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November 2018 Regulatory Report

By Market Insight Team | Posted December 06, 2018

Generation

Last month saw Business and Energy Secretary Greg Clark deliver a speech outlining the government’s proposals for the future of the energy sector. Responding to the independent assessment by economist Dieter Helm in 2017, Clark discussed Carbon Capture, Usage and Storage, leaving the development of gas storage to the market and support for new nuclear. Clark also outlined four guiding principles that will drive strategy during these “transformative time” for the industry.   

On 15 November Capacity Market auctions and payments were suspended on State Aid grounds, following a ruling by an EU court. National Grid had to “postpone indefinitely” the upcoming auctions, with payments not being made to generators over the coming winter.
 

Delivery

The UK’s Joint Committee on the National Security Strategy has pointed to the growing risk of cyber attacks on the UK’s electricity grid. In a document published on 19 November, the committee identified the power grid as a major target for cyber criminals and said that more should be done to meet the level of protection required.

The government’s target for all households and small businesses to have smart meters installed by the end of 2020 is likely to fail, a new report from the National Audit Office (NAO) has claimed. The NAO said that while the government had originally planned for the latest generation of smart meters to be deployed at scale in 2014, the first were installed in July 2017. It also pointed to the overall cost of the smart meter rollout exceeding a 2016 estimate of £11bn.
 

Usage

In a report entitled Hydrogen in a Low-Carbon Economy, published on 22 November, the Committee on Climate Change suggested that hydrogen can be used to decarbonise the UK’s energy system, but its role is dependent on the level of commitment provided by the government.

MPs on the BEIS Committee launched an inquiry into the government’s approach to delivering energy efficiency improvements in domestic and non-domestic buildings on 19 November. It will examine whether the delivery of energy efficiency measures in buildings has been carried out in line with the targets set out by the government in the Clean Growth Strategy.

Also covered in this Regulatory Report:

 


Generation


Clark outlines future of the energy sector

Business and Energy Secretary Greg Clark has delivered a speech on the future strategy for the energy sector. The address, delivered on 15 November, was given in response to an independent assessment of proposed energy reforms by Dieter Helm published in October 2017. Clark said that recent successes in the sector had provided a “glimpse” of green, cheap, technologically-driven power and that, in this context, the energy “trilemma” of meeting cost, security and decarbonisation objectives simultaneously was coming to an end.

The speech addressed some of the principles put forward by Helm, including the recommendation for a power auctions combining the areas covered by the Contracts for Difference (CfD) renewables auctions and Capacity Market energy security auction and the greater use of market mechanisms. Clark said that “we should be transitioning to a system in which businesses decide what technologies to deploy in meeting twin security and decarbonisation targets”. He highlighted the government’s publishing of a Carbon Capture, Usage and Storage Action Plan in the interests of maintaining diversity and flexibility in energy supply sources.

Discussing new-build nuclear, Clark said that the government continues to explore the best ways in which to finance projects, including through the potential for direct investment in the Wylfa project and a Regulated Asset Base model for future developments. It was also announced that the government and Ofgem will launch a full review into industry codes and governance, and that a review will be conducted into how networks operate. On the latter, Clark recognised that, due to technological innovation, there may be new methods of operating and controlling networks that prove safe and efficient, but which are not permitted under old regulations.

Concluding, Clark drew from Helm’s assessment four guiding principles, which would act as “good guides to strategy in these transformative times for the power sector”: the market principle: wherever possible market mechanisms should be used, the agility principle: energy regulation should be responsive and agile, the insurance principle: government must be prepared to intervene to preserve optionality and provide insurance in the event of future uncertainty, and the “no free-riding principle”: all consumers should contribute a fair share of system costs.

A policy paper is expected shortly, with an energy White Paper planned for 2019.


Capacity Market halted following EU court decision

Capacity Market (CM) auctions and payments are to be suspended on State Aid grounds following a ruling by the General Court of the European Court of Justice on 15 November.

The ruling relates to a case brought by Tempus Energy, launched in December 2014 against the treatment of demand-side response in the CM. The court ruled that the European Commission had not launched a proper investigation into the CM when the scheme was first cleared for State Aid approval in 2014. Subsequently, National Grid said it has had to “postpone indefinitely” the upcoming auctions for delivery of capacity one year and four years ahead.

In a written statement to the Commons on 19 November, Energy and Clean Growth Minister Claire Perry announced that, as a result of the ruling, the government was seeking State Aid approval for a T-1 auction to cover winter 2019-20, and was working with the European Commission to reinstate the CM.  She added that power supplies remain secure for the coming winter.


Government announces small budget for next renewables auction

On 20 November, the government published its Draft Budget Notice and Draft Accompanying Note with regards to the third Allocation Round (AR3) of the Contracts for Difference (CfD) scheme. These set an overall budget of £60mn in 2011-12 prices.

AR3 will commence in May 2019 for delivery years 2023-24 and 2024-25 respectively. BEIS confirmed that it is open to Pot 2 “less established” technologies only, including remote island wind of greater than 5MW – eligible technologies will compete for an annual budget of £60mn for both delivery years, with an overall capacity cap set at 6GW. The note detailed the baseload and reference prices, used to calculate the impact a project’s bid will have on the overall budget; AR3 is the first auction to use different reference prices for baseload and intermittent technologies.

Offshore wind projects have an Administrative Strike Price (ASP) – the highest price the government will offer developers – of £56/MWh and £53/MWh for delivery years 2023-24 and 2024-25. Around 7.9GW of consented offshore wind projects could compete at auction, with BEIS forecasting that up to 4.5GW of capacity could be secured.


Brexit Withdrawal Agreement brings some clarity on energy questions

The UK and European Commission have reached an agreement in principle on Prime Minister Theresa May’s Brexit Withdrawal Agreement. The agreement included several proposals on energy, including a framework to facilitate future “technical cooperation” between gas and electricity transmission operators in the UK and the EU Internal Energy Market. It said that this will cover mechanisms that ensure trading over interconnectors continues, and the planning and use of grid infrastructure.

On nuclear power, the agreement said that the future relationship should include a wide-ranging Nuclear Cooperation Agreement between Euratom and the UK, and that the UK will be responsible for safeguards regarding nuclear materials equivalent to existing standards in European and international treaties.

Elsewhere, it confirmed details on future carbon pricing, stating that a carbon pricing system would be implemented post-Brexit that will have “at least the same effectiveness and scope” as the EU Emissions Trading Scheme (EU ETS). On emissions, the government said that there would be no lowering of the level of environmental protection that currently exists, and that greenhouse gas reporting and emissions reduction targets would continue to 2020. The deal faces a vote in the Commons on 11 December.


UK falls in EY renewable energy investment index

The latest bi-annual Renewable Energy Country Attractiveness Index (RECAI), which ranks 40 countries based on their attractiveness to clean energy investors, has shown a slowing of UK renewables investment.

The index, published on 7 November by professional services firm EY, found that UK investment in clean energy in Q3 2018 declined 46% year-on-year amid uncertainty around the impact of Brexit on power exports to the EU and the price of imported equipment. EY said: “There are few positives to draw from the latest Budget as the current government seems to be committed to significant spending on new roads, whereas there was little to encourage investment in renewables or low-carbon transport”. The index explained that a global trend has emerged of uncertainty leading to some investors waiting to see the outcomes of various geo-political events.
 


Delivery


Ofgem proposes two options for reform of residual grid charges

Ofgem is consulting on its now leading options for how grid costs should be allocated on consumer benefits, and reform of remaining “embedded benefits” enjoyed by small power generators.  

On these proposals, Ofgem stated that its preferred approach is a fixed charge for individual customer segments, with those segments being based on an existing industry approach. It is also considering an agreed capacity charge for large users with a specified agreed capacity – capacity for smaller businesses and households would be based on assumed levels.

The reforms have been criticised by industry groups as offering some short-term savings for smaller consumers but removing an incentive for flexibility. Association of Decentralised Energy (ADE) Director Tim Rotheray said: “The ADE supports Ofgem’s commitment to ensuring charges are fair but removing benefits today on a vague promise of jam tomorrow isn’t fair and could end up costing all energy users more in the long-term.”

Changes would be implemented either fully from April 2021 or be phased in commencing April 2021, with full implementation following in April 2023.


Cyber attacks and dry winter key threats to UK power supply

The Joint Committee on the National Security Strategy has concluded that the UK’s electricity grid, alongside other critical national infrastructure, is at increasing risk from cyber attack.

In its Cyber Security of the UK’s Critical National Infrastructure report, published on 19 November, the committee identified the UK power grid as a major target for cyber attacks, using the example of Russian state hackers disrupting Ukraine’s grid in 2016 and 2017.

It said that hostile states and organised crime groups could be likely perpetrators and warned that public opinion as yet had “only a limited appreciation of what could befall us as a result” of such attacks. The Committee said that while some progress had been made over the past two years, including the establishment of a national technical authority on cyber security – the NCSC – more is required to achieve the level of protection required.


National Audit Office says 2020 smart meter deadline will be missed

A report published on 23 November by spending watchdog the National Audit Office (NAO) has claimed that the government target for all households and small businesses to be offered smart meters installed by the end of 2020 will not be met.  

It also said that suppliers have estimated the rollout will only be around 70%-75% complete by this date. The government had originally planned for the most up to date smart meters (SMETS2) to be deployed at scale by 2014, but the first were installed in July 2017. The NAO said that 109,000 SMETS2 meters were installed in GB as of November 2018; the earlier SMETS1 meters account for 12.5mn installations.  

The report blamed long delays to put in place the necessary asset standards and communications infrastructure for SMETS2 meters as the key reason for likely not achieving the 2020 target. Further, it found that delays in SMETS2 meters reaching the market in numbers have resulted in the overall cost of the rollout exceeding considerably a 2016 cost estimate from BEIS of £11bn.
 


Usage


CCC recommends hydrogen for decarbonising the UK

Hydrogen can be used to help decarbonise the UK’s energy system, but its role is dependent on government commitment and better support to develop the UK’s industrial capability, according to a report published by the Committee on Climate Change on 22 November.

The report, Hydrogen in a Low-Carbon Economy, called for the government to embrace the potential of hydrogen, suggesting that it can replace gas in areas of the energy system where electrification is not possible or is too expensive. The CCC said that hydrogen can play an important role in long-term decarbonisation if it is combined with greater energy efficiency, low-cost and low-carbon generation, and the electrification of transport. In particular, it said hydrogen could act as a low-carbon replacement for gas in several sectors including: buildings, where it could be used in conjunction with heat pumps as a heating source; industry, where it can play an important role in reducing emissions from industrial heat; power, as a back up to very-low carbon electricity; and transport. 

The committee said that, despite being recognised as an option to reduce emissions, hydrogen has “yet to justify its deployment at scale within the UK energy system”, as a result of it being not commercially competitive. It therefore recommended as a priority for 2020, the development of hydrogen production at scale and hydrogen-ready technologies such as boilers and turbines. It was also recommended that effective policy mechanisms be put in place to accelerate the adoption of hydrogen technologies where they add most value.

Elsewhere, the report said that the government should commit to developing a low-carbon heat strategy within three years and that “significant” volumes of low-carbon hydrogen should be produced with carbon capture and storage (CCS) for power generation and injection into the UK gas network. The CCC also noted that public engagement on the future of the UK’s heating choices would help to heighten awareness among the general public of the need to transition from natural gas to low-carbon alternatives.


BEIS Committee launches energy efficiency inquiry

The government’s approach and progress towards delivering energy efficiency improvements in buildings to meet emissions and efficiency targets will be scrutinised by the BEIS Committee, following the launch of an inquiry on 19 November.

The inquiry will examine whether the government’s delivery of energy efficiency improvements in commercial, public sector and residential buildings is in line with the targets it set out in its Clean Growth Strategy. Specifically, this said that up to £6bn could be saved by 2030 through “investment in cost-effective energy efficiency technologies in buildings and processes” in the non-domestic sector. In the Clean Growth Strategy, the government said it would explore using voluntary building standards to support improvements in energy performance, consult on the improvements of regulations related to energy efficiency in commercial buildings and “work to understand different options for the long-term decarbonisation of heat”.

Against this context, the committee is seeking written submissions on several areas including the overarching approach to energy efficiency – who is responsible for the cost and should it be considered a national infrastructure policy; government targets on Energy Performance Certificate (EPC) improvements; measuring the overall progress on energy efficiency in commercial and public sector buildings and considering if there is regional disparity to the progress.


EU confirms revised energy efficiency and renewable targets

On 13 November, the European Commission announced that the European Parliament has agreed new energy efficiency and renewable energy targets, as well as new rules on the governance of the Energy Union.

The agreement completed the parliamentary approval of half of the eight legislative proposals in the 2016 Clean Energy for All Europeans package, which aimed to create a “resilient Energy Union with a forward-looking climate change policy”. Two new targets were fixed for the EU in 2030: a binding renewable energy target of at least 32% and an energy efficiency target of at least 32.5%. These, said the European Commission, will stimulate industrial competitiveness across Europe and lead to steeper emissions reductions of up to 45% by 2030.

An extension of the annual energy saving obligation beyond 2020 was also agreed, as was the requirement for Member States to prepare a national energy and climate plan for the 2021-2030 period covering the five dimensions of the Energy Union – energy security, the internal energy market, energy efficiency, decarbonisation of the economy and research, innovation and competitiveness.


UK can lead the way in tackling climate change, says WWF

In a new report published on 21 November, the World Wildlife Fund (WWF) has said that the government should implement more ambitious energy and climate policies in order to achieve net zero carbon emissions by 2045.

The WWF highlighted its latest emissions modelling, which showed that the UK could lead the way in reducing emissions by ending its contribution to climate change in less than three decades. This can be achieved if reductions are made in emissions from power, transport and buildings “deeper and faster”, and if international collaboration continues on areas such as reducing aviation emissions. On this point, the report said that a regional agreement across Europe, combined with similar agreements with the US, Japan and Australia could potentially save 10-15 MtCO2 emissions.

The document also urged continued collaboration on the research and development of new emissions reduction technologies, particularly in the fields of shipping and aviation. This would allow the UK to gain an economic advantage by “leading the way on clean growth”. Coordinator of the Net-Zero Campaign for The Climate Coalition Ed Matthew said the report shows “there is a pathway for total decarbonisation which is feasible, fast and packed full of economic opportunity. If the UK government commits to this goal, we can inspire the world to follow.”


Businesses call for integrated European renewables market

Businesses including Google, Amazon, Ikea and Facebook have urged European governments to consider policies that incentivise corporations in Europe to invest in renewable energy.

In the RE-Source Declaration, published on 20 November, the organisations said policy makers should remove regulatory and administrative barriers to renewable energy; offer clarity to corporates on long-term ownership of guarantees of origin from contracted supplies; encourage cross-border transactions; and enable a variety of procurement models and market products, including on- and off-site solutions and multi-corporate renewable power purchase agreements.

The group said that corporate electricity buyers, renewable energy suppliers and policy makers have “a unique opportunity” to collaborate so that Europe reaches its climate and energy targets, and to enable new and competitively priced renewable energy resources to be deployed at a scale that would otherwise not be achievable. 

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