August 2020

Generation

The government released details of an extension to the domestic Renewable Heat Incentive (RHI) and a new flexible allocation of tariff guarantees under the non-domestic RHI scheme (NDRHI).

BEIS published an update to their electricity generation costs forecast, which presents levelised cost estimates for electricity generation technologies. The last report of this kind was published in 2016.

Delivery

Ofgem will undertake a review of the high balancing costs that were experienced during the spring and summer period, with the aim of identifying areas that need to be explored to reduce costs for consumers. Balancing costs of £718mn were incurred between March and July.

National Grid ESO issued its five-year view from 2021-22 to 2025-26 of transmission network use of system (TNUoS) charges.

Ofgem launched a Managing Network Charge Bad Debt consultation, proposing recovering bad debt through a new bad debt term in the RIIO-2 licences.

Usage

BEIS published a Business Models for Low Carbon Hydrogen Production report produced by Frontier Economics, focusing on near-term investments to incentivise large-scale low carbon hydrogen production for supply to industry.

Citizens Advice research has found that one in nine people, equivalent to 6mn in the UK, have reported falling behind on household bills due to the impact of COVID-19.

Also covered in this Regulatory Report:

• New framework to reduce nuclear power costs published
• Increasing the level of coordination in offshore electric infrastructure
• NIC: government should commit to annual CfD auctions
• BEIS sets out CCUS delivery action plan and business models
• Drax: electricity “cheaper, cleaner and harder to control over lockdown”
• Survey reveals public underestimate role of heating in emissions

Generation  

Government issues amendments to RHI schemes

The government released details of an extension to the domestic Renewable Heat Incentive (RHI) and a new flexible allocation of tariff guarantees under the non-domestic RHI scheme (NDRHI) on 17 August. The scheme enables businesses to earn money from using clean heating sources. On 30 June, BEIS published a response to the notice changes to the RHI and COVID-19. This response outlined changes to the RHI schemes, following announcements made by the Chancellor as part of the Spring Budget. Additionally, proposals were outlined that were designed in response to the impact that COVID-19 is having on NDRHI projects’ ability to meet predetermined commissioning deadlines as set out by the current Tariff Guarantee (TG) scheme.

In the August update, BEIS said it intends to make further changes to the NDRHI, in order to aid those non-TG eligible projects that have invested capital into project developments that will not be able to be accredited by the scheme prior to its closure. These projects will be afforded an additional six months after scheme closure (on or before 30 September 2021) to submit a full application for accreditation, providing that they submit an ‘extension application’ to the scheme during a window opening in March 2021. Evidence to support an extension application must be provided no later than 31 March 2021 and should be as complete as possible.

Additionally, it is intended that there will be a separate allocation of funding within the NDRHI funding envelope to specifically cover this measure. The deadline for all responses to these proposals is 7 September.

BEIS updates electricity generation costs forecast

On 24 August, BEIS published an update to their electricity generation costs forecast, which presents levelised cost estimates for electricity generation technologies. Following on from the 2016 iteration of this report, BEIS included costs projections for newer technology types such as CCUS and BECCS, whilst revising earlier projections for existing technologies (CCGT, wind and solar).

The report presents the levelised cost by technology type (the discounted lifetime cost of building and operating a generation asset, expressed as a cost per unit of electricity generated) as a measure of comparing economic viability of future projects as a function of their generational output.

Key findings from the forecasts showed initial levelised costs to be the highest for gas fuelled technologies CCGT and CCGT + carbon capture, usage and storage (CCUS) both at £85/MWh in the central scenario for 2025. The direction of these differing technology types diverged in the latter years forecasted in the report, with construction costs for the newer CCUS assets falling as developers become more familiar with how to use them. The 2040 projected levelised costs for the central scenario for CCGT technologies rise to £125/MWh largely as a result of a jump in the carbon costs, whilst lower operating costs projects the CCGT + CCUS price to sink to £85/MWh.

Offshore wind and large solar projects are forecast to see their levelised cost drop by £17/MWh and £11/MWh respectively owing to declining construction costs.

The report presents a sensitivity analysis, highlighting the sensitivities of the previously calculated levelised costs when changes are made to factors used to calculate the cost. Fuel price was found to be the most influential factor in CCGT and CCGT + CCUS technologies, whilst onshore and solar technologies were more swayed by changes to capital expenditure and load factor assumptions.

New framework to reduce nuclear power costs published

The nuclear industry published a framework to cut the cost of constructing new power stations in the UK on 2 September. In the new report, Nuclear Build Cost Reduction, a cross-industry team, working as part of the government-backed Nuclear Sector Deal, set out the key factors to reduce risk and bring down costs by 30% by 2030. The report also identifies how a new financing model that controls construction risk will also bring down consumer costs by mobilising a wider pool of investors and cutting the cost of capital.

Increasing the level of coordination in offshore electric infrastructure

BEIS published a joint open letter with Ofgem on 24 August, which sets out the actions both parties are taking to increase the level of coordination in offshore transmission infrastructure, and has called for views to support the offshore transmission network review which launched in July 2020.

To date, all offshore wind farms in GB have been connected to the onshore system by individual point-to-point, or radial, links. The two parties stated: “We acknowledge that this type of link may not be the best outcome for consumers in the future as generating capacity increases, and may also increase pressure on coastal connection points.”

BEIS and Ofgem said that a key step in the review is for them to understand what has stopped the development of coordinated transmission assets to date, and they welcome suggestions on how barriers could be overcome. They want to hear from respondents about all potential barriers, including those of a legal, commercial or regulatory nature. Ofgem would also like to understand where a change in current regulatory arrangements now could facilitate greater coordination or if wider change is needed.

Ofgem and BEIS will use this information to “capitalise on early opportunities that will deliver benefits for consumers and the wider energy system” and inform future policy development relating to an enduring regime for connections post 2030.

The closing date for all responses is 30 September.

NIC: government should commit to annual CfD auctions

The National Infrastructure Commission (NIC) published new analysis and a set of recommendations for deploying more renewables to achieve net zero on 11 August.

The report, Renewables, recovery, and reaching net zero, suggests that accelerating renewables deployment to 65% of generation by 2030, compared to 50% (which the NIC had previously recommended), would not materially change costs for consumers in the short or the long run. The NIC said that renewables are now the cheapest form of electricity generation due to “dramatic cost reductions in recent years”, adding that its analysis holds without making optimistic assumptions on further cost reductions.

Based on this analysis, the NIC made several recommendations for the government to enable an acceleration of renewables capacity. It said the government should set out a pipeline of annual Contracts for Difference (CfD) auctions with estimated budgets that offshore wind, onshore wind and solar can all compete in. Using the CfD as the primary measure would allow the government to mobilise private capital “when the public sector balance sheet is tight” and do so quickly. Large-scale deployment of infrastructure sends a clear signal to other infrastructure investors that they should have confidence in the UK economy, the NIC argued.

Delivery

Ofgem announces review of £718mn BSUoS costs

On 17 August, Ofgem set out that it will undertake a review of the high balancing costs that were experienced during the spring and summer period, with the aim of identifying areas that need to be explored to reduce costs for consumers. This period saw the onset of COVID-19, as well as record high renewables output and saw the electricity system operator (ESO) incur balancing costs of £718mn between March and July, 39% higher than the normal expected costs for this period. Balancing costs filter down into electricity bills. Over the spring and summer, the ESO introduced three changes to the existing GB balancing arrangements to enable it to better manage the system: contracting with Sizewell B nuclear power station to reduce its output by 50%; designing and introducing a new Optional Downward Flexibility Management service to turn down distributed generators which do not normally provide balancing services; and clarifying the emergency arrangements for the disconnection of distributed generation if necessary.

Ofgem will now assess how well the market responded to the challenges faced during this period. Specifically, the review will focus on three areas: the extent to which the challenges faced were foreseeable and how much of a cause COVID-19 was to these increased costs; an assessment of the crisis management and response, focusing in particular on how well the ESO met its expected standard and how it engaged with the market; and the identification of any lessons that can be learnt for the future. Ofgem intends to hold industry roundtables in early September to gather stakeholder views on these three areas.

ESO issues five-year view of electricity transmission charges

National Grid ESO issued its five-year view from 2021-22 to 2025-26 of transmission network use of system (TNUoS) charges on 31 August. The total TNUoS revenue to be collected is forecast to rise from £3,048.6mn to £3,758mn over the period.

Due to the reform of the Transmission Generator Residual (TGR), total revenue to be recovered from generators has increased significantly in 2021-22 to £826.4mn compared to the current year. The average generation tariff for 2021-22 is forecast at £10.74/kW and is expected to increase to £11.96/kW by 2025-26, the rise mainly due to the increase in the generation charging base and increases in local charges. Revenue from demand is forecast to reduce to £2,222mn in 2021-22, then rise to £2,558mn by 2025-26. The impact on the end consumer is forecast to be £31.87 in 2021-22, rising to £33.38 in 2025-26. The ESO highlighted uncertainties arising from several ongoing charging methodology changes as well as the RIIO-2 price control process.

Ofgem consults on recovery of network charge bad debt

Bad debt accrued through non-payments under the Network Charge Deferral (NCD) scheme should be recovered through a new bad debt term in the RIIO-2 licences, the regulator has proposed. It launched the Managing Network Charge Bad Debt consultation on 7 August.

The regulator’s preferred option for gas networks and the ESO is to introduce a bad debt term (BDt) in the RIIO-2 licence with a provisional allowance for the ongoing recovery of bad debts. For electricity distribution, it proposes a new NCD-specific bad debt term (CBt) in the RIIO-1 licence, with the intention to eventually replace this with BDt in the RIIO-ED2 licence. Ofgem outlined that this would enable the recovery of not only network charges incurred under the NCD scheme, but also any other bad debts due to the non-payment of network charges.

Usage

Government to assess options for hydrogen deployment

BEIS commissioned Frontier Economics to develop business models to support low carbon hydrogen production and published the firm’s report Business Models for Low Carbon Hydrogen Production on 17 August. It focuses on near-term investments to incentivise large-scale low carbon hydrogen production for supply to industry.

Frontier Economics considered four broad categories of business models:

• Contractual payments to producers – a subsidy that covers the incremental cost of low carbon hydrogen above the carbon-intensive alternative fuel, e.g. Contracts for Difference.
• Regulated returns – a hydrogen producer would earn a regulated return on costs, e.g. Regulated Asset Base.
•  Obligations – these could be imposed on parties outside the hydrogen production sector to supply or consume a certain quantity of low carbon hydrogen.
• End user subsidies – an ongoing technology-neutral subsidy provided to end users for carbon abatement.

The report suggests that it would be more difficult to deliver several business model priorities via obligations or end user subsidies. Under an obligations model, investors will continue to be exposed to policy uncertainty, while under an end user subsidy model, investors will be exposed to demand risk. Contractual and regulated returns models, as well as hybrid approaches, are identified as being the preferred options. Contractual models may give more certainty to producers, while regulated return models may be easier to implement, given existing institutional capabilities.

BEIS is aiming to publish an update on its assessment of potential hydrogen business models by the end of 2020. It will consult on a preferred business model in 2021, with a view to finalise this in 2022.

6mn fall behind on bills due to COVID-19

Citizens Advice research, published on 21 August, has found that one in nine people, equivalent to 6mn in the UK, have reported falling behind on household bills due to the impact of COVID-19. The charity warns that many of those struggling may face “harsh enforcement”.

Citizens Advice “fears that many of those now in debt may never escape it”. People who sought help with debt since March this year will need, on average, two and half years to pay back their current priority debts, which include household bills, Citizens Advice said.

The charity said it also fears that businesses, landlords and councils might face the prospect of “being saddled with a mountain of unrecoverable debts that could affect their own viability”. This, along with reduced consumer spending as people pay down debt, could hamper the wider economic recovery, it warned.

People in debt because of COVID-19 need “urgent financial support” to deliver on the Prime Minister’s pledge to ‘build back better’. Citizens Advice is calling for one-off or time-limited financial support for arrears built up because of COVID-19, with the cost of relief shared fairly between government, creditors and individuals. This would be tailored to each sector but could include grants, payment matching or government-backed loans, it said.

BEIS sets out CCUS delivery action plan and business models

BEIS provided more clarity on the government’s plans for carbon capture, usage and storage (CCUS), publishing its response to a consultation on CCUS business models on 17 August. The consultation response stated that the government “recognises the critical importance of CCUS and low carbon hydrogen to our current net zero strategies”. The Spring Budget included the commitment that the government will invest at least £800mn in facilitating deployment of CCUS in at least two sites across the decade and this consultation response provides detail on how the government will enable this.

BEIS will develop commercial frameworks and delivery capability for CCUS during this year. It will also frame the scope and objectives of the CCS Infrastructure Fund. By the end of 2020, BEIS will award funding under the second phase of the Industrial Decarbonisation Challenge and publish a draft value for money methodology and criteria and metrics for assessing affordability of CCUS enabled industrial clusters. It will also provide an update on its assessment of business models to deploy low carbon hydrogen.

Drax: electricity “cheaper, cleaner and harder to control over lockdown”

Under lockdown, electricity was “cheaper, cleaner, but harder to control”, Drax found in its most recent Electric Insights report, covering Q220. Published on 31 August, it reported that wholesale power prices declined by 42% from the same quarter last year as demand plummeted during lockdown. Power prices fell to their lowest in nearly two decades, with prices down two-thirds over the last two years hitting a low of £22/month over May.

The share of renewables generation was up 32% year-on-year as biomass, wind and solar set new generation records in Q220. Solar supplied an average of 2.7GW of power during May, surpassing 10% of the month’s electricity demand. Drax pointed to high levels of sunshine over the period as a factor. Renewables’ share in the power system rose from 30% in Q219 to 40% in Q220. Together, nuclear and renewables produced 90% of GB’s electricity.

Drax found that coal saw a period of 67 days (10 April to 16 June) straight without generating – May saw no coal generation in the entire month. No electricity was produced from coal during 92% of the hours this quarter.

Carbon emissions from electricity generation were 75% lower than the same period a decade ago. Carbon intensity hit a new low of just 18 g/kWh in the middle of the Spring Bank Holiday.

Survey reveals public underestimate role of heating in emissions

BEIS published its findings from a May 2019 survey of the British public on the transition to a low-carbon heating future on 1 September. Transforming Heat – Public Attitudes Research, produced by NatCen Social Research, revealed that there is strong public support for carbon reduction policies, but there was some disconnect with knowledge of heating’s role.

The report found there was strong public support for carbon reduction policies. 90% regarded targets for emissions overall, and heating specifically, to be important. Self-reported knowledge/awareness when focused specifically on heating was, however, relatively low. Most have never heard of several types of low-carbon heating technologies. 

There was no statistical significance between the those on or off the gas grid regarding attitudes to the energy transition or transition scenarios. Off gas grid householders were generally positive about the efficacy of and options around sustainable heating systems, but there was widespread concern about up-front costs.