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December 2018 Regulatory Report

By Market Insight Team | Posted January 08, 2019


Last month the government published a consultation on proposed amendments to the Capacity Market following its earlier suspension as a result of a European Court of Justice Ruling in November. Proposals included a replacement “top-up” T-1 auction to be held in summer 2019 for delivery year 2019-20, though this will be dependent on a European Commission decision on State Aid. The document also proposed new deadlines related to milestone delivery and gave clarification on the pre-qualification process.

On 11 December the Solar Trade Association (STA) published analysis showing that the cost of large-scale solar has fallen faster than expected and that it will likely decrease further. The STA also noted a “significant” solar pipeline anticipated for 2019, which will be supported by the growing need for clean generation. 


Ofgem issued its decision on the scope and timetable for a Significant Code Review on its forward-looking charges and network access arrangements on 18 December. The regulator said that ensuring the best use of power network capacity and having effective signals on how users can create costs and benefits in the network will be key to delivering a flexible energy system in the future.

GB’s six distribution network operators (DNOs) committed to the development of flexibility systems, according to an announcement by the Energy Network Association (ENA) made on 13 December. The ENA said the DNOs are committed to creating a smarter, more flexible and efficient energy system and, as such, they have committed to several initiatives including opening up requirements for building new electricity network infrastructure and working with Ofgem to develop price control frameworks.


The COP24 UN Climate Change Summit took place in Katowice, Poland from 3-14 December, with the goal of finalising the Paris Agreement Work Programme – referred to as the “rulebook” for the implementation of the agreement’s goals.

The latest edition of BEIS’s quarterly energy statistics, Energy Trends: December 2018, has shown that at the end of Q3 2018 renewable capacity was 43.2GW, representing an increase of 10% on Q3 2017. For the same quarter, renewables generated a record high of 33.1% of the UK’s electricity.

Also covered in this Regulatory Report:


Government proposes Capacity Market amendments

BEIS has published a consultation on several proposed technical amendments to the UK’s key energy security scheme, the Capacity Market (CM). This follows the suspension of the scheme as a result of a ruling by the General Court of the European Court of Justice on 15 November in relation to a case launched by Tempus Energy in December 2014. The ruling prompted National Grid to “postpone indefinitely” the upcoming auctions for delivery of capacity one (T-1) and four (T-4) years ahead.

In its consultation, published on 19 December, BEIS proposed that a replacement “top-up” T-1 auction be held in summer 2019 for delivery year 2019-20. It noted that agreements won in this auction would remain conditional on the timing and outcome of the European Commission decision to grant State Aid – expected early this year, although no timeframe has been provided. The government believes it unlikely that a final decision on State Aid will be reached by the Commission before the summer T-1 auction. As a result, it intends to amend the regulations so that the results of the auction do not actually represent Capacity Agreements until the granting of State Aid. BEIS also confirmed that “minor changes” to CM rules and regulations would likely be required in order for this auction to proceed and that these will be decided in spring.

On the pre-qualification process, BEIS said it does not consider it necessary for this to be reopened ahead of the replacement T-1 auction, meaning that finalised results for the planned auction will still remain valid. However, it explained that there may be a requirement for some applicants to re-confirm information previously provided – applicants can also withdraw their prequalification applications.

Two new deadlines have been proposed: a delivery year readiness deadline, by which all key milestones must be demonstrated to the Delivery Body following the auction, and a grace period deadline – failure to demonstrate key milestones by this deadline could result in penalties or termination. The government also intends to make provisions that allow for deferred payments to capacity providers following the current standstill period. These will be dependent on the State Aid decision and ensure that any Capacity Agreement awarded through previous auctions remains fully enforceable. Two options are currently being considered for collecting the Capacity Market Supplier Charge during the standstill: collection by the Electricity Settlement Company (ESC) or through a modification to the BSC. The latter is currently under consultation.

Solar costs fall faster than expected, says STA

Large-scale solar costs have fallen faster than expected, and will likely drop further, according to an assessment of the Levelised Cost of Electricity (LCOE) for the technology by the Solar Trade Association (STA).

The analysis, published on 11 December, found that solar has exceeded the previous expectations of the association, with predicted LCOE costs of £50-60/ MWh in 2019. This figure is also significantly below BEIS’s 2016 Central Estimate of Electricity Generation Costs. STA Policy Analyst Nicholas Gall said: “This is yet another example of the fast-moving solar power market outpacing official cost analyses. Our aim here is to provide an accurate assessment of where large-scale solar costs stand as we enter 2019, when we hope to see some revival of the UK large-scale solar market.”

The STA also noted that a “significant” solar pipeline is anticipated to start in the UK in 2019, adding that long-term outlook will be supported by the UK’s growing need for clean generation capacity.

Government publishes revised CfD terms following consultation

On 18 December, the government published its response to its earlier August 2018 consultation on the proposed contract drafting it will use to implement the changes to the Contracts for Difference (CfD) scheme. This comes ahead of the third allocation round, which will have a total budget of £60mn of annual support and take place in May 2019.

BEIS outlined several changes to the contract in the document. The definition of advanced conversion technologies (ACT) has been amended, with participating technologies now required to reach an efficiency of 60% – the physical separation of the gasification or liquefaction process and the combustion process is also required. The response also confirmed the introduction of the new category of Remote Island Wind projects, which will be subject to similar standards as onshore wind. This also included a stipulation regarding minimum length of electrical connection between the project and the mainland power grid.

An updated and lower greenhouse gas emissions (GHG) calculation formula with regard to Combined Heat and Power (CHP) was confirmed. This will only apply in respect of “optional CHP” technologies to the extend that the generator can provide evidence related to the energy content of heat supplied in the relevant calculation period in a form satisfactory to the LCCC.

UK will not auction EU ETS permits in Q1 2019

The government has announced that the UK will not auction any permits for the EU’s carbon market, the EU Emissions Trading Scheme (ETS), in Q1 2019. It was reported by Reuters on 19 December that an email sent by BEIS confirmed that no auctions of carbon permits will be held in January, February or March this year while uncertainty around the outcome of Brexit remains.

The European Commission has previously said that, should the UK leave the EU with no deal, it would suspend access to the registry that allows it to auction and allocate permits. It was reported that BEIS said, should a deal be secured and the UK remain in the EU ETS, auction volumes would be spread across those auctions held during the rest of 2019. Allowances issued in 2018 will remain valid for EU ETS compliance.

In the longer-term, several options for carbon pricing have been outlined following withdrawal from the EU. These include remaining in the EU ETS, creating a UK version of the ETS that is linked to the EU scheme or the establishment of a UK-only ETS scheme. A carbon tax has also been proposed.


UKERC warns of implications of hard Brexit

Analysis released by the UK Energy Research Centre (UKERC) has predicted that a hard Brexit could add £270mn/ year to GB electricity bills. The report, Elexcit: The Cost of Bilaterally Uncoupling British-EU Electricity Trade, said that a hard Brexit will lead to greater friction in electricity trading between GB and the EU, and make the process less efficient.

UKERC reiterated the benefits of the EU Single Electricity Market, stating that a less efficient market following Brexit, and the abandonment of planned interconnectors, would increase generation costs by £505mn – or 1.5% annually in both GB and France compared to GB remaining in the existing single market. It was noted that GB would face 60% of this cost, equating to £270mn per year. Other impacts outlined included reduced capabilities of interconnectors and a greater chance of trading errors due to traders having to commit to cross-border trades on anticipated prices rather than actual prices, as a result of the difference in market closing times.


Ofgem announces forward-looking charges review

Ofgem has issued its decision on the scope and timetable for a Significant Code Review (SCR) on its forward-looking charges – which are charges to use the network that reflect the cost of adding future capacity – and network access arrangements.

In a document published on 18 December, the regulator said that ensuring the best use of network capacity and having effective signals on how users can create costs and benefits on the network will be key to developing a flexible energy system. The SCR will review the definition and choice of access rights for transmission and distribution users, particularly with regards to rights to the system, how far access can be restricted and the potential for shared access across different users.

Ofgem also intends to review distribution network use of system (DUoS) charges, including the balance between capacity-based and usage-based charges in order to encourage better use of existing network capacity. The regulator explained that it expects industry to take forward a number of elements outside the scope of the SCR, including a review of aspects of allocation rights and a review of balancing and service charges. A decision on modifications is expected by the end of 2021, with transmission charging charges to be in place for 2022-23.

All GB network operators commit to flexible electricity systems

It has been announced by the Energy Network Association (ENA) that GB’s six distribution network operators (DNOs) have committed to the development of flexibility systems. On 13 December, the ENA issued a release stating that Britain’s network operators are committed to creating a smarter, more flexible and efficient energy system that offers reliable, safe and affordable energy. Specifically, the announcement said that DNOs have committed to: the opening up of requirements for building “significant new electricity network infrastructure”, including smart flexibility services; openly testing the market to compare flexibility solutions for new significant projects; and working with Ofgem and other stakeholders to develop price control frameworks. The ENA said the initiative will help to reduce the cost of investment in new infrastructure and ensure that existing infrastructure can operate more effectively.

Ofgem issues RIIO-2 sector specific methodology consultation

On 18 December, Ofgem issued a consultation on the RIIO-2 sector specific methodologies, outlining its thoughts on the next round of price controls. The consultation is focused on how Ofgem plans to apply the RIIO framework over the next price controls, which start in 2021 – these cover companies operating gas distribution and transmission, and electricity transmission networks, as well as the electricity system operator (ESO).

Ofgem confirmed that allowed cost of equity will be limited to 4% in CPIH (a measure of inflation) terms. It also detailed enhanced engagement models intended to ensure that consumers are at the heart of the price control process – network companies are expected to work with customer engagement groups in the distribution sector and user groups in the transmission sector. With regards to asset resilience, Ofgem proposed setting output targets that reflect actions to improve resilience targets against asset failures, with potential financial penalties for under-delivery. It also outlined plans for innovation measures under RIIO-2, including the introduction of a new network innovation funding pot that will be focused on strategic energy system transition challenges and seeking views on whether the Network Innovation Allowance should be retained. Views are sought by 14 March.


UN climate summit finalises Paris Agreement rulebook

The COP24 UN Climate Change Summit took place in Katowice, Poland from 3-14 December, with the goal of finalising the Paris Agreement Work Programme – the “rulebook” for the implementation of the agreement’s goals.

At the event, UN Secretary General António Gutteres said that the majority of the countries most responsible for greenhouse gas emissions were behind in their efforts to meet the Paris goals. Accordingly, he said that transformative climate action was necessary in five key areas: energy, cities, land use, water and industry, but that 75% of the infrastructure needed for decarbonisation efforts to 2050 must still be built. A report was launched at the summit by the UNFCCC that detailed progress on emission reductions. It said that between 1990 and 2016, emissions from developed countries decreased by 13%, noting that “measures by developed countries have increased and are paying off”.

Guterres told delegates that it was “hard to overstate the urgency of our situation”. He noted that: “This meeting is the most important gathering on climate change since the agreement was signed. Even as we witness the devastating climate impacts causing havoc across the world, we are still not doing enough, nor moving fast enough, to prevent irreversible and catastrophic climate disruption.”

The summit saw the EU, Canada and several developing countries pledging to further toughen their existing commitments to cut greenhouse gasses and work to limit global warming to 1.5C.

Coinciding with the beginning of the summit, the Confederation of British Industry called on the UK government to go “further and faster” concerning climate change policy to help prevent global warming of over 2C. Energy and Infrastructure Director, Tom Thackray, said in a 3 December press release that “action is needed right now” across business, governments and society. He welcomed the European Commission’s recent 2050 net zero strategy, adding that the latest climate science underlines the UK’s need to be more ambitious.

The Renewable energy capacity increases during 2018

The latest edition of BEIS’s quarterly energy statistics, Energy Trends: December 2018, published on 20 December, has shown that at the end of Q3 2018 renewable capacity was 43.2GW, representing an increase of 10% on Q3 2017. For the same quarter, renewables generated a record high of 33.1% of the UK’s electricity.

The overall increase in renewables generation caused low-carbon electricity’s share of generation to reach a record high of 56%, up from 54% in 2017. On renewables, it was also revealed that during November 4,728 solar panel installations were completed, which is the highest number of installations in a single month since September 2016. BEIS also reported that total energy production was 0.7% higher than in the third quarter of 2017, largely driven by increased gas, bioenergy and renewables production.

Final energy consumption (excluding non-energy use) fell by 0.4% compared to the third quarter of 2017. Domestic consumption fell by 4.5% reflecting the warmer weather in the quarter, service consumption fell by 3.0%, whilst transport consumption rose by 1.2% and industrial consumption rose by 0.6%.

Non-domestic energy efficiency spending still strong despite slight decline

Spending on non-domestic energy efficiency declined in Q3 2018 when compared to Q2, according to research from EEVS and Bloomberg NEF. In Energy Efficiency Trends Vol. 25, published on 4 December, EEVS said that the decline means that investment in non-domestic energy efficiency has returned to the “normal range” after a large increase between April and June 2018.

However, the report stated that overall results for the quarter were still strong, representing the second highest level of spending since Q4 2016. Average spending remained at around £250,000 per project, with lighting efficiency projects retaining the lead position for uptake, followed by lighting controls and boiler controls/optimisation. After a period of strong growth, building energy management systems (BEMS) saw a sharp decline in uptake during the quarter.

EEVS said that the most common reason for a lack of efficiency uptake during Q3 was businesses already having a pipeline of planned future projects, with a lack of resources and affordable finance, uncertainty over financial benefits and higher priorities elsewhere listed as the joint next most common reasons.

Innovate UK announces low-emission vehicle funding competition

A new £20mn funding competition will invest in innovative projects that support the design, development and manufacture of low- and zero- emission vehicles and technologies. 

The scheme, which is being delivered by the Advanced Propulsion Centre (APC), Innovate UK and BEIS, aims to make the UK a global centre of excellence for the development of next generation, low-carbon vehicles. Organisations can apply for a share of the funding, with the competition particularly seeking developments in the design, build and manufacture of zero tailpipe emission vehicles – other projects that demonstrate a “significant reduction in carbon dioxide emissions” are also welcome.

UK-based businesses can lead a project but must work in partnership with at least one SME, vehicle manufacturer or tier 1 supplier - companies that supply directly to manufacturers. Innovate UK said that projects must focus on five key areas in order to be applicable: alternative propulsion systems; electric machines and power management; energy storage and energy management; lightweight vehicle and powertrain structures; and thermal propulsion systems. The competition has been developed in support of the government’s “future of mobility grand challenge” – part of the Industrial Strategy – that aims to transform how people and vehicles move around the UK.

Government backs low-carbon heavy industry cluster

The government is to offer up to £170mn of funding to create a net-zero carbon cluster of heavy industry by 2040. In an announcement made on 13 December at the UN COP24 climate summit in Poland, government officials said that such an industry hub would be a world first.

Industry currently accounts for around 25% of all greenhouse gas emissions in the UK, with more than two-thirds coming from energy intensive industries. The new scheme, which is expected to be backed by industry, will help sectors such as steel, cement, chemicals and paper to share knowledge and expertise in low-carbon solutions and aid the UK’s transition to a decarbonised economy.

Energy and Clean Growth Minister Claire Perry said: “This will help to develop the technologies of the future to transform industry around the world, ensuring the UK seizes the global economic opportunities of moving to a greener, cleaner industry.”

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