Leviathon meets the source of all energy.

Consultation, Change-over could be this year

The consultation runs til March.
Essentially it means we all will be subsidising coal and nuclear power whenever we use electricity (from the grid).
The consultations is full of fascinating info, i have selected chunks, some too wordy for non-nerds.
It is good market stuff, how to get the investors to cough up so UK plc is a power-house, it doesnt mean the population will be able to afford the power. However luckily we will be connected to EU so it wont be wasted.
I am being unfair, it will be hard to find an alternative plan, as if we do nothing there won't be much power in the UK anyway. And its all in the name of low carbon, halleluja!

I reckon Wales could do it differently, Scotland wants to, as they have lots of renewables and dont fancy nuclear, we just need those extra powers too please.
summary in next para then
extracts in following one.
personal experience of living on little easily below that.

power jungle ahead?

Electricty market reform, informal take on't

Essentially this is a neat way to ensure UK has power. It is a way to attract the investment necessary to produce electricity from nuclear, coal, renewables and reduce our present dependance on imported gas and oil. It is done by price differentials, customers pay extra for the UK stuff. The coal must have ccs capability, but there is a let out clause not to use it when conditions require.


It is all done under a decarbonising banner, presumably for climate salvation, but happens to neatly permit the necessary subsidies for UK to replace its clapped out power kit and expand it for electric cars and heating (those affording them).


The idea is that as govt. is guaranteeing a price top-up for home- produced ‘low carbon’ energy, investors will be happy to invest. Otherwise they wont because there are too many risks. The money for the top-up comes from everyone’s power bills.


As the consultation points out, if we don’t do this, price will go up anyway. Because without a guarantee the ‘cost of capital to invest is much higher, due to the uncertainties’, ie investors take it out on you by charging higher interest rates to cover their backs, and most likely there will be insufficient for the growing need for power, so the black-out threat.


It is a FIT (feed-in tariff)  . The present FIT works for dispersed small-scale renewables, and this is the same principle extended to the giant producers - coal, nuclear, big renewables. There are 3 other measures, and a good approach.


Carbon floor price / tax: The larger polluters are required to pay a carbon tax. This will give competitive advantage to the non-polluters.


Energy performance standard: New coal extraction will need an EPS, and wont get it unless it meets a basic carbon intensity number, ie how much energy for how much carbon, if too much carbon to energy, then no certificate. It could mean the coal plant needs a proportion of its coal operating with CCS , or capable of doing so. The standard can be dropped if we badly need the power! and it will be quite gentle, and 'grandfathered' which means you keep the same standard for the economic life of the investment! 
Wow, rollover to seduce or what.

Money for reserve or negaWatts. This is a payment to have some power in reserve to keep lights on. This can go to gas or biomass or coal generation all of which are flexible enough to top up when needed it can also go to DSR, this is the good approach.


DSR or DSM = demand side response or management. It means using power when its there and not when it isn’t , ie fitting use to the variability of renewables. An example is power industry which works when there’s lots of power, ie it is cheap, night storage heaters and fridges that all go off during TV advert breaks when kettles come on!  It includes reducing use without loss of functionality, ie efficiency. Think of a reading light instead of lit bed-room.


The whole consultation is full of interesting facts, and is trying to find the best ways to woo investors without funding cock-ups.  I found it valuable in these respects.


The risks as I see it are:

We will all be funding coal and nuclear power whether we like it or not whenever we buy grid power.

Power prices cannot fall far with the market as they are kept high by this commitment.

Our power can be sold abroad for any price, eg cheaper and ‘interconnectivity’ with other countries is happening and will be extended.


All in all this is potentially heavy stuff.

I wonder if we couldn’t take a different approach in Wales .

Keep the carbon floor price thing and use the money to provide

power tokens to every citizen who then can choose which low carbon supplier they spend them with. If they use very little power they end up paying nothing for it, after that they pay a high rate.

Half the carbon tax can be allocated to business, half to domestic use.

This doesn’t make power cheap, it makes it as dear as the other proposal but it gives everyone a small free ration which should encourage the rationing mentality – very useful. There can be free power at times that match surplus, just to make life even more interesting.


Rations can be traded of course by the ultra low power and off-grid and compact livers. It also keeps peoples’ freedom to choose, those who hate wind turbines don’t have to fund them, same for nuclear and coal.


It keeps all the other advantages like letting market sort out what works best and encouraging that great DSR.


Complex? Just a soft-ware programme away, after that it’s no different to bills with funny deals like friends and family or free minutes on your phones. Ish.


Of course Wales would need a bit more powers than at present. Maybe a good reason to vote for them in the spring?





Blackout in London, you can see the dawn.

Extracts from the document before parliament

extracts from the consultation
The challenge

Our electricity market has served us well, providing affordable and secure energy since the 1990s.
The watchword has been the encouragement of competition

overseen by Ofgem as the independent regulator of the sector. As a result we have had some of the lowest electricity prices in the EU and this model formed the basis for EU rules on energy markets and independent regulation.

However, in the
coming decades we face major new challenges which require careful but farreaching reforms to meet our objective of ensuring the supply of reliable, lowcarbon

and affordable electricity:

Even as we improve energy efficiency, demand for electricity may need to
double by 2050 – as decarbonisation of the economy means that electricity provides more of our heating and transport needs;

To ensure security of supply, we will need to replace a quarter of our existing capacity by 2020, which are ageing and unlikely to meet environmental regulations. In the current system, maintaining the level of security of supply is left to market forces.

The power sector needs to lead the decarbonisation of our economy, but the
current market has a bias towards fossil fuels. DECC shows that the power sector emissions need to be largely decarbonised during the 2030s.The Committee on Climate Change has recently proposed that the power sector should be close to zero-carbon by 2030;


30% of our electricity in 2020 needs to come from renewable sources (largely onshore and offshore wind), up from 7% today, to meet our legally binding EU target.

Low carbon = renewable electricity (for example wind

and tidal technologies), nuclear power and new fossil fuel power stations equipped with carbon capture and storage ( CCS )

Technology to reduce or manage electricity demand


Ofgem estimated that we need around £200bn in generation, electricity networks and gas infrastructure. Of this at least £110bn would be needed in new generation and transmission – over double the rate of the last decade


Without reform, the existing market will not deliver the scale of long-term investment, at the pace we need, in particular in renewables, new nuclear and CCS


Proposals are designed to strike a balance between the best possible deal for consumers and giving existing players and new entrants in the energy sector the certainty they need to raise investment. Specifically, they are designed to ensure that low-carbon technologies become a more attractive choice for investors, and adequately reward back up capacity to ensure the lights stay on.

(the 4 main measures)

Carbon price support

Strengthening the carbon price for electricity generator will increase the cost of fossil fuel generation, , making lower-carbon power more attractive;


Feed-in tariffs


Capacity payments


Emissions Performance Standard : A back-stop to limit how much carbon the most carbon intensive power stations - coal - can emit.


Ofgem’s review into the liquidity of the electricity wholesale market is an essential complement to these reforms, to safeguard competitiveness and the ability for new firms to enter and compete

It is vital that retail energy markets work to keep energy prices as low as possible, consistent with the need for investment to meet climate change and energy security objectives


(Price of power should be) lower in the five year period up to 2030 than continuing with existing policies despite delivering a higher level of ambition

The key conclusion
the trend in bill impacts: small impacts on bills in the near term, but in the longer-term bills are expected to fall by 2030,

a White Paper in late Spring 2011, incorporating a

response to this consultation, and setting out detailed legislative and administrative proposals to support these reforms. The conclusions of the Ofgem Review will be published alongside, Legislation will follow as soon as possible thereafter and the transition to the reformed market will follow before the end of the Parliament


Energy policy is generally a reserved matter. However, certain powers have been executively devolved to Scotland , and the generation of electricity in Northern Ireland is fully devolved.



To ensure security of supply later in this decade and the

2020s, market design will need sufficient

investment in new base load, as well as flexible plant and other technologies such as interconnection, storage and demand side response to balance the system.

Decarbonisation of the whole economy can be achieved most

effectively if the electricity industry is largely decarbonised by the 2030s so that electrification of heat and transport can follow


even as we keep overall demand for energy stable or reduce it, the UK ’s demand for electricity would be expected to increase, and potentially as much as double by 2050


a longer term view introduces uncertainties:

the amount of energy we will need

the availability of resources

low-carbon transition
requires confidence to act, and an understanding of the timelines needed to deliver large building and infrastructure projects. Decisions made in the next decade will have consequences for the next 40 years.


Over 19GW of nuclear, oil, coal and gas plant is scheduled to close over the coming decade as stations reach the end of their design lives and due to the effects of environmental legislation. Over 20 GW of new capacity is either in construction or development and will therefore enable the UK to maintain secure supplies for the time being


This allows transport and heat to be electrified and

decarbonised in parallel.

Our primary objectives are to ensure the sector is largely decarbonised during the 2030s.

A supporting objective is to ensure that the target for 15% renewable energy consumption across the UK economy is achieved by 2020. This is likely to mean circa 30% renewable penetration in the electricity market as this is one of the lower cost and most mature areas for renewable energy deployment.


4 broad principles.

Cost-effectiveness: important that interventions are

affordable in absolute terms to electricity consumers and taxpayers.


Durability and Flexibility robust to a number of unlikely outcomes regarding carbon prices, fossil fuel prices, and technology costs.





the transformation of the UK ’s energy sector will be achieved

by balancing environmental, social and economic considerations.


attractiveness of the UK electricity market is affected by other areas of policy including the planning system, technology licensing and grid connection regime that all support the development of major infrastructure. The Electricity

Market Reform project is not trying to address these wider factors, but we recognise that they are critical enablers for investment decisions


The UK ’s electricity supplies are amongst the most reliable in Europe . While the current market provides incentives to align electricity production with demand, these may not be strong enough to overcome the additional uncertainty that arises as we deploy intermittent renewables.


The current market has developed following liberalisation in the 1990s. The intention was to create a competitive electricity system where prices are determined without administrative price caps or other regulatory interventions and where unfettered movements in price, and the freedom of market participants’ actions (including contracting and hedging), would be the main drivers of investment behaviour. This is similar in many ways to a range of other commodity markets.


The electricity wholesale market is designed to be much like a typical commodity market. Generators (those who produce electricity) sell electricity to suppliers (those who sell electricity to consumers) through bilateral contracts, over the counter trades and spot markets.

However, electricity cannot be easily stored, so to ensure a secure supply of electricity the amount being produced (supply) and the amount being
consumed (demand) must match at all times; the system must ‘balance’.

Electricity is traded in 30-minute blocks. This continues until an hour before the start of a block (a point called gate closure). At this point the volume of

electricity generators have contracted to produce and that suppliers have

contracted to consume should be equal (balance). They are incentivised to do

this by having to pay an imbalance penalty (cash out price) if they have not

contracted sufficiently to cover the amount they actually generate or supply to


After gate closure the responsibility for ensuring supply equals demand on a second-by-second basis is held by a central body (National Grid, the System Operator), as it is not technically possible to do this through bilateral trading.


This market structure has been effective. The liberal GB electricity market has delivered increased choice in tariffs and services and enabled consumers to switch suppliers.


feed-in tariffs for small scale generation – introduced in April 2010 this scheme encourages the deployment of smaller renewable installations below 5MW, particularly by organisations, businesses, communities and individuals not traditionally engaged in the electricity market. This scheme was introduced in recognition of the potential role communities could play in the UK ’s transition to a low-carbon economy. The Government is committed to encouraging community-owned renewable energy schemes where local people benefit from the power produced. The small scale feed-in tariffs are not affected by the reforms proposed in this consultation, which are aimed at

large-scale low-carbon generation



The Government supports further integration of EU electricity markets as this will increase security of supply and facilitate the move to a low-carbon economy at least cost to consumers.


since privatisation and liberalisation. The UK market has:

delivered the almost 30GW of gas generation currently in operation 8 and maintained an adequate capacity margin (the margin of spare capacity in excess of maximum electricity demand). This has resulted in low risks of electricity demand not being met. resulted in electricity prices which have been comparatively low and fairly responsive to movements in fuel costs 9 ;

supported the deployment of increasing amounts of renewables from 3.1GW in 2002 to 8GW in 2009; and reduced greenhouse gas emissions.

UK needs to dramatically reduce its carbon intensity. An opportunity for this transformation arises in the next decade when a large proportion of our existing coal and oil generation will close as a result of the new standards being introduced by the Large Combustion Plant Directive and Industrial Emissions Directive and as nuclear plants come to the end of their lives 10 . At the same time, the need to meet our legally binding EU renewable energy target will require a dramatic increase in the proportion of UK electricity that is generated by renewables.


Figure 1, below, shows that under the current market arrangements (including the RO) and without any additional form of Government intervention we will achieve approximately 20% reduction in the carbon intensity of power generation to 2020, rising to approximately 60% by 2030, relative to 1990

levels. Nevertheless, without reform, carbon intensity will not fall fast enough


Much of the low-carbon technology that could be deployed this decade has high capital costs and is either only able to generate

intermittently (e.g. when the wind blows) or is inflexible and therefore has to run continuously. These characteristics mean that the system will require flexible capacity to respond to demand spikes or supply shortfalls.
also need technologies such as demand side response, storage, interconnection and new thermal plant to fulfil this vital role,


Without reform, spare capacity 12 will fall below a margin of 10% over the decade 13 . As margins fall there is an increasing risk of localised instances of supply not meeting demand, yielding ‘energy unserved’ which take the form of blackouts or voltage reductions.


Current high capacity margins are, in part, a reflection of slower than anticipated economic growth due to the recession;


gas is generally the price setting plant and can pass through any changes in gas or carbon prices to the electricity price. Therefore electricity and gas prices (and hence revenues and costs) tend to move together. By contrast low-carbon generators are price takers and are more exposed to gas or carbon price volatility.



finance requirements of low-carbon generation – to support the

construction of £70-75bn of new plant in the next ten years will stretch and possibly exceed the balance sheet capacity of incumbent firms. Therefore we need to attract investment from new entrants.
a margin around 10% is generally considered to

provide an appropriate balance between the costs of spare capacity and the security of supply benefits


21. These factors combine to make low-carbon investment slow to come forward and expensive to develop which results in increasing concerns around the efficiency and fairness of the current design and the costs that it passes through to consumers.



conventional gas generation and biomass technologies to

balance the increasingly intermittent and inflexible generating mix we are likely to have in future


Interconnectors are physical links between GB and other electricity grids that allow electricity to be imported or exported in response to appropriate price signals.

The UK currently has 2.6GW of interconnection which

is around 3% of peak GB demand. Different countries have differing peak

demand times, interconnectors can bring security of supply without extra investment in plant.allowing for export/import at times of high/low renewable output

Historic high capacity margins have meant that use of

demand side response (DSR) has been relatively limited in GB. The system

operator contracts approximately 200 MW of interruptible industrial demand fromlarge consumers (who stop energy intensive processes when instructed, in return for payment), as well as a limited amount of frequency control demand management. Apart from this, there are mechanisms such as the Economy 7 tariff which incentivise consumption, such as the charging of electric heaters, outside peak time 14

an important role for DSR in the future as it has strong potential to assist system balancing and reduce costs and a more dynamic demand side can reduce the power of market players on the supply side.

Currently, installed storage capacity in GB is just under 3GW and is largely made up of pumped storage, this being the only established technology at present.


14 An international example of DSR is from France , where EDF’s Tempo tariff informed customers in advance

of the electricity price for the next day using colour coded lights. Consumption was seen to shift on average by

as much as 45% between the most expensive (red days) and the cheapest (blue days).


even if the scheme’s current 2037 end date were extended the

Renewables Obligation would not be the most cost effective mechanism



28. Overall the Government assessment is that the current market will not provide signals for investments that will cost-effectively decarbonise the electricity system in the long term. Current levels of EEU arising as a result of distribution level faults, for example trees falling on lines, are about 12GWh of outages per year 17. To put this figure into context, the total electricity supplied in the UK in 2009 was almost 400,000GWh 18 The EEU from generation related problems has been near zero

suggests that an economically optimal de-rated capacity margin 23 in

the UK could be around 8-12%. This could result in an estimated EEU of

around 0.5-4GWh per year could be mitigated through voltage reduction rather than actual power cuts


16 In voltage reduction, the system voltage is reduced by a few %, and so performance of heaters, lights etc diminish a little. This has no significant impact on customers, but after a while systems start to compensate e.g. a heater may run longer, a consumer may turn more lights on.


In the domestic and SME sector there are few Time of Use (ToU) tariffs available.

Lack of half hourly metering : This technical requirement is important for the

application of dynamic ToU tariffs.

DSR can play an important role in assisting DNOs to manage the network but they have no direct link to their customer base.


Storage: In terms of future investment in storage, high capital costs combined

with uncertainty over the future market, in particular the levels of volatility we

will see, are cited as the main barriers to further investment.


Wholesale price volatility is important to the commercial success of storage as arbitrage is fundamental to its business model: storage generally uses less expensive electricity in off peak times so that they are able to capture higher prices at other times..

There is considerable complexity in predicting levels of volatility as the market

goes through a period of unprecedented transition.

High capital costs : Most storage technologies are in early stage of

development. The costs of many technologies do not compare favourably with

conventional generation technologies 25 . Other possibilities, such as using

electric vehicles to act as a store, are still uncertain.


Pumped Hydro.

This technology is geographically limited and obtaining suitable sites

may limit further build. However, whilst they may be limited, there are sites

which are thought to be suitable and have potential for development.


New power plants and grid

capacity are likely to cost over £110bn in capital investment to 2020. Of this,

about £70-75bn is likely to be investment in new generation capacity, and the

remainder in the electricity networks 26 . Moreover, energy utilities could also

face additional financing requirements in their supply and retail businesses, for example associated with the roll out of Smart Meters, gas transmission and distribution and renewable heat policies that could take the investment

challenge toward £200bn.


rising demand for capital may need to be met in the context of a shrinking

supply of capital from the incumbent energy utilities. Financial analysts and

other experts have suggested 27 that utilities are under pressure to moderate or lower their capital expenditure programmes and to find higher-yielding and

higher-growth opportunities as a result of high debt levels, pressure to grow

dividends , falling share prices and increased pressure on credit ratings. It is

likely that they will exercise maximum discretion these assets have

longer development and construction periods and more volatile returns. In

comparison, investment in the regulated network businesses likely to

be relatively easy to finance. This guarantees returns is low risk (and therefore attractive for debt financing)


P 39

additional sources of finance will be important, other developers

are essential. Indeed, a third of on-shore and offshore wind projects in the

pipeline at the moment are being developed by companies outside the “Big 6”


discussions with investors and lenders have indicated that there are a large number of risks associated with lowcarbon generation (such as planning, grid access, technology, construction and long-term availability) which may have a much greater effect in constraining the availability of finance than revenue uncertainties.



EU ETS continues to be the primary EU wide policy driving decarbonisation

across a number of sectors in the UK economy

EU ETS not sufficient to decarbonise the electricity sector at the pace required


Electricity sector to facilitate the decarbonisation of other sectors).

The Coalition Agreement set out three reforms to the electricity market:-

Carbon price, feed-in tariff or FIT ) and an emissions performance standard (EPS)


Plans: a floor price for carbon




EPS prevent most carbon intensive unabated coal-fired power stations


Redpoint Energy report shows diff results under diff scenarios


Result shows

100gCO 2 /kWh by 2030. This is similar to the figure

previously recommended by the Committee for Climate Change in 2009. The

recent publication by the CCC for the 4 th Carbon budget recommends a lower

figure of around 50gCO 2 /kWh as a medium scenario.. It compares to a

business as usual grid intensity of approximately 200gCO 2 /kWh.

Actual targets; next year when the Government sets the UK ’s fourth carbon budget


Net welfare is measured in terms of the net present value (NPV), which is the sum of all the costs and benefits


the impact assessment quantifies these costs, but does not capture the long term benefits of avoiding dangerous climate change.

overall costs to society

costs to society under all the options for reform when compared to the baseline 34 and as a consequence the NPV is negative


over the complete lifetime of the

low-carbon generation technologies, the Government would expect the NPV

would be positive.

a 30% reduction on 1990 levels rather than a 20%

reduction, carbon price estimates would be higher which would in turn

improve the overall NPV


carbon price support as part of reform the climate change levy (and fuel

duty) and is the subject of a separate consultation 36

decisions on the carbon price support mechanism will be taken at Budget 2011.

low-carbon generators do not have to pay a price for carbon



From 2013, the EU ETS emissions cap tightens each year However, for a variety of reasons, to date the carbon price has not been stable, certain or high enough to encourage sufficient investment in low-carbon electricity generation in the UK. Supporting the carbon price in the electricity sector in the UK will increase the incentives to invest in UK low-carbon generation. EU ETS will remain an essential prerequisite


floor for carbon creates investment certainty

High levels of uncertainty over future profitability and rates of return

could increase the cost of capital for investors and deter investment

capital could be diverted into less risky forms of generation.


achieved by the climate change levy ( CCL ) and fuel duty being levied on all

fossil fuels used to generate electricity in the UK .


fossil fuels currently used to generate electricity are exempt from

CCL . The Government proposes to remove these CCL exemptions and to tax

these commodities at rates that take account of their average carbon content.

Oils are not subject to CCL but fuel duty is payable at the point oil leaves the

refinery. Currently, the duty can be reclaimed in full by the electricity generator

Government proposes to reduce the amount of fuel duty that can be reclaimed.


carbon price would need to be increased significantly above the level delivered through EU ETS.

The modelling shows that it would need to reach £50/tCO 2 by 2020 and then

increase in a straight line to the 2030 target consistent price of £70/tCO 2 .

The key factor in the effectiveness of the policy is the reaction

of potential investors, and whether the mechanism is “bankable” for the

purposes of raising finance for new low-carbon generation investments.

it would need to be combined with a continued RO, or a feed-in tariff mechanism


it directly targets the carbon externality by putting a price on emissions and

maintains the role of carbon pricing and the “polluter pays” principle at the

centre of the Government’s decarbonisation strategy. In doing this, it also

maintains more of the competitive market signals that create incentives for


carbon price support policy is implemented through the tax system

increase the proportion of tax revenues from environmental taxes; and

make the tax system more competitive, simpler, fairer and greener.


RO s and FITs.

RO extended: require suppliers to source a certain percentage of their generation from low-carbon generation. Suppliers certificates to demonstrate they had met their obligation and these certificates would have a value which reaches the generator..


Feed-in tariffs are long-term contracts between government (or an

entity on behalf of government) and a low-carbon generator, giving a

guaranteed tariff or price e.g. for 15-20 years.


V: Lots about variations on fits, and effects on investment, ro’s rejected as fits better.


Extending £ support to ccs coal and nuclear is mega new step, slipped into the pot like a minor tweak.:v



Regulated Asset Base

(RAB) model is used by regulators as a mechanism

for providing a credible commitment to the recovery of the sunk costs

associated with capital investment by regulated monopolies. In the electricity

sector, a RAB model already applies to the development and maintenance of

transmission and distribution networks. licensees are allowed to add

efficiently incurred capital expenditure to their RAB and to make a return on

that investment in line with their average cost of capital through setting tariffs

the regulator in effect means a transfer of risk from the developer to the consumer

Construction risk is transferred because the RAB is adjusted periodically, to reflect changes

costs of capital for regulated businesses are lower than for unregulated businesses 51

as such a RAB could lead to a reduction in cost of capital and as such the

support costs needed to meet the UK ’s decarbonisation objectives.

Disadvantages: significant loss of market efficiency signals



V: This is the tool to control coal (and later gas)

It is a backstop with low ambition – 600 – 450 grams co2 per mW.

The dominant consideration here is to keep our coal going, and gas because we need it as backup for intermittent renewables, as both coal and gas can be turned up and down. and there’s enough closure of coal on its way anyway.


Grandfathering means that whatever the level when the installation is built is the installation for its economic life, ie investors can be happy that costs wont go up. Certainty about profit is the word on the block.:V


V:And the eps can be turned of when needed ! :V

exceptions to the EPS where there are short-term or longer-term energy

supply emergencies. For example, in order to safeguard security of supply

such an exemption would allow coal plant, under tightly defined

circumstances, to turn off their CCS equipment at times of exceptional

demand and thus be able to output additional electricity to the grid, or it would

allow the plant to operate at a higher output (or load factor) than the

constraints imposed on its operation by an EPS.


‘zero rate,’ or otherwise differentiate, the

emissions from the biomass fuel when calculating plant carbon dioxide



the EPS are consistent with demonstrating CCS on

around 400MW (gross) of output of a new supercritical power station, and

therefore the Government does not expect any costs to the economy in

addition to the costs of the CCS Demonstration Programme

an alternative - effectively imposing a running hours limit on all

fossil-fuel power stations, both new and existing. This limit would be then

progressively tightened such that by 2030 only fossil-fuel power stations

equipped with CCS would be able to operate as baseload. The general effect

of this would be to increase the electricity price to a level where it was

economic for generators to invest in low-carbon generation, which typically

have higher costs (and higher risks). It would create significant security of

supply risks by driving early closure of existing plant and preventing new

investments in flexible generation plant.


Such an EPS is

unlikely to be viewed as a credible intervention by investors. Emissions limits

would be relatively straightforward for Government to change


Question 13: Which option do you consider most appropriate for the level of

the EPS?

Question 14: Do you agree that the EPS should be aimed at new plant, and

‘grandfathered’ at the point of consent?

Question 17: How should biomass be treated for the purpose of meeting the

EPS? What additional considerations should the government take into


Question 18: Do you agree the principle of exceptions to the EPS in the event of long-term or short-term energy shortfalls?



mechanism to explicitly reward the provision of capacity (as opposed

to only the energy from electricity generation). Such a mechanism would also be designed to reward demand-side response, to encourage the development of energy efficiency and other “smart” technologies.

a central body to maintain a set capacity margin.

This body would make an assessment of the level of spare capacity that will be provided through the energy market and then will run tenders for any additional capacity needed to make up the shortfall



Technologies such as demand side response, storage and interconnection

offer the opportunity to have a greater diversity of technologies, so improving

security of supply, as well as reducing emissions. A more dynamic demand

side also increases competition and the effective functioning of the market.

16. Demand side measures (energy efficiency, Demand Side Response (DSR)

and distributed generation) can reduce the need for investment in

infrastructure by reducing overall need and making more efficient use of

network and generation capacity. Experience from other markets (e.g. New

England USA )


scope for immediate development lies in the industrial and commercial sectors with opportunities for aggregation of firm demand response, for example a supermarket chain being able to control usage of electricity for refrigeration across a whole network of stores.


DSR could be a particularly useful tool for Distribution Network

Operators(DNOs) whose role is to manage the local electricity networks. DSR

can reduce or delay the need for local network reinforcement by smoothing

peaks in demand. However, the DNOs have no direct relationship with

electricity consumers. Two of Ofgem’s recently announced Low-Carbon

Network Fund projects address this problem by promoting a partnership

approach between suppliers and DNOs.


19. Domestic consumption offers more potential post 2020 with the likely

electrification of heat and transport, which could significantly increase the

amount of discretionary electricity use available for DSR. Increased

automation via the introduction of smart appliances and widespread use of

automated building energy management systems could play a vital role in

assisting system balancing, empowering individuals and communities to

actively participate in achieving a low-carbon future.



The GB electricity system is currently relatively unconnected to other countries electricity systems 66 . Under the current arrangements, investments in interconnection are made on commercial terms, i.e. where developers identify an opportunity for arbitrage between markets then such investments take place. However, the nature of the investments make them high risk. As a

response, Ofgem is developing a new regulated approach to interconnector

investment which will be consulted on early in 2011. There is widespread

industry support



Reform of the cash out price will improve the economic

case for storage, by making the costs of imbalance higher and more cost reflective. low short run marginal cost plant will drive low prices at times of low demand. This should make storage a more attractive investment, because it increases the opportunity for arbitrage. today, the

only market-ready technology available for large-scale deployment is pumped

storage 67 ). Going forward as technologies mature, the costs will reduce



“recognised, financed and delivered on the basis that it is a power system

resource” 68 .

a range of measures on energy efficiency end in December 2012 and will be

replaced by the Green Deal. The Green Deal = offer all households and businesses in Britain energy efficiency improvements to their properties at no upfront cost.

consumers to pay back the costs over time through

energy bills. With payments being less than the expected savings, ie pay less than now.


DSR could increase customers focus on how they can use energy more intelligently through energy management


The Energy

Intensive Industry Strategy, is a joint project between BIS and DECC , with

DEFRA involvement, which will look at greenhouse gas abatement potential in

key energy intensive sectors, in light of the move to a low carbon economy.



potentially still be under-investment in particular in generation that

is only required to run occasionally. Further, due to the cyclical nature of

investment, there would continue to be a risk that capacity margins would

remain low in some years.

do not address all of the risks to security set out in Chapter 2 and that these are set to increase as the volume of low-carbon generation increases, the Government has concluded that in addition it is necessary to introduce a capacity mechanism in order to provide greater assurance of the future security of electricity supplies. this transfers the management of the risk associated with underestimating capacity to the government from market participants.


Instead of developers receiving all their revenues from electricity sales, they receive a payment that attaches value to capacity or resource being available

By providing a regular revenue stream, it should ultimately deliver greater

investment in new capacity by reducing the cost of capital

a capacity mechanism will bring forward significant demand side response, as demonstrated by the experiences in North America discussed above.


Eg from all island ie Ireland south and north

Capacity payments are made to generators based on a measure of their

availability. The payment is broken into three sections, a fixed amount based

on forecast demand, a variable amount based on expected levels of scarcity

and an ex post payment based on actual scarcity. This mix provides a balance between providing certainty and reducing gaming. Payments are funded by charges levied on suppliers based upon their electricity consumption.


Model from usa

Capacity auction:

The current PJM market (PJM= Pennsylvania , New Jersey and Maryland is a Regional Transmission Organisation

serving much of the North East USA)

Demand side response and energy efficiency measures (negawatts) compete in the auction alongside generating capacity.

All contracted resource receive the auction clearing price for the periods they

are available, which is paid by an obligation on suppliers.



The independent SO holds a capacity auction three years in advance. To

reduce gaming the required capacity is not fixed absolutely, i.e. at low prices

the SO intentionally procures excess capacity, at high prices it procures less

than target, leaving some to be procured in incremental auctions up to the

delivery year.


Tender for Peak Load Reserve in Sweden



For illustration, the modelling

undertaken for the project, with a target margin of 10%, showed that in overall

net welfare terms a market-wide capacity mechanism had a negative NPV

impact of £0.78bn 75 and £0.7bn for a targeted capacity mechanism. However,

a positive NPV would result if a higher value was placed on security of supply

or if a lower target margin had been chosen.

61. The modelling did not include the potential for new  DSR , costs could be lower with this included

impact of a capacity mechanism on consumer bills is expected to be

small. In the modelling, the market-wide capacity mechanism added around

1% to the average annual household electricity bill, in the period to 2030. The

effect of a targeted capacity mechanism would be minimal.

P 99


Energy efficiency

73. A capacity mechanism can be designed to reward energy efficiency for the permanent reduction in demand that it offers.

in the PJM 2012/13 auction, the first

PJM auction in which energy efficiency is eligible for a capacity payment,

568.9 MW of energy efficiency measures cleared the auction, 0.4% of the

market 81 .

Under a targeted capacity mechanism, energy efficiency measures, although

not contributing to the flexibility of the system, could potentially be rewarded

for the reduction in demand offered at peak hours.

this is more complex than including other demand side technologies. For example, there may be unintended consequences

has the potential for greater market distortion.

However, given the advantages of putting increasing supply and reducing

demand on an equal footing, this possibility should be explored further.

At times of system tightness, it is more efficient if the additional resource is located close to areas of high demand. This minimises system losses and avoids any network constraints on congested

areas of the network


in the market-wide capacity auction in (PJM) there are separate capacity

auctions for locations that are experiencing distribution or transmission bottlenecks

Different auctions could beheld for different geographical areas, so that  resource in an area of high demand receive a price that is reflective of demand in that area.

it would mean, for example, that DSR was targeted at those geographical

areas in which it could provide most benefit.

static electricity from a leaf - message?

the Answer is easy

When I tell people on an ecotour jumpers keep out the cold i get blank stares.. it's not the answer they're looking for.

Energy is a luxury, but great fun technically. Living within our power on small-scale renewables is practical, I made a DVD about local people doing so, about microgeneration. Send £5 to be sent one.

I wouldnt want to live on little food, and am terrified of running out of metals, and tools. But energy? I wonder if the obsession with it isnt a bit doolally? It's like You cant take away our latest toy! we promise you anything just to keep it a bit longer!
I think the more we protect ourselves from cold the whimpier we get. First there were wind-holes, then came glass, the ultimate luxury, later curtains, recently double glazing, and now people are freaking at the cold coming through even them and installing super low U value, highly engineered non cold-bridging argon filled triple glazed windows. They could go and chop some wood instead and come in boiling.


Black mountains, Powys.

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