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May 2019 Regulatory Report

By Market Insight Team | Posted June 06, 2019

Generation

The Labour Party launched its Bringing Energy Home plan, setting out its proposals for the renationalisation of GB’s energy networks. These include replacing National Grid and the GB Distribution Network Operators with publicly owned national, regional and municipal agencies, as well as taking ownership of the UK side of all interconnectors and enabling and supporting the creation of Local Energy Communities (LECs).

The UK’s third Contracts for Difference allocation round (AR3) opened; it will support up to 6GW of new renewable capacity and the round is open to “Pot 2” less established technologies including offshore wind, remote island wind, wave, tidal, and combined heat and power biomass. 

Delivery

Ofgem published its network price control methodology for RIIO-2 on 24 May. RIIO-2 is the next price control period for GB’s electricity and gas network companies (2021-2026).

Ofgem launched a strategic review of the microbusiness retail market, highlighting concerns that the market is not working as well as it should for microbusinesses, with a wide variety of contracts and lack of accessible price information making it hard for microbusinesses to engage.

Usage

A report released by the Grantham Research Institute on Climate Change and the Environment at the London School of Economics (LSE) advised a reformed approach to carbon pricing if the UK is to reach net zero by 2050. It also urged the implementation of a politically feasible medium-level carbon price that is higher than today’s price.

A report published by the International Energy Agency highlighted the importance of nuclear power in enabling a future energy transition, noting that without new nuclear projects CO2 emissions could increase.

Also covered in this Regulatory Report:


 


Generation

Labour outlines plans for energy sector

The Labour Party launched its Bringing Energy Home plan on 16 May, setting out its proposals for the renationalisation of GB’s energy networks, including replacing National Grid.

Labour said it would replace National Grid and the GB Distribution Network Operators with publicly owned national, regional and municipal agencies, as well as taking ownership of the UK side of all interconnectors. A National Energy Agency (NEA) would provide the overall strategy for the energy transition and would “guide public, collective and private forms of energy ownership”. It will be set up on the existing institutional base of National Grid.

In the document, Shadow Business Secretary Rebecca Long Bailey said that the UK “stands on the cusp of a Green Industrial Revolution”, adding that the energy sector is central to the decarbonisation plans of the UK, yet “energy networks are poorly placed to respond to the task at hand”. Long Bailey also said that if energy networks are returned to public hands it will be possible to address the energy trilemma—the provision of energy that is low carbon, secure and affordable.

Outlining its plans, Labour said that on day one after nationalisation the transmission company owned by the NEA will look near identical to the privatised electricity transmission operator, but in public ownership. The assets and workforce of the gas transmission companies would then be gradually transferred to the NEA, merging electricity and gas networks. The duties of the NEA would also include decarbonisation. It would set and oversea the Regional Energy Agencies’ (REA) targets for decarbonisation to deliver a national target of 60% of energy from low carbon or renewable sources by 2030, as well as overseeing the rollout of the UK’s electric vehicle charging network and development of energy storage capacity. The NEA would also aim to ensure that energy costs are affordable for all households.

Additionally, Labour plans to incorporate some of the regulatory powers currently held by Ofgem, reasoning that the regulator “has suffered from insufficient regulatory teeth and asymmetries of knowledge created by the lack of serious government energy institutions.”

Labour also said it would enable and support the creation of Local Energy Communities (LECs), which can engage in supply, distribution and/or generation of energy at the micro level and reduce strain on the overall grid, increasing efficiency and reducing the need for grid reinforcements.
 

Third Contracts for Difference allocation round opens

The UK’s third and latest Contracts for Difference (CfD) allocation round (AR3) opened on 29 May. The framework for AR3 was originally published on 1 May, detailing the relevant rules and eligibility requirements that must be satisfied by applicants. It was previously announced that £65mn would be offered in CfD AR3 by BEIS.  

CfD AR3 will support up to 6GW of new renewable capacity and the round is open to “Pot 2” less established technologies including offshore wind, remote island wind, wave, tidal, and combined heat and power biomass. The round sees offshore wind administrative strike prices (ASPs) – the maximum strike price a project of a particular technology type in a given delivery year can receive during an allocation round – set at £56/MWh in 2023-24 and £53/MWh in 2024-25.

Developers have until 18 June to enter their projects, with projects that are selected are scheduled to come online in 2023-24 or 2024-25, with support offered over 15 years.
 

Government consults on post-Brexit carbon pricing options

On 2 May BEIS launched a consultation on the future of the UK government’s and Devolved Administrations’ approach to carbon pricing once the UK leaves the European Union. The consultation, The Future of UK Carbon Pricing, provided further details on the proposals for the design of a linked or standalone UK emissions trading scheme (ETS), following the UK’s decision to leave the European Union. In it, BEIS confirmed its commitment to carbon pricing “as an effective tool for achieving our carbon emissions targets”.

It also stated that the UK Government and Devolved Administrations remain “fully committed to driving up global ambition on carbon pricing”. The consultation said that, upon the UK leaving the EU, establishing a UK national greenhouse gas emissions trading system (UK ETS), linked to the EU ETS is the UK Government’s and the Devolved Administrations’ preferred carbon pricing option.

In the event of the introduction of a standalone UK ETS, BEIS proposed a single cap that includes both stationery and aircraft operators. It said that delivering a UK ETS would “deliver continuity and help ensure our approach is at least as ambitious as that of the EU ETS”.

BEIS said that this option would enable the development of a larger carbon market, which will provide further emissions reduction opportunities and greater market liquidity for trading purposes. However, it also noted that should no agreement for the UK leaving the EU be reached, alternative options will be considered including a standalone domestic emissions trading system or a tax on carbon. On a potential tax, the consultation outlined that, while the Carbon Emissions Tax (CET) announced in the UK’s 2018 budget was designed to work similarly to the EU ETS, several areas will need to be revised if a long-term alternative tax is implemented.
 

Major generators reach renewables high in Q1 2019

BEIS published its recent provisional monthly energy production, consumption and price statistics which deliver key insights from Q1 2019.

Released on 30 May, it found that renewables share of electricity generation increased 11%, with renewables and wind reaching record highs of 37.4% and 26.6% of electricity generation respectively in March 2019. The low carbon share of electricity generation by Major Power Producers (MPPs) increased 3.7% to 49.2%, whilst fossil fuel share of electricity generation stood at 50.5%. Also, primary energy consumption in the UK on a fuel input basis fell by 7.9%, on a temperature adjusted basis consumption fell by 4.0%.

Electricity generation by MPPs fell 8.1%, with coal down 65% and gas down 1.7%. Gas provided 46.2% of electricity generation by MPPs, with renewables at 31.2%, nuclear at 17.9%, and coal at 4.1%. In March 2019 renewables and wind were at record highs of 37.4% and 26.6% of electricity generation respectively.
 

UK breaks solar generation record

UK solar generation hit a record high of 9.47GW on 13 May. The Solar Trade Association (STA) said on 14 May that the record was broken around noon, surpassing the previous record of 9.38GW set in May 2017.

STA Director of Advocacy and New Markets Léonie Greene said: “Days like these show that the technology can deliver clean, affordable power in abundance. We now need government to provide a level playing field with other technologies and allow solar to thrive without public support. Currently solar in the UK faces a plethora of barriers which have dramatically slowed deployment.”
 


Delivery

Ofgem confirms methodology for RIIO-2

Ofgem published its network price control methodology for RIIO-2 on 24 May. RIIO-2 is the next price control period for GB’s electricity and gas network companies (2021-2026).

Ofgem announced the allowed rate of return network companies can make. Specifically, Ofgem decided that the allowed baseline return on equity should be 4.3% (CPIH) in a cost equity range of 4.0-5.6%. on setting the allowed baseline return on equity at 4.3% (CPIH) in a cost equity range of 4.0-5.6%. This is almost 50% lower than under RIIO-1 and the lowest ever capital rate for energy network companies. Ofgem said that this lower allowed return on equity combined with a lower allowed return on debt would reduce costs passed on to consumers by £6bn over the five years of the RIIO-2 price control period when compared to RIIO-1.

Additionally, the regulator said RIIO-2 will increase the support provided by network companies to vulnerable consumers, for example by strengthening licence conditions and by incentivising companies to take vulnerability into account when interacting with their customers. Ofgem will also reform current innovation funding and provide new dedicated funding to support projects that specifically benefit vulnerable or poorly served consumers. RIIO-2 will also facilitate the decarbonisation of power, heat and transport and the transition to a smarter energy system.

 Chief Executive of Citizens Advice Gillian Guy responded, saying that although Ofgem has made “significant progress”, it “must hold its nerve to deliver a price control which is good value for customers.”
 

Microbusiness energy market review launched

Ofgem launched a strategic review of the microbusiness retail market on 3 May. The regulator highlighted concerns that the market is not working as well as it should for microbusinesses, with a wide variety of contracts and lack of accessible price information, meaning that it can be hard for microbusiness customers to engage. According to government data, there were over 5mn microbusinesses in the UK by 2018, accounting for one-third of employment and 21% of turnover.

Ofgem set out its vision for a future retail market and is now seeking inputs on the model, alongside the issues that currently face customers at each stage of the journey. Following the analysis of responses and other evidence, Ofgem will set out its updated position and next steps in winter. Responses are requested by 21 June.
 

ADE launches new flexibility for business scheme

The Association for Decentralised Energy (ADE) launched its Flex Assure scheme on 15 May. A new compliance scheme, it is designed to make it easier for businesses to participate in the country’s smart energy system and could save UK customers £600mn by 2020 and £2.3bn by 2035.

The ADE said Flex Assure will help businesses compare the different services offered by aggregators, provide greater transparency and give businesses’ confidence in the services offered to them. The new voluntary membership scheme is open to all demand-side response (DSR) aggregators and licensed energy suppliers offering DSR services, a form of flexibility which enables businesses to sell electricity through onsite generation and onsite energy storage for export. Flex Assure also sets common standards across the industry, making it easier for industrial and commercial customers to access the revenue these new energy services can provide.
 


Usage

LSE urges use of carbon pricing to reach net zero by 2050

A new report by the Grantham Research Institute on Climate Change and the Environment at the London School of Economics (LSE) has advised a reformed approach to carbon pricing if the UK is to reach net zero by 2050. The report urges the implementation of a politically feasible medium-level carbon price that is higher than today’s price.

A shadow price (the price used internally to guide decisions) that is consistent with the net-zero would start at £50 (with a range of £40-100) per tonne of carbon dioxide (tCO2) in 2020, reaching £75 (£60-140) in 2030 and £160 (£125-300) per tCO2 in 2050, which reflects the likely cost of negative emissions technology. LSE calculated that if imposed through a tax or the auctioning of emissions allowances, the proposed price levels would raise public revenue of around £20bn a year until the early 2030s.

To ensure full decarbonisation, the carbon price must be complemented by regulation, technological support and incentives, in order to reach net-zero emissions in the UK. If imposed through a tax or the auctioning of emissions allowances, proposed price levels would raise public revenue of around £20bn a year until the early 2030s, before falling gradually as emissions reduce to net-zero. “This is equivalent to about two-thirds of the total revenue raised through fuel duty. If fully redistributed it would equate to a carbon dividend of about £300 per person and year,” the report stated.

A complementary price mechanism would also seek to encourage the development and use of negative emissions technology. One method would be the development of a public procurement scheme. A second possible mechanism could be a private but regulated offset market, in which market participants would buy negative emissions in place of paying the carbon price.    
 

IEA highlights importance of nuclear in energy transition

A recent report published by the International Energy Agency (IEA) has found that, without policy changes, advanced economies could lose 25% of their nuclear capacity by 2025 and as much as two-thirds of it by 2040.

Published on 28 May, Nuclear Power in a Clean Energy System concluded that this could result in billions of tonnes of additional carbon emissions. The IEA noted that without additional lifetime extensions and new builds, meeting key sustainable energy goals, including international climate targets, would become increasingly difficult and costly. The lack of further lifetime extensions of existing nuclear plants and new projects could result in an additional 4bn tonnes of CO2 emissions.

The European Union would see the largest decline with the share of nuclear in its generation mix falling to just 4%, according to the report. If other low-carbon sources, such as wind and solar PV, are to fill the shortfall in nuclear, deployment would have to accelerate to unprecedented levels.

“Without an important contribution from nuclear power, the global energy transition will be that much harder,” commented IEA Executive Director Dr Fatih Birol. “Alongside renewables, energy efficiency and other innovative technologies, nuclear can make a significant contribution to achieving sustainable energy goals and enhancing energy security. But unless the barriers it faces are overcome, its role will soon be on a steep decline worldwide.”
 

Public support for renewable energy found to have increased


BEIS’s latest Public Attitudes Tracker has found that the public’s support for renewables energy has risen from 77% in December 2018 to 84% in March 2019. The survey also showed that support for solar (89%), offshore wind (83%), wave and tidal (82%) and onshore wind energy (79%) have all increased, reaching their highest levels since the survey started. 80% of the public were either fairly concerned (45%) or very concerned (35%) about climate change.

It also revealed that 75% of the public were most likely to be concerned about steep rises in energy prices in the future and 69% stated the UK was not investing fast enough in alternative sources of energy. The proportion of people also opposed to fracking increased from 35% in December 2018 to 40% in March.

Additionally, awareness of smart meters reached a peak of 88% in March 2019, having gradually increased over the course of the survey.

The use of innovative technologies, such as carbon capture and storage (CCS) has also gained further traction. In March 2019, 63% of those who knew a lot of a little about CCS said they supported it, the highest level in the survey to date.
 

NIC calls for “once in a generation” energy transformation


Chair of the National Infrastructure Commission (NIC) Sir John Armitt has written a letter to Chancellor of the Exchequer Philip Hammond, urging him to use the autumn Spending Review to commit to a “once-in-a-generation transformation” of the UK’s energy, transport and energy networks.  In the letter, Armitt laid down four key tests by which the NIC will judge the credibility of the government’s National Infrastructure Strategy, which is expected to be announced at the autumn Spending Review.

The key tests are a long-term perspective and set out government’s expectations for infrastructure funding and policy; clear goals and plans to achieve them; a firm funding; and a genuine commitment to change, where “the strategy needs to respond in the same spirit.”

“Real change is required if we are to boost our economic prosperity and quality of life up to 2050. That requires the government’s National Infrastructure Strategy to be bold and transformative and commit to major changes like devolving funding for cities transport,” he added.
 

BNEF report expects 57% of all passenger vehicle sales to be electric by 2040 


BloombergNEF (BNEF) has released its updated forecast on how electrification and shared mobility will impact road transport from now to 2040. Electric vehicle (EV) figures are increasing, with annual passenger EV sales set to rise to 28mn in 2030 and 56mn by 2040, with total passenger vehicles fleets reaching 1.68bn.

By 2040, the report anticipates 57% of all passenger vehicle sales to be electric, as well as over 30% of the global passenger fleet. The report also notes that 500mn passenger EVs will be on the road by 2040, as well as 40mn commercial EVs. Commercial van and truck sales are also set to accelerate throughout the 2020s.

The decline in battery process continues to boost rising figures. The report highlights that piece parity between EVs and internal combustion vehicles (ICE) will thus be achieved by the mid-2020s in most segments. While total passenger vehicle fleet figures will rise, the internal combustion passenger vehicle fleet will remain steady until 2030, before gradually declining. Europe also surpasses the US as the second largest EV market.

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