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February 2015

By Market Insight Team | Posted February 02, 2015

January 2015 - in brief

Generation
The government progresses plans to offer selected electricity-intensive businesses a reprieve from the rising costs associated with funding renewables installations. While businesses that are eligible for the compensation could receive up to 85% off policy costs on purchased electricity, the scheme is estimated to add 20p/MWh on the price of electricity for other consumers.

Universities and local authorities are among the winners of the government’s latest funding scheme, designed to boost innovation in heat network technologies. Energy and climate change secretary Ed Davey said the funding would help create a heat network market in the UK; bringing with it jobs and economic growth, while helping meet low-carbon targets.

Delivery
A government report warns that approximately £41.6bn of additional investment will be needed in UK’s electricity and gas networks by 2020 to secure stable supplies and ensure the grid can cope with increasing levels of intermittent renewables generation.

The Association for Decentralised Energy claims demand-side investments have made a significant contribution in cutting overall energy demand and are saving industrial, commercial and public consumers £37.2bn every year. But the group’s study says much more can be done to target efficiency gains in electricity and gas networks.

Usage
Small- and medium-sized businesses across the UK could be missing out on total cost savings of £2.63bn, because of a reluctance to invest in energy efficiency measures, a government report finds.

Campaign group RE100 urges high-profile firms to aim for 100% use of renewables within their businesses.

Also covered in this Regulatory Report:

Generation
Electricity-intensive industries to gain cost exemptions
Heat industry innovation gets £7mn investment
Government set to impose tighter fracking regulations
Business group calls for carbon trading reform
Government ups CfD funding
Dungeness B nuclear plant gets life extension

Delivery
Government sets out need for investment in networks
Demand-side delivering substantial benefits, says industry

Usage
Report claims SMEs undervaluing energy efficiency
Campaign group targets 100% renewables for businesses
Government boosts funding for green vehicles
CBI urges next government to aim high on energy efficiency
Minister calls for crack down on Green Deal rogue trading


Generation

Electricity-intensive industries to gain cost exemptions
A scheme to help the UK’s most electricity-intensive industries (EIIs) deal with rising electricity costs has come a step closer, after the government unveiled further details of the way that the policy would be implemented.

Electricity bills include a rising level of taxes and levies aimed at incentivising investment in energy infrastructure and, in particular, low-carbon technologies. But there has been growing concern that these add-ons are detrimentally impacting the competitiveness of the UK’s most energy-intensive businesses. Last year the government announced plans to introduce a scheme to compensate selected businesses from the cost of the Renewables Obligation and small-scale Feed-in Tariff, while exempting some businesses from the cost of the Contract for Difference scheme.

In its response to this consultation, published on19 January, the government confirmed that it would press ahead with its preferred option to implement the scheme – by using a two tier test. The first test will be at a sector level and will be based on a combination of trade intensity and electricity intensity. The second tier will assess the same data, but on a company level.

Businesses that pass both tests could be eligible to receive support of up to 85% of policy costs on purchased electricity. The impact of the relief schemes is estimated to add 20p/MWh on the price of electricity for all non-exempt consumers.

A report will also be released later in 2015 detailing in depth the sectors that could, if they pass the threshold test, be eligible for the scheme.

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Heat industry innovation gets £7mn investment
The London Borough of Islington and the University of Warwick have, alongside 15 other organisations, been awarded a share of £1mn of government funding to boost innovation in heat network technologies.

Heat networks supply heat from a central source directly to businesses and homes, through a network of pipes carrying warm water. It is estimated that around 14% of UK heat demand could be cost-effectively met by heat networks by 2030 and around 43% by 2050, reducing carbon emissions and cutting bills for energy users.

Under a funding round for new projects, the government received a total of 57 applications from 39 organisations. Bids were assessed against a range of criteria, including technical feasibility, commercial viability, future carbon saving and social benefits. The 17 winning entries announced on 20 January will share £1mn of funding to help them carry out feasibility studies, while 10 of these projects will bid for a share of a further £6mn through which to fully implement their proposals. The projects vary from a proposal to combine solar and heat pump technology in Exeter, to a scheme trialling super insulated pipes in West Cumbria.

Energy and climate change secretary Ed Davey said: “More support for local heating projects will also give jobs in the sector a huge boost, with the value of the district and heat network market expected to rise to around £530mn this year.”

The government has also over the last year awarded an additional £7mn directly to local authorities across the country to further support heat networks.

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Government set to impose tighter fracking regulations
Plans for shale gas developments should be put on hold as they could jeopardise the UK’s long-term emissions goals, an influential committee of MPs has claimed.

In a report published on 26 January, the environmental audit select committee raised concerns that any large-scale extraction of shale gas was unlikely to occur until at least the mid-2020s, by which time the resource would most likely be competing in the UK’s energy mix with renewables rather than coal. It argued that a moratorium was needed in order to ensure that the UK’s legislated carbon budgets were not breached.

Later the same day the government accepted opposition amendments to the Infrastructure Bill that will introduce new protections for shale gas development.

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Business group calls for carbon trading reform
The EU Emissions Trading Scheme (EU ETS) needs a Market Stability Reserve (MSR) to keep Europe on target for meeting its climate goals, The Prince of Wales’s Corporate Leaders Group (CLG) has argued.

The EU ETS, which covers more than 11,000 factories, power stations and other installations, operates as a cap-and-trade system. Under the scheme, total greenhouse gas emissions are capped, but allowances can be traded – providing a financial incentive for businesses to reduce their emissions. But concerns have been voiced that the current surplus of allowances in the scheme means that the carbon price is too low to incentivise investment. The European Commission has proposed, from 2021, to introduce an MSR, which would effectively introduce a flexible cap on allowances under the scheme. But in a letter to EU policy-makers, CLG called for an earlier implementation of the MSR, a proposal backed by the UK government.

“The EU ETS is the cornerstone of EU climate policy, so we have to get it right – it must be reformed to drive forward green growth sooner rather than later”, the letter said. The EU ETS must, according to the letter, be reformed to include a MSR by 2017 at the latest, to “keep the continent on track for developing a low-carbon economy and energy system”.

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Government ups CfD funding
A further £25mn will be added to the funding pot for less established technologies in the first contracts for difference (CfD) auction, the government has confirmed.

Under the CfD scheme, low-carbon power generators will be guaranteed a fixed price for the electricity they produce, called a “strike price”.

In a press release, published on 28 January, the government said the additional allocation would mean that technologies such as offshore wind would compete, in the first allocation round, for £260mn overall: £155mn for projects commissioning from 2016-17 and £105mn for projects commissioning from 2017-18. Established technologies will compete for £65mn. Energy and climate change secretary Ed Davey said: “The high demand for contracts shows that we’re one of the top places for renewables investment, and the best place in the world for investing in offshore wind.”

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Dungeness B nuclear plant gets life extension
The Dungeness B nuclear power station on the south coast of England has been awarded a 10-year life extension, following a £150mn investment by its operator EDF Energy.

The confirmation, made on 20 January, means that the plant can continue to generate low-carbon electricity until 2028, producing enough power each year to supply the equivalent of 1.5mn homes. The £150mn investment will be in addition to £83bn of investment already confirmed. EDF Energy welcomed the news, which it said “secures 550 jobs and work for 200 contractors at the site, as well as maintaining essential expertise in engineering and the UK nuclear industry”.

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Delivery

Government sets out need for investment in networks
Approximately £34bn of investment into the electricity networks and £7.6bn of investment in gas networks will be needed by 2020 to secure energy supplies, a new government report has said.

Delivering UK Energy Investment: Networks, which was published on 8 January, highlights the significant progress made in investing in the network over the past five years. In particular, it notes that, between 2010-14, there has been more than £16bn of investment in electricity networks plus £3.8bn in gas networks. The government has also delivered increased interconnector capacity to other countries and funded £500mn in support for trialling new smart grid technologies.

At present, the UK is the most energy secure country in Europe and fourth in the world as a whole, the report claimed. But it warned that, if the UK were to transition to a low-carbon economy, further investment would be required. A key area of focus would, it said, be the development of smart grids, which use digital communications technologies to detect and react to localised changes in usage. The report said they had the potential to deliver an estimated £13bn boost to the economy between now and 2050.

Heat networks could also provide a valuable service to the electricity grid, both storing and balancing, as well as improving the resilience of the overall system. At present, 122 heat network projects in 91 local authorities are benefiting from £7mn in government grant funding for development studies. Their potential contribution is, the report said, “enormous”; it suggested that they could, by 2050, meet 43% of heat demand in UK buildings.

The report concludes that energy networks of the future will be far more diverse in types and sources of generation. To make networks fit for purpose they will require not only investment but to be restructured in order to make them “smarter, more local and integrated”.

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Demand-side delivering substantial benefits, says industry
The positive effects of demand side energy on the business sector have been substantial, according to analysis by The Association for Decentralised Energy (ADE).

Invisible Energy: Hidden Benefits of the Demand Side, which was published on 19 January, outlines the significant impact that demand-side investments had made in delivering economic growth. It estimated that such measures had reduce power consumption in the UK by the equivalent of 14 power stations, and were saving industrial, commercial and public consumers £37.2bn every year.

But the report raised concerns that the government’s current suite of energy policies was sending “mixed signals” to consumers. It said that more than 84% of energy was lost in transit, but current efficiency policies focused on getting end users to increase their energy efficiency.

The report estimated that £5.6bn of energy efficiency improvements could be realised up to 2020, but that for these to be achieved the government must ensure policies to reduce emissions tested decentralised and demand side options against traditional, centralised solutions. It also called on the government to implement policies designed around the energy user.

“With a clear, simple policy approach that values these smaller contributions, demand-side services can help consumers do even more to cut waste, improve competitiveness and reduce emissions”, ADE director Tim Rotheray concluded.

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Usage

Report claims SMEs undervaluing energy efficiency
Small- and medium-sized (SME) businesses across the UK could be missing out on total cost savings of £2.63bn, a government report has found.

Published on 16 January, the report assessed the drivers and barriers to SME energy efficiency investments. While it noted that potential cost savings were the main driver of energy efficiency investments, it found that progress on the roll-out of measures was being undermined by concerns over payback timescales.

The report said that businesses faced challenges both in understanding and quantifying potential financial savings from a project. This might, it explained, lead or contribute to the “undervaluing” of energy efficiency investments. The need for upfront capital was also cited as a major barrier, along with the length of the estimated payback period. The majority of interviewed businesses reported that energy efficiency improvements with a payback period of less than two years made commercial sense and would be likely to go ahead if finance was available. But few said they would go ahead with a project paying back over five years.

These findings suggested that businesses could be missing out on between £5,800 and £12,200 of savings per annum, or between 18% and 25% of their annual energy costs. This compares with an investment cost associated with these savings of between £8,600 and £18,800 – representing an average payback period of 1.5 years.

The report recommended that the government work to improve access to metering and monitoring technologies.

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Campaign group targets 100% renewables for businesses
Businesses across the globe are finding innovative ways to decarbonise their power use, campaign group RE100 has claimed.

The Journey to 100%, which was published on 19 January, found that renewables accounted for 41.3% of the new generating capacity installed globally in 2013. In addition the share of world electricity generation represented by renewable energy – excluding large hydropower installations – rose in 2013 to 8.5%, compared with 7.8% in 2012 and 5.2% in 2007.

The report suggested renewable power investments could create internal rates of return as high as 18%, in addition to generating other significant benefits to businesses. The most financially attractive renewables investments were said to be biomass projects providing power and heat for industrial processes. However, other technologies were also found to be increasingly popular, such as solar photovoltaic panels and wind generation technologies.

In addition to direct investments in renewable power, companies are also benefitting from indirect investments. These include supporting power developers and utilities through long-term power purchase agreements, and taking advantage of renewable electricity tracking instruments.

While the report noted that many global businesses, including Coca Cola, BT and Nestlé, are already targeting 100% renewables, the group urged other companies to follow-suit and “commit to the journey”.

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EEF provides ESOS guidance
Manufacturers organisation EEF has launched a new guide that aims to help British businesses understand their obligations under the government’s Energy Saving Opportunities (ESOS) Scheme.

ESOS requires all companies with more than 250 employees or a turnover of more than €50mn to produce reports on their energy use and efficiency every four years. Lead assessors will have to carry out a detailed energy audit, paid for by the business, by 5 December 2015 at the latest. Although there is no obligation to implement any of the efficiency measures identified, the government has estimated that businesses that implement recommendations made as part of their ESOS audit could cut their consumption by 0.7%, saving over £250mn a year.

Published on 29 January, the guide provides an overview of the ESOS scheme, which EEF estimates will affect around a third of all UK manufacturers. It is designed to help businesses plan their approach to the scheme and provides valuable links to other sources of help and information.

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Government boosts funding for green vehicles
A further £5mn of government funding has been made available to public sector organisations to promote the uptake of ultra-low emission vehicles (ULEVs).

A competition, announced on 13 January, is open to public sector organisations, including the police, fire services and the NHS. Up to 35 public organisations are being invited to bid for the funding, which aims to get electric and plug-in hybrid vehicles into the fleets of central government. This finance comes in addition to the £500mn of government spending on ULEVs announced in April 2014.

Transport minister Baroness Kramer welcomed the move, saying: “This £5mn investment will see a significant increase in the number of plug-in vehicles used by public bodies such as local authorities, police forces and the NHS and help both the environment and the economy.”

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The next UK government will need to adopt a “refreshed approach” to improving energy efficiency in the UK’s existing building stock, according to a policy briefing by the CBI.

Published on 21 January, Effective Policy, Efficient Homes, said that policy-makers would need “swiftly to make energy efficiency a national infrastructure priority, building consensus around a long-term, coherent approach”. It argued that progress in the sector had, in recent years, been undermined by “overly complex and frequently changing policies” that had resulted in “a loss of faith among both industry and the public”.

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Minister calls for crack down on Green Deal rogue trading
The consumer protection obligations of the Green Deal must be held to the highest possible standard, energy minister Amber Rudd has said.

In an open letter, released on 23 January, Rudd highlighted concerns about miss-selling, cold calling and promoting “incorrect and exaggerated information” of the potential benefits of energy efficiency measures installed through the Green Deal.

Rudd urged authorised Green Deal companies to actively seek assurance from their supply chain that they are aware of, and compliant with the scheme’s code of practice. This is designed to ensure that providers and installers operate fairly and transparently, deliver good customer service, have relevant levels of training, and provide appropriate redress mechanisms for consumers.

Separately, the government announced that its Energy Company Obligation (ECO) and Green Deal schemes had delivered energy efficiency measures to over one million UK homes by the end of November 2014 – four months ahead of schedule.

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