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Summary of Responses and Government Response to the July 2013 Consultation

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Summary of Responses and Government Response to the July 2013 Consultation Electricity Market Reform Delivery Plan: Summary of responses and Government response to the July 2013 Consultation December 2013 1 © Crown copyright 2013 You may re-use this information (not including logos) free of charge in any format or medium, under the terms of the Open Government Licence. To view this licence, visit www.nationalarchives.gov.uk/doc/open-Government-licence/ or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: [email protected]. Any enquiries regarding this publication should be sent to us at [email protected] This document is also available from our website at https://www.gov.uk/government/publications/electricity-market-reform-delivery-plan 2 Contents Background .......................................................................................................................................... 5 Executive Summary ............................................................................................................................. 6 Introduction ........................................................................................................................................ 15 Purpose of this Document ................................................................................................................. 17 Structure of this Document ............................................................................................................... 17 Summary of Responses ..................................................................................................................... 19 Question1 - Do you agree that CfD strike prices should be set comparable to the Renewables Obligation for the period 2014/15-2016/17? If not, why and what alternative would you propose?........ 20 Question 2 - The methodology for setting Renewables Obligation-comparable strike prices is described in Box 1 and the resulting strike prices are in Table 1. Do you agree that the strike prices we have set offer support that is comparable with the Renewables Obligation? ......................................... 21 Question 3 - We propose that where technology costs are expected to decline, strike prices should decline over time to reflect technology cost reductions and ensure value for money. Do you agree that this the most appropriate basis on which strike prices should change over time? If not, why and what alternative would you propose? ............................................................................................................ 27 Question 4 - Do you believe that the recommended strike prices shown in Table 1 change over time in a way that appropriately reflects technology cost reductions and ensures value for money? ................ 28 Question 5 - Do you agree with the key assumptions underpinning the strike price analysis? ............. 31 Question 6 - Do you agree with our judgement that setting strike prices consistent with Core Scenario 32% (described above and in the Report from the System Operator at Annex E) is the best way to balance the Government’s objectives of renewables deployment and affordability? If not, please state why. ...................................................................................................................................................... 38 Question 7 - Do you agree with our proposed approach by technology? Please provide evidence to support your position. ........................................................................................................................... 40 Question 8 - We have not set a strike price for (biomass) co-firing plants because our preference is for conversions, which are more sustainable and provide higher levels of renewable generation. Do you agree with this approach? .................................................................................................................... 57 Question 9 - Government’s 2012 Bioenergy Strategy concluded that support for new dedicated biomass should be treated with caution given the lock-in risks for this technology and its relatively high costs of carbon abatement compared to biomass co-firing/conversions. In line with this conclusion, we have not set a strike price for dedicated biomass without CHP. Do you agree with this approach? ...... 58 Question 10 - We have not set a strike price for standard bioliquids, as we do not wish to divert this technology from more suitable sectors such as transport. Do you agree with this approach? ............... 60 Question 11 - We have not set a strike price for geopressure since the technology is at development stage, and no geopressure projects have come forward through the Renewables Obligation. Do you agree with this approach? .................................................................................................................... 61 Stakeholder Responses – Capacity Market Reliability Standard .................................................... 62 Question 12 - Do you agree with our proposed reliability standard of 3 hours LOLE? ......................... 62 3 Question 13 - Do you agree with the methodology underpinning the reliability standard that is to calculate this using the value of lost load and the cost of new entry? ................................................... 62 Question 14 - Do you agree with the analysis of the value of lost load as described on Page 48 and in Annex C? ............................................................................................................................................. 64 Question 15 - Do you agree with our estimate of the cost of new entry as described on page 49 and in Annex C? ............................................................................................................................................. 65 Question 16 - Do you agree the reliability standard should be reviewed every five years to reflect any future evidence in the value of lost load and the cost of new plant entry? ............................................. 67 Question 17 - Do you agree with the proposed methodology for the auction demand curve? .............. 68 Annex A – List of respondents ............................................................................................................. 69 4 Background From 17th July to 25th September 2013 the Government consulted on the draft strike prices for the Contracts for Difference for renewable technologies and the reliability standard for the Capacity Market in the draft Electricity Market Reform (EMR) Delivery Plan. This document presents an overview of issues raised by stakeholders and the Government responses. 5 Executive Summary This section gives an overview of the main points made in the consultation responses as well as the Government’s response to these. Further information on the responses received for each consultation question can be found in the section ‘Summary of Responses’. CfD strike price methodology for renewables There was general agreement that Contracts for Difference (CfD) strike prices should be set to be as broadly equivalent to the Renewables Obligation (RO). Some consumer groups felt that the strike prices should be set lower, while some industry groups felt that, as a new instrument, strike prices should be set to be more favourable during the period in which the RO and CfD are both available to incentivise uptake of the CfD. The Government has considered these responses. It believes there is a case for setting the CfD strike prices at broadly equivalent levels to the RO in order to enable a smooth transition between the instruments and avoid investors disproportionately preferring one or the other, while the two instruments are operating in parallel. However, the RO-X methodology is a guideline and not a rigid equivalence. There are clearly different assumptions that can be made about factors such as future wholesale prices, and there is no commitment on the Government’s part to maintain this equivalence in future. Some felt that differences in the terms of the RO and CfD instruments made it difficult to compare them in practice. 6 The Government has set strike prices at a level that ensures broad equivalence, including taking account of key differences such as the shorter term of the CfD (15 years), the lower cost of capital, and the different inflation indices. However, given differences in how the instruments protect investors against risk and the uncertainty over some assumptions, it is not possible to achieve perfect equivalence. Strike prices and technology costs Several respondents said that strike prices were too low – especially for the offshore wind strike price. Some respondents such as consumer groups argued that strike prices were too high and should be reduced across the board. Some industry respondents submitted evidence suggesting that the costs of their projects were higher than the averages assumed in the DECC technology costs reports. Some felt that certain costs such as potential increases in balancing costs of constrained wind generation had not been adequately accounted for in the setting of strike prices. Most consultation responses agreed with the principle of cost degression. However, respondents made a number of detailed points about whether technology costs were indeed coming down for all technologies, and whether the rates of cost reduction assumed were correct. Others felt that the rates of degression should be directly linked to rates of deployment. Some
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