December 2020

Generation

The Energy White Paper (EWP) was published on 14 December, setting out new measures for the sector including autoswitching and establishing a UK Emissions Trading Scheme (ETS), as well as plans for third party regulation. 
The Treasury published its Net Zero Review interim report on 17 December, providing initial analysis of the government’s plans to build back greener. 

Delivery

Ofgem issued the final determinations for the five-year RIIO-2 price controls for the electricity transmission, gas transmission, gas distribution and ESO on 7 December. 
On 9 December, Ofgem published information regarding the redistribution of around £72.88mn Renewables Obligation (RO) payments for 2019-20. 
Ofgem published its methodology for RIIO-ED2, the price control mechanism for electricity distribution which runs for five years from April 2023. In the 17 December statement, Ofgem said ED2 will support investment required to deliver net zero, such as providing more chargepoints for an anticipated rise in electric vehicle use and the expected increase in heat pump uptake. 

Usage

The Department for Business, Energy and Industrial Strategy (BEIS) launched a consultation on 30 November, seeking views on how to design the proposed Green Heat Network Fund (GHNF) scheme, a funding programme to help new and existing heat networks move to low and zero carbon technologies. 

The government published findings from workshops with the public on the transition to low carbon heating on 17 December.

Also covered in this Regulatory Report: 

• Brexit deal sees UK leaving EU energy groups, but cooperation intended
• Climate advisors sets out 78% emissions reduction pathway for 2035
• Renewable electricity generation projected to grow almost 7% in 2020
• New vulnerability commitment will help microbusinesses
• MPs to investigate zero emission vehicles
• EDF announces deal with Gresham to optimise UK’s largest battery site 

Generation

Energy White Paper measures cover third party regulation

The Energy White Paper (EWP) was published on 14 December, setting out new measures for the sector including autoswitching and establishing a UK Emissions Trading Scheme (ETS), as well as plans for third party regulation. 
The government announced it will be consulting by spring 2021 on regulating third parties, such as energy brokers and price comparison websites. It is also consulting on reforms to ensure customers are provided with more transparent and accurate information on carbon content when choosing energy services.

The government will consult by March 2021 on creating the framework to introduce opt-in switching by 2024, considering reforms to the current roll-over tariff arrangements. The government will also consider how the current auto-renewal and roll-over tariff arrangements could be reformed, also consulting by March 2021 on how opt-out switching could be tested as part of any future reforms, including looking at how the new tariff should be determined and what safeguards should be in place. 
The government is aiming to bring “at least one” large-scale nuclear project to the point of Final Investment Decision by the end of this Parliament, “subject to clear value for money”. It published its response to the Regulated Asset Base (RAB) model for nuclear consultation, saying it is continuing to explore a range of financing options for new nuclear with developers including the RAB funding model. It says it will also consider the potential role of government finance during construction, “provided there is clear value for money for consumers and taxpayers”.

Treasury report sets out initial analysis on net zero cost

The Treasury published its Net Zero Review interim report on 17 December, providing initial analysis of the government’s plans to build back greener. 

In its analysis, the Treasury found that the costs of the transition to net zero are uncertain and depend on policy choices. It found that the amount of investment required to reach net zero and the consequential impacts on operating costs are “difficult to estimate”, due to a range of factors including the precise path for the transition, changes in behaviour and the rate at which technology costs fall. 

Different types of households will have different levels of exposure to the transition, depending on their level of income, the Treasury found. Higher-income households consume more carbon in absolute terms, but lower-income households tend to consume more carbon relative to their income. Households are also exposed to the transition through the labour market, with people in certain occupations (skilled trade, and process plant and machine workers) more likely to work in more carbon-intensive industries. People in these occupations are also disproportionately likely to have a lower level of education and to be lower-income workers. The Treasury said the government will need to be mindful of these issues as they consider the best way to design policy to support the transition.
The final report is due out next spring and will build on the analysis presented in the interim report by looking at innovation and growth, competitiveness, household impacts and embedding the findings.

Brexit deal sees UK leaving EU energy groups, but cooperation intended

The UK and the EU agreed a post-Brexit trade deal on 24 December, outline how energy markets will be affected. The deal sees National Grid Electricity System Operator leaving ENTSO-E (the EU electricity transmission system operator group) and ENTSOG (the EU gas transmission system operator group), and Ofgem leaving ACER (the European Agency for the Cooperation of Energy Regulators), but both organisation will continue to “cooperate” with EU transmission system operators and regulators, respectively. 

On interconnectors, the deal says that the new procedure for allocating capacity on electricity interconnectors at the day-ahead market timeframe shall be based on the concept of “multi-region loose volume coupling”. This involves the volume traded between two countries or regions being calculated and then the prices are calculated separately. The deal also sees the creation of a new Specialised Committee on Energy to discuss and provide expertise on matters such as electricity trading. 

In response, Energy UK Chief Executive Emma Pinchbeck said it is “great news” and they now “await further details on important issues on climate and energy, including new cross-border trading arrangements and the cooperation on carbon pricing.” Ed Birkett, Senior Research Fellow at the Policy Exchange Thinktank, said: “What’s good to see in this deal is the intention to develop a new trading system for electricity between the two sides. That will hopefully return some of the market efficiency that we’ll lose in the short term because we’ll no longer have the automatic ‘market coupling’ system.”

Climate advisors sets out 78% emissions reduction pathway for 2035

The Climate Change Committee (CCC) published its advice for the Sixth Carbon Budget on 9 December which requires a 78% reduction in UK territorial emissions between 1990 and 2035. This is part of the CCC’s statutory role as the official advisor to the government under the Climate Change Act 2008. The Sixth Carbon Budget covers the period 2033-2037.

The CCC estimates up to £50bn/yr investment needed, but costs are estimated at below 1% of GDP. It said there will be a ‘critical moment’ in early 2030s, as sales of most high-carbon goods are phased out altogether – UK emissions should then fall sharply over the 2030s. The CCC stressed that the 2030s will see more of a need for individuals to take action saying that to date policy has enabled emissions reductions that has not required mass engagement.

Additionally, the UK set a new interim emissions reduction target on 12 December for 2030, targeting a 68% reduction on 1990 levels.

Renewable electricity generation projected to grow almost 7% in 2020

The International Energy Agency (IEA) published its first Electricity Market Report on 14 December, which includes an assessment of 2020 trends and 2021 forecasts for electricity demand, supply, capacity and emissions – both globally and by country. The report finds that global electricity demand in 2020 is projected to fall by around 2%, the biggest annual decline since the mid-20th century and far larger than what followed the global financial crisis. Renewable electricity generation is projected to grow by almost 7% in 2020, with long-term contracts, priority access to the grid and sustained installation of new plants underpinning strong growth in renewable electricity production. Coal-fired generation is estimated to fall by around 5% in 2020, the largest decrease on record, alongside nuclear power generation, which is set to decline by around 4%, and gas-fired electricity generation, which is projected to fall by 2%.

Delivery

Ofgem finalises RIIO-2 price controls

The regulator issued the final determinations for the five-year RIIO-2 price controls for the electricity transmission, gas transmission, gas distribution and ESO on 7 December. 

Since the draft determinations (DD) in July, Ofgem has increased the level of upfront funding for the networks from around £25bn to £29.60bn. This includes £23.32bn for baseline totex and other totex related allowances, £5.74bn for pass through costs such as business rates and £0.55bn for other allowances including innovation. On average, this is still a 16% downward adjustment to the levels requested in the companies’ business plans. 

As a result of the determinations, Ofgem said that customers will see a £2.3bn saving over the course of RIIO-2, equivalent to an average bill reduction of about £10 before inflation, which compares to £20 at the DD stage. 

RO mutualisation triggered due to late payment shortfall

On 9 December, Ofgem published information regarding the redistribution of around £72.88mn Renewables Obligation (RO) payments for 2019-20. The RO scheme places an obligation on suppliers to source renewable electricity and is evidenced through Renewables Obligation Certificates (Rocs), which are presented to the regulator on 1 September each year. 

Suppliers that are not able to present a sufficient number of Rocs are required to pay an equivalent amount into a buy-out fund and those that fail to meet their obligations in full by this date must make the necessary payments by the late payment deadline of 31 October. 

Both the buy-out and late payment funds are redistributed to those suppliers that presented their Rocs by the initial deadline. For 2019-20, these suppliers received £0.63 per Roc in late payment funds, in addition to £5.02 per Roc from the buy-out fund, giving a total recycle value of £5.65. 13 suppliers failed to meet the late payment deadline, resulting in a total shortfall of around £33.14mn, triggering mutualisation for the RO in England, Wales and Scotland. 

Additionally, the government launched a new consultation on proposed significant changes to the scheme, including changing the mutualisation threshold from its current £16.94mn trigger, to 1% of the annual cost of the scheme (approximately £62mn, as per the cost of the scheme in 2020-21). This would be implemented from 2021-22.

RIIO-ED2 methodology prepares DNOs for net zero

Ofgem published its methodology for RIIO-ED2, the price control mechanism for electricity distribution which runs for five years from April 2023. In the 17 December statement, Ofgem said ED2 will support investment required to deliver net zero, such as providing more chargepoints for an anticipated rise in electric vehicle use and the expected increase in heat pump uptake. It will also require distribution network operators (DNOs) to grow their capacity through flexible solutions such as battery storage, before building new network capacity. 

Ofgem also said the price control will ensure “less of consumers’ money goes towards network companies’ profits”. Final methodology decisions on the financial framework, including the regulator’s working assumptions on the cost of capital, will be taken in Q121.

Usage

Government spells out plan for Green Heat Network Fund

The Department for Business, Energy and Industrial Strategy (BEIS) launched a consultation on 30 November, seeking views on how to design the proposed Green Heat Network Fund (GHNF) scheme, a funding programme to help new and existing heat networks move to low and zero carbon technologies. 

The scheme’s main objectives are to achieve carbon savings and reduce the carbon intensity of heat supplied in heat networks, increase the total amount of low carbon heat utilisation in heat networks (both retrofitted and new heat networks), and help prepare the market for future low carbon regulation and ensure compliance with existing regulations. The funding is expected to open for applications in April 2022 and is anticipated to run for three years, to 2025. 

BEIS reasoned that, without additional support, heat network projects taken forward are unlikely to opt for low carbon heating solutions when gas CHP is available. BEIS said it is crucial that the GHNF enables a seamless transition in support from the Heat Networks Investment Project (HNIP) and deliver low and zero carbon (LZC) heating at scale, as well as helping to bring down costs. Where the HNIP allowed for efficient fossil-based heating technologies to lay the foundation for future decarbonisation, BEIS said the GHNF is a capital grant funding programme which seeks to fund projects moving to LZC technologies.

On the issue of heat network customer protection, BEIS is proposing that for existing and new heat networks applying to the GHNF, their operators be registered participants of the Heat Trust or equivalent. The Heat Trust is a UK-wide, independent heat network customer protection scheme, which puts in a common standard for the quality of customer service provided to domestic and microbusiness customers. An equivalent consumer protection regime should at a minimum provide the same degree of consumer protection as the Heat Trust to domestic and micro-business consumers by the time any funding is drawn down.

The consultation closes on 29 January 2021.

High acceptance level found on need for heating transition

The government published findings from workshops with the public on the transition to low carbon heating on 17 December. A particular focus was placed on people’s attitudes towards different approaches for implementing low carbon heating and of the technologies involved. There was a high level of acceptance on the need for a heating transition.

Participants were less aware of the contribution domestic heating makes to carbon emissions and about low-carbon technology in general. However, whilst initially having some reservations about how achievable meeting targets would be, participants were largely supportive of and understood the urgency of the need to address how they heat their homes through using new technology and associated policy change.

Participants in on-gas grid workshops were concerned with the unfamiliarity of new heating systems, while off-gas grid workshops spent more time deliberating on the merits of different technologies.

New vulnerability commitment will help microbusinesses

Trade association Energy UK launched a new Vulnerability Commitment on 1 December, announcing that 15 suppliers have signed up to the series of commitments which go above and beyond their licence obligations, including for microbusinesses. Energy UK said all signatories have been working to make sure they can meet the commitments from the start of next year.

One commitment is that signatories should never knowingly disconnect non-domestic supply for reasons outside the domestic household’s control, if it is determined that a member of a domestic household, which takes its energy through a non-domestic supply, is vulnerable.

Energy UK said that the Commitment does not seek to add rules to the existing licence obligations, rather it seeks to add a new approach to complement the licence. This approach will be proactive, collaborative and transparent. The principles and commitments cover three areas: accessibility, collaboration and innovation.

The Commitment also compels signatories to demonstrates their commitment to innovation and continuous improvement. Specifically, it wants suppliers to assign a dedicated vulnerability champion, at board level or equivalent, who will be responsible for overseeing commitment delivery to improve service to vulnerable households.

MPs to investigate zero emission vehicles

The Commons Transport Committee has launched an investigation into zero emissions vehicles, considering the implications of accelerating the shift to zero emission vehicles, including bus and freight vehicles, and the case for using innovative new technology to introduce some form of road pricing. 

Speaking on 18 December, Committee Chair Huw Merriman said: “A consequence of the transition to electric vehicles is a potential £40bn annual fiscal black hole, due to the reduction in Fuel Duty and Vehicle Excise Duty. Something will have to change. We will be exploring whether radical road pricing or ‘pay-as-you-drive’ schemes can offer a revenue-raising solution to this problem.”

EDF announces deal with Gresham to optimise UK’s largest battery site

Announced on 17 December, Gresham House Energy Storage Fund has selected EDF to optimise its new 50MW battery site at Wickham Market.  Capable of storing 75MWh of energy, it is the UK’s largest battery installed to date, and will enable EDF, alongside controls partner Upside Energy to direct the battery’s energy flow into all markets including Dynamic Containment, generating revenue for the fund both within and outside National Grid relationships. 

Dynamic Containment is designed to act rapidly when triggered by a fault on the system – for example the loss of a generator – to catch and ‘contain’ the resulting deviation in frequency. Maintaining the UK transmission grid at 50Hz is a crucial part of National Grid’s role, because any deviations in frequency can damage equipment. National Grid said Dynamic Containment will activate in under a second to manage the imbalance in the frequency.

The site will utilise EDF’s innovative Powershift platform, which is already optimising a range of storage technologies across the UK.