1. Overview of the UK Electricity Market

2. Structure
Part 1: Some general context
Part 2: The retail market
Part 3: The networks
Part 4: The wholesale market
Part 5: Thinking system wide

3. Who are Ofgem? About us Office of Gas and Electricity Markets (Ofgem)
Regulator for both gas and electricity markets in Great Britain (separate regulator for Northern Ireland)
Our statutory Principal Objective and general duties
Protect the interests of energy consumers
Existing and future consumers
Environmental objects
Security of supply
European objectives
National Regulatory Authority and National Competition Authority
Regulation of the network monopolies through licences and domestic and EU legislation; price controls; economic and efficient tests.
Suppliers in competitive market. No price controls but some regulation of behaviours through licences.

4. Highly regulated sector
Key characteristics of the energy sector
Energy characteristics influence design and effectiveness of the markets:
Essential product: cost and security of supply / carbon = public policy issues
Highly regulated sector
Complex / detailed market rules
Monopoly networks with technical complexities
Keen to have an interactive presentation. Aware have done some training, Assume they have knowledge of the market but important to go through some key background points.
Key messages:
Wholesale is technical, complex, artificial, highly regulated market
We will play a full role assisting the CMA investigation
Focus of today is how we monitor the wholesale market. In addition to this we will provide background slides.
Things we won’t cover today:
Future drivers of change: EMR, Smart, elec and gas SCRs,
Vertical integration and different business models
Profitability
Detail of Ofgem’s proposals, eg liquidity
Barriers to entry for small suppliers / further detail on theories of harm
Networks / regulated monopolies, interconnection
 But we will make a list of things that we may wish to have further teach-ins, discussions, calls, etc.
Challenges to differentiate products
Consumer engagement weak

5. Bills & the breakdown of bills

6. Bills & the breakdown of bills
Keen to have an interactive presentation. Aware have done some training, Assume they have knowledge of the market but important to go through some key background points.
Key messages:
Wholesale is technical, complex, artificial, highly regulated market
We will play a full role assisting the CMA investigation
Focus of today is how we monitor the wholesale market. In addition to this we will provide background slides.
Things we won’t cover today:
Future drivers of change: EMR, Smart, elec and gas SCRs,
Vertical integration and different business models
Profitability
Detail of Ofgem’s proposals, eg liquidity
Barriers to entry for small suppliers / further detail on theories of harm
Networks / regulated monopolies, interconnection
 But we will make a list of things that we may wish to have further teach-ins, discussions, calls, etc.

7. The supply chain Electricity and gas Gas Consumer Electricity
Regulated monopolies
Offshore production, LNG, pipelines and interconnectors sell their outputs on the wholesale market
Bilateral and exchange trading between producers, suppliers, traders and larger consumers
Suppliers purchase energy in the wholesale market for their consumers.
High-pressure gas network owned and operated by National Grid Gas (NGG)
8 regional gas distribution networks (GDNs)
Gas
Upstream production
Wholesale market
Transmission networks
Distribution networks
Retail
market
Consumer
Electricity generators and interconnectors sell their output on the wholesale market
Bilateral and exchange trading between generators, suppliers, traders and larger consumers
High pressure electricity network owned and operated by National Grid Electricity Transmission (NGET)
14 regional electricity distribution network operators (DNOs)
Suppliers purchase energy in the wholesale market for their consumers
Electricity

8. Part 2: What is the retail market?
The retail market is:
The place were energy companies sell energy to consumers and businesses
The only interaction between consumers and the market
Who are the participants
Generally perceived as the Big 6 and independents
Price comparison websites and intermediaries
Consumers

9. How is the retail market changing?
The Big 6’s joint market share, which had been relatively stable during 2009-early 2012, has fallen 6% as a consequence of independent suppliers’ steady growth from mid In June 2014 their market share was 7%, about four times the market share they had in 2012

10. Switch & save
Keen to have an interactive presentation. Aware have done some training, Assume they have knowledge of the market but important to go through some key background points.
Key messages:
Wholesale is technical, complex, artificial, highly regulated market
We will play a full role assisting the CMA investigation
Focus of today is how we monitor the wholesale market. In addition to this we will provide background slides.
Things we won’t cover today:
Future drivers of change: EMR, Smart, elec and gas SCRs,
Vertical integration and different business models
Profitability
Detail of Ofgem’s proposals, eg liquidity
Barriers to entry for small suppliers / further detail on theories of harm
Networks / regulated monopolies, interconnection
 But we will make a list of things that we may wish to have further teach-ins, discussions, calls, etc.

11. The retail challenges Promoting customer engagement
Building trust & confidence
Promoting customer engagement
Ensuring competition works for all customers
Moving to a smarter world
Making sure wholesale price rises are passed through
Keen to have an interactive presentation. Aware have done some training, Assume they have knowledge of the market but important to go through some key background points.
Key messages:
Wholesale is technical, complex, artificial, highly regulated market
We will play a full role assisting the CMA investigation
Focus of today is how we monitor the wholesale market. In addition to this we will provide background slides.
Things we won’t cover today:
Future drivers of change: EMR, Smart, elec and gas SCRs,
Vertical integration and different business models
Profitability
Detail of Ofgem’s proposals, eg liquidity
Barriers to entry for small suppliers / further detail on theories of harm
Networks / regulated monopolies, interconnection
 But we will make a list of things that we may wish to have further teach-ins, discussions, calls, etc.

12. Part 3: The networks Transmission High voltage networks
3 companies onshore.
Distribution
Lower voltage networks.
14 regional areas.
Offshore
Offshore Transmission Owner
Appointed via tender.
Interconnection
Owners of interconnectors.
Also certified as TSOs
The System Operator
Operates the grid.
Coordinates planning and development.
Keen to have an interactive presentation. Aware have done some training, Assume they have knowledge of the market but important to go through some key background points.
Key messages:
Wholesale is technical, complex, artificial, highly regulated market
We will play a full role assisting the CMA investigation
Focus of today is how we monitor the wholesale market. In addition to this we will provide background slides.
Things we won’t cover today:
Future drivers of change: EMR, Smart, elec and gas SCRs,
Vertical integration and different business models
Profitability
Detail of Ofgem’s proposals, eg liquidity
Barriers to entry for small suppliers / further detail on theories of harm
Networks / regulated monopolies, interconnection
 But we will make a list of things that we may wish to have further teach-ins, discussions, calls, etc.

13. Network Costs post privatisation
Keen to have an interactive presentation. Aware have done some training, Assume they have knowledge of the market but important to go through some key background points.
Key messages:
Wholesale is technical, complex, artificial, highly regulated market
We will play a full role assisting the CMA investigation
Focus of today is how we monitor the wholesale market. In addition to this we will provide background slides.
Things we won’t cover today:
Future drivers of change: EMR, Smart, elec and gas SCRs,
Vertical integration and different business models
Profitability
Detail of Ofgem’s proposals, eg liquidity
Barriers to entry for small suppliers / further detail on theories of harm
Networks / regulated monopolies, interconnection
 But we will make a list of things that we may wish to have further teach-ins, discussions, calls, etc.
Network costs are determined via periodic price controls.
Our RIIO framework focusses on what customers value.
Network costs recovered from system users via charges.

14. And the role of the SO will need to evolve.
Network Challenges
Making sure RIIO delivers
Thinking about more competition
Getting interconnection built
Betting planning/ coordination
Continuing to drive down costs but ensure investment
Keen to have an interactive presentation. Aware have done some training, Assume they have knowledge of the market but important to go through some key background points.
Key messages:
Wholesale is technical, complex, artificial, highly regulated market
We will play a full role assisting the CMA investigation
Focus of today is how we monitor the wholesale market. In addition to this we will provide background slides.
Things we won’t cover today:
Future drivers of change: EMR, Smart, elec and gas SCRs,
Vertical integration and different business models
Profitability
Detail of Ofgem’s proposals, eg liquidity
Barriers to entry for small suppliers / further detail on theories of harm
Networks / regulated monopolies, interconnection
 But we will make a list of things that we may wish to have further teach-ins, discussions, calls, etc.
And the role of the SO will need to evolve.

15. Part 4: The wholesale market
Part 1: The industry structure, roles & responsibilities.
Part 2: The retail market
Part 3: The networks
Part 4: The wholesale market
Keen to have an interactive presentation. Aware have done some training, Assume they have knowledge of the market but important to go through some key background points.
Key messages:
Wholesale is technical, complex, artificial, highly regulated market
We will play a full role assisting the CMA investigation
Focus of today is how we monitor the wholesale market. In addition to this we will provide background slides.
Things we won’t cover today:
Future drivers of change: EMR, Smart, elec and gas SCRs,
Vertical integration and different business models
Profitability
Detail of Ofgem’s proposals, eg liquidity
Barriers to entry for small suppliers / further detail on theories of harm
Networks / regulated monopolies, interconnection
 But we will make a list of things that we may wish to have further teach-ins, discussions, calls, etc.

16. Part 4: The wholesale market
The wholesale market is:
The place where generators sell their energy
The place where suppliers buy their energy
Supply and demand must be matched, or balanced, at all times (in the case of electricity in real time). The market incentivises suppliers and electricity generators to balance their own supply and demand positions.
Overall responsibility for balancing supply and demand sits with the System Operator.
Who are the participants
The Big 6 and independent suppliers
Generators, Interconnector/LNG operators
Banks and financial institutions, Hedge funds
Exchanges
Brokers
National Grid, as system operator
Elexon as the BSC Company

17. Wholesale market design
The NETA/BETTA market which replaced the Electricity Pool is based on the following principles
The market should incentivise parties to trade as they wish to manage their risk (with prices set based on the cost of the marginal plant).
The role of the SO should be minimised – “residual balancing”.
Parties which causes costs should face the costs they cause .
Market rules should be capable of being changed by market players.
There should be a single GB price/ bidding zone.

18. Sources of supply

19. Sources of supply Electricity
Power generation in recent years dominated by coal, gas and nuclear
Coal has been providing majority of seasonal swing, as plant look to save running hours under environmental legislation
Gas generation expected to play a key role providing flexibility going forwards

20. Buy & sell power from many years ahead to day ahead.
The timescales for power trading
Forward Markets
Buy & sell power from many years ahead to day ahead.
In order to hedge risks.
Day Ahead/ Spot markets
Where a lot of power is traded.
Market coupled with Europe.
Intraday Markets
Allow the fine tuning of positions near real time.
Balancing Markets
SO run market to balance demand & supply.
Based on bids and offers in a balancing mechanisms.

21. Over-the-Counter (OTC)
Trading gas and power
Over-the-Counter (OTC)
Exchanges
Bilateral agreements
Opaque market
Facilitated by brokers and Price Reporting Agencies
Counterparties won’t necessarily post collateral
Act as an intermediary between parties
Transparent market
Counterparties have to post collateral
Party A
Party B
Financial flow
Party A
Party B
Exchange
Delivery of commodity

22. Price Formation Generators Interconnectors
Costs of production mainly determined by:
Cost of plant
Commodity prices
Plant reliability and efficiency
Government policies e.g. carbon price floor/Contracts for Difference
Costs of production mainly determined by:
Cost of interconnector
Prices in other markets
Exchange rates
Interconnector reliability and efficiency
Gas
Conventional
Coal
Oil
Keen to have an interactive presentation. Aware have done some training, Assume they have knowledge of the market but important to go through some key background points.
Key messages:
Wholesale is technical, complex, artificial, highly regulated market
We will play a full role assisting the CMA investigation
Focus of today is how we monitor the wholesale market. In addition to this we will provide background slides.
Things we won’t cover today:
Future drivers of change: EMR, Smart, elec and gas SCRs,
Vertical integration and different business models
Profitability
Detail of Ofgem’s proposals, eg liquidity
Barriers to entry for small suppliers / further detail on theories of harm
Networks / regulated monopolies, interconnection
 But we will make a list of things that we may wish to have further teach-ins, discussions, calls, etc.
Nuclear
Low carbon
Wind
Hydro

23. Price Formation (2) Supply curve: Demand curve:
Combining the costs on the previous slide gives a supply curve…
Demand curve:
Demand, on the other hand, is determined by:
Temperature
Light
Weekday/weekend
Over the long-term: GDP
Demand is quite inelastic, i.e. not very responsive to changes in price, and therefore has a steep curve:
Supply
Gas
Oil
Coal
Interconnectors
Renewables& Nuclear
Renewables& Nuclear 23

24. Balancing the system Electricity t-1 t t+0.5
Gate Closure – trading stops
Settlement period (30 mins)
Forward trading
Balancing Mechanism
Electricity
Parties submit:
To National Grid
Final Physical Notifications (FPNs)
Bids and Offers
To Elexon
3. Contract notifications
t-1 t
t+0.5
NG accepts bids/offers to balance the system

25. Wholesale Challenges Rewarding flexibility/ encouraging investment
Ensuring liquidity
Rewarding flexibility/ encouraging investment
Greater European integration
Getting the demand side involved
Interactions with policy initiatives

26. It’s all about the system!
We can think about individual parts of the electricity sector.
But it’s all part of one very complex system.
A tweak in one place can have big consequences in another.
The biggest challenge is ensuring coherence.
We at a point where lots is changing.
Ensuring security of supply, keeping costs down & decarbonisation rely on getting things right!

27. MIR now will lead to faster conclusion to market uncertainty
Market Investigation Reference (MIR)
Why?
“Reference test” threshold met: reasonable grounds to suspect features of market restrict/distort competition
Why now?
Still expect RMR reforms to directly address market failings, but investigation will clear the air and allow CMA to ensure right industry structure is in place
Scope
Supply of gas & electricity to GB households and small businesses
Features of the market that could harm competition
Recognising Ofgem’s RMR remedies and future developments
Process
Jul/14-Jan/16: CMA market investigation – 18 months, can add 6 months
Jan/16-Jul/16: CMA remedies (if required) – 6 months, can add 4 months
MIR now will lead to faster conclusion to market uncertainty