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    16 Jan 2020

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Report name - year quarter PIMR

This Pöyry Independent Market Report (PIMR) by Pöyry Management Consulting describes the drivers for the value of electricity from generators accredited under the United Kingdom’s Renewables Obligation (RO) support scheme. We describe this support scheme and the electricity market in Great Britain (GB) and provide projections for each component element of value over the period 2018/19 to 2036/37. This edition of the report was published in December 2018 with the market outlook reflecting our Q4 2018 market modelling and price projections.

Changes Applied

The main changes introduced in this update in relation to the principal drivers of wholesale electricity price projections are summarised below.

  1. Fuel and carbon prices
    1. Carbon prices are higher in the 2030s reflecting visibility in the modelling of the ever-tightening market after 2040.
    2. Long-term gas prices are slightly lower due to less oil indexation (High), and an upward revision to US shale gas production (Central).Long-term coal prices are lower in all three scenarios due to lower European coal demand.
  2. Electricity demand
    • No changes in the quarter.
  3. Generation capacity mix:
    • Greater capacitites of onshore wind due to greater merchant capacitites and an updated generation profile for repowered sites enabling an accelereated build out. In the long-term, the high pace of decearbonisation leads to the emergence of CCS biomass and hydrogen as a generation fuel in the High and Central scenario.
  4. Renumeration of capacity:
    • Following the suspension of the Capacity Market, the issue is being followed closely. The modelling of the Capacity Market remains unchanged between quarters.
  5. Technology costs
    • Technology costs have broadly remained unchanged from the previous quarter.
  6. Exchange rate:

The main changes introduced in this update in relation to the principal drivers of wholesale electricity price projections are summarised below.

  1. Fuel and carbon prices
    1. Carbon prices are higher in the 2030s reflecting visibility in the modelling of the ever-tightening market after 2040.
    2. Long-term gas prices are slightly lower due to less oil indexation (High), and an upward revision to US shale gas production (Central).Long-term coal prices are lower in all three scenarios due to lower European coal demand.
  2. Electricity demand
    • No changes in the quarter.
  3. Generation capacity mix:
    • Greater capacitites of onshore wind due to greater merchant capacitites and an updated generation profile for repowered sites enabling an accelereated build out. In the long-term, the high pace of decearbonisation leads to the emergence of CCS biomass and hydrogen as a generation fuel in the High and Central scenario.
  4. Renumeration of capacity:
    • Following the suspension of the Capacity Market, the issue is being followed closely. The modelling of the Capacity Market remains unchanged between quarters.
  5. Technology costs
    • Technology costs have broadly remained unchanged from the previous quarter.
  6. Exchange rate:

Wholesale electricity price projections

Below is a summary of our wholesale electricity price projections by scenario.

High

  • The High scenario examines the effects of strong global GDP growth and high fuel prices driven by strong growth in oil prices, which reaches $138/bbl by 2040.
  • The high oil prices also drive up gas prices across the modelled period as oil-indexed pricing in gas contracts persist in this scenario.
  • This scenario is also characterised by high carbon prices, which rise to £66/tCO2 in 2040, reflecting high abatement costs as a result of high electricity demand and high decarbonisation policy ambitions. The target carbon floor price is not met as the carbon price support cap is binding throughout the modelled period.
  • Wholesale prices increase due to rising gas and carbon prices is partially offset by increased deployment of renewable technologies and nuclear.

Central

  • The Central scenario is an ‘expected’ pathway for market wholesale electricity prices at the time projection.
  • The Central scenario is characterized by moderate GDP growth which remains at historical levels and results in moderate growth in commodity prices.
  • Though the 2020s and out to 2040 we project a steady growth in gas prices as declining European gas reserves lead to a need for more expensive gas sources, which in turn steers electricity prices higher over the same period.
  • In this scenario, annual average gas prices initially decline from 54p/therm in 2019 to 46p/therm in 2020 before increasing to 69p/therm by 2040. In the short term coal prices decline from $91/tonne in 2019 to $75/tonne in 2023 but in the medium term, steadily growing consumption in developing Asian countries pushes the coal price upwards until 2033 when they decline again to 2040.
  • In the long term, prevailing decarbonisation policies reduce global reliance on coal, which drives the price downwards. From 2021 onwards the effective carbon price rises with the EU ETS until 2035 after which is remains relatively flat until 2040.

Low

  • In the Low scenario wholesale electricity prices are projected to decrease initially before gradually recovering, reflecting the trajectory of our wholesale gas price projections.
  • Additionally, in the Low scenario, low demand for electricity is combined with low fuel prices. We assume that within the next few years gas prices permanently delink from oil, causing them to fall to the long-run marginal cost of supply.
  • In this scenario we believe that a carbon floor price significantly above the EU ETS price would be untenable, and we therefore hold the effective carbon price constant at £23/tCO2 from 2024 until the end of the modelled period.
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