Overview of the UK
Electricity Market
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
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.
3
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
Monopoly networks with
technical complexities
Complex / detailed
market rules
Challenges to differentiate
products
Consumer
engagement weak
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Bills & the breakdown of bills
5
Bills & the breakdown of bills
The supply chain
Electricity and gas
REGULATED MONOPOLIES
GAS
ELECTRICITY
Offshore
production, LNG,
pipelines and
interconnectors
sell their
outputs on the
wholesale
market
UPSTREAM
PRODUCTION
Bilateral and
exchange
trading between
producers,
suppliers,
traders and
larger
consumers
WHOLESALE
MARKET
Electricity
generators and
interconnectors
sell their output
on the
wholesale
market
Bilateral and
exchange
trading between
generators,
suppliers,
traders and
larger
consumers
High-pressure
gas network
owned and
operated by
National Grid
Gas (NGG)
8 regional gas
distribution
networks
(GDNs)
Suppliers
purchase energy
in the wholesale
market for their
consumers.
TRANSMISSION
DISTRIBUTION
RETAIL
NETWORKS
NETWORKS
MARKET
14 regional
electricity
distribution
network
operators
(DNOs)
Suppliers
purchase energy
in the wholesale
market for their
consumers
High pressure
electricity
network owned
and operated by
National Grid
Electricity
Transmission
(NGET)
CONSUMER
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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
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 2012.
In June 2014 their market
share was 7%, about four times
the market share they had in
2012
Switch & save
The retail challenges
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
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.
Network Costs post privatisation
Network costs are determined via periodic price controls.
Our RIIO framework focusses on what customers value.
Network costs recovered from system users via charges.
Network Challenges
Making sure RIIO
delivers
Thinking about
more competition
Getting
interconnection
built
Betting planning/
coordination
Continuing to drive
down costs but
ensure investment
And the role of the SO will need to evolve.
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
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
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.
Sources of supply
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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
•
120
100
Other fuels
Oil
TWh
80
Pumped Storage
Bioenergy
60
Wind and Solar
Hydro (natural flow)
40
Gas
Coal
20
Nuclear
0
2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1
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In order to
hedge risks.
Market
coupled with
Europe.
Allow the fine
tuning of
positions near
real time.
Balancing Markets
Where a lot of
power is
traded.
Intraday Markets
Buy & sell
power from
many years
ahead to day
ahead.
Day Ahead/ Spot markets
Forward Markets
The timescales for power trading
SO run market
to balance
demand &
supply.
Based on bids
and offers in a
balancing
mechanisms.
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Trading gas and power
Over-the-Counter (OTC)
• 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
Financial flow
Party A
Exchanges
Party B
Party B
Delivery of
commodity
Exchange
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Price Formation
Generators
Gas
Conventional
Coal
Oil
Nuclear
Low carbon
Wind
Hydro
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
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Price Formation (2)
8
Oil
6
4
Renewa
bles&
Nuclear
0
0
Coal
2
Gas
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:
Price
Supply
10
Interconnectors
Cost (£/MWh)
Supply curve:
Combining the costs on the previous slide
gives a supply curve…
10
8
6
4
2
4
6
8
10
Maximum Export Limit (MW)
2
0
0
2
4 Demand 6
8
Quantity
10
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Balancing the system
Gate Closure – trading
stops
Settlement
period (30 mins)
Electricity
Forward trading
Balancing Mechanism
Parties submit:
To National Grid
1. Final Physical Notifications
(FPNs)
2. Bids and Offers
To Elexon
3. Contract notifications
t-1
t
t+0.5
NG accepts bids/offers to balance
the system
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Wholesale Challenges
Ensuring liquidity
Rewarding
flexibility/
encouraging
investment
Greater European
integration
Getting the
demand side
involved
Interactions with
policy initiatives
25
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!
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Market Investigation Reference (MIR)
Why?
Why now?
 “Reference test” threshold met: reasonable grounds to suspect features of
market restrict/distort competition
 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
 Supply of gas & electricity to GB households and small businesses
Scope
 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
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