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September 2019 Regulatory Report

Posted October 16, 2019

Generation

 On 20 September, BEIS announced the results of the Contracts for Difference Allocation Round 3. The auction results cleared at record low prices with 2023-24 delivery year prices at £39.65/MWh and 2024-25 prices at £41.61/MWh (2012 money). The government unveiled a new set of decarbonisation policies during the Conservative party conference held at the end of September. Government statistics published on 26 September show that renewables’ share of electricity generation achieved a record high for Q2. Renewables’ share of electricity generation increased from 32% in Q218 to 35.5% in Q219, the highest Q2 on record for renewables. Labour and the Liberal Democrats showed off their visions for net zero during their respective party conferences.

Delivery

The Energy Networks Association published its response to BEIS and Ofgem’s letter of recommendations for the Open Networks Project. In the letter, the ENA agreed that decentralisation, decarbonisation, digitalisation and a transition to net zero is transforming the UK’s energy system. Ofgem appointed Jonathan Brearley as its new Chief Executive. Current Chief Executive Dermot Nolan will remain in the post until the end of February.

Usage

The Commons BEIS Committee expressed “disappointment” at the government’s response to its recommendations for carbon capture, usage and storage (CCUS). In it, the government said it agreed with the committee that CCUS can support decarbonisation. However, on calls for more ambition, the government’s response was non-committal, with no new dates or targets announced.

 

Also covered in this Regulatory Report:

 



Generation

CfD AR3: auction clears at record prices

On 20 September, BEIS announced the results of the Contracts for Difference Allocation Round 3. The auction results cleared at record low prices with 2023-24 delivery year prices at £39.65/MWh and 2024-25 prices at £41.61/MWh (2012 money).

5.77GW of capacity was awarded to 12 projects, with remote island wind projects winning contracts for the first time. Overall, two advanced conversion technology projects, six offshore wind projects and four remote island wind projects were awarded contracts. Low clearing prices, which were below the auction’s wholesale reference price levels, meant that the auction was cleared through the 6GW capacity cap in place, as effectively budgetary constraints had no impact. Successful offshore wind projects included the 12MW Forthwind demonstration project.

Energy and Clean Growth Minister Kwasi Kwarteng said: “Offshore wind is a British success story, with new projects at record low prices creating new opportunities for jobs and economic growth as we leave the EU. The support we’re announcing today will mean that over 7mn more homes will be powered by renewable energy as we decarbonise our energy system – crucial as we continue on the road to net zero emissions by 2050.”

Government unveils net zero package

In speeches at the Conservative Party conference, the government announced a new set of decarbonisation policies. Taking place from 29 September to 2 October, the conference saw various energy and climate announcements, including a package of policies designed to contribute to the 2050 net zero emissions target.

There was a large focus on electric vehicles (EVs), with the government committing to up to £1bn of investment in the automotive industry to promote EV expansion. The government would invest in the manufacturing of batteries, electric motors, drives, power electronics and hydrogen fuel cells, along with their component and materials supply chains.

Chancellor Sajid Javid gave a speech in which he announced a National Bus Strategy which would see the roll-out of new “superbus” networks to expand the UK’s fleet of low emission buses.

Acknowledging the large impact of housing emissions on the UK’s decarbonation progress, Housing Secretary Robert Jenrick announced a timeframe for the Future Homes Standard, which then-Chancellor Philip Hammond announced during the Spring Budget in March. Jenrick said that the Future Homes Standard will see requirements of building regulations for new homes raised by 2025 to meet “world-leading energy efficiency standards,” with interim regulations from 2020.

He continued: “I want new homes to play their part in tackling climate change and leaving the environment in a better way for future generations. That’s why I am introducing a Future Homes Standard which ensures that no new home is built from 2025 without the best levels of energy efficiency and low or zero carbon heating.”

On generation, the government announced plans to design, develop and build a fusion power plant by 2040. There will be an initial £200mn investment in the first five-year development phase of the Spherical Tokamak for Energy Production (STEP) with an ambition to develop and build a commercially viable fusion power plant by 2040, offering “clean, safe and carbon-free fuel supplies.” The government also highlighted the 6GW of offshore wind which received Contracts for Difference.

Renewables’ share of electricity generation hits Q2 record

The government published the latest Energy Trends quarterly publications, covering Q219, finding that renewables’ share of electricity generation achieved a record high for Q2.

In the data, published on 26 September, it was found that renewables’ share of electricity generation increased from 32% in Q218 to 35.5% in Q219, the highest Q2 on record for renewables. However, renewables’ share of generation decreased 0.3pp on Q119, when renewables generation was boosted by high wind speeds.

Between Q218 and Q219, coal’s share of electricity generation fell from 1.6% to 0.6%, marking the first time since the 19th Century that coal has had a less than 1% share. The Gas share increased from 41.7% to 43.6% and nuclear fell from 21.6% to 17.1% due to outages at Hunterston B (unplanned) and Dungeness B (statuatory).

For the rise in renewables’ share of electricity generation between Q218 and Q219, the government cited increased renewables capacity. Renewable electricity capacity was 45.9 GW at the end of the Q219, a 7.9% rise (3.4 GW) on a year earlier, with two-thirds of the annual increase coming from wind

Lib Dems and Labour outline commitments in party conferences

The Liberal Democrats passed a motion at their conference committing to achieving net zero greenhouse gas (GHG) emissions by 2045, five years earlier than the current UK target.

The Liberal Democrat conference took place from 14-17 September, with climate change a prominent feature in speeches and agendas. During the conference, the party voted to pass a motion connected to Policy Paper 139, “Tackling the Climate Emergency”, committing the party to achieving net zero greenhouse gas emissions by 2045.

Labour backed a motion at its party conference calling for a 2030 net zero target and committed to achieving this if the party comes to power.

The motion, which was passed on 24 September, was introduced by the Labour for a Green New Deal group. The motion commits Labour to aim for net zero carbon emissions by 2030, nationalisation of the Big Six energy companies, the guarantee of “new good unionised jobs as part of a worker-led just transition,” free or affordable integrated green public transport and support for the Global South and climate refugees.

This target is 20 years ahead of the current government target and 15 years ahead of the Liberal Democrats’ recent commitment to net zero by 2045.

Welsh government calls for marine energy to be included in CfD

Speaking at the Ocean Energy Conference in Dublin on 30 September, Wales’ Minister for Environment, Energy and Rural Affairs Lesley Griffiths referred to marine energy and offshore wind as “essential parts” to Wales’ decarbonisation targets.

More than €71mn of European funding has been agreed, delivering over €117m of investment.

The minister also urged the UK government to place further investment in marine and renewable energy in Wales: “announcements on the Contracts for Difference (CfD) auction have shown how it has driven down costs for offshore wind. The success of this mechanism must be extended to other marine technologies,” she stated. “Offshore wind has shown it can compete at or below the market rate, so the UK Government should open the support for marine and other new technologies to drive down the costs and secure a new industry to the UK."



Delivery

The Open Networks Project: ENA responds

The Energy Networks Association (ENA) has responded to BEIS and Ofgem’s open letter on the Open Networks Project. This is a project supporting network companies to manage systems smarter while facilitating the growth of emerging flexibility services markets.

In its 2 October response, the ENA agreed that decentralisation, decarbonisation, digitalisation and a transition to net zero is transforming the UK’s energy system. The ENA then described: how it has adjusted its work that is already underway in 2019 to align with BEIS and Ofgem’s priorities; what it expects to include in the 2020 workplan – giving opportunity for stakeholders to provide input on priorities and consulting; and what is already in place to deliver these priorities in addition to what other initiatives are under way outside Open Networks.

The response went on to list the ENA’s next steps: monitoring implementation of Open Networks’ outcomes and Flexibility Commitments on a six-monthly basis; planning change to deliver Distribution System Operation (DSO) through a DSO implementation plan; defining outcomes with planned timescales in the 2020 work plan; raising appropriate change within electricity network companies and/or electricity codes; and identifying any barriers to development where we may need Ofgem or BEIS policy intervention.

Ofgem consults on RO payments final orders

Ofgem is consulting on issuing final orders to four suppliers amidst the ongoing compliance deadlines for compliance year (CP) 17 (2018-19) of the Renewables Obligation.

GB electricity suppliers had an obligation to source 0.468 Renewable Obligation Certificates (ROCs) per MWh of eligible electricity supplied during CP17, which ran from April 2018 to March 2019. Each year suppliers have a deadline of 1 September following the CP to present ROCs to Ofgem to meet their obligations or pay a buy-out price by 31 August. The buy-out price for every ROC a supplier cannot source was set at £47.22 for CP17.

Ofgem confirmed on 1 October that four suppliers – Delta Gas and Power, Gnergy, Robin Hood Energy and Toto Energy – who missed the original CP17 compliance deadline have not provided Ofgem with adequate assurances that they will pay by the late payment deadline. Ofgem is therefore consulting on issuing these four suppliers with final orders to compel them to make £14.7mn in outstanding payments they owe to comply with the RO by 31 October.

Ofgem said it has engaged with all suppliers that missed the 31 August and 1 September deadlines to seek assurances that they will be in a position to make the necessary payments by the late payment deadline.

Jonathan Brearley appointed as new Ofgem CEO

On 2 October, Ofgem appointed Jonathan Brearley as its new chief executive.

The regulator noted that Brearley, currently Ofgem’s executive director for systems and networks, has led the RIIO-2 network price control programme and has also been a member of the regulator’s governing board. Brearley was previously a director at the Department of Energy and Climate Change where he led the delivery of the government’s Electricity Market Reform programme.

Current chief executive Dermot Nolan will remain in the post until the end of February.



Usage

MPs “disappointed by government’s CCUS ambition”

On 20 September the government published its response to a BEIS Committee report on carbon capture usage and storage (CCUS). The committee’s 20th report of session 2017–19, entitled Carbon Capture Usage and Storage: Third Time Lucky? was published on 25 April. It highlighted widely held views among policy makers and climate experts that use of CCUS will be necessary to achieve net zero emissions by 2050. The report also claimed that cost estimates had fallen in recent years. It also urged the government to view CCUS primarily as a tool for decarbonisation, rather than as an extra cost on power generation and that it would reduce the overall cost of meeting the UK’s emission reduction targets.

In the report, MPs criticised the government for failing to fully capitalise on what it described as “one of the most favourable environments globally” for CCUS. Noting that no commercial-scale plant for CCUS had yet been constructed in the UK, the committee called on the government to give a clear policy direction on CCUS. The response to the report from the government was received by the committee on 21 August. In it, the government said it agreed with the committee that CCUS can support decarbonisation. However, on calls for more ambition – including enabling CCUS commissioning from 2023 rather than 2025 and setting specific emissions reduction goals for CCUS – the government’s response was non-committal, with no new dates or targets announced.

In a statement published on 20 September, Committee Chair Rachel Reeves described the government’s response as “very disappointing” and that new Energy and Clean Growth Minister Kwasi Kwarteng’s views contrasted to the initial enthusiasm to the committee’s findings from the previous Minister, Claire Perry. Reeves added: “The government’s response barely engages with the specific recommendations of our report […] I hope the government will rethink its approach.” On 9 September Reeves sent a letter to Kwarteng to clarify the government’s position. This included asking why the government had not made further commitments to supporting CCUS, why it had not brought forward timelines and why it had not accepted the committee’s recommendation to set specific targets for the volume of carbon that should be stored by 2030 and 2035. The Minister is yet to respond.

World energy consumption to grow nearly 50% by 2050 

The US Energy Information Administration’s (EIA) International Energy Outlook 2019 has projected a near 50% rise in world energy usage by 2050. Published on 27 September, the report found that electricity generation will increase 79% between 2018 and 2050 as a result of increased electricity consumption in all end-user sectors. In the residential and commercial sectors, electricity use will rise as populations increase, commercial services expand and standards of living increase in economies outside the Organisation for Economic Cooperation and Development (OECD).

In OECD countries, energy usage is forecast to increase between 30 and 80 quadrillion British thermal units (BTU). Energy consumption in non-OECD countries is predicted to increase from just over 350 quadrillion BTUs to an estimated 580 to 730 quadrillion BTUs. Residential energy consumption is set to rise at a rate of 1.4% per year. The growth in the residential sector is dominated by a rise in consumption of electricity. Although electrical energy consumption rises significantly, coal consumption is forecast to fall until 2030, but will steadily rise a decade later up until 2050. Renewable energy is forecasted to be the world’s fastest growing form of energy over the coming decades and is expected to supply close to 28% of the global primary energy consumption by 2050, growing at an average annual rate of 3%.

Almost half of businesses planning to become net zero in a decade

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

Published on 30 September, 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. However, 59% of business people think that business and industry can be an effective force in combating climate change and 92% say they believe the climate is changing and that humans are at least somewhat responsible, with just 2% responding they do not believe the climate is changing at all.

Non-domestic electricity prices rise 4.6% between Q218 and Q219

On 26 September, the Department for Business, Energy and Industrial Strategy (BEIS) published its quarterly annual gas and electricity prices for the non-domestic sector, with metrics including and excluding the Climate Change Levy (CCL). Between Q218 and Q219, average electricity prices in cash terms (excluding CCL) in the non-domestic sector rose 4.6%.

Prices for all the business consumer size bands increased over the same period, ranging from 1.3% in the Very Large band to 7.2% in the Small band. The average electricity prices including the CCL also increased by 7.2% over the period.

During this period, average gas prices in cash terms (excluding CCL in the non-domestic sector) also rose by 2.8%. Gas price changes for various consumer bands over the same period varied with a fall of 11% in the Very Large band to an increase of 11% in the Very Small band. Average gas prices including the CCL increased by 4.6% between Q218 and Q219. The rates of CCL for electricity and gas rose significantly on 1 April 2019 due to the closure of the Carbon Reduction Commitment (CRC). 

Climate Action Summit held in New York

On 23 September governments, the private sector, civil society, local authorities and international organisations convened for the United Nations Climate Action Summit in New York. At the summit, 77 countries committed to cut greenhouse gas emissions to net zero by 2050, while 70 countries announced they would either boost their national action plans by 2020 or have started the process of doing so. In addition, over 100 business leaders delivered “concrete” actions to align with the Paris Agreement targets and speed up the transition from the “grey to green economy.” Amongst the major announcements, the UK made a “major additional contribution” in which it doubled its overall international climate finance to £11.6bn for the period from 2020 to 2025. The European Union also announced at least 25% of the next EU budget would be “devoted to climate related activities.” Additionally, a group of the “world’s largest asset owners” who are responsible for directing over $2trn in investments said they are “committed” to move to carbon-neutral investment portfolios by 2050.

The European Commission was in attendance, presenting its progress towards a climate-neutral Europe by 2050. This target was made under its legally binding framework to deliver on its pledges under the Paris Agreement. The EU and its member states, together with all parties of the Paris Agreement are to communicate by early 2020 their long-term strategy to achieve climate neutrality by 2050.

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