N' Keith Tovey, M'A' PhD, C'Eng MICE

1
The changing face of the Electricity Market in
the UK
???????????? ???? ????? ?????????????? ? ????????
???????????? ????????? ??????
5th July 2003
N. Keith Tovey, M.A. PhD, C.Eng MICE
Energy Science Director Low Carbon Innovation
Centre University of East Anglia, Norwich
2
The changing face of the Electricity Market in
the UK

• A brief review of the UK Electricity Industry
  prior to 1990.
• ??????? ????? ????????? ??????????
  ????????????????? ????? ????????????? ? 1990 ?
• The Electricity Markets in the 1990s after
  Privatisation
• ????? ?????????????? ? 1990 ? ????? ????????????
• The New Electricity Trading Arrangements
• ????? ??????? ??????? ???????? ????
• The Supply of Electricity since 1990
• ???? ?????????????? ? 1990

3
The changing face of the Electricity Market in
the UK

• A brief review of the UK Electricity Industry
  prior to 1990.
• ??????? ????? ????????? ??????????
  ????????????????? ????? ????????????? ? 1990 ?

• Electricity Generation and Supply
• differences in approach between England / Wales
  and Scotland.
• ????????? ? ???? - ??????? ????? ?????????

• Fuels used for generation
• ???????, ???????????? ??? ?????????

4
The Generation and Distribution of Electricity
have always been different in Scotland compared
to England and Wales
5
Most Generating Capacity is in the North - most
demand is in South
MW
Generating Capacity Surplus/Deficit on February
12th 1800 ve generating capacity exceeding
demand -ve demand exceeding generating capacity
6
???????????? ???? ????? ?????????????? ? ????????

• Demand has risen by 50 since 1970
• Large rise in output from CCGT since 1993
• Nuclear output increased steadily but is set to
  decline
• Coal Oil generation has fallen rapidly since
  Privatisation

7
Electricity Generation - pre 1990

• Decision on how electricity was to be generated
  was done on a generating set basis
• Generating Sets to run were selected on Merit
  Order.
• Based on Marginal Costs (i.e. the fuel costs)
• Some generating sets were run OUT of MERIT ORDER
  where system constraints were an issue.
• Generators sold electricity to Regional
  Electricity Boards.
• Electricity Boards sold to consumers in their
  Area only.
• Prices to consumers varied between regions

8
???????????? ???? ????? ?????????????? ? ????????

• Most Generating Capacity in North
• Most coal-fired stations in North
• Most Oil-fired stations in South
• Nuclear stations - distributed around
  coast
• Most Hydro stations are in Scotland

Significant power flows North gt South
9
Privatisation of Electricity Supply Industry 1990
Central Electricity Generating Board
National Power PowerGen Nuclear Electric

• Coal Fired Power Stations
• Oil Fired Power stations
• Gas Turbine Stations
• Hydro Stations
• Nuclear Stations
• Transmission

National Grid Company
12 Regional Electricity Companies
12 Regional Electricity Companies
10
The changing face of the Electricity Market in
the UK

• A brief review of the UK Electricity Industry
  prior to 1990.
• ??????? ????? ????????? ??????????
  ????????????????? ????? ????????????? ? 1990 ?
• The Electricity Markets in the 1990s after
  Privatisation
• ????? ?????????????? ? 1990 ? ????? ????????????
• The New Electricity Trading Arrangements
• ????? ??????? ??????? ???????? ????
• The Supply of Electricity since 1990
• ???? ?????????????? ? 1990

11
The changing face of the Electricity Market in
the UK

• The Electricity Markets in the 1990s after
  Privatisation
• ????? ?????????????? ? 1990 ? ????? ????????????

• The bidding process - Pool Input and Pool Output
• ??????? ?????? ?????? ? ??????? ????

• The Electricity Pool
• ????????????? ???

12
The Operation of The Electricity Pool 1990 - 2001

• Only the Generators (gt100 MW) bid into the POOL
  to supply electricity e.g. National Power (now
  Innogy), PowerGen etc.
• The National Grid Company published projected
  demands for the following day and invited bids.
• The Generators supplied bids for each generating
  set in each station for each half-hour period of
  the following day.
• The NGC sorted bids to determine which generating
  sets would be used for each particular period,
  and which ones would have capacity made
  available.

13
Scotland
England and Wales
14
System Marginal Price 19.31 SMP
10000 MW
10000 MW
Companies up to and including B successful
10000 MW
1 50 Roubles
15
The Operation of The Electricity Pool

• All Companies who were successful are paid the
  SMP for all units generated irrespective of what
  their bid was.
• The bids were for the single half-hour period and
  fresh bids were required for all half hour
  periods.
• It was possible for companies to bid 0 and this
  would guaranteed that they generated and paid
  SMP.
• However, if all Companies did the same they would
  have to generate electricity for nothing.
• In addition to the SMP, there was also a
  capacity charge relating to the generating
  capacity which was requested to be available.

16
The Operation of The Electricity Pool

• Capacity Charge paid to all Generators who had
  been requested to have capacity available.
• -based on formula
• LOLP (VOLL - SMP)
• Loss of Load Probability

Value of Lost Load
VOLL was set by the Regulator at around 2400
per MWH LOLP normally a very low figure but
could become significant if there was a shortfall
in generating capacity Capacity Charge signal
to ensure sufficient capacity was available. Pool
Input Price (PIP) SMP LOLP (VOLL - SMP)
17
????????????? ???

• System Constraints
• Some Power Stations constrained ON to ensure
  security of supply even when their bid was more
  expensive.
• Some Power Stations constrained OFF even when
  their bid was cheaper (-excess of capacity in one
  region).
• Constrained Stations paid their Bid Price
• POOL Output Price (POP) PIP Uplift
• Uplift represented the additional charges
  incurred to National Grid Company because of
  System Constraints
• Suppliers purchased Electricity at POP

18
????????????? ??? A Review

• Need for strong Regulatory Body to ensure prices
  were not fixed.
• Evidence suggested price manipulation took place
  in early years.
• Regulator required major generators to dispose of
  some stations.
• The lack of Demand Side Bidding was a weakness
• Charges for Transmission Losses were averaged
  over whole Network.

• Customers in North subsidise those in South
• Generators in South subsidise those in North
• These issues are still under discussion

Separate discussions relating to Distribution
Charges are also under way
19
The changing face of the Electricity Market in
the UK

• A brief review of the UK Electricity Industry
  prior to 1990.
• ??????? ????? ????????? ??????????
  ????????????????? ????? ????????????? ? 1990 ?
• The Electricity Markets in the 1990s after
  Privatisation
• ????? ?????????????? ? 1990 ? ????? ????????????
• The New Electricity Trading Arrangements
• ????? ??????? ??????? ???????? ????
• The Supply of Electricity since 1990
• ???? ?????????????? ? 1990

20
The changing face of the Electricity Market in
the UK

• The New Electricity Trading Arrangements
• ????? ??????? ??????? ???????? ????

• The basic principles
• ???????? ????????

• Gate Closure and Final Physical Notification
• ???????? ??????? ? ????????????? ??????????
• ???????????

• The Balancing Mechanism
• ????????????? ????????

21
????? ??????? ??????? ???????? ????

• The basic principles ???????? ????????

How does it differ from the Pool?

• Both Generating and Demand Side Bidding Takes
  Place
• Most Electricity (gt90) is traded outside NETA
  Balancing Mechanism
• NETA favours generators and suppliers who can
  guarantee specific levels of generation/supply in
  advance.
• NETA favours generators and suppliers who can
  guarantee flexibility in output / demand at short
  notice.

22
????? ??????? ??????? ???????? ????

• The basic principles ???????? ????????

How does it differ from the Pool? - continued

• Generators and Suppliers are penalised if they
  deviate from their agreed level of generation /
  supply.
• System security is maintained via the Balancing
  Mechanism ????????????? ????????
• Renewable Generators e.g. Wind and small CHP
  (10 MW) can be adversely affected.

23
????? ??????? ??????? ???????? ????

• The basic principles ???????? ????????
• Generation and Supply focuses on

• Balancing Mechanism ????????????? ????????
• (BM) Units
• Generating BM Units may be a single generating
  set or a collection of small generating sets.
• Demand BM Units may be a single large demand
  consumer or a collection of small consumers.
• Trading can take place between Generating and
  Demand BM Units
• Only the volume traded ( not price) has to be
  notified.

24
The New Electricity Trading Arrangements

• Gate Closure and Final Physical Notification
• ???????? ??????? ? ????????????? ??????????
  ???????????

• Each Generating or Demand BM Unit notifies System
  Operator of the projected Volume of Electricity
  to be Traded for each half hour period by 1100
  on preceding day.
• Initial Physical Notification (IPN)
• System Operator checks sufficient capacity is
  available.

GATE CLOSURE ???????? ???????

• Initially 3.5 hours before REAL Time - later
  reduced to 1 hour.
• Final agreed Volumes to be traded noted before
  Gate Closure.
• Final Physical Notification (FPN) ??????????
  ??? ?????????? ???????????

25
The Balancing Mechanism ?????????????
????????
Summary
3.5 hours
1 hour

• Changes to contract position cannot be made
  after Gate Closure
• The Balancing Mechanism is operated after Gate
  Closure to provide System Security

26
The New Electricity Trading Arrangements ?????
??????? ??????? ???????? ????
The Balancing Mechanism ?????????????
????????

• To allow system to remain stable
• Too little electricity on the system
• Generators can OFFER to INCREASE output
• Suppliers can OFFER to REDUCE consumption

• If OFFER is agreed then Generators / Suppliers
  are PAID for any electricity increased / reduced
  under the OFFER.

27
The New Electricity Trading Arrangements ?????
??????? ??????? ???????? ????
The Balancing Mechanism ?????????????
????????

• Too much electricity on the system
• Generators can BID to REDUCE output
• Suppliers can BID to INCREASE consumption

• If BID is agreed then Generators / Suppliers PAY
  for any reduction in generation / increase in
  demand under the BID.

28
The Balancing Mechanism ?????????????
????????
Generators / Suppliers may submit OFFERs or BIDs
which differ for different levels of deviation
from the Final Physical Notification
National Grid Company normally accepts OFFERS /
BIDS which are cheapest unless System Constraints
prevent this.
29
The Balancing Mechanism ?????????????
???????? What happens if System Operator has got
it wrong?

• OFFERs / BIDs cannot be cancelled
• UNDO BID removes an OFFER and is usually less
  than the OFFER
• UNDO OFFER removes a BID and is usually more
  than the BID
• OFFERs / UNDO BIDs or BIDs / UNDO OFFERs
  are submitted in pairs

30
????? ??????? ??????? ???????? ???? What happens
if a Generator / Supplier is out of balance?

• Unexpected changes in Demand
• Equipment Failure
• Generator / Supplier has too much electricity on
  the system too much generation / too little
  demand
• charged for imbalance at System Sell Price
• Generator / Supplier has too little
  electricity on the system too little
  generation / too much demand
• charged for imbalance at System Buy
  Price

31
????? ??????? ??????? ???????? ???? How well has
it performed since starting on 27th March 2001?
From OFGEM Review of First Year of
NETA Wholesale prices of electricity are now 40
lower than they were 5 years ago.
32
????? ??????? ??????? ???????? ???? How well has
it performed since starting on 27th March 2001?
From ELEXON Web Site 3rd July 2003
33
????? ??????? ??????? ???????? ???? How well has
it performed since starting on 27th March 2001?
Average OFFER and BID Prices for different
Generators
From OFGEM Review of First Year of NETA
34
The changing face of the Electricity Market in
the UK

• A brief review of the UK Electricity Industry
  prior to 1990.
• ??????? ????? ????????? ??????????
  ????????????????? ????? ????????????? ? 1990 ?
• The Electricity Markets in the 1990s after
  Privatisation
• ????? ?????????????? ? 1990 ? ????? ????????????
• The New Electricity Trading Arrangements
• ????? ??????? ??????? ???????? ????
• The Supply of Electricity since 1990
• ???? ?????????????? ? 1990

35
The Supply of Electricity since 1990 ????
?????????????? ? 1990

• Large Consumers (gt 1 MW)
• ??????? ???????????

• Before privatisation
• Could only purchase from the Local\Regional
  Electricity Company (REC) supplier in their
  region
• After privatisation
• Consumers gt 1MW could purchase from ANY REC not
  just their own regional Company (second tier
  RECs).

• From 1994 Consumers gt 100 kW were included in
  Deregulation

36
The Supply of Electricity since 1990 ????
?????????????? ? 1990

• Domestic Consumers ??????? ???????????
  (?????????)

Transition Arrangements to 1998 ???????? ?
?????????? ??????? ?? ?????? ?? 1998
Domestic Consumers did not benefit from
competition until September 1998. Prices to
Domestic Consumers were regulated according to
the formula RPI - X E F
RPI is a measure of inflation X was a factor
set by Regulator - initially 5 but later
reduced. E was an energy conservation factor
whereby costs of such measures could be
passed on to the consumer F was a levy designed
to promote exploitation of Renewables
37
The Supply of Electricity since 1990 ????
?????????????? ? 1990

• Domestic Consumers ??????? ???????????
  (?????????)
• September 1998 - June 1999

Regions of England and Wales were progressively
Deregulated so that Domestic Consumers could
purchase their electricity from any
supplier. Implementation of Deregulation in
stages allowed any initial problems encountered
to be sorted out. After Deregulation, the RPI -
X E F formula no longer applied. To allow
new suppliers to gain a foothold, the existing
suppliers could not reduce their prices in their
own area for a further transition period of a few
years.
38
????????????? ??? Supply Side

• Domestic Consumers ??????? ???????????
  (?????????)
• Tariff Structure ?????????
  ???????????

• The unit charge to the consumer has three
  components.
• The actual unit charge as determined by the
  Supplier
• A distribution charge (payable to local REC as
  distributing company) which is same for all
  suppliers in a region
• A meter reading charge.
• The domestic consumer does not see these
  different component parts on their bills.

39
????????????? ??? Supply Side
Impact on Suppliers of Renewables Obligation
Certificates (ROCs) ??????????? ????????????
????????????? ?? ????????????? ??????????????
??????????

• Since April 1st 2002, all suppliers must
  provide a minimum percentage of electricity from
  renewable sources.
• The percentage is set to increase each year to
  10.4 by 2010.
• Compliance is indicated by Renewable Obligation
  Certificates. Failure to meet this requirement
  incurs a fine at the Buy-out price - initial 3p
  per kWh (1.5 Roubles per kWh) and rising in line
  with inflation - currently 3.051p per kWh.
• But-out fines are recycled to companies in
  proportion to ROCs they hold - thus trading is
  occuring in ROCs at a surcharge price as high as
  4.8p per kWh (2.4 Roubles).
• Domestic prices are set to rise slightly because
  of this Renewable Obligation.

40
Effects of Privatisation and Deregulation on
Energy Prices

• Deregulation in Domestic Market
• 1996 - 1998 for Gas
• 1998 - 1999 for Electricity

Domestic Consumers ??????? ???????????
(?????????) ????????? ?????? 1998 7.48p (3.74
Roubles) per kWh 2003 5.62p (2.81 Roubles) per
kWh
Source Energy Sector Indicators Department of
Trade and Industry
41
Conclusions (1)

• Key Changes in Electricity Market in UK
• April 1st 1990 Privatisation Electricity
  POOL Established
• Large Consumers benefit from Deregulation
• 1994 Intermediate Consumers benefit from
  Deregulation
• 1998 All Consumers benefit from Deregulation
• 27th March 2001 NETA replaced POOL
• 1st April 2002 Renewable Obligation comes into
  force
• The POOL and NETA were not used in Scotland

The Future BETTA (British Electricity
Transmission and Trading Arrangements). It is
planned to extend NETA to include Scotland in
April 2005 (recently put back from October 2004)
42
Conclusions (2)

• Key Changes in Electricity Market in UK
• Prices to consumers have fallen as a result of
  Deregulation (up to 20 in some cases)
• Wholesale prices of Electricity have fallen by
  40 over last 4 years, and 20 since
  introduction of NETA
• Prices to consumers have changed little since
  introduction of NETA - to early to see full
  effect as prices by Suppliers only tend to
  change once a year or so.
• Most electricity gtgt 90 is traded outside
  Balancing Mechanism Trading
• NETA favours Generators / Suppliers who can
  guarantee output / supply in advance
• NETA favours Generators / Suppliers who can be
  flexible to make adjustments during Balancing
  Mechanism Trading.

43
The changing face of the Electricity Market in
the UK
???????????? ???? ????? ?????????????? ? ????????

• Some Useful WEB Sites
• www.bmreports.com/ Up to date information of
  NETA Market
• www.ofgem.gov.uk/ The UK Regulator
• www.elexon.co.uk/ Documents and
  Modifications to NETA
• www.nationalgrid.com/uk/ The System Operator
• www2.env.uea.ac.uk/gmmc/energy/enpoint.htm
• the Energy Web Page at UEA giving links to many
  Energy Web Sites in UK and overseas.

This presentation is available over Internet
at www2.env.uea.ac.uk/gmmc/neta/NETA.htm
44
?.?.???? ?.?., ?-? ??????????? ???? ?????????
????????????? ???????????? ????????????
????????? ??????
k.tovey_at_uea.ac.uk
Energy Science Director Low Carbon Innovation
Centre
School of Environmental Sciences University of
East Anglia Norwich NR4 7TJ
45
(No Transcript)
46
N. Keith Tovey, M.A. PhD, C.Eng MICE Energy
Sciences Director Low Carbon Innovation
Centre University of East Anglia Norwich NR4
7TJ k.tovey_at_uea.ac.uk
Will be aiming to reduce Carbon Dioxide Emissions
by 60 by 2025 Will be launched on 21st May 2003
47
Impacts of Pool and NETA on one Coal Fired Power
Station
Fiddlers Ferry

• 2000 MW Coal Fired Station
• built 1971
• 110 MW Auxiliary Gas Turbines
• now only 55 MW of AGT

48
School of Environmental Sciences University of
East Anglia
Oceanography
Climate Change
60 Faculty 50 Support Staff 120 Research
Workers 120 PhD Students 80 MSc Students 380
Undergraduates
Hydrology
Geology
Politics
Sedimentology
Economics
Geological Hazards
Energy
Risk
Resources
A 5 Research Department 4 International Research
Centres
49
The changing face of the Electricity Market in
the UK

• A brief review of the UK Electricity Industry
  prior to 1990.
• ??????? ????? ????????? ??????????
  ????????????????? ????? ????????????? ? 1990 ?
• The Electricity Markets in the 1990s after
  Privatisation
• ????? ?????????????? ? 1990 ? ????? ????????????
• The New Electricity Trading Arrangements
• ????? ??????? ??????? ???????? ????
• Some Implications for Renewable Generation and
  Combined Heat and Power.
• ??????????? ??? ????????? ?? ??????????????
  ?????????? ? ??? ????

50
Some Implications for Renewable Generation and
Combined Heat and Power. ??????????? ???
????????? ?? ?????????????? ?????????? ? ??? ????
Most CHP Schemes in UK are small average size for
those under 10 MW is 650 kW
51
Some Implications for Renewable Generation and
Combined Heat and Power. ??????????? ???
????????? ?? ?????????????? ?????????? ? ??? ????

• Small CHP Generators
• Often do not have resources to compete in
  Trading
• Rely on Suppliers who are not so keen to take
  electricity as their Imbalance position might
  be affected
• Since 2000
• 61 reduction in output from small CHP
  Generators after NETA
• At same time have seen prices for fuel for
  generators increase by around 14
• The few Trading in NETA saw reduction of 17 in
  income

52
Some Implications for Renewable Generation and
Combined Heat and Power. ??????????? ???
????????? ?? ?????????????? ?????????? ? ??? ????

• Wind Generation has been affected -
• cannot predict wind so cannot guarantee output
• cannot trade in Balancing Mechanism.
• In 2002 the Renewables Obligation will assist
  Wind but there was one year before this was
  introduced

• Consolidation of groups of small CHP units
  together has been shown to reduce risk of NETA
  trading.
• However, only marginally improvements are
  possible from consolidation of several Wind
  Farms.

53
Some Implications for Renewable Generation and
Combined Heat and Power. ??????????? ???
????????? ?? ?????????????? ?????????? ? ??? ????
District Heating

• CHP units using Pass Out Turbines should be
  suited to NETA because of flexibility
• In UK there are very few schemes like this 10
  MW

54

• The Supply of Electricity since 1990
• ???? ?????????????? ? 1990
• Large Consumers
• ??????? ???????????
• Domestic Consumers
• ??????? ??????????? (?????????)
• - Transition Arrangements to 1999
• ???????? ? ?????????? ??????? ?? ?????? ?? 1999
• Deregulation in the Domestic Market
• ?????? ????????????? ?? ????? ???????
  ????????????
• Tariff Structure
• ????????? ???????????
• Impact on Suppliers of Renewables Obligation
  Certificates (ROCs)