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October 2018 Regulatory Report

By Market Insight Team | Posted November 06, 2018

Generation

The month the government issued a comprehensive response to a previous Committee on Climate Change report outlining the UK’s progress towards decarbonisation. The government highlighted the progress that had been delivered by the power sector and the sustained increase in renewable generation. It also laid out its commitment to future Contracts for Difference allocation rounds.

Last month also saw Chancellor Philip Hammond deliver the Budget. Clarity was given on future carbon pricing in the event of a no deal Brexit, as well as the announcement of funding to support businesses in their low-carbon transition.


Delivery

National Grid published its Winter Outlook Report 2018-19 providing an evaluation of security of supply and a forecast of supply and demand for the upcoming winter for both gas and electricity. Highlights included a higher electricity supply margin at 7.1GW this winter and gas supply expected to meet all security of supply scenarios.  

Research by trade association Renewable UK shows a significant increase in the number of battery storage projects being brought forwards by developers. Planning applications in the UK to install just 2MW of battery storage capacity in 2012 have soared since then to a cumulative total of 6,874MW in 2018.


Usage

A report published by a UN panel outlined the urgent action required to limit global warming to 1.5C, which it said will require rapid and far-reaching transitions across all sectors of society. The report stated that unless such action is taken in sectors including energy, then “far greater than expected consequences” will result.

Meanwhile, the Commons BEIS Committee published a report saying that the government’s 2040 targets for zero emissions cars and vans were unambitious and vague. The committee said the government has been guilty of a lack of clarity to date and proposed accelerating the plan to end the sale of petrol and diesel cars and vans – originally planned to 2040 – to be accelerated to 2032.

 

Also covered in this Regulatory Report:




Generation

Government reports progress against decarbonisation plans

On 15 October the government issued a response to a Committee on Climate Change (CCC) report on progress towards decarbonisation goals originally published in June 2018. This found that, while substantial decarbonisation has taken place in the power sector, other areas such as transport and buildings were falling behind.

The government, in its response, reiterated the “fundamental change” that had been delivered by the power sector at “remarkable speed”. The sector, it said, has reduced emissions from 158 to 73 MtCO2e since 2010. Overall, carbon emissions in 2017 were down 11% on 2016 levels, 58% on 2008 levels and 65% on 1990 levels. This was attributed to the phasing out of coal and the development of renewable energy and gas infrastructure – the response noted that 50% of electricity was generated from clean sources in 2017 – up from 19% in 2010.

On renewable generation, the government highlighted a sustained increase in the sector, noting several developments such as Equinor’s (formerly Statoil’s) Hywind floating wind farm demonstration project towards the end of 2017 and the starting of construction of Phase 1 of the Hornsea wind farm in the North Sea at the start of 2018.

The government also confirmed that it remains committed to holding its next Contract for Difference (CfD) allocation round in May 2019, with subsequent allocation rounds to be held every two years thereafter. Depending on prices achieved, the government said these auctions will deliver between 1-2GW of offshore wind per year by the 2020s with support of up to £557mn. It was also suggested that the CfD framework may be “refined” in the coming years, with government seeking to improve its operation and stimulate the deployment of renewable technologies, while also lowering costs for consumers.

In its progress report, the CCC made several recommendations, which the government addressed in its response. On the CCC’s request for a new strategic approach to deploying carbon capture, usage and storage (CCUS) at scale in the 2030s, the government highlighted the progress of its CCUS Cost Challenge Taskforce, which has published a report on cost-effective CCUS progress in the UK. It also said it is reviewing its investment delivery frameworks for the technology, with a consultation due this next year.


Budget brings clarity on future carbon pricing

Chancellor Philip Hammond delivered the Budget on 29 October. Although the speech was light on energy-related announcements, the government provide clarity on carbon pricing in Budget documents.

It was announced that the Carbon Price Support (CPS) will be frozen at £18/tCO2 to 2020-21 and that, in the event of a no deal Brexit, a carbon emissions tax will be imposed at £16/tCO2 to replace the EU Emissions Trading Scheme (EU ETS).

Budget documents also noted that businesses with high energy use will benefit from £315mn of funding in order to support their low-carbon transition, and there will be an extension of Enhanced Capital Allowances to companies investing in electric vehicle infrastructure.

Climate Change Levy rates to 2020-21 was also confirmed, with a rebalancing of the rates for gas and electricity. North sea tax rates will remain unchanged to support domestic production and £20mn will go to nuclear fusion research.


Perry proposes separate UK carbon market in the event of no deal Brexit

Energy and Clean Growth Minister Claire Perry has said that if no deal is reached in Brexit negotiations, the UK will leave the European Emissions Trading Scheme (EU ETS) and establish a separate carbon market that is linked to the EU ETS.

Currently, close to 1,000 UK installations – including power stations, oil refineries and industrial facilities – participate in the EU ETS, an EU-wide initiative aimed at reducing CO2 emissions. Speaking during a House of Lords Select Committee on 23 October, Perry said that current plant operators will still be required to monitor and report their emissions post-Brexit and that the government was “trying to maintain a strong price signal for carbon reduction”.

She also noted that there was a strong commercial reason for EU countries to want to maintain cross-border gas and electricity trading. A government guidance notice, published on 12 October said that, in the event of a no deal Brexit, the UK would meet its carbon pricing commitments via a tax that would take effect in 2019. It also confirmed the government’s intention to ensure transparency is maintained over greenhouse gas emissions.


Latest Contracts for Difference projects pass first milestone requirement

Five projects representing more than 95% of total capacity signed after the second Contracts for Difference (CfD) Allocation Round have passed their first milestone, it was confirmed by the Low Carbon Contracts Company (LCCC) on 19 October.

The successful projects include the Hornsea 2, Moray and Triton Knoll wind farms as well as biomass and advanced conversion technology projects. In order to meet the milestone requirement projects must demonstrate their commitment to delivering by either incurring actual spend equal to 10% of the expected development and construction costs, or by demonstrating commitments such as having financing and contracts in place to generate and export electricity.

In a related development, 14 renewable energy developers presented a joint letter to Business and Energy Secretary Greg Clark calling for the government to allow subsidy-free onshore wind to participate in future CfD auctions – it is currently excluded from competing against other technologies. In the letter, signatories said that while new onshore wind can be secured at a subsidy-free price, the certainty offered by contracts to generate power can allow companies to ensure projects are financially viable and can recoup their investment. They suggested that, if the government resumed pot 1 (established technologies including onshore wind and solar) CfD auctions between 2019-25 it would “provide a payback to consumers of £1.6bn”.


34 suppliers fail to meet ROC obligation for 2017-18 compliance period 

On 22 October Ofgem confirmed that a total of 34 suppliers, which represents a record number, did not meet their total obligations for their Renewables Obligation Certificates (ROCs) in time.

The regulator said that 117.8mn ROCs were presented by suppliers in 2017-18, which is only 87.6% of the year’s total obligation. As a result of suppliers not meeting their obligations, there was a combined shortfall of £102.9mn across the UK. The percentage of obligations met with ROCs was 87.1% in England and Wales, 93.2% in Scotland and 80.7% in Northern Ireland. Suppliers were required to make buy-out payments of £45.58 per ROC by 31 August to meet their obligations for 2017-18, or to use a combination of ROCs and a buy-out payment. Ofgem confirmed that any suppliers that did not meet their obligations in full must make a late payment, with the potential that if a certain number of suppliers don’t meet their obligations, the costs are met across all other suppliers through a process known as “mutualisation”.



Delivery

National Grid forecasts winter gas and electricity supply and demand

National Grid published its annual Winter Outlook Report 2018-19 on 11 October, presenting a forecast of supply and demand for the forthcoming winter for both gas and electricity, and an evaluation of security of supply. The electricity supply margin is forecast to be higher this winter than last at 7.1GW, or an 11% increase on an underlying demand basis. Average Cold Spell peak underlying demand is expected to drop to 60.6GW, while peak transmission system normalised demand was also forecast lower at 48.2GW. National Grid assessed total maximum generation capacity at 104.7GW – 3.5GW higher than last winter – and predicted electricity demand during the Christmas period at 20.8GW.

Gas demand from all demand types is forecast to be lower than last winter, with the exception of exports to Ireland and storage injection. National Grid said that gas supply margin is expected to be sufficient across all its security of supply scenarios. Gas for power demand is forecast to drop to 7.0bcm, compared to 12.7bcm last winter and, on the supply side, cold day non-storage supply is forecast at 360mcm/d. Peak supply (575mcm/d) is capable of meeting the 1-in-20 peak day demand.


Trade association finds scope for significant build-out of battery storage

Lobby group RenewableUK launched on 5 November a database showing a substantial increase in battery storage capacity is set to take place.

Planning applications in the UK to install just 2MW of battery storage capacity in 2012 have risen since then to a cumulative total of 6,874MW in 2018. The average capacity of applications for new battery storage projects has increased from 10MW in 2016 to 27MW today.

RenewableUK’s Executive Director Emma Pinchbeck said: “The energy sector is breaking new ground by making an unprecedented transition to a clean, flexible system which will power our country in the future. Energy storage is already playing a key part in that, from small local projects to grid-scale schemes. We’re decentralising the way the power system works and, at our conference, we’ll hear how an increased share of wind, solar and storage on the grid could transform UK energy markets”.  


UKPN to procure 100MW of flexibility services

Distribution network operator UK Power Networks (UKPN) has announced that it is to procure more than 100MW of flexibility services from distributed energy sources. The electricity distribution network operator (DNO) said it plans to launch 25 “flexibility first” zones across its three licence areas of London, the South East and the East of England in order to create new markets for a range of flexibility services such as energy storage, demand-side response and on-site generation.

The company said that the flexibility services will help to lower electricity distribution costs, provide new revenue opportunities for distributed energy resources such as renewables and create a stronger and more resilient electricity network.

UKPN will use the Piclo online software, which identifies areas where the DNO is looking to add more flexibility on an interactive map and matches energy providers’ resources with local needs for flexible energy resources. As part of the new initiative the business will run “flexibility first” tenders. The first of these will take place in Q1 2019 and will allow providers to bid for longer-term contracts from one to four years.


 

Usage

IPCC report calls for urgent action on climate change

A report published by the Intergovernmental Panel on Climate Change (IPCC) has said that limiting global warming to 1.5C will require “rapid and far reaching” transitions across all sectors of industry and society.

The IPCC analysed the impacts of global warming of 1.5C and 2C above pre-industrial levels and recommended several greenhouse gas emissions pathways. It found that unless urgent action is taken in land, energy, industry, buildings, transport and cities then “far greater than expected consequences” could result, including an increased severity and frequency of extreme weather. The impacts of 1C global warming are already visible, said the report, adding that limiting further warming to 1.5C rather than 2C could mitigate climate change impact.

While actions are already underway to limit global warming, the IPCC said they must be urgently accelerated. For example, limiting warming to 1.5C will require 100-1,000GtCO2 to be removed from the atmosphere by the end of the 21st Century and for global net human-caused C02 emissions to fall by around 45% from 2010 levels by 2030, reaching net zero by 2050.

One suggested pathway detailed how by 2050 renewables could account for 70-85% of global power supplies, coal’s share would reduce to nearly zero, carbon emissions from industry would decrease by 75%-90% and investments in mitigating energy sector emissions would rise to an annual average of around $900bn/year from 2015 to 2050. All pathways advocated a transition to the use of electric vehicles and the greater implementation of emissions reduction technology such as Carbon Capture and Storage (CCS). The IPCC also suggested that carbon prices would need to be three to four times higher in the future.

Following the release of the IPCC’s report, on 15 October the government published a request to the Committee on Climate Change (CCC) seeking advice on the UK’s climate targets. The document, signed by Energy and Clean Growth Minster Claire Perry, Scotland’s Energy Minister Paul Wheelhouse and the Welsh government’s Secretary for Energy, Planning and Rural Affairs Lesley Griffiths asked the CCC if further action is needed to meet the goals of the Paris Agreement. It also asked for guidance on setting a date for the UK to achieve net zero greenhouse gas emissions, and the expected costs and benefits of any proposed new targets. A response was requested by March 2019.


BEIS Committee proposes ambitious zero emissions targets

A report published by the BEIS Committee on 19 October has said that the government’s 2040 targets for zero emissions cars are unambitious and vague. The report, Electric Vehicles: Driving the Transition, said that while the UK is at the forefront of the global uptake of electric vehicles (EVs) the government is guilty of a lack of clarity on zero emissions targets – the plan to end the sale of petrol and diesel cars and vans was announced in July 2017.

The Committee said that, while the setting of such targets was welcome, they lack the “necessary specificity to address the urgent challenges of climate change and air quality”. It called transport the UK’s next major decarbonisation challenge and proposed the plan to ban petrol and diesel car and vans be accelerated to 2032. The Committee also recommended that government works with industry to develop new and innovative technologies, that it ensures the provision of charging for EVs nationwide and that it delivers a shared approach to planning national charging infrastructure at least cost by December 2019.


Micro and small businesses increasing engagement with energy market 

A survey published by regulator Ofgem has found that micro and small businesses are becoming increasingly engaged in the energy market. The Micro and Small Business Engagement Survey, published 19 October, covered switching and comparison behaviour, perceptions of suppliers’ prices and their switching processes, and contract review processes. The survey involved 1,253 businesses and took place between December 2017 and February 2018.

Ofgem said that micro and small businesses are taking an active role in the energy market, with an increase in comparison of prices and in businesses negotiating energy contracts. The survey found that the largest micro and small businesses were more likely to have switched supplier in the past 12 months – in the previous year 32% of small businesses with 10-49 full-time equivalent employees switched supplier, compared to only 22% of sole traders. Looking in the longer term, the survey noted that just over four in five (81%) of micro and small businesses have switched supplier or tariff at least once in the last five years.

Regarding wider market changes, Ofgem said that more businesses agreed it was easy to compare prices between suppliers (51% in 2018, compared to 47% in 2017) and more agreed it was easy to switch supplier – up from 56% in 2017 to 62% in 2018.


UK companies pledge investment in climate action 

Several leading UK businesses have pledged investment into tackling climate change. Announced on 16 October, the plans – from around 30 companies across a range of sectors – are aimed at cutting emissions and include the proposed installation of battery storage systems and solar panels, improving sustainability standards in offices and other buildings and transitioning to low emission vehicles.

EDF Energy announced its commitment to electrifying its fleet of 1,500 vehicles by 2030, an objective double that set by the government by the same deadline. Retailer Amazon outlined plans to deploy 20MW of rooftop solar panels across 10 of its fulfilment centres in the UK and to use battery storage systems that will be used for local and national flexibility services. The former is part of a wider commitment from the company to deploy solar systems across 50 sites worldwide by 2020.

Elsewhere John Lewis Partnership announced plans to update its 500-strong fleet of diesel delivery vehicles by replacing them with biomethane powered vehicles by 2020, which it predicted could cut emissions by more than 80% and save close to 50,000 tonnes of CO2 per year.

 

NHS gains £46mn for energy efficiency improvements

The government has granted the NHS £46mn through Public Dividend Capital funding for investment in LED lighting to improve energy efficiency across NHS Trusts and Foundation Trusts in England.

The investment, delivered through the NHS Energy Efficiency Fund, will help to reduce energy bills, to lower carbon emissions and to provide better standards for patients, staff and visitors. It also said that investment in infrastructure such as LED lighting would reduce backlog maintenance risk for trusts by as much as 10% over the coming 36 months, as it will allow capital investment to be channelled into spend-to-save programmes.

The NHS said that, after considering several energy conservation options LED lighting was considered the most effective in order to deliver benefits including 5%-20% reduction in electricity and potential carbon savings of up to 45%. Trusts are invited to bid for funding until 30 November. 

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