy investment
to become smart and to meet new demands from heat pumps and electric
vehicles. The only mitigant available is efficient use
of energy, which will need continuing strong emphasis.
Storage and Interconnectors
17. Neither storage nor interconnectors seem
to have been given strong consideration during the DECC work so
far. Both have potentially large roles to play in the longer term,
and we would suggest that a range of storage and interconnector
scenarios are tested against the proposed reforms before they
are firmed up.
18. Storage is essential to the secure operation
of the power system and has the potential to play a bigger role
in the future. It is recognised that storage can offer multiple
benefits to the power system. Examples include helping to manage
intermittency, meeting shorter term peak demands, reducing the
need for new network capacity and enhancing security of supply.
At present there is not a storage technology available that has
the price/performance characteristics that will ensure widespread
deployment. However, a number of technologies are under development
and as the value of the ancillary services that storage can provide
increases, they may well prove to offer economic solutions.
19. Storage can supply multiple services to different
parties in the disaggregated supply chain. There is therefore
a risk that the current market structure may make it difficult
for storage owners to be properly rewarded for the services they
can provide. This issue should be explicitly addressed as part
of the EMR consultation process, involving the key players in
the storage community. Hopefully, this will ensure that the market
reforms introduced will not present any unnecessary and/or unintended
barriers to the further development of storage.
20. Under the EU Third Legislative Package on
Energy there is a requirement to form a single energy market but
one in which the electricity supply systems of each member state
will continue to have their own characteristics. Furthermore all
members are obliged to significantly increase the renewable component
of their generating portfolio, UK included.
21. With different levels of security of fuel
supply, proportions of intermittency and cost of generation, increased
interconnection within the EU seems inevitable. Interconnection
with the UK is, of course, a special case because of the need
for submarine connections with higher costs. Nevertheless, interconnectors
have potentially large roles to play in the longer term and we
would suggest that a range of interconnector scenarios are tested
against the proposed reforms before these are finalised. It should
be noted that both political and technical risk underlying the
development of interconnectors is likely to remain low.
26 Dispatch risk is the risk that a particular power
plant is or is not called upon to operate, which depends on the
balance of supply and demand at a particular time, and on the
marginal costs of operating the plant compared to other plant.
As we move forward with considerable uncertainty as to how much
renewable and nuclear capacity gets built and when, it is much
harder for investors to be able to predict the extent to which
their plant will be dispatched and therefore what their revenues
will be. Back