Electricity Supply Industry Past Present Future

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IMPERIAL COLLEGE LONDON

Faculty of Natural Sciences

Centre for Environmental Policy

The Electricity Supply Industry: Past, Present, Future

By

Alex Whitney

A report submitted in partial fulfilment of the requirements for the MSc and/or the DIC.

07/09/2011

DECLARATION OF OWN WORK

I declare that this thesis

The Electricity Supply Industry: Past, Present, Future

is entirely my own work and that where any material could be construed as the work of others, it is fully cited and referenced, and/or with appropriate acknowledgement given.

Signature:.....................................................................................................

Name of student (Please print):.................................................................

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AUTHORISATION TO HOLD ELECTRONIC COPY OF MSc THESIS

Thesis title:

The Electricity Supply Industry: Past, Present, Future

Author: Alex Whitney

I hereby assign to Imperial College London, Centre of Environmental Policy the right to hold an electronic copy of the thesis identified above and any supplemental tables, illustrations, appendices or other information submitted therewith (the thesis) in all forms and media, effective when and if the thesis is accepted by the College. This authorisation includes the right to adapt the presentation of the thesis abstract for use in conjunction with computer systems and programs, including reproduction or publication in machine-readable form and incorporation in electronic retrieval systems. Access to the thesis will be limited to ET MSc teaching staff and students and this can be extended to other College staff and students by permission of the ET MSc Course Directors/Examiners Board.

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ContentsIntroduction ......................................................................................................................... 6 Chapter One: A Brief History of the Grid ................................................................................. 7 1.1 Beginnings ...................................................................................................................... 7 1.2 Nationalisation ............................................................................................................... 8 1.3 Privatisation ................................................................................................................. 10 1.4 Re-Integration .............................................................................................................. 11 1.5 Competition ................................................................................................................. 15 1.6 NETA ............................................................................................................................. 17 1.7 In review....................................................................................................................... 20 1.8 Renewables Investment ............................................................................................... 22 1.9 UK Policy ...................................................................................................................... 23 1.10 Electricity Market Reform .......................................................................................... 26 Chapter Two: The Electricity Generation Industry ................................................................ 28 2.1 Model Outline .............................................................................................................. 28 2.2 The Economics of Electricity Generation ..................................................................... 29 2.3 Levelised Cost Model ................................................................................................... 31 2.4 The Grid Today ............................................................................................................. 35 2.5 FPN and MEL Data........................................................................................................ 36 2.6 Balancing Mechanism Data .......................................................................................... 39 2.7 Generation Mix ............................................................................................................ 43 2.8 Prices ............................................................................................................................ 46 2.9 The Big Six .................................................................................................................... 50 Chapter Three: Grid Model .................................................................................................... 53 3.1 Model Design ............................................................................................................... 53 3.2 Demand, Availability, Capacity .................................................................................... 54 3.3 Marginal Cost Curve ..................................................................................................... 54 3.4 Outcome ...................................................................................................................... 57 3.5 Scenarios ...................................................................................................................... 60 3.6 Results .......................................................................................................................... 61 3.7 Oversupply ................................................................................................................... 63 3.8 Storage ......................................................................................................................... 64 3.9 Modelling Storage ........................................................................................................ 65

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3.10 Results ........................................................................................................................ 68 Conclusion .............................................................................................................................. 71 References ............................................................................................................................. 72 A description of the main generation technologies .......................................................... 77 UK plant statistics............................................................................................................... 78

List of Figures Page Fig 1.1 Takeovers and mergers of ex-publically-owned enterprises 1995-2011 Fig 1.2 Price support and costs for wind power by country Fig 2.1 Levelised Cost model indicative results by technology Fig 2.2 Interpreted FPN data Fig 2.3 Interpolation rules Fig 2.4 TGSD data and FPN data Fig 2.5 Load factors by plant 2010 Fig 2.6 Load factors by plant, season and settlement period, 2010 Fig 2.7 BMU prices plant and settlement period, 2010 Fig 2.8 BMU prices by cumulative volume and by plant, 2010. Log-log plot Fig 2.9 Detail of Fig 2.5, linear plot Fig 3.1 Marginal cost curve components Fig 3.2a Marginal cost curves by plant Fing 3.2b Overall MCC Fig 3.3a Sample model output Fig 3.3b Sample model prices Fig 3.4a Real-world output Fig 3.4b Real-World prices Fig 3.5 Load factors by year for each scenario Fig 3.6 Oversupply by year Fig 3.7 Modelling Storage 14 26 34 38 39 42 44 46 48 49 49 55 56 56 59 59 59 59 63 64 67

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Introduction

The UKs electricity supply industry (ESI) is poised somewhere between flux and crisis. Our deregulated industry structure has been so lauded and imitated it has become known as the British Model, yet the industry is perpetually under investigation for price gouging and anticompetitive behaviour. The regulator is frequently criticised as toothless and our legislation is often byzantine, self-contradictory, self-defeating or all three. There are no British utilities with anything like the international reach of EdF or E.on and a string of high profile corporate failures have left the majority of our infrastructure in foreign hands. Despite having the best renewable resources in the EU, our generation mix is 80% dependent on coal and gas and investment has been steadily dropping. How did we get into this mess and what happens next? This dissertation is a three-part attempt to answer that question. In the first chapter I trace the history of the grid from its beginnings, paying particular attention to the effects, intended or otherwise, of the 1990 privatisation. I investigate whether the particular structure of the ESI has helped or hindered attempts to kick-start the green revolution. I contrast the UKs approach with the rest of the EU and ask whether the recent Energy Market Reform marks a change in direction. In the second chapter I begin my empirical investigation. I obtain and process data from a variety of sources in order to sketch a detailed picture of both the physical operation of the grid and the underlying economic. I construct a merit order of dispatch and create a model to calculate the levelised cost of various technologies for use in the next chapter. In the third chapter I create a model to estimate the generation mix and costs of electricity through to 2025. Drawing upon section two, I create four possible scenarios for the grid and quantify indicators such as costs, carbon emissions and reliability of supply. I extend the model to investigate the effects of adding energy storage capabilities to the grid and comment upon my results. Finally, I offer some conclusions on the lessons of the past and the challenges of the future. 6

Chapter One: A Brief History of the Grid1.1 BeginningsThe history of the electricity supply industry (ESI) is a fascinating case study of the political history of the UK. Since its inception the ebbs and flows of the industry have mirrored the prevailing political winds, from laissez faire in the 19th and early 20th centuries to the postwar consensus of embedded liberalism, and the post-Thatcher neoliberal turn. This review will draw a sketch history of the grid with particular emphasis upon developments since privatisation. Up until the early 20th century, there was no national grid per se. In the mid-to-late 19th century myriad small networks sprung up, privately owned and operated for profit (the first public utility was a small hydro-electric facility established in Surrey in 1881). As a new technology, electricity had only a few specific uses. The initial motivation came from providing street (and later residential) lighting in competition with town gas. In the absence of common standards relating to voltage, frequency and interconnection, these grids were for the most part non-interoperable (Jamasb & Pollitt, 2007). However it was in the early 20th century, as the domestic and commercial uses of electricity began to multiply, that of the strategic importance of electrical power became evident, and in 1926 the Central Electricity Board was formed to impose order upon the industry. The CEB created operating standards, built high-voltage long-distance interconnects and oversaw the construction of new capacity. The National Grid was created in 1933 to oversee transmission infrastructure. Expansion, integration and technological

improvements began to increase the efficiency and reliability of the supply (Chick, 1995). Yet at this point it is thought that there was still over 600 suppliers operating 400 power stations at any of 19 different voltages (Chesshire, 1996) a proliferation attributed to a lack of a cohesive central government programme for the development of utilities (Byatt, 1979). The essential inefficiency of the existing system coupled with the fact that electricity distribution had monopolistic economies of scale meant that public ownership was (in retrospect) inevitable. This was finally realised in 1947, as part of the radical reinvention of the state engineered by the post-war Labour government who also nationalised coal, transport, gas, iron and steel, healthcare, Cable and Wireless, British Airways and the Bank of England. 7

1.2 NationalisationThrough this process the ESI was formalised into its current structure, which vertical links together four components: generation, transmission, distribution and supply. Point-sources of power generation scattered throughout the nation are interconnected by a high-voltage transmission network, usually overhead pylons. The transmission network feeds into a multitude of (non-interconnected) lower-voltage distribution networks which wind their way capillary-like into every village and street corner in the country. Suppliers contract local demand and oversee metering and billing. The whole ESI operates at 50Hz (threephase) and generators must synchronise at this frequency before they can transmit power. Electricity flows roughly linearly through the system and substations are positioned throughout the network to step the voltages down from 400kV to 275kV, 132kV,33kV, 11kV, 6kV, 450V and finally 240V (single phase) in the home (National Grid Electricity Transmission, 2011) The British Electrical Authority, later the Central Electricity Generating Board (CEGB), was instituted as a vertical monopoly in control of generation and transmission. Distribution, supply and customer services were the responsibilities of 14 regional Area Electricity Boards (AEBs), and this arrangement remained relatively unchanged for the next 43 years. Under nationalisation, integration and standards compliance advanced quickly. During the two decades following the reform, the UK enjoyed unprecedented economic growth, and this was coupled with a huge increase in demand for power as the generation that had never had it so good filled their homes with electrical appliances. As a powerful and highly centralised agency, the CEGB was well placed to meet this growing demand and embarked on a huge plant-building program. Installed generation capacity increased from 16 GW to 65 GW between 1951 and 1971 (or from 0.3 kW to 1.2 kW per capita), whilst total electricity generation grew from 57 to 221 TWh (MacLeay et al., 2011). Indeed a government report from 1969 recommends scaling back the program due to oversupply. (Truly, that was a different era - the same report states that the government expects investment to show a return of at least 8% in real terms and that however careful the forecasting... expenditure generally falls appreciably short of the approved figures.) (Nationalised Industries Review, 1969).

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This level of success was in large part due to the fact that t...