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October 2019 Regulatory Report

Posted November 08, 2019

Generation

In open letters on 25 October, Business Secretary Andrea Leadsom confirmed the European Commission’s decision to restart all Capacity Market functions. Addressed to National Grid Electricity System Operator Director of Operations Duncan Burt and Electricity Settlements Company Chief Executive Neil McDermott, both parties have been requested to calculate and collect post-standstill payments from suppliers and make capacity payments in respect of the standstill period. The government published its response to the Committee on Climate Change’s July report on reducing the UK’s emissions, setting out several new policy actions. The report covered progress emissions from power, buildings, industry and transport, as well as setting out actions in these areas.

Delivery

On 3 October, Ofgem released its State of the Market Report for 2019, which shows that, although the Competition Market Authority’s price transparency remedy has improved the price information available to microbusinesses, engagement remains low due to price complexities, inconsistent implementation of the remedy across the suppliers and low awareness. Ofgem launched a consultation on proposals to introduce new financial checks and tests for existing suppliers in the energy retail market. The National Infrastructure Commission has argued that the UK’s model of regulation for energy, water and telecoms must be updated to meet challenges, including achieving net zero emissions, improving water resilience and providing 5G coverage.

Usage

The government announced on 2 November that it has halted fracking in England. The decision was based on the conclusion reached by the Oil and Gas Authority’s report that it is not possible with current technology to accurately predict the probability of tremors associated with fracking. It has been recommended at a Treasury Committee that Task Force on Climate -related Financial Disclosures reporting should be mandatory, and part of the government’s Green Finance Strategy.

 

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Generation


Capacity Market reinstated

In open letters on 25 October, Business Secretary Andrea Leadsom confirmed the European Commission’s (EC) decision to restart all Capacity Market (CM) functions. The CM is the scheme which guarantees the UK’s security of electricity supply.

Addressed to National Grid Electricity System Operator (ESO) Director of Operations Duncan Burt and Electricity Settlements Company Chief Executive Neil McDermott, both parties have been requested to calculate and collect post-standstill payments from suppliers and make capacity payments in respect of the standstill period.

The letters followed the 24 October announcement by the EC that it has approved the CM, following several months of investigation. The EC “did not find any evidence that the scheme would put demand response operators or any other capacity providers at a disadvantage with respect to their participation in the scheme”.

The investigation was opened in February 2019 after the general court annulled the EC’s original July 2014 decision to grant the CM State Aid approval in November 2018. This was due to an appeal by Tempus Energy – the annulment was granted on procedural grounds the EC had not properly considered the case for granting State aid. Tempus argued that the scheme unfairly favoured traditional generation over demand-side response. Following this, the CM was suspended pending the outcome of the investigation.

In addition, the EC found that, considering recent market and regulatory developments (including the new EU Electricity Regulation), and other issues identified during the UK's July five-year review of the CM, the UK government is committed to improving the scheme for the future. These improvements concern: the lowering of the minimum capacity threshold for participating in the auctions; the direct participation of foreign capacity; the participation rules for new types of capacity; the access to long-term contracts; the volume in the year-ahead auction; and the compliance with the new Electricity Regulation.

Government unveils emissions reductions proposals

The government published its response to the Committee on Climate Change’s (CCC) July report on reducing the UK’s emissions, setting out several new policy actions. Published on 15 October, the report, Leading on clean growth: government response to the Committee on Climate Change 2019 progress report to Parliament - Reducing UK emissions, covered progress emissions from power, buildings, industry and transport, as well as setting out actions in these areas.

On building emissions, the government said that decarbonising the UK’s building stock is “at the heart of our ambition to achieve a net zero economy by 2050”. It announced proposals to set minimum energy efficiency standards of rented commercial buildings at EPC band B by 2030 in a new consultation. Additionally, the government will launch a consultation in 2020 on introducing mandatory in-use energy performance ratings for business buildings.

A new Transport Decarbonisation Plan is expected “that will review the entire system” and put forward the policies needed to help deliver carbon budgets, whilst “looking at the supply chain of each modal sector and adopting a place-based approach”. The plan will also look at ways to enable people to more easily monitor the carbon footprint associated with their journeys and make more informed travel choices.

Prime Minister to chair new Climate Change committee

Prime Minister Boris Johnson announced on 17 October that he will chair a new climate cabinet committee, which will look to drive further action across government to protect the environment, reduce emissions and improve air quality.

The committee will bring together ministers responsible for domestic and international climate change policy and provide a forum to hold departments to account for their actions to combat climate change. The Committee will also oversee the UK’s preparations to host the UN’s major climate summit COP26, in November 2020, and include representation from the departments responsible for taking the agenda forward.

Shadow Business Secretary Rebecca Long-Bailey criticised the decision: “There is possibly no one more ill-suited to this role than a Prime Minister with a history of climate denial, from a Tory government that has dismantled the UK’s solar and onshore wind industries, overseen a collapse in household energy savings measures and stalled the UK’s progress cutting emissions.”

The Renewable Energy Agency (REA) welcomed the announcement, adding: “We will be writing to request a joint meeting between No 10, the Cabinet Office and BEIS to discuss the cabinet committee on climate change.”

Energy White Paper delayed until Q1 2020

Business Secretary Andrea Leadsom told the Commons BEIS Committee that the Energy White Paper, which had originally been targeted for summer 2019, would not be released until Q1 2020. The White Paper would set out the government’s policy direction for energy.

Speaking during her first evidence session as Business Secretary on the work of BEIS on 15 October, she said the reason for the delay was that consultations on carbon capture, usage and storage and proposed use of regulated asset base model funding for new nuclear have just closed and the department wanted to include its responses to those in the White Paper.

She said that the three main sections of the white paper will be decarbonisation of the power, heat and transport sectors. Additionally, she said achieving net zero by 2050 was her “first priority”.

BEIS Committee Chair Rachel Reeves urged the Business Secretary to take on the recommendations put forward by the committee, such as bringing forward the 2040 target for the phase-out of internal combustion engine cars and vans.

IEA: offshore wind to become a $1trn industry

The International Energy Agency (IEA) published a report on 25 October, concluding that global offshore wind capacity may increase 15-fold and attract around $1trn of cumulative investment by 2040. The IEA found that this will be driven by falling costs, supportive government policies and some remarkable technological progress, such as larger turbines and floating foundations.

Today, offshore wind capacity in the EU stands at almost 20GW. Under current policy, that is set to rise to nearly 130GW by 2040. However, if the EU achieves its carbon neutrality aims, offshore wind capacity could hit around 180GW by 2040 and become the region’s largest single source of electricity.

By around 2025, China is likely to have the largest offshore wind fleet of any country in the world, overtaking the UK. China’s offshore wind capacity is set to rise from 4GW today to 110GW by 2040. Policies designed to meet global sustainable energy goals could push that even higher to above 170 GW.
 



Delivery


SMEs pay higher gas and electricity prices

On 3 October, Ofgem released its State of the Market Report for 2019, which shows that, although the Competition and Market Authority’s price transparency remedy has improved the price information available to microbusinesses, engagement remains low due to price complexities, inconsistent implementation of the remedy across the suppliers and low awareness.

SMEs and microbusinesses also continue to pay higher prices than other businesses. 25% of electricity and gas microbusiness meter points are on default and deemed contracts. The smallest microbusinesses, which account for around 40% of meter points, continue to have the lowest proportion of customers on negotiated contracts – 65% in gas and 62% in electricity in Q119 –a slight increase compared to 2018. However, the proportion of customers on negotiated contracts was between 76% and 87% for microbusinesses with higher consumption levels.

Additionally, in Q119, small businesses paid on average a price for gas supply that was nearly twice as high and an electricity price that was around 30% higher than the average across all business customer segments. In Q119, the lowest average prices were 4p/kWh and 15p/kWh respectively for negotiated gas and electricity contracts (i.e. acquisition and retention contracts), while the most expensive ones were 8p/kWh and 26p/kWh for deemed contracts.

Ofgem proposes new supplier financial tests and checks

Ofgem launched a consultation on proposals to introduce new financial checks and tests for existing suppliers in the energy retail market. Launched on 22 October, the consultation is the latest step in the regulator’s Supplier Licensing Review and sets out a package of proposals to ensure suppliers have effective risk management processes in place, maintain appropriate governance and increase accountability and that the regulator’s market oversight is increased.

To promote better risk management, Ofgem proposes cost mutualisation protections, which would see a new requirement for suppliers to put in place protections to cover at least 50% of credit balances and a proportion of government scheme costs in the event of their failure. This, the regulator argues, would minimise mutualisation costs across other parties.

NIC seeks reform to regulation of utilities

The National Infrastructure Commission (NIC) has argued that the UK’s model of regulation for energy, water and telecoms must be updated to meet challenges, including achieving net zero emissions, improving water resilience and providing 5G coverage.

The NIC’s report, Strategic Investment and Public Confidence, issued on 11 October argued that, while the current regulatory system has generated investment and improved performance, it was not set up to provide strategic direction. Also, the system does not always protect consumers where the market is not working in their favour. Since high levels of future investment will be recovered from consumers, the NIC believes it is important consumers have confidence that long-term strategic investments benefit them. It set out a series of recommendations to strengthen and update the current regulatory system.

The Commission wants the use of competition to be enhanced as the most reliable means of supporting innovation. In retail markets, the Commission believes regulators should be able to prevent companies from engaging in price discrimination that does not provide an overall benefit to consumers.
 



Usage

Government halts fracking in England

The government announced on 2 November that it has halted fracking in England. The decision was based on the conclusion reached by the Oil and Gas Authority’s report that it is not possible with current technology to accurately predict the probability of tremors associated with fracking. This, as well as the disturbance caused to residents living near Cuadrilla’s Preston New Road site in Lancashire, convinced the government to announce a moratorium on fracking until compelling new evidence is provided.

Business and Energy Secretary Andrea Leadsom said: “Whilst acknowledging the huge potential of UK shale gas to provide a bridge to a zero carbon future, I’ve also always been clear that shale gas exploration must be carried out safely. In the UK, we have been led by the best available scientific evidence, and closely regulated by the Oil and Gas Authority, one of the best regulators in the world.” She continued: “After reviewing the OGA’s report into recent seismic activity at Preston New Road, it is clear that we cannot rule out future unacceptable impacts on the local community.”

Business, Energy and Clean Growth Minister Kwasi Kwarteng said: “The Committee on Climate Change’s advice is clear that natural gas will continue to have a key role to play as we eliminate our contribution to climate change by 2050, including for the production of hydrogen. However, following our action today, that gas will need to come from sources other than domestic fracking.” He continued: “Today’s decision will not in any way impact our energy supply. The UK benefits from one of the most active gas markets in the world, with security ensured through diverse sources - including domestic offshore production, pipelines from Europe and liquid natural gas terminals.”

Treasury Committee: TCFD reporting should be mandatory

On 8 October, Simon Howard, chief executive UK Sustainable Investment and Finance Association – a members organisation for the financial services companies that has a commitment towards protecting the environment – recommended that Task Force on Climate -related Financial Disclosures (TCFD) reporting should be mandatory, and part of the government’s Green Finance Strategy (GFS).

The recommendation came at a Treasury Committee inquiry into the decarbonisation of the UK economy and green finance. The Committee questioned witnesses on how HM Treasury, regulators and financial services firms can further support the government’s net zero 2050 commitments.

Wes Streeting (Lab, Ilford North) asked which aspects of the government's GFS would have the biggest impact on greening the financial system. Howard said the GFS could also set about changing the statutory objectives of regulators. He said he welcomed the commitment to match the EU Action Plan on green finance but said this should be exceeded.

Although recommending mandatory TCFD reporting, he said this needed to be done on a “comply or explain” basis. Overall, the market needs to be to be able to determine how the system worked best. Bruce Davis, joint managing director at Abundance Investment, who was also a witness at the committee, said there was a need to make data more granular, which included making more data publicly available in a way that could be widely understood.

Howard also praised the creation of the Green Finance Institute, and noted work done by the Department for Digital, Culture, Media and Sport on financing civil society green finance projects.

Government launches consultation on Future Homes Standard

The Ministry of Housing, Communities & Local Government launched a consultation on 1 October on its plans for the Future Homes Standard, including proposed options to increase the energy efficiency requirements for new homes in 2020.

The key purpose of the consultation is to seek views on proposed changes to Part L (conservation of fuel and power) of the Building Regulations for new homes. It is also seeking views on Part F (ventilation) of the Building Regulations and is considering proposals for improving compliance and performance to ensure that energy efficiency requirements are delivered on the ground.

The introduction of an uplift to Part L standards in 2020 would not only improve the energy efficiency of new homes but would also mean that home builders, installers and supply chains will be working to higher specifications in readiness for the introduction for a further uplift in 2025.

The government describes the consultation, which closes on 10 January 2020, as the first stage of a two-part consultation about proposed changes to the Building Regulations. The government envisages research into the Future Homes Standard to commence from 2021 alongside the establishment of an industry taskforce, and research will continue into 2023.

Government launches consultation on introducing green number plates

The government has launched a consultation which seeks views from industry and the public regarding the introduction of green number plates for zero emission vehicles.

Published on 22 October, the initiative aims to raise awareness of the increasing number of zero emission vehicles as well as boost the uptake of new vehicle technology. Local authorities would be able to introduce incentives to promote the use of zero emission vehicles, such as being able to use bus lanes and get free or cheaper parking.

Potential plate designs include: a fully green number plate with black lettering; the addition of a green flash on the plate; or a green dot or symbol. The consultation seeks views from industry and the public on aspects including vehicle eligibility, number plate design and the rollout of the plates.

The consultation comes as part of the government’s £1.5bn ‘Road to Zero Strategy’ in efforts to reach the UK’s net zero emissions target by 2050, and to make the UK the ‘best place in the world to own an electric vehicle’.

Transport Secretary Grant Shapps said: “Green number plates are a really positive and exciting way to help everyone recognise the increasing number of electric vehicles on our roads.”

Almost half of businesses target net zero emissions by 2030

According to a YouGov poll published on 30 September, 46% of businesses in the UK are planning to become net zero within the next 10 years.

The poll found that, of the 502 business people surveyed, 6% of them are planning for their businesses to become carbon neutral within the next six months, 8% within the next year, 14% in the next two to three years, 11% in the next five years and 7% in the next 10 years. It was also found that 8% are already net zero.

The poll found that 14% don’t know if they are planning to become carbon neutral and 31% of businesses have no plans to become carbon neutral. This is despite new laws passed in June requiring the UK to be carbon neutral by 2050. 2% of the companies surveyed denied that the climate was changing at all.

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