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May 2018 Regulatory Report

By Market Insight Team | Posted June 07, 2018

Generation

The National Audit Office (NAO) has published a report revealing that the 2017 Contracts for Difference auction will cost consumers £1.5bn. The report says that BEIS made changes to the auction design prior to the 2017 auction that resulted in small “fuelled technologies” raising the strike price for larger projects and that, as a result, consumers face extra costs of roughly £100mn each year.

Elsewhere the Lords EU Energy and Environment Sub-Committee has written to Business and Energy Secretary Greg Clark asking the government for clarity on the possible impacts on the energy industry of a no deal Brexit. The letter posed a series of questions looking at the potential economic impact of the UK becoming a “third country” under EU law, the financial impact of new transmission system use fees in imports and exports being implemented, and more.

Delivery

The Ofgem-established Charging Futures Access and Forward Looking task forces have issued a report on the various options open to the regulator for reforming the current network access and charging arrangements. Delivered in response to Ofgem’s Reform of the Electricity Network Access and Forward Looking Charges working paper, the report explores various “building blocks” that will allow the future development of access rights and charges.

The Smart Meters Bill passed its Third Reading in the House of Lords on 22 May and became law. The bill will introduce new powers to facilitate the roll-out of smart meters and extend these powers over the roll-out to November 2023.

Usage

Prime Minister Theresa May has announced that the UK will utilise modern construction practices to “halve” the energy usage of new buildings by 2030. Giving a speech on the government’s Industrial Strategy, the Prime Minister encourages the use of smart technologies and construction methods to in order to make buildings more energy efficient and enable to the UK to meet its carbon reduction targets.

The BEIS Committee has conducted an evidence session into the development of charging infrastructure for electric vehicles (EVs). Questions focused on major challenges facing infrastructure developers, practical methods of funding and developing new charge points and the setting of five-year milestone goals.

Also covered in this Regulatory Report:


Generation

CfD changes to cost consumers £1.5bn, says NAO report

The National Audit Office (NAO) has published a report revealing that the 2017 Contracts for Difference (CfD) auction will cost consumers significantly more than the 2015 auction, relative to the capacity that it secured.

The report, Investigation into the 2017 Auction for Low-carbon Electricity Generation Contracts focuses on changes BEIS made to the auction design before the 2017 round. It states that the department capped the amount of generating capacity that projects using certain “fuelled technologies” could use and adjusted the way that this cap applied when compared with previous auction rules.

According to the NAO, these changes meant that some projects that “were too large to fit within the capacity cap did not win contracts”. In contrast, some other projects that were smaller but costlier per unit of electricity did win contracts. The report also notes that BEIS failed to highlight the change to the programme or test whether it would result in “unintended consequences”. The changes were made, it adds, as part of a wider change that allowed bidders to submit flexible bids.

The NAO says that BEIS “recognised that the change could enable auction results that would go against its principle that more expensive projects should not be accepted if a larger project with a cheaper unit price is rejected.” However, it explains that the department has provided no evidence that it considered whether this would occur and did not notify its programme management board of the changes.

Having studied the bid information from the auction to determine the outcome had BEIS capped fuelled technologies in line with the February 2015 auction rules, the NAO discovered that the changes introduced enabled small fuelled technologies to raise the strike price for larger projects. BEIS is reported to have told the NAO that the design change was made “on the expectation, shared by a number of industry commentators, that wind projects would bid at a higher price than fuelled technology projects.”

In conclusion the increase, states the NAO, raised the cost to consumers by roughly £100mn each year, which equates to a total additional cost of “around £1.5bn over the 15-year life of the contracts”. BEIS has stated that, because of this outcome it will not apply the capacity cap rule in the same form in future auctions.  

BEIS sets out non-domestic RHI decisions

BEIS confirmed its decisions on several issues relating to the non-domestic Renewable Heat Incentive (RHI) on 29 May. These include making payable heat from very large plant limited to 250GWh/ year, and also allowing recipients to combine multiple plant on one site for tariff purposes.

Elsewhere, BEIS has decided to remove the process of staggered commissioning for biomethane installations and a replacement where an original installation breaks down will be allowed. In relation to new plant, as well as any additional capacity added to existing plant,

BEIS has decided that this will now be required to declare compliance with environmental legislation and have all the relevant permits in place in order to be able to receive support.

Lords seek government clarity on “no deal” energy consequences

The Lords EU Energy and Environment Sub-Committee has written to the Business and Energy Secretary Greg Clark to seek the government’s views on the EU Commission’s advice to energy stakeholders on preparing for a no-deal Brexit.

It follows the publishing of a European Commission memorandum in April detailing the practical impact on the Internal Energy Market (IEM) if a ratified withdrawal agreement is not reached and the UK becomes a “third country” post-Brexit. The memorandum states that, in the absence of any transitional arrangement in a withdrawal agreement, EU energy market rules and regulations will not apply to the UK from 30 March 2019.

The Lords’ letter, published 9 May, poses a series of questions to the government asking for clarity in the event of no deal and no mutual recognition. These include how UK-based operators no longer participating in the EU’s common platforms would impact the prices consumers pay for energy, the potential consequences of restrictions on trading nuclear material, the economic value of business that could be lost if UK companies are denied exploration and production rights in EU Member States, and the financial impact of new transmission system use fees being imposed on imports and exports.

Energy UK proposes changes to Electricity Market Reform framework

Energy UK has released a series of recommendations on the forthcoming review of the Electricity Market Reform (EMR) programme introduced through the Energy Act 2013.

With the Act due for review in 2019, Energy UK’s vision paper sets out how EMR can provide greater benefits for consumers and the UK’s future economy. Energy UK emphasises its ongoing support for the programmes two key elements – Contracts for Difference (CfDs) and Capacity Market (CM) auctions – but makes a number of suggestions as to how they can both remain fit for purpose by providing “a level playing field for all participants and technologies enabling investment at lowest cost”.

These recommendations include a revenue stabilisation CfD to reflect “substantial” cost reductions in low-carbon technologies; greater clarity on rules and timing for CfD auctions; a review of CM rules and governance including penalties and fees; and changes that allow renewables to participate in future CMs. On the latter point, Energy UK recommends also exploring how innovative new models like hybrid and aggregated sites can take part in the CM.

UK rises to seventh in EY global renewables rankings

The UK has moved up from 10th to 7th in EY’s latest Renewable Energy Country Attractiveness Index (RECAI), reflecting an increasingly positive outlook for renewable energy investments.

The latest rankings, released on 1 May, note that following a large drop in renewables investment in 2017 the UK is “bouncing back”. This is highlighted, says the RECAI, in subsidy-free solar PV and onshore wind projects for merchant generation and the repowering of older existing wind farms.

China topped the list, with the United States (2nd) and Germany (3rd) also showing signs of improvement. The current data, says EY, highlights a trend of “rising protectionism” across the renewable energy sector. Ben Warren, RECAI Chief Editor, said that despite the current economic climate causing a “relentless focus on costs” the focus is paying dividends with “the cost of electricity from renewable sources falling year-on-year”.


Delivery

Task forces release final report on network access and charging changes

The Charging Futures Access and Forward Looking task forces – established by Ofgem – have issued their final report in response to the regulator’s Reform of the Electricity Network Access and Forward Looking Charges working paper.

The work has been completed as part of Ofgem’s Charging Futures Forum access project and aims to inform the regulator’s assessment of the options for reforming the current network access and charging arrangements. The report sets out analysis of two “clusters” of building blocks (a key design parameter outlining a possible choice for developing access rights and charges).

The first of these, Cluster One – Influences User Investment, comprises building blocks such as connection of charging boundaries, timing of payment of connection charges and degree of user commitment. Cluster Two – Influences User Operations, addresses blocks including short-, medium-and long-term reallocation and temporal signals. The choice of proposed tariff design and charging model is dependent on the decisions made regarding these clusters. The report says that the discussion will be developed through Ofgem’s forthcoming consultation, but it recommends further work in areas including quantitative assessment and practical design details.  

Smart Meter Bill passes House of Lords as Ofgem provides clarity on roll-out

The Smart Meters Bill passed its Third Reading in the House of Lords on 22 May and received Royal Assent on 23 May. The bill will introduce new powers to facilitate the roll-out of smart meters, extending the powers of the Secretary of State to direct the roll-out until November 2023.

The bill also sets out plans for a new special administration regime for the DCC in the event of its insolvency to ensure impacts such as loss of billing services could be minimised; a clause relating to the introduction of market-wide half hourly settlement that will use smart meter data; and gives Ofgem the power to implement that system without having to rely on code modification processes. Ofgem has also recently published an open letter providing clarity on its views on suppliers’ smart meter roll-out progress and plans. The regulator recognises that, for most large suppliers, the number of meters installed was in line with targets and outlined plans for early smart meters to be enrolled in the national communications network. Moving forward, Ofgem also encouraged suppliers to engage with all energy users closely.

Ofgem RIIO-2 framework consultation closes

Ofgem’s RIIO-2 framework consultation closed on 2 May following a series of stakeholder events and workshops to facilitate discussion and improve understanding of the proposals. RIIO is the process by which the regulator sets how much network companies can earn and sets incentives to encourage behaviours, for example boosting innovation.

Consultations covered areas such as empowering consumers, network use, driving innovation and efficiency, and simplifying the price controls. All responses to the consultation will be considered before Ofgem makes a final decision on the framework in summer. On 17 May, Ofgem also requested views in relation to the RIIO-1 price control reopener mechanism, designed to allow network companies to propose adjustments to baseline expenditure allowances when there is more certainty. In particular, views are sought on the evidence presented on planned expenditure and whether it is necessary, efficient and proportionate. Ofgem welcomes responses by 15 June with determinations due by 30 September.


Usage

PM pledges to halve the energy usage of new buildings

Prime Minister Theresa May has announced that the UK will utilise modern construction practices and new technologies to “at least halve the energy usage of new buildings by 2030”. While giving a speech on the government’s Industrial Strategy on 21 May, the Prime Minister discussed four challenges that, if tackled, will deliver “enormous potential” for the UK’s economy.

Noting the scale of the “clean growth and grand challenge mission”, May reiterated that heating and powering buildings currently accounts for 40% of the UK’s total energy use. By embracing smart technologies and making new buildings more efficient the UK will reduce overall energy demand and meet its carbon reduction targets, May said. She also outlined plans to achieve similar standards in existing buildings and added that doing so could reduce energy bills “by as much as 50%”.

Tackling this challenge, said the Prime Minister, will be a catalyst for new technologies and more productive methods that can be exported to a “large and growing global market for clean technologies”. She also said it would be a driver for higher standards and innovations across the construction sector, enable the UK to achieve its homebuilding targets and create jobs and new opportunities for “millions of workers” across the country.

During the speech the Prime Minister outlined several other ambitions, including plans to be a global leader in manufacturing zero-emission and electric vehicles (EVs), championing artificial intelligence (AI) and data, and for the UK to continue to pay for access to nuclear safety and research programmes such as Euratom.

Sandbag examines barriers to industrial decarbonisation

Climate change think tank Sandbag has released a report that examines barriers to industrial decarbonisation across the EU. Based on evidence given to Sandbag from stakeholders regarding their experiences of EU industrial emissions policy, the paper says that in practice “cutting emissions has proven to be particularly challenging for a host of reasons”.

Sandbag’s reports states that a lack of alignment between the EU Emissions Trading System (ETS) sectoral emissions trajectories and overall targets outlined by the EU is sending “mixed signals” to the market. Further, more than a third of stakeholders said that the ETS currently encourages a “cautious approach” to cutting emissions that is geared more towards distributed incremental improvements than supporting innovative or breakthrough CO2 abatement technology.

According to Sandbag, EU climate policy has hindered the development and commercialisation of processes and technologies that can reduce emissions from carbon-intensive industries. CO2 reduction solutions that incur low or negative costs are not being used to their maximum potential because of their being treated under different EU benchmarks, says the report. This pathway has resulted in “competitive distortions that favour more polluting technologies over innovative products and processes”.

Sandbag concludes that there are “numerous” opportunities to decarbonise the EU industrial sector, but that in some cases they are not being pursued. It recommends solutions such as increased active involvement from member state governments in the deployment of low-carbon technologies and aligning EU Paris Agreement ambitions with industrial emissions targets to give greater certainty.   

UK to contribute £21.5mn to global CCUS innovation challenge project

Energy and Clean Growth Minister Claire Perry has announced that the UK will provide £21.5mn of funding towards a global challenge for “ground-breaking” innovation projects to capture CO2 emissions. The international Carbon Capture Challenge, which also involves Saudi Arabia and Mexico, aims to encourage and invest in innovation for new carbon capture, utilisation and storage (CCUS) technologies in order to make CCUS commercially viable at scale.

The challenge will focus on addressing the innovation challenges that CCUS presents, including enhancing innovation for relevant technologies to reduce costs and support development.

Speaking at the launch of the challenge, Perry said: “my ambition is for the UK to become a global technology leader in carbon capture, working with international partners to reduce its costs. As the UK has led the debate globally on tackling climate change and pioneering clean growth, we are leading this challenge.”

BEIS Committee hears evidence on development of EV infrastructure

On 8 May the Business, Energy and Industrial Strategy Committee conducted an evidence session on the development of charging infrastructure for electric vehicles (EVs) as part of its ongoing inquiry into the development of a market for EVs. 

Questioning focused on major challenges faced by those developing EV charging infrastructure, as well as issues related to the funding of and financial support for new charge points. Other areas of discussion included the need for interim targets towards the 2040 phase-out of internal combustion engine cars and the potential barriers faced by local authorities in deploying charge points. David Martell, CEO of Chargemaster, said that five-year milestone goals and a strategy for fiscal benefits should be incorporated into the upcoming Road to Zero Strategy, while Rasita Chudasama from Nottingham City Council pointed to key challenges such as procuring a provider and finding the expertise and resources to go to market.

Elsewhere, a report published by the London Assembly on 24 May has called for more public EV charging points in the capital. The report highlighted the rapidly growing demand in London, with 10 times more EVs in use than in 2012. It said that encouraging the 60% of Londoners who do not own a garage or driveway to invest in EVs was a key challenge for take-up and called on Mayor Sadiq Kahn to encourage boroughs to offer temporary free or discounted charging.                                                                                           

South Somerset Council to invest in battery energy storage system

South Somerset District Council will build a 25MW battery storage system that it claims will be “one of the largest and most advanced in the UK”. The project will provide essential support to National Grid for balancing demand and power management and will also store renewable energy that would “otherwise be wasted”.

The project is part of the council’s vision for creating more income generation opportunities, allowing for a better return so it can invest more money into the services it delivers to communities. The council aims to have the project completed by the end of 2018, at which point it will be used to balance out fluctuating demands on the local Somerset power grid. It is hoped that the project will future development of the region by removing “electricity supply constraints”, which can often be a barrier to new investment.

Henry Hobhouse, South Somerset Council’s portfolio holder for property and income generation said: “We take our role in caring for the environment seriously. We are committed to doing all we can to promote the efficient use of energy resources.”

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