Memorandum submitted by National Grid|
National Grid owns and operates the high voltage
electricity transmission system in England and Wales and, as Great
Britain System Operator (GBSO), we operate the Scottish high voltage
transmission system. National Grid also owns and operates the
gas transmission system throughout Great Britain and through our
low pressure gas distribution business we distribute gas in the
heart of England to approximately eleven million offices, schools
and homes. In addition National Grid owns and operates significant
electricity and gas assets in the US, operating in the states
of New England and New York.
In the UK, our primary duties under the Electricity
and Gas Acts are to develop and maintain efficient networks and
also facilitate competition in the generation and supply of electricity
and the supply of gas. Our activities include the residual balancing
in close to real time of the electricity and gas markets.
Through our subsidiaries, National Grid also owns
and maintains around 18 million domestic and commercial meters,
a Liquid Natural Gas importation terminal at the Isle of Grain,
and 50% of IFA and BritNed (the electricity interconnectors with
France and the Netherlands respectively).
National Grid will be contributing to the DECC consultation
on Electricity Market Reform launched on December 16th. As such,
the responses set out below express our initial thoughts and will
be subject to review during the course of the DECC consultation.
National Grid is fully supportive of electricity
market reform (EMR). In order to assist in the decarbonisation
of other sectors, early large scale investment in low-carbon,
electricity generation infrastructure will be a priority. EMR
has the potential to ensure that the necessary investment in appropriate,
low-carbon technologies is made in an affordable, secure and sustainable
We are supportive of the principles of a carbon floor
price, feed-in tariffs and an emissions performance standard.
We do also agree that it is important to consider
whether an additional intervention to bring on sufficient "back-up"
generation is necessary. However, there is more work to be done
before we can conclude that further intervention in the form of
explicit capacity payments is required. It may be that adjustments
to existing market mechanisms will be sufficient to facilitate
the investment. For example, imbalance prices could be "sharpened"
to encourage suppliers to make the appropriate investments in
order to avoid being exposed to the true cost of imbalance. The
extent to which such amendments could be successful in providing
comfort that sufficient generation will be available requires
further assessment. National Grid will provide more detail on
what such amendments could look like when formulating its response
to the DECC consultation on EMR.
Finally, in order to maintain security of supply,
it is crucial that Electricity Market Reform is carried out in
a coordinated way with other energy policy and planning policy
development. If EMR is to drive GB down a certain "energy
path", then it is important that other policy, legislation
and regulation support the delivery of that.
1. What should the main objective of the Electricity
Market Reform project be?
The main objective of the project should be to encourage
efficient and timely investment in low carbon generation, energy
efficiency and network/interconnection technologies while maintaining
security of supply.
The measures recommended by the EMR project should
fully take into consideration EU objectives and initiatives such
as the development of the internal energy markets (including the
third package and relevant legislation on state aid).
2. Do capacity mechanisms offer a realistic way
of achieving energy security, low-carbon investment and fair prices?
It is important to define what is meant by a capacity
"mechanism". A "capacity mechanism" should
not necessarily be regarded as synonymous with pure capacity payments.
Capacity payments, even if made via an auction which could help
to find the best "market" price, could prove unnecessarily
expensive to consumers if inappropriately designed.
It might be that a package of subsidies and incentives
to encourage the development of generation capacity could ensure
that sufficient capacity is available without the need for an
explicit pure capacity payment. The measures already proposed
as part of DECC's EMR consultation (eg feed-in tariffs) will,
by themselves, result in some new generation capacity being built.
This, along with additional market-based measures (eg sharper
imbalance prices) to incentivise generators and suppliers to "self-insure"
against the intermittency associated with increased volumes of
renewable generation, could constitute a "capacity mechanism",
ensuring that the risk remains with the market (where it is best
able to be managed) rather than with the consumer. The mechanisms
currently employed by National Grid as System Operator to procure
"balancing services" could also be extended or amended
to provide additional "back-up" capacity. National
Grid intends to work up these alternatives with DECC over the
coming months to identify how such a package of mechanisms could
work to provide the government and the industry with the necessary
confidence that security of supply will be maintained.
Capacity Payments and Capacity Auctions
Given the focus in the DECC consultation on capacity
payments, we thought it would be helpful to set out our views
on this option which needs to be considered alongside other capacity
Capacity payments have the potential to encourage
investment in generation and may thereby facilitate a transition
to low carbon electricity while delivering security of supply.
Whether capacity payments can deliver such outcomes at fair prices
very much depends upon the design and operation of the mechanism.
Although we can see the benefits of a capacity auction
which could be designed to bring on certain types on generation
technology at a fair price, there is a risk that such interventions
will disrupt other segments of the market. For example, interventions
for just low carbon technology might reduce market investment
for establishing or maintaining back-up generation. However,
extending support to cover certain backup generation will reduce
incentives for interconnection and enhanced demand side measures.
In this way, it is possible that more interventions are then required
for increasingly larger sections of the market. We are very keen
to understand DECC's views on how this risk could be mitigated.
We also have a concern about who would decide on
what needed to be auctioned. Some careful thought is needed on
this issue as this mechanism is likely to result in a much more
prescriptive approach to the balance of the energy mix.
There are a number of other issues which need to
be considered when designing capacity interventions. Some of these
potential for distorting effects if additional revenues are unduly
focused on capacity without regard to its effectiveness in terms
of reliability and flexibility of energy production.
if revenues are unduly focused on energy delivery from certain
sources there is the potential for distorted scheduling and consumption
decisions (for example, in extreme, those conditions observed
in some markets when negative prices result).
practical issues associated with specifying the required functionality
of the capacity (for example, ensuring appropriate reliability
and flexibility). These are particularly challenging if the characteristics
of particular low carbon technologies (such as variable wind)
are addressed independently of the wider portfolios in which they
issues associated with ensuring appropriate settlement of technology
specific revenue streams (for example, ensuring payments are not
made where contracted services have not been delivered).
that incentives on the demand side may be dampened at a time when
new opportunities from SMART metering, demand scheduling and energy
efficiency technologies are increasingly important.
potential for additional obligations or complexity to dissuade
new entrants and so reduce competitive pressures that protect
need to ensure consistency with capacity limitations in the network.
timing for the application of capacity mechanisms is crucial in
tackling security of supply issues. The implementation needs to
target the period when security of supply becomes a major issue
(eg in 2016 following closure of Large Combustion Plant Directive
to consumers should remain at the forefront of all considerations.
3. What is the most appropriate kind of capacity
mechanisms for the UK?
As per our response to question 2, we think there
is a requirement to undertake further analysis and discussion
before taking any decision on capacity mechanisms.
4. Should the system of Feed-in Tariffs be focused
on particular technologies or maintain a wider technology-based
While National Grid has a duty to remain neutral
and non discriminatory in its dealings with all generation technologies,
we observe that experience from other countries suggests Feed
in Tariffs offer a means of bringing new technologies to market
readiness with lower financial risks and hence lower costs than
the approach embodied in the Renewables Obligation. They also
potentially offer a better deal for consumers in so far as they
offer improved sunset arrangements for situations where technologies
have reached market readiness or it has become clear that certain
technologies are unlikely to ever reach such a state.
We would however recommend that FiTs are structured
so that they do not insulate recipients from appropriate market
imbalance and network locational signals. These signals will
remain important in guiding efficient market development and facilitating
competition such that consumers can be assured fair prices. This
factor must be taken into consideration in the development of
any capacity mechanism discussed above.
Similarly, FiTs should also be structured so that
appropriate locational signals, concerning the relative merits
of connecting close to consumption within distribution networks
(as so-called embedded generation), are balanced with the costs
of accommodating generation in net surplus areas which will require
strengthened transmission links.
5. Will it be feasible to deliver EMR in one go,
or will regulations and implementation be spread over time?
We recommend that, regardless of whether the implementation
of EMR is staggered or delivered in one go, firm policy decisions
need to be made as early as possible to remove uncertainty for
6. Will market reform increase political risk
for investors or create certainty?
The market reform has the potential to enhance certainty
and increase investment provided appropriate policy decisions
are made and suitable implementation arrangements are chosen.
We suggest clarity on how policy interventions will address specific
market short-comings will help avoid unintended consequences and
improve certainty for the industry and the financing parties/institutions.
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?
The combination of different mechanisms should
provide the required incentives to drive transformation to achieve
climate change goals.
It is important that EMR is not carried out in isolation
from other energy policy and planning policy development. If
EMR is to drive GB down a certain "energy path", then
it is important that other policy, legislation and regulation
support the delivery of that. For example, if there is to be
greater reliance on flexible gas generation, then it is important
that the industry has a clear vision of the requirements for gas
infrastructure to support this transformation
In parallel to work on gas policy, it is also vital
that we continue to develop CCS so that we can reduce emissions
further and perhaps provide access to coal generation as well
as gas. The CCS demonstration programme should be continued and
extended to include at least one gas plant. An acceptable regime
for storage and incentives for investment in CCS infrastructure
should be developed with a view to the future wider scale roll
out of CCS when commercially and technically proven.
The EPS should not be set at such a level as to prevent
the further build of unabated gas generation.
FiTs - See question 8
Capacity mechanisms - see questions 1, 2 and 3
Carbon Price floor - See questions 3 and 9
8. What synergies and conflicts will there be
between proposed mechanisms and policies already in place?
We have mentioned above a number of interrelations
between different mechanisms and the existing market, and also
the importance of how the implementation of the measures is timed.
Conflicting signals between a UK carbon floor price
and the EU ETS incentive could lead to a "carbon leakage"
scenario (see question 3 and 9)
Interaction between the development of cross border
electricity markets as recommended within the EU third package
and the changes brought to the UK electricity market through the
EMR needs to be considered.
We believe that support for investment decisions
made under the RO regime should be grandfathered if FiTs are expanded
to cover all scale of renewable generation replacing the RO regime.
9. Will a carbon floor price be feasible in the
context of EMR and at what level should it be set?
We are supportive of the establishment of an appropriate
and stable carbon floor price. An unstable or low carbon price
has hindered delivery of the potential benefits of the EU ETS.
A UK carbon floor price is feasible provided the level is set
so as to increase the wholesale price of fossil fuel used for
generation to a level that makes low carbon generation feasible.
We believe the carbon floor price will be a welcome interim measure
in the medium term to provide certainty for UK investors in the
absence of an EU wide carbon floor price. However we need to carefully
assess the level to which it is set and its potential interactions
with an EU and international carbon price. Too low a level will
again fail to drive investment whereas a high level could lead
to "carbon leakage" with investors offsetting their
carbon emissions elsewhere in Europe. It is also important to
consider whether to apply a carbon tax on power sector/electricity
generation only or on a wider scale across industries. The latter
solution could exacerbate the "carbon leakage" problem
and drain investment.
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?
We do not believe there will be a material impact
at this stage; however the impact of a low carbon generation fleet
with low marginal cost but a need for flexible albeit low load
factor backup/top up may be conducive to the development of new
forms of electricity storage, "quasi-storage" from the
demand side (eg electric vehicles charging network) as well as
increased interconnection to other markets..
If the government ends up with a more prescriptive
approach to the energy mix, then it will be vital to ensure that
interconnection with Europe is taken into consideration when determining
appropriate generation requirements. Even with a more market
based approach, it is important that the market understands the
appetite for greater interconnection so that this can be factored
into the investment decisions.
Much greater coordination with Europe is required
than currently exists.