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February 2019 Regulatory Report

By Market Insight Team | Posted March 05, 2019

Generation

The government published its response to the Capacity Market (CM) Technical Consultation on 28 February, following the suspension of the CM in November 2018 after a ruling by the General Court of the European Court of Justice. In its response, the government outlined several draft regulations including for conducting a replacement capacity auction for delivery in 2019/20.  

The BEIS Committee launched an inquiry into the outlook for future investment in the UK’s energy infrastructure, to examine whether a new approach to accelerate investment that can deliver a low cost and low carbon energy system is necessary.

Delivery

National Grid’s electricity and gas transmission arms issued consultations seeking views on their approach to business priorities under the next round of RIIO-2 price controls and highlighting the need to create a safe and reliable future network.

The National Infrastructure Commission published its latest Annual Monitoring Report analysing progress made on flexibility in the UK but also saying that more can be done in the area, including from government and Ofgem.

Usage

A report published by the International Renewable Energy Agency found that 85% of electricity generation will need to come from renewable sources by 2050 in order to meet targets set out by the Paris Agreement. This, it said, could cost as much as £14trn.

A hearing of the Parliamentary Science and Technology Committee is told by several industry representatives that the government should consider incentivising companies to replace their petrol and diesel vehicles with electric or low emission alternatives.

Also covered in this Regulatory Report:


 


Generation

BEIS announces decisions on CM technical amendments

On 28 February the government published its response to the Capacity Market (CM) Technical Consultation which closed on 10 January.

The technical amendments consultation was launched on 19 December 2018 following the suspension of the CM in November 2018. This came as a result of a ruling by the General Court of the European Court of Justice (ECJ) that it violated EU state aid rules. The case was originally brought to the ECJ by Tempus Energy.

BEIS launched the consultation with the view that the court's decision did not challenge the fundamental design of the CM or find it incompatible with state aid. The government stated that the ruling had not changed its view that the CM was “the right mechanism to deliver secure electricity supply at least cost”. As a result, it confirmed its plans to hold a replacement T-1 “top-up” auction in summer 2019 (initially planned for January) and said it expected a positive final decision on state aid to allow payments to be made to existing agreement holders that have met their obligations during the standstill.

The government said in its response that it has laid draft regulations that will, when in force, make the necessary changes to: conduct a replacement capacity auction for delivery in 2019/2020; allow capacity providers holding agreements greater flexibility in dealing with forthcoming milestones affected by the standstill period; and enable suppliers to make payments during the standstill period to fund deferred payments to capacity providers who have met their obligations during the standstill period – subject to a positive final state aid decision.

On the first point, the auction window has been extended to the end of August “as a contingency measure” to account for a possible clash with pre-qualification for next year's auctions and the need for approval from both Houses. The auction will likely occur before the CM could be reinstated and therefore successful bidders will not be entitled to capacity payments until state aid approval is obtained.

In a Written Statement to Parliament Business and Energy Secretary Greg Clark said that the government “will shortly consult on regulatory changes that will be required to hold a T-3 auction in early 2020”. The T-3 auction is to provide capacity three years in the future.

BEIS said that it anticipates that the EC will publish its opening decision in full, in the next four weeks.


Committee to address low carbon investment

The BEIS Committee has launched an inquiry into the outlook for future investment in the UK’s energy infrastructure, it was announced on 28 February.

During the inquiry, the committee will examine whether government should implement a new approach to accelerate investment in order to deliver a low carbon, low cost energy system and to secure long-term energy supplies for the UK. In particular, the inquiry will focus on existing challenges to raising finance for clean energy technologies such as renewables and storage as well as possible investment in system flexibility, decarbonising heat, demand reduction and power plants. Future financing will also be addressed, particularly concerns surrounding foreign investment.

BEIS Committee Chair Rachel Reeves commented that a larger shift in energy infrastructure towards low carbon generation is necessary.
 

Perry outlines UK post-Brexit carbon pricing plans

In a 27 February EU Energy and Environment Sub-Committee evidence session, Energy and Clean Growth Minister Claire Perry confirmed that the government is working on plans to establish a post-Brexit domestic carbon emissions trading system (ETS) that it hopes to connect to the EU Emissions Trading System (EU ETS) from January 2021.

The UK is currently still part of the EU ETS, although it has been suspended from taking part since 1 January until after EU exit. When it leaves the EU, it will withdraw from the scheme and a replacement will be needed.

Perry said that, on the assumption the UK leaves the EU with a withdrawal agreement in place, creating a domestic ETS that would link to the EU ETS was the government’s preferred option. She said that BEIS intends for the UK to stay in the EU ETS until the end of the current trading phase at the end of 2020, after which it would establish its own scheme that would integrate with the EU’s from January 2021. In the event of a no deal scenario, the government has said it will introduce a new carbon tax at £16/ tonne to be imposed upon those companies that participate in the EU ETS. This tax could eventually be replaced by a trading scheme, although linking it with the EU scheme would be less likely.

A consultation on plans for the scheme will reportedly be published in “the week commencing 29 April”, with work on the plans already underway.


Updated no deal Brexit guidance for energy businesses published

On 6 February the government published further post-Brexit guidance for businesses engaged in the energy sector that are “a supplier, installer or generator of electricity, renewable energy or certain microgeneration technologies”, as well as large industrial sites, all of which it said would be impacted by the UK’s EU exit.

BEIS said a no deal scenario would see the UK’s electricity markets removed from the EU internal energy market and that the EU would also no longer govern cross-border flows across electricity interconnectors that link the UK and EU member states. As a result, it said, alternative trading arrangements would need to be developed.

The notice also highlighted energy-related arrangements that would remain the same in a no deal situation. These included measures under the government’s Industrial Strategy, the Climate Change Act 2008, cross-border trade for gas, and regulations for the monitoring, reporting and verification of greenhouse gases.


Government confirms commencement date for CfD third allocation round

The third allocation round (AR3) for the Contracts for Difference (CfD) scheme has been given a prospective commencement date of 29 May 2019. This was disclosed in The Contracts for Difference (Allocation) Regulations 2014 Exemptions Request Notice, published by BEIS on 14 February. However, the government has yet to confirm the date in an official Allocation Round notice.

In November 2018, the government announced it would be allocating £60mn for AR3, which aims to contract up to 6GW of capacity and will be open to less established technologies such as offshore wind, remote island wind, tidal and wave technologies.

Developers will be bidding for the delivery years 2023-24 and 2024-25. In total, £557mn has been allocated for bi-annual CfD auctions starting from 2019 and going into the 2020s.


Delivery


National Grid outlines RIIO-2 transmission plans

National Grid’s electricity (NGET) and gas (NGGT) transmission arms have issued consultations seeking views on their business priorities under the next round of price controls (RIIO-2).

Both consultations highlighted the need to create a safe and reliable network, including maintaining world-class levels of safety during RIIO-T2, and developing a new asset management methodology. There was also a consideration of how National Grid can take a leading role in the ongoing transition of the energy system, including investigating new ways to make best use of existing network capacity and analysing how to maintain security and quality of supply as the system evolves. Views were also sought on how proactively NGET should invest in network capacity for electric vehicles and working with stakeholders on how to embed a whole-system approach.

Responding to stakeholder suggestions that it should be a leader and enabler in innovation, NGET said that there are several opportunities in the area, including the digitalisation of the network, environmental impact reduction, and accelerating the implementation of new technologies. NGGT highlighted its own focus on developing innovation projects, for example through considering the transportation of hydrogen. The need to deliver an overall package that provides value for money was recognised.


NIC calls for government action on managing networks

In its latest Annual Monitoring Report, the National Infrastructure Commission (NIC) praised the progress made on flexibility in the UK, highlighting that all distribution network operators (DNOs) had signed up to the Energy Networks Association to open up all significant new network requirements to storage and demand-side technologies.

However, it also said “more can be done, faster”. It called on the government and Ofgem to have greater oversight to consider the issues that arise during the process, such as conflicts of interest for DNOs, and to set a timetable for the transition. It also highlighted that although progress has been made on some interconnector projects others have stalled. There is now a risk that the outcome of EU exit negotiations will create barriers to future interconnector projects.

Three main priorities for 2019 were offered: removing barriers for future interconnector projects as part of EU negotiations; ensuring the Electricity Act 1989 is amended as soon as possible to define electricity storage as a subset of generation; and the government and Ofgem providing support to DNOs to deliver a more actively managed energy system.


DNO announces £12mn flexibility auction

Distribution network operator (DNO) UK Power Networks (UKPN) plans to hold a £12mn auction to procure flexibility services in the South East and East of England. In a 20 February announcement the DNO said the £12mn will be spread across 28 locations to “kick-start a new market for energy generators and other energy resources” in order to deliver a stronger and more resilient network which can better manage electricity at peak times.

UKPN said companies now have until 12 March to register to tender. Additionally, an auction to bid for up to four contracts to provide flexibility services from winter 2019 onwards will be held in late March. UKPN also announced that it is reducing the minimum capacity threshold from 100kW to 50kW to allow smaller providers to participate in the tender.


Usage


Government urged to adopt innovation to meet Paris goals

A new report from the International Renewable Energy Agency (IRENA) has calculated that 85% of electricity generation will need to come from renewables by 2050 if the Paris Agreement targets are to be met.

IRENA is an intergovernmental organisation which aims to support countries transitioning to use more sustainable forms of energy. It said that the growth in generation that is needed is expected to cost around $18trn (£14trn).

The report added that this would include wind and solar capacity increasing to account for 60% of generation by 2050, up from just 4.5% in 2015. The report also recommended a similar level of investment to update infrastructure and flexibility options to support the higher level of renewable generation on the system.

Published on 19 February, IRENA’s report aimed to provide policy makers with 30 different solutions to assist with integrating large-scale variable renewables into grids globally. These were divided into four categories, which were: enabling technologies (e.g. battery storage and smart grids), business models (e.g. energy-as-a-service) and market design (e.g. new regulations).

IRENA then set out an eight-step innovation plan to bridge the gap between countries which have embraced innovation and those which are only just beginning to. The steps included: anticipating future power system needs; fostering learning by doing; creating synergies through sector coupling; making market design innovation a priority; adopting an open and co-operative approach to innovation; and turning smart innovations into smart solutions.

Director of IRENA Adnan Z. Amin said that many of the solutions outlined in the report were ready for commercialisation, adding that pioneering companies were “creating, trialing and deploying a swathe of potentially transformative innovations […] faster than anyone expected”. However, he also called for “timely, focused” government action to support innovation and integrate emerging solutions.


Industry calls on government to decarbonise fleets

During a hearing of the Parliamentary Science and Technology Committee held on 26 February, the government was urged to incentivise companies to replace their petrol and diesel vehicles with electric vehicles (EVs) or low emission vehicles.

MPs asked representatives from the UK Hydrogen and Fuel Cell Association, the Low Carbon Vehicle Partnership and EV charger company ChargePoint about how the government could decarbonise transport to help meet UK emissions reduction targets.

Managing Director of Low Carbon Vehicle Partnership Andy Eastlake and Chair of UK Hydrogen and Fuel Cell Association Amanda Lyne recommended that the government focus on decarbonising fleets, both in the public and private sectors. Eastlake said that this would be easier than trying to change consumption behaviour and Lyne said that there needed to be public sector fleet targets. Labour MP Darren Jones said the government had several issues to contend with. These included whether there would be enough generation capacity to accommodate mass EV uptake, the development of charging infrastructure, whether there are the right regulations in place to enable flexibility and incentivising consumers to buy EVs. He said that this was big job for government and could not be left to market forces.


Europe sees efforts towards 2020 energy efficiency target falter

New figures released by Eurostat on 7 February found that the EU is getting further away from its 2020 energy efficiency target.

The EU has committed to a binding energy efficiency target of reducing energy consumption by 20% by 2020 on 1990s levels. However, the data found that energy consumption across the bloc rose for the third consecutive year in 2017.

Energy consumption during the year was 1% higher than in 2016, at 1,561mn tonnes of oil equivalent. The EU’s primary energy consumption – which includes energy used by the power sector – was 5.3% above its 2020 energy efficiency target by the end of 2017, while final energy consumption – the total energy used by consumers – was 3.3% above the target.

Senior Advisor at NGO the Regulatory Assistance Project Samuel Thomas called for “a step change” in building renovation and new build efficiency, adding: “We have the money, and there is plenty to learn from recent experiences in different countries.”


Major corporations pledge EV fleet switch

More than 30 companies worldwide have pledged to take action on replacing their road fleets with electric vehicles (EVs) as part of non-profit organisation The Climate Group’s EV100 initiative.

In the recently published Climate Group’s EV100 Progress and Insights Annual Report, it was highlighted that transport emissions worldwide continue to increase at around 2.5% per year. The EV100 initiative aims to tackle this trend and help limit global warming to 1.5C by accelerating the transition towards EVs. It currently has a target of helping ensure more than 2mn EVs are on roads worldwide by 2030. 

Since the launch of the EV100 initiative in September 2017, 31 global corporations with a combined revenue of $0.5trn (£0.38trn) have pledged themselves to the scheme’s aims. The report claimed that, to date, EV100 had led to 145,000 vehicles being switched to EVs by 23-member organisations, saving an estimated 6.6mn metric tonnes of carbon.

EV100 members listed reducing greenhouse gas emissions as their top reason for committing to EVs, followed by wanting to lead the EV transition, reputational benefits, reducing local air pollution and making financial savings.


BP predicts renewables to be main power source by 2040

In its latest annual energy outlook, BP made various predictions about the future of energy including that renewables could be the world’s main power source by 2040.

Renewables in the power sector are expected to increase 7.6% annually, accounting for around two-thirds of the increase in global power generation. Solar and wind generation are expected to grow rapidly in the 2020s and beyond, increasing by a factor of five and 10 respectively. This, BP said, will be due to “pronounced falls” in the costs of the two technologies. BP also said that the EU would continue to outperform the rest of the world, with the share of renewables in the EU power market exceeding 50% by 2040.

However, BP predicted that although the rate of carbon emissions increase will be much slower than in the past 20 years, emissions will still increase more quickly than the “sharp decline likely to be necessary” to achieve the Paris climate goals

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