Power Market Reform Roundtable

Power Market Reform Roundtable

Professor Anthony (Tony) D OwenSIEW, 30 October 2014

Australia’s dilemma

2001 Mandatory Renewable Energy Target:

2% of electricity from renewables by 2010

2011 Renewable Energy Target:

20% of electricity from renewables by 2020

But 20% of what? Target set at 45,000 GWh

2011 RET split into “large” and “small” with target of 45,000 GWh given to LRET.

Some States have own targets.

2014 Target revised down to “updated” 20% = 27,000 GWh

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Problem

Demand has stagnated due to

• Fall off in industrial demand;

• Rapid increase in retail prices; and

• Off-grid PV connections

But generation capacity has increased due to investment in wind, therefore

• Wholesale prices have fallen;

• Under-utilisation of CCGT;

• Poor returns on capital invested; and

• Loss of long-term price signal.

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Low SRMC generators entering the market

The following illustrations are indicative only!

Reality has been GREATLY simplified for illustrative purposes.

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Figure 1 Infra-marginal rent in the absence of wind

Price ($/MWh)

Demand

Capacity (MW)

WP

Baseload technology: nuclear

Intermediate technology: CCGT

Peaking technology: OCGT

Infra-marginal rents

Baseload technology: coal

Figure 1 Infra-marginal rent in the absence of wind

Price ($/MWh)

Demand

Capacity (MW)

WP






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Figure 2 Infra-marginal rent with wind

Price ($/MWh)

Demand

Capacity (MW)

WP




Wind



Figure 2 Infra-marginal rent with wind

Price ($/MWh)

Demand

Capacity (MW)

WP




Wind



Solutions: incentives

• Spain: specific compensation (FIP)

• UK: CfD-price guarantees (FIT)

FIT and FIP protect producers from revenue risk, but efficiency benefits of exposure to market prices is lost.

Green certificates introduce market exposure, but raise revenue risks and consequently capital costs.

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Spanish new renewable support schemeSource: Christina Tapia (IEA, 2014)

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Specific compensationSource: Christina Tapia (IEA, 2014)

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UK Contracts for Difference

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UK Contract for Difference: Strike prices

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The dawn of a UK capacity market

After 2 decades, 2014 sees the end of the UK’s energy-only market: as from December it will co-exist with a capacity market. Pricing capacity auctions will be held 4 years ahead of each delivery year.

Beneficiaries of UK low-carbon support (e.g. CfDs) not eligible! Designed to support CCGT and/or OCGT?

Three key forms of agreement:

1. 10 year contracts to support new generation assets;

2. Up to 3 year contracts to support major refurbishment of existing assets; and

3. 1 year contracts for existing generators.

Blueprint for the rest of Europe?

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Thank you!

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