improvement of procedure for construction of generating capacities

The project is funded by the European Union

Complementary Technical Assistance to the EU-Funded Budget Support to Ukraine's Energy Strategy Implementation (ESBS)

Додаткова технічна допомога бюджетній підтримці впровадження Енергетичної стратегії України, що

фінансується з боку ЄС (ESBS)

This project is implemented by the

Consortium led by KANTOR Management Consultants S.A.

Workshop concerning drafting a law and regulation on improvement of procedure for

construction of generating capacities

Kostas KanellopoulosKiev 7 June 2012







Structure1. Licensing of new capacity (Procedure stages,

variations – by size & by technology)2. Monitoring Security of Supply (Roles of TSO,

Regulator, Ministry) 3. Tendering of new capacity (Directive

requirements, examples, lessons learned)







Licensing new capacity• Directive requirements and conditions• Member States practices with regard to

– Licensing phases– Variation of requirements per technology

• Licensing design considerations







Directive 2003/54 requirementsArticle 6 (Authorisation procedure):• Member States shall adopt an authorisation procedure, which

shall be conducted in accordance with objective, transparent and non discriminatory criteria.

• Sets criteria that may be used for granting authorisations. ! These are General criteria that need to be further elaborated in national primary or secondary legislation.

• Member States must consider the limited size and potential impact of small and/or distributed generation.

! More relaxed requirements for small units – Distributed Generation







Directive 2003/54 requirementsContinued…• The authorization procedures and criteria shall be made

public. • Any refusal must be duly substantiated.

– Applicant must be informed.– The reasons must be objective, non discriminatory, well founded and

duly substantiated.– Appeal procedures shall be made available to the applicant.







Environmental Impact assessmentEnvironmental licensingConnection agreementBuilding licensingOther permissions fromLocal or state Authorities

Generic authorization processLicense to generate

Authorization process

(Existing prior to Directive 2003/54/EC)

New license







What is a license to generate?

• Regulatory tool for allowing participation to the market.• Legal document that sets specific parameters, conditions

and criteria pursuant to which the licensee may engage in Licensed activities.







Some Generating license design considerations• Which subset of the criteria of article 6 should be or can be

examined at this phase?– Use all or most criteria or– Use criteria than are not specifically examined at a later stage

• How are the criteria used to assess a request? – Multicriteria analysis in a contest type process or– More flexible less defined criteria that would allow greater

discretion to the regulator• Who initiates the process? (The regulator or the developer)• How are connection costs considered?• How is long term planning taken into consideration?







Two variations of licensing processes

G. Iglesias, P del Rio, J.A. Dopico Policy analysis of authorisation procedures for windenergy deployment in Spain, Energy Policy 2011







Licensing criteria Greece until 2010According to the Law, the general criteria applied for the granting of

generation licenses are:a) The safe and sound operation of the Electricity System, including the network, the generation installations and all relevant equipment.b) The protection of the consumers and the environmentc) The efficient production and use of electricityd) The primary source of energy and the technology usede) The technical, economical and financial capacities of the investorf) The maturity of the projectg) The provision of public service obligationsh) The long-term energy planning of the countryj) Information received from other public authorities regarding issues of national security







Licenses in GreeceThree types of licenses are required for in Greece • Generation Licence :

– Any power station larger than • 1MW if the station exploits Renewable Energy or produces electricity through a

high efficiency CHP process.• 20 KW in all other cases.

– Granted by RAE (The Regulator)– Validity : 20 -25 years

• License to install– Any power station larger than 1MW– Granted by the Ministry of Environment, Energy and Climate Change– Validity : 2+2 years

• License to operate– Granted by the Ministry of Environment, Energy and Climate Change– Validity : 20 years







Authorization Procedure for RES GreeceRequest to RAE

License to generate

Environmental licensingGrid connection agreement

License to install

Building license License to operate

On average 5 years







In case of an exemption…Request to RAE

License to generate

Environmental licensingGrid connection agreement

License to install

Building license License to operate

On average 5 years







Licensing Exemptions Greece (RES)The following power generation technologies are

exempted from licensingsince 2010 since 2006

• Geothermal energy: 0,5 MW• Biomass: 1,0 MWe (100 kWe)• Photovoltaic: 1,0 MWp (150 kWp)• Wind Power: 0,1 MWe (50 kWe)• Other RES: 50 kWe







Licensing Exemptions GreeceFossil fuel

The following conventional power generation technologies are exempted from licensing

• Stations with installed capacity less than 20 kW• Emergency back-up generators of any capacity• High efficiency Cogeneration with installed capacity less

than – General case 1 MW – 5MW if installation serves academic or scientific purposes– 5 MW if isolated from the Grid







Licenses in the UKThree types of licenses are required for in the UK • Generation Licence :

– Any power station capable of providing 100MW or more to the Grid– Granted by Ofgem ( Regulator)

• Consent to build and operate powerplants– Any power station larger that 50MW– Granted by Secretary of State – Validity : five years

• Consent to Build or convert power stations fuelled by oil or natural gas– Granted by Secretary of State based on current energy policies

In 1 March 2010, the Infrastructure Planning Commission (IPC) became responsible for processing new planning applications under the Planning Act 2008







Licenses IrelandTwo types of licenses are required for in Ireland • Authorisation to Construct or Reconstruct Generation Plant.

– Validity : 5 years– Exemptions : Units < 1 ΜW

• Licence to Generate. Granted after all necessary permits have been obtained– Validity : 15 + 15 years

These licenses contain a number of conditions relating to the construction and operation of the plant, and the applicant’s business.

These are both issued by the CER (The regulator) which assesses the suitability of applications in accordance with the following criteria:

– Suitability of the Applicant (correctly constituted body, managerial competency, solvency, etc.);– Suitability of Project – technical assessment (generation plant and technology proposed,

construction and commissioning programme, plant engineers, network connection agreements, etc.);

– Compliance with relevant legislation (environmental regulations, planning permissions, other permits (Water Extraction Licence, Thermal Emissions Regulations, etc);

– Project business plan (project financing, business plan, off-take arrangements, accounts projections, etc.);

– Overall development certainty.







Licenses in SpainIn Spain administrative authorization is required for the construction of electricity

production installations This authorization is granted by competent Administrations, subject to the

concessions and authorisations which may be required pursuant to other provisions, based on the following criteria :

a) Energy efficiency, technical and safety conditions of the proposed installations.b) Proper compliance with conditions for environmental protection and minimising of

environmental impacts.c) The particulars of the location for the installation.d) Their legal, technical and economic-financial capacity for the carrying-out of the

project.Granted by : The local Government if the project does not affect more than one

autonomous regions, and the State in other cases.Specific regulations governs authorization of Nuclear Powerplants. Registry of all authorized powerplants is maintained at the Ministry of Industry,

Tourism and Trade.







Roles of central and regional administration in SpainThe public administration is structured in 3 levels

Central government Central registryPlanningAuthorizations for RES-E plants > 50 MW

Regional government

Regional legislation RES-E energy planningEnvironmental and territorial planningAuthorizations for RES-E plants < 50 MW

Local level Municipal land-use plansBuilding permits







Good practices*

• Facilitate public participation and inputs as early as possible• Efficiency can be enhanced by creating a central authority

which supervises the authorization process (Italy)• Establishing a bank of sites destined for energy can speed up

the process significantly (Ireland, Germany)• Direct compensation of those affected by projects can

enable faster and wider acceptance of projects (Spain, Greece).

*IEA, Tackling investment challenges in power generation in IEA countries







Licensing in ItalyItaly : A mechanism called Sbloca Centrali introduced in 2002

aimed to streamline the approval process of projects of public interest, including powerplants larger than 300 ΜW.

Within this process the different authorizations are replaced by a single authorization process in which State and local Agencies are involved, and which includes the “integrated environmental license”. This license replaces the various licenses granted by local authorities.







Licensing vs construction“Since 2001, when the Greek electricity market was liberalized, 12 generation licenses have been granted to anticipated gas-fired non-PPC producers for a total capacity of 4153 MW, and a large number of licenses (583) to RES plants (for a total capacity of 4566 MW) (Please see Table ’RES Generation Licenses’ below). However, only one 400 MW CCGT power plant, owned by Hellenic Petroleum, is currently under construction […] the gas-fired peaking power station (147 MW) […] is in operation under a contract with HTSO for the provision of ancillary services. Another 400 ΜW gas fired CCGT power plant is currently under construction by PPC S.A […] this plant shall substitute equal capacity from old PPC plants that will be retained as cold (emergency) reserve.”

RAE “National Report 2005”







Breaking down Security of Supply into components*

• Security : Short term “The ability of the electrical system to support unexpected disturbances such as electrical short circuits or unexpected loss of components of the system”.

• Firmness : Medium term. The ability of the already installed facilities to supply electricity efficiently (Fuel provision, water reservoir managements, maintenance scheduling etc).

• Adequacy : Long term. The existence of enough available generation capability, both installed or expected to be installed to meet efficiently demand in the long term.

• Strategic expansion policy : Very long term availability of energy resources and infrastructures (Fuel and or technology mix).

*C. Battle, P Rodilla. A Critical Assessment of the different approaches aimed to secure electricity generation supply . Energy Policy 2010







Monitoring Security of SupplyArticle 4 of Directive 55 “Monitoring of security of supply”

– According to the provisions of this article Member States (M-S) are obliged to monitor the demand/supply balance and report on this to the Commission every two years

– M-S can entrust this task to :• a Government body or• the Regulator or • the TSO.

– M-S shall indicate to the Commission what measures they (intend to) take to ensure that a foreseen disruption in the supply/demand balance is adressed.







Reporting on Security of SupplyMost EU Members write a report collecting information

about:– Consumption and generation evolution– Network and generation investment needs

The timeframe ranges from 5 to 20 yearsIn a recent questionnaire by CEER answered by 24 M-S

responsibility of reporting falls on:• The regulator alone : 3 M-S• The TSO alone : 2 M-S• The government : 5 M-S• All or some of the above : 14 M-S







Responsibility of Reporting on SoS examples

Regulator Ministry / Government

Authorities in cooperation with TSOs

TSOs alone

Greece X

Germany X

Ireland X X

Italy X

Spain X

UK X X X







Comparison of practices across MSGR ES UK IR

The Ministry’s role Long term planning

Long term planning

Joint Report to parliament with Ofgem

-

The Regulator’s Role Monitors & reports to EC

Monitors & reports to EC.

Reports to EC

Monitors & reports to EC.

The TSO’s Role 5 yrs grid planning

Reports on reserve

margin and electricity

and gas grid planning

procedures

Seven Year Statement.Winter outlook .

Annual (7 yr) review of Generation Adequacy .







Monitoring SoS – Greece (GR)The TSO’s annual report includes:a. 5 yr forecasts of electricity demand and peak loadb. expected new generating capacityc. Necessary investments at the transmission network over a

5 yr periodFurthermore for each reliability year the TSO reports on the

available capacity margin based on an LOLP analysis.







Monitoring SoS – Spain (ES)Several reports on reserve margin and electricity and gas grid

planning procedures are compiled by the System Operator, the Energy Commission and the Industry Ministry.

The following are monitored and reported :– Energy supply situation and prospects– Forecasts on the evolution of demand– Status and prospects of energy supply and its prospects– Final recommendations







Monitoring SoS – UKSeven year statement by NG reports on the following

indicators for the next 7 years : – Winter Peak Demand evolution at “average cold spell”

conditions.– Expected new generation capacity.– Retiring generation capacity.– Plant margin (% of installed capacity above peak demand)

Ofgem in its reporting to the Commission make reference to supply demand forecasts compiled by TSOs







Monitoring SoS – Ireland (IR)The Generation adequacy report is published by

the TSO provides information on : 1. Future demand 2. Future supply3. Balance between supply and demand4. Scenarios examining effects of powerplant

construction delays







Ensuring generation adequacy+ Functioning Energy markets should in theory ensure security of supply

through price signals.+ Transparent authorization procedures allow market participants to

invest. + Monitoring and reporting on security of supply by governments

regulators and TSOs should provide the market with future However – Market participants can invest but they are not obliged to do so.– Concerns over excessive prices caused by lack of timely construction of

new capacity.

Regulatory Authorities can intervene on the market in order to promote investments in the interest of security of supply.







Options for ensuring Security of SupplyThe Directive leaves open two sets of options to

Member States:

Capacity measuresa. Tendering for new capacityb. Capacity mechanisms

• Reserve standby capacity• Capacity payments• Reliability contracts

c. Long term contracts

Demand side measuresa. Interruptible loadb. Energy efficiency measures c. Real-time cost information to

customers (smart metering)

AND / OR







Many MS have opted to exercise the option provided by the directive to

introduce into their market some form of capacity measure

Capacity mechanisms across the EU Various capacity mechanisms

implemented or under study in Europe illustrate the uncertainties regarding the ability of energy only markets to deliver a satisfactory level of SoS in Europe

Capacity obligationGreece

Capacity paymentIreland, Italy, Portugal, Romania, Spain,

Strategic reserveFinland, Poland, Sweden

Mechanism under implementationFrance, UK

Strategic reserve

Capacity payment

No mechanism

Capacity obligation

Mechanism under Implementation / consideration







Capacity TendersTenders should be : • Justified : Tenders may only be launched if on the basis of an

authorization procedure the generating capacity being built or the energy efficiency/demand side measures being taken are not sufficient to ensure security of supply. (Art. 7.1)

• Open and transparent : Call for tender 6 months prior to closing date . Details published in the Official Journal of EU. Tender Documents available to any interested party.

• Independently monitored : MS should designate Public or private body independent (i.e. the Regulator) to organise, monitor and control the procedure. The TSO if fully independent can be in charge of the process.







Tender justification The decision to launch a tender must be based on a solid analysis by the competent authority (in most cases the TSO). The adequacy analysis typically includes

Future demand projections New Capacity construction schedules Capacity withdrawal schedule Interconnection capacity RES and hydro participation in peak demand

It must be demonstrated that if without the new capacity provided the reliability criteria (Capacity margin, LOLP, LOLE etc) is not achieved.







Capacity Tenders – Ireland (IR)In Ireland the regulator (CER) launched a tender in 2003 for the construction of new capacity.

Tender facts: – “Guidelines for the competition document” published on April 8th

– Tender launch : 22nd of May. Was amended twice (July and August) – Time to submit : 5 months (20th October closing date) – Two stages (1st stage : expression of interest, 2nd stage submission of tender offer).

Main Requirements from participants: – Bidders must have an authorization to construct– Should have received valid connection offer from the TSO– New centrally dispatchable facilities larger than 50 ΜW accepted– Bids from facilities outside IR accepted if demonstrated ability to contribute to long term

security to same extent as local facilities.– Plant already operation or under construction not eligible.







(IR)Evaluation process in two stages:Stage One criteria:

• Completeness• Development certainty • Technical commercial and financial fitness• Ensure than all bids can be compared on the same basis (standard terms

followed)Only Tenders meeting criteria proceed to stage two.

Stage two : Quantitative bids evaluated• Bid capacity price in €/MW per year• Bid capacity schedule (MW). Quantity made available to financial agreement for

up to 10 years

Selection is on the least cost basis and bundles of bids could be evaluated.







Bid requirements - structure (IR)Provisions provided remarkable flexibility to participants with regard to

powerplant size and contract duration. – Minimum capacity required : 300 MW– Maximum capacity required : 531 MW– Minimum bid : 50 MW– Maximum bid volume : 3400 MW yearsApart from individual bids within above parameters, groups of bids were

created. Selected bid can be part of the bundle of bids with the lowest cost.In case of a tie the bundle or bid with the shortest contract period for the

CADA agreement is selected.







Agreements with successful Tenderer (IR)

Two agreements were developed.

Implementation agreementAgreement with a duration up to Start of commercial operation of Powerplant. (Between CER and Tenderer)Includes provisions related to: a. Timely construction b. Performance guaranteesc. Penalties

Capacity and differences Agreement (CADA)Signed after execution of imple-mentation agreement and start ofCommercial operation. (BetweenESB and Tenderer) Includes provisions related to: a. Capacity paymentsb. Contract for differencesc. Availability provisions and

penalties

A third agreement with step-In and step-Out clauses was foreseen between CER, the Tenderer and a Bank representing the lending institutions.







Design of the CADA is based around the following basic provisions: Availability payments paid monthly for up to contracted capacity Difference payments which aim to pay the Tenderer for the energy

supplied according to a “strike price” which is calculated for a “reference CCGT” plant with a reference gas price and reference O&M costs.

The Tenderer participates in the wholesale market and by means of the Difference payment provisions returns to ESB excess income compared to the “strike price” in the form of a hedge payment (HP).

If HP ≤ 0 then HP = zero

CADA provisions (IR)

48

1

)(i

iii OCMPQHP

Market price Strike price







Capacity outcome – Ireland (IR)Accordind to CEER’s National report 2005 Arising out of this competitive process, two new point plants were announced:

– Tynagh Energy, located in the mid-west of Ireland, a 400 MW CCGT power plant (delivery January 2006); and,

– Aughinish Energy, located in the south-west of Ireland, a 150 MW CHP plant (delivery November 2005).

“Tynagh Energy successfully tendered in a Dec 2003 Commission for Energy Regulation (CER) competition to build the plant, which cost about €300mn. Financing was arranged by Royal Bank of Scotland, KBC Bank, Ulster Bank and IIB Bank with financial close in Aug 2004. The plant was handed over on 28 Mar 2006. Under the terms of the CER award, 89% of output is sold to ESB and 11% is traded by RWE Trading Ireland Ltd.” http://www.industcards.com/cc-ireland.htm







Legislation on capacity Tenders (GR)Greek Leslation enables the HTSO, following a call for tender, to contract for the provision of ancillary services. Also the same law provides for the HTSO to contract for generation capacity in order to ensure that the availability of sufficient capacity and adequate reserve capacity margins is secured on a long term basis. Contracted capacity specified in HTSO report on reserve capacity adequacy margins. This report is validated by the Minister of Development following an opinion issued by RAE. Up to 900 MW can be contracted initially with a supplementary option of another 400 MW; PPC is eligible to bid only for capacity contracts up to 200 MW of these supplementary 400 MW. The same Law also provides for PPC the possibility to renew and substitute a total capacity of 1600 MW from its old plants.







Capacity Tenders – Greece (GR)Two different tender procedures took place in Greece

since 2003:– A tender procedure for the supply of ancillary services in

the form of tertiary reserve.– A tender procedure for the construction of new

capacity.







2006 Tender for new capacity (GR)At the end of 2003 and due to tight capacity margins especially for the summer peak, the HTSO launched a tendering procedure for the provision of ancillary Tender facts:

– On 27 December 2005 the full text was made public. 1 month consultation.– Tender launch : 17 May 2006. Was amended once in August – Time to submit : 6 months (23.11.2006 closing date) – Two stages (1st stage : Prequalification by RAE, 2nd stage submission of tender offer).Main Requirements from participants: – Valid Generation license– Certificate from RAE– Should have filed request to authorities for environmental licensing of connections of

the station with the power and gas Transmission networks.– New CCGT with a capacity ≥ 360 MW– Bids from facilities located in the 2 southern zones of the System– Plant already operation or under construction not eligible.







Prequalification Requirements from participantsAt the prequalification stage the Tenderers were required to submit to RAE the following:

– The estimated starting date of commercial operation– A valid installation license– Complete EPC offer and LOI to contractor in was of success– Bank letter showing adequate commitment to finance the project – Valid connection offer from the electricity TSO– A letter from the Gas TSO indicating feasibility of connection with

NGTS within time schedule.RAE would issue a certificate granting the Tenderer the right to issue CAC

and to participate in the Tender.







Main Terms of the TenderAim : to provide minimum financial guarantees to secure project financing

– Bids consisted of two values • GNCAP : Guaranteed net capacity (MW)• SGFA : Specific Guaranteed net income €/MW-year• GEFORd : Guaranteed max forced outage rate (powerplant unavailability)

– TSO contracts 70% of Net Capacity up to a maximum of 300 MWCNCAP = 0.7 x GNCAP

– Contract Duration : 12 years starting 27 months after Tender conclusion. – Through financial agreement the successful tenderers net income from the

market is guaranteed to the value GNCAP x SGFA - availability penalties.– Net income calculated as

24

1

)(i

iii VCSMPQNI

System marginal price Reference plant VC







Bid requirements - structure (IR)Provisions provided some flexibility to participants with regard to

powerplant size and no flexibility with regard to contract duration. – Minimum capacity required : 360 MW– Maximum capacity required : not determined explicitly– Minimum bid : 360 MW– Maximum bid volume : Max capacity in installation licence– Max SGFA value : 92.000€/MW- yr– Max SGFA value : 35.000€/MW- yrOnly one bid allowed per participant. Selection based on one value : SGFA/(1-GEFORd)In case of a tie of the SGFA bids, the selection rule was the highest

capacity (GNCAP).







Agreements with successful Tenderer (IR)Three agreements and one contract were developed.

Implementation agreementAgreement with a duration up to Start of commercial operation of Powerplant. (Between HTSO and Tenderer)Includes provisions related to: a. Timely construction: 27 months b. Performance guaranteesc. Penaltiesd. Reward for early completion ( 2 extra months)

Financial agreementEnters into force after the start ofCommercial operation. (BetweenHTSO and Tenderer) Includes provisions related to: a. Guaranteed income paymentsb. Availability provisions and

penalties

Transfer agreement : provided as a template for the transfer of CACs to the market through an auction initiated by the TSO.

CA contract : From Grid code. Hol-ds provisions necessary in the event of a transfer to Suppliers.







Tender participation and outcomePariticipation– Four participations (out of 5 in the first phase) in the second phase– One participant announced buidling the powerplant regardless of the

outcome– Two Tenderers bid at 35000€/MW (very aggressive biding)– Selected Tenderer with the Higher installed capacity

Outcome at first glance very strange- Three out of four of the contenders took decision to build the powerplants- The successful bidder did not build the powerplant Result

The tender achieved its mission by adding approximately 1250 MW of new capacity. The result was achieved not by the Tender but through the Tender process in which, investors and Banks studied in depth the Greek market conditions.







2003 Tender for ancillary services (GR)At the end of 2003 and due to tight capacity margins especially for the summer peak, the HTSO launched a tendering procedure for the provision of ancillary services (reserve capacity). Therefore, the abovementioned plant benefits from a special contract with the HTSO, with a duration of almost 3 years.Tender facts:

– The requirement was for peaking units from 120 to 160 MW– Requirement for flexible fast starting units– Offered contract : 3 years– Construction time required : very short (6 months)– Due to very urgent conditions there was no public tender process. Instead a

closed tender process with license holders took place.– The unit would not participate in the energy market.– Fuel costs were passthrough based on a reference heatrate value.







Selection criteria processSelection criteria process– Lowest bid– In case to bids differ less than 10 % the highest offered capacity is

selected.– Negotiation of selected offer allowed in case offer deemed

unreasonable.

Results– Award to build one 147 MW station based on three GTs– Time schedule was not achieved.







Things to watch• Start very early with tender basic design. Decide very early on the

following: • Can existing powerplants participate?• Can demand side management participate?• May the Incumbent be allowed to participate?

• Involve at the earliest possible all parties (Banks, TSOs etc) that will participate contractually in the tender preparation process.

• Banks very interested in regulatory – licensing risks.• Pay particular attention to force majeure clauses.• Pay particular attention to requirements for participation. Relaxing

requirements opens participation but may increase risks of not delivering. But too stringent requirements will reduce participation and competition.

• If time is very constrained - and it will be – try to avoid setting target dates that are too close. Better provide for a reasonable completion date and give a bonus for earlier completion.

• Leave plenty of time to participants for the preparation of their proposals. (6 months mentioned in the directive is enough).







Things to watch II• Try to limit technical specifications to the absolute minimum. Use

instead a reference plant based on the best available technologies and let the market decide on most optimal way to provide the requested capacity.

• Try to simplify evaluation criteria – if possible down to one number. The reference plant can help also in this respect.

• Be very careful if setting ceiling and minimum values on bids accepted. Check that other constraints do not create hidden advantages for participants.

• Avoid setting very short contract periods. 10 years should be considered as a minimum. Allow Tenderers to offer for shorter periods. Use this as a decision criterion in case of a tie.







And finallyConsider all the time that this is last resort mechanism that can distort the market and create unfair advantage for the successful tenderer over their competitors.

Therefore the capacity payments should be counterbalanced by provisions that restrict the tenderer’s freedom to influence the market.