Independent Energy Sector Seminar – Summary

24th November 2014

On 10th November 2014, Taylor Keogh Communications brought together a panel of speakers at the House of Commons for a seminar focusing on the independent sector’s perspective of Electricity Market Reform and the future of the energy sector in the UK.

Speaking Panel:

Chair: Dan Byles MP (Member of the Energy & Climate Change Select Committee)

Peter Atherton, Head of the Utilities Team, Liberum
George Grant, MD – Watt Power / Stag Energy (Ind Developer)
Tim Warham, Senior Policy Advisor, EMR Team – DECC
Clive Moffatt, Senior Economist & Policy Adviser
Tim Smith, Finance Director – Green Energy UK (Ind Supplier)
Rachel Fletcher, Senior Partner (Markets) – Ofgem
Four years in, what has Electricity Market Reform (EMR) done for independent developers of power projects and suppliers? Further intervention is almost inevitable, stakeholders told regulators and policymakers. EMR’s attempting too much at once.

Summary

Liberum Capital’s Peter Atherton noted that across Europe, the utility market had been de-rated by around 70% since 2009. Rather than asset builders, debt-laden utilities have become net sellers. Governments reneging on promises has curbed investor enthusiasm. Investors seek only the most stable regimes to avoid being “stabbed in the back” by politicians.

Atherton said independent suppliers are gaining customers and funding, but investors question whether they have “very secure future cash flows that will turn to profit” and viable long term business models.
Scope for independent generators was “much higher” under a government procurement model as it alleviates price risk. However, independents must navigate a “labyrinth of government procurement processes”, either for the contract for difference or capacity payments, which is easier for incumbents, said Atherton.

Commenting on new nuclear, Atherton said that there had been insufficient debate or serious concerns raised by politicians, industry or by the public about Hinkley, labelling the deal as an ‘abomination’.

Watt Power/Stag Energy is developing 1,500MW of new gas-fired generation. MD George Grant said government should recognise the high cost of entry for independents. Large projects require a Development Consent Order, which takes 5-10 years with “little change from £10 million”. Asking investors “to post significant capital [before even being able to participate] is a concern”. His point was echoed by RBS Head of Energy Andrew Buglass during Q&As. Securing long term power purchase agreements was another issue.

While independents can never have the same cost and risk structures as vertically integrated utilities, DECC senior EMR policy adviser Tim Warham said EMR had made “the playing field as level as possible. The big question is can innovation and efficiency overcome the advantages of balance sheet funded and low Power Purchase Agreement discounts? We are about to find out”.

Grant said the capacity mechanism was not perfect, but had progressed from its early designs, was financeable and should attract new entrants. Mooted government reviews of the capacity mechanism from 2015 were counterproductive.

Overall, Government should: work towards long term goals on decarbonisation (ie by 2050), not pick technology winners and, be honest with the electorate about the cost of decarbonisation.

Grant suggested the Competition Market Authority (CMA) review of the Big Six should result in the unbundling of generation and supply.

Clive Moffatt, senior economist & policy adviser at Moffatt Associates, disagreed. He warned unbundling was unproven and could result in a set of “sub-optimal” suppliers, increase prices and reduce investment.

Tim Smith, finance director at independent supplier Green Energy UK, criticised the focus on capacity issues at the expense of reducing consumption.

He disagreed that the Big Six were the problem, as scale rendered them ponderous, creating opportunities for independent suppliers. By targeting them, Ofgem had created perverse outcomes for all suppliers and
consumers: Suppliers pushed up bills when told to consolidate tariffs and bills are arguably more complex after intervention, Smith said.

He warned that independents that grow too quickly risk billing problems and collapse. Therefore Ofgem should “return to regulating rather than managing the market”, Smith suggested. Government should “stop meddling” and create a cross-party strategic framework to deliver stability.

Clive Moffatt said the fundamental issue was trying to bolt-on affordability and security to a policy originally intended to deliver decarbonisation. But to start again from scratch would be “disastrous”.

Government should avoid “returning to the CEGB model of central control and procurement and revert to underpinning the role of the market in pricing, investment decisions and competition”, he said. Committing “once and for all” on a design of the capacity mechanism would help, as would the reintroduction of the Electricity Pool.

Moffat said security of supply should take priority with quantitative legal CO2 targets replaced with soft targets linked to a long-term rising price trajectory for carbon. Resulting revenues could tackle fuel poverty, protect intensive energy users and fund technology development. Overestimating the potential of demand-side reduction was foolhardy, he warned.

Rachael Fletcher, Ofgem’s senior partner (markets), noted that independent market participants went beyond suppliers and generators to include financiers, traders, agencies, exchanges, intermediaries, aggregators, and non-commercial parties such as local authorities and social landlords. “As a regulator that takes us very quickly into a whole load of activities that we don’t formally regulate,” she said.

Ofgem was concerned “that we are not the only rule maker in this space”. Fletcher flagged a “status quo bias” in the way some industry rules were made that is detrimental to alternative business models. That concern has been raised with the CMA and Ofgem will examine it independently.

Independents’ current 8% domestic retail market share versus 2% in 2012 suggested progress. Whether that was enough to put real competitive pressure on the incumbents was questionable, Fletcher added.

Question & Answer Session

Alan White, Project Finance Director at Carlton Power, asked how the government might counter “the accusation that four years of EMR had delivered very little” should the capacity market fail to bring on new plant.

Decc’s Tim Warham said that EMR might not be perfect “but at least now there are levers in place” that could adapt to whatever comes next. He said the capacity mechanism design is “intended not to bring forward capacity that is not needed… Where the first auction clears will be an indicator of the situation we are in. We will have to just wait and see”.

Warham also confirmed there was nothing to prevent coal from bidding in to the capacity market so that it remains available to meet peak demand.

Liberum’s Peter Atherton remarked that the capacity mechanism was originally designed in conjunction with a carbon price floor. That was one of many perverse outcomes of the last Energy Act – and previous interventions – that require a new Energy Act to correct them. His bet was 2017.

Decarbonisation was so challenging that it “will require government to take all decisions and all of the risks and live or die by it. They are trying to do that anyway so they should stop messing around with a bunch of halfbakedmarket mechanisms which are frankly delivering nothing but perverse outcomes.”Not Atherton’s preferred approach, “but that is where we are likely to end up.” He seconded calls for more political debate and honesty with the electorate.

Watt Power’s George Grant said another perverse outcome loomed over the first capacity auction. “New plant is going to set the price for the auction. That gives a huge windfall to existing capacity and enables it to stay open a lot longer. So we may see inefficient, carbon intensive plant [extended] at the expense of new gas capacity.”

Dan Byles MP noted that stakeholders on the one hand tell government to “stop messing around” and create stability, yet on the other call for more intervention. “So should we rip everything up and start again and risk undermining market confidence or is there a third way?”

Clive Moffatt said the “third way” was to stop digging and determine what is worth keeping and necessary to underpin the market. The issue around legal binding quantitative CO2 targets was pressing, he added.

George Grant said he did not want more intervention, but “we are at a point where it is necessary”. Tim Smith agreed. “You have to carry on intervening now to get us out of this mess”.

Ofgem’s Rachael Fletcher said there was a need to work out both EMR’s evolution and an exit strategy. She agreed that another Energy Act may be required.

Angus Norman, Chief Executive of interconnector firm ElecLink said an interconnected Europe would deliver price and supply security, deal with diversity and could be rapidly built. DECC’s Warham said there was “work going on” to incorporate interconnection into the capacity market.

Martin Wright, of Aurora Ventures and Chairman of the Renewable Energy Association, said a robust and reducing emissions performance standard would drive investment flows into low carbon technologies. He pointed to the success of similar directives in the automotive industry.

The REA’s Head of Public Affairs, James Court, also expressed preference for a “robust” carbon price over subsidies and claimed that storage technology could render much of the discussion redundant by 2020.

Key points:

  • More honesty with the public needed as to the cost of energy and cost of decarbonisation
  • More debate needed on new nuclear and in particular Hinkley Point C
  • Stability required yet more intervention inevitable, risking further perverse outcomes
  • Affordability, security of supply and decarbonisation mutually exclusive
  • EMR exit strategy required/New Energy Act by 2017?
  • Regulatory/Competition Market Authority intervention risks pushing retail prices up
  • Capacity mechanism imperfect but workable

For a PDF of this Press release, click here.

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