14ELP0/644: Energy System Investment and Risk Management Unit 2D: Electricity Markets and Renewables Simon Watson, Loughborough University

Overview Support mechanisms for renewables in the UK Feed-in Tariff NETA/BETTA and renewables An example: Black Law wind farm The effect of wind power on imbalance prices Impact of renewables on the German electricity market

Non-Fossil Fuel Obligation Nuclear liabilities Chance to stimulate renewables market Levy on all electricity sold Projects bid to generate for given price Projects selected to fill capacity of each technology tranche Successful projects paid bid price for long term (15 year) contract from levy

NFFO Prices NFFOPrice (p/kWh) NFFO 1 (1990)7.51 NFFO 2 (1991)8.78 NFFO 3 (1994)4.84 NFFO 4 (1997)3.59 NFFO 5 (1998)2.71

Renewables Obligation Obligation on all suppliers to source generation from RE (3% 2002/2003 – 15% 2014/2015) Can ‘buy-out’ at £44.33/MWh (2015/2016) Buy-out proceeds recycled to compliant suppliers Generator receive renewable obligation certificates (ROCs) which can be sold separately to electricity Number of ROCs/MWh depends on technology Buy-out price and recycled proceeds set ROC value To be fully replaced by a Contracts for Differences mechanism by March 2017

ROC Values

New CfD Mechanism Strike price compared to monthly APX/N2Ex price

Climate Change Levy Levy on all energy sold to all non-domestic consumers £5.54/MWh (2015/2016 prices) Renewable electricity exempt Renewable generators receive Levy Exemption Certificates (LECs) which are sold with electricity to supplier

Feed-in Tariff For renewable energy generation <5MW Guaranteed price for electricity generated AND extra bonus for that exported (up to 4.85p/kWh) Banded depending on technology and size TechnologyBandTariff (p/kWh)Duration (years) Wind<=1.5kW Wind>1.5-15kW Wind>15-100kW Wind> kW Wind> kW Wind>1.5-5MW st April 2015 – 31 st March 2016

Black Law Wind Farm Output 6/3/14 to 12/3/14

Scenario: Black Law produces a forecast of power output based on persistence every 6 hours for t+1h to t+6h Generator has a fixed price contract of £45/MWh for output What is the exposure to imbalance prices?

Actual vs Forecast

System Buy and Sell Prices 6/3/14 to 12/3/14

Revenue Earned During the Week Contract worth £45/MWh Exposure to imbalance prices due to error in forecast reduces value to £42.13 (6.4% reduction) Just spilling power and accepting SSP would net £37.21 (17.3% reduction)

Reducing Exposure Cost of balancing the system placed on those who cause imbalance rather than averaged over whole market (unlike pool) Better forecasting Aggregation/consolidation Storage, combining with another more controllable renewable energy generation source

Effect of Wind Power on GB Imbalance Prices Present UK capacity is reducing prices by ~£4.11/MWh

The German Experience Courtesy of E.ON

Effect of Renewables on German Market Decreasing revenue potential for conventional power plants Fewer operational hours/year and lower prices Midday price peak has disappeared Price depression during hours around midday visible

Smoothing of the Midday Peak Courtesy of RWE

Summary Support mechanisms for renewables has evolved in UK Some challenges for variable power source in an ex-ante electricity market with dual imbalance prices UK imbalance prices reduced by wind power German market prices reduced by renewables – challenge for conventional plant