Interim Update 28 th July 2020 A webinar with experts from the Sector ReSHAPING REGULATION POWERING FROM THE FUTURE By Laura Sandys, Dr Jeff Hardy & Professor Richard Green
Su Support orters & & Co Co-Cr Creator ors Co-Creators: Supporters: • ENA • UKPN • Thomas Pownall • Octopus • Orsted • PwC • ESO • Centrica • Energy Systems Catapult • RenewableUK • REA • Professor Catherine Mitchell • RES • SPEN • Nigel Cornwall • Energy UK • Ohme • Dr Jeff Hardy • LCCC • WPD • Frontier Economics • Elexon • Vector (New Zealand ) • LCP • Xoserve • Arup
The Challenge: A New Cost, Value & Price Ca Capital As Assets changing the Blended Assets & Service ces Consumer Models ch changing COST base of of energy th the new VALUE how e how ene nergy i is P PRI RICED ED throughout th th the system Multi-actor Blended Assets Varied Business Models Management Tailored Services & Products Free feedstock, high Demand and Supply replacing commodity pricing CAPEX, low OPEX equally valuable
Unlocking the value Unlocking the value Unlocking the capital of all demand actions trapped within the to invest in the right system things Optimising the System
The Smoldering Platform Th Lots of commodity not enough storage and processing Depressed price Unequal access to requiring more and more negative pricing public support Rising system 200.00 Much more Network 2019 - £1.2bn management costs paid 150.00 Optimisation needed for by consumers 100.00 50.00 0.00 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 -50.00 Kill value in Still supporting digitalisation and smart Fossil fuels system
Th The Missing Prizes Wasted Energy & Unlocking total Blended & Demand and Supply Capital flexibility value Processed Energy are Equal Customers Value Limited Manage Peaks Deeper Utilization of Marginalised Optimisation NOT Meet Peaks all Network Assets
No Now is the Mom oment to o Get th this is Righ ight Before decarbonizing heat, transport and wider industrial
Dec ecarbo boni nisati tion Divi vidend: dend: An n Op Optimise sed Sy System Carbon Capital Capacity Cost Sized around Optimised Demand • Customers Value & reward more from less • Unlock new system tools, data, demand • Optimise and blended assets Demand Equal in markets, policy & • the 5 C’s regulation Focus on permanent demand reduction • as much as flexibility Demand Fair access to demand assets & actions • and System risks internalized not • Metric for Avoided Cost & Carbon Production • socialized Competing Blending assets and actions • Significant Manage peak not meet Peak • Unlock the Derisk Capital not Price • but All responsible to maximise total • System Incentivize processed energy Efficient • energy utility Value Demand assets equally important Capital • Stop Waste • Citizens should explicitly Citizen Dividend benefit from decarbonisation
Unlo Unlocking king the he va value of all de demand mand act actio ions ns
Optimised Supply Chain Demand? Mainframe Core demand delivered by an optimized Supply From Mainframe to in Consumer home first responder PC Tesco Optimised Dema Choice Chain s e c i v r e S Cloud / Data l a Self Special n Centres / o Sized around Choice i t Service Supply a Broadband/ N Demand Mobile s Op Choice & What is Competition Wh Regulator Optimized Utility across complex system options Role
Supply Assets Demand & Supply of Equal Value All demand actions, assets and Capacity actions throughout the system must Market: £3.85 receive equal access to markets, bn support, focus of regulation and policy attention. Demand Assets & Actions Balancing & Full Value of Avoided Cost System Costs: £1.94bn of Energy (based on US metric) Integrate a discounted value to Capacity Market: Avoided Cost of Energy & Carbon 5.6% storage / 2.35% DSR into all policy and market design. CfDs: £600m ACE is the fully loaded cost of Customer Balancing : 0.29% generating, managing & Assets DSR distributing energy & is excellent Networks : Energy for valuing energy efficiency limited & tactical Efficiency Network Reinforcement Avoided Cost of Peak Energy : £2bn
First Steps: Democratise the System Customers & their “agents” need equal access to derisk capital investment & markets as much as large developers Self Supply Capital Assets delivering Capacity Market Balancing Costs flexibility or Increase access for Increase access to all generation efficiency, all storage demand shifting assets & types, self-supply & DSR actions Demand Shifting Assets or actions Permanent Demand Consumer Contracts for contributing Reduction value to the Difference Fully loaded value of system Contract for Difference Avoided Cost of Energy miniaturized and Carbon Energy Efficiency Real Time Tariffs Permanent reduction of total energy needs
De Demand & Supply Compared: Fu Fully loaded costs s between demand and su supply actions New £150 Metrics £100 £50 £/MWh £0 -£50 -£100 -£150 Blended Self Energy DSR CCGT Nuclear Gas CCS Biomass Onshore Offshore Solar - assets Supply efficiency CCS wind wind large Technology direct costs Capacity adequacy costs Balancing costs Network costs Displaced generation costs Da Data to be delivered to the project ct by mid August Chart includes illustrative cost benefit estimates developed for the ETI in 2017/18.
Un Unlo lockin ing th the e va value trapped wi withi hin t n the he s system
Optimised Utilisation: Reward More from Less Reversing regulatory incentives to unlock new innovative business models and reduce overall costs. Without “normal” supply chain pressures regulation and mandate needs to drive efficiency, productivity and optimization of all assets, actions and actors. Optimised Demand Processed Supply New System Tools Unlocks the new customer The delivery of utilizable energy Significant focus on system tools, capabilities delivering a optimising its “processing”, delivery optimization, data and downward cost pressure “dispatch” and “stability”. Moves digitalization transforming system changing the demand curve from a “commodity” to a full stability, active network “service” and breaks down the from security of supply to management & market design security of service. artificial silos.
Reallocate Risk & Reward All market players should own as much of their system risk as possible and benefit from the rewards. But penalised for “socializing” the risk Cost reallocated where possible for ££ for Optimised Demand ££ for “Processed” Energy businesses to manage 200.00 150.00 100.00 Penalty for accessing balancing market Penalty for accessing balancing market – 50.00 No Curtailment Payments not socialised 0.00 9 9 9 9 9 9 9 9 9 9 9 9 1 1 1 1 1 1 1 1 1 1 1 1 - - - - - - - - - - - - b n l p t v n r r y g c u a p a c o e a e u u e J O M A J F M J A S N D -50.00 Energy Imbalance Operating Reserve STOR Constraints Negative Reserve Fast Reserve Some system services need to stay with ESO Enabled by Data Flow, Optimization Technology & Digitialised Markets
Whe Where do do you u start fr from? Which end to A&E Role for the ESO you start £££££ from? R • Surveillance role of system stability Hospital i • Develop IP address equivalent “plug & play” D £££ s a to enable data flows k t • Drive as much balancing and stability into Consultant a ££ the businesses themselves • Penalise businesses, not consumers for GP requiring their intervention £ • Role to maximise the overall optimization of the system not just stability Self Help/Pharmacy/Online • Avoided Cost of Energy metric part of their competitive calculations
Un Unlo lockin ing th the e ca capital to invest in in th the rig ight t th thin ings
Fr From Commodity dity to Capit apital al & & Ser ervic vices es
Immediate Actions to Unlock Investment Demand Action Competing No Constraint Payments Citizen Dividend Fair & Limited but important Driving greater utilization of Once capital has been recouped Equitable competitor to supply assets Change Merit CfD / CM Mandated Revenue Driving Storage REGOs Amalg De-Risking Order Decarbonized Make Regos Stacking & Unlocking Increased Through Reduce Supply Blended Assets investment much more Market competition support Demand & long More revenue drivers for all robust from fossil Measures mechanisms term certainty options storage needs generation Risk sitting with the Planning Risk Construction Risk Operational Risk investors What role Reducing Cost of Maturity of for the Counterparty Risk Capital Technology public good?
How to unlock them together!
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