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January 2015

By Market Insight Team | Posted January 07, 2015

December 2014 - in brief

Generation
The government unveils its Autumn Statement and National Infrastructure Plan, which includes substantial reforms to the way in which the North Sea oil and gas industry is taxed. Plans are also unveiled to exempt fossil fuels used in combined heat and power plants that generate electricity used on-site from carbon price support rates.

The first UK capacity market auction procures 49.26GW of capacity for 2018-19 at a clearing price of £19.40/kW. Energy and climate change secretary Ed Davey says the mechanism will guarantee security of energy supplies at the lowest possible cost for consumers.

Delivery
The government’s smart meter roll-out continues to progress with a record number of smart and advanced meters now operating at business sites across the country. But the energy regulator Ofgem says it is keeping a close watch on the costs of the scheme and will, if necessary, intervene to ensure that these are managed.

Embracing smart grid technologies could bring about significant benefits to the UK economy and allow for more effective management of electricity, industry group Smart Grid GB says. But it also cautions that for the full benefits to be realised policy-makers will need to ensure plans for smart grid development are incorporated into their wider energy policy platforms in the run up to the 2015 general election.

Usage
An index of the energy efficiency performance of a number of local authorities is launched, seeking to demonstrate the differences between some of the best and worst in the country. It urges councils to develop local micro-generation schemes, and to consider purchasing low- or zero-carbon energy.

The government invites local authorities to bid for funding to install charge points for electric vehicles or to introduce low emissions zones in a bid to boost the uptake of low emission vehicles.

Also covered in this Regulatory Report:

Generation
Government boosts oil and gas sector
Capacity market to deliver security of supply: Davey
Small nuclear potential should be explored, say MPs
Tariff guarantees planned for non-domestic RHI
Government backs North Sea carbon storage

Delivery
Smart meters reach record installation levels
£2.8bn benefit to UK economy from smart grids: report
Engineers highlight cost of power cuts

Usage
Southampton tops local authority energy index
Councils invited to bid for new electric vehicle fund
Fold policy costs into general taxation, report says
Low-carbon policies to increase business energy bills
Government urged to prioritise green energy
Lima climate talks maintain momentum


Generation

Government boosts oil and gas sector
On 3 December, chancellor George Osborne delivered the government’s 2014 Autumn Statement, the last from the coalition government before the general election.

The statement confirmed a number of reforms to the fiscal regime for the North Sea oil and gas industry, with the headline shift being a reduction in the North Sea supplementary charge from 32% to 30%. This was welcomed by the oil and gas industry, which is currently facing high operating costs and low oil and gas prices. The chancellor also announced that the current ring-fenced expenditure supplement (which assists companies that do not yet have sufficient taxable income for ring-fenced corporation tax purposes) would be extended to 10 years.

Additional reforms included support for seismic surveying to boost discovery in unexplored areas of the UK Continental Shelf (UKCS), and a new “cluster area allowance” designed to encourage companies to invest in high temperature and ultra-high pressure assets. The equivalent of a sovereign wealth fund for the North of England was also unveiled, which will ensure that areas that host the development of new shale gas installations benefit directly from the revenues.

Osborne also announced that, from 1 April, fossil fuels used in combined heat and power plants to generate electricity that is self-supplied will be excluded from carbon price support rates. From the same date, organisations benefiting from renewables subsidies (such as feed-in tariffs) will be prevented from benefiting from tax-advantaged venture capital schemes such as Social investment tax relief, the Enterprise Investment Scheme, and the Seed Enterprise Investment Scheme. Meanwhile, the government assured that it was working to bring private capital into the Green Investment Bank through a new fund for investment in operational offshore wind assets and wider options.

Ahead of the statement, the government published its National Infrastructure Plan 2014. This confirmed that interconnectors would be able to compete in the 2015 capacity market auction. The government also set out its intention to open talks on the development of the proposed Swansea Bay Tidal Lagoon; it is eager to understand whether the project will offer value for money for consumers, with a view to potentially offering subsidies for the scheme.

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Capacity market to deliver security of supply: Davey
The government’s first capacity market auction concluded on 18 December, procuring 49.26GW of capacity at a price of £19.40/kW/year.

The mechanism was introduced by the government in order to ensure peak future electricity demand could be met, with December’s auction concerned with guaranteeing additional capacity for 2018-19. Energy and climate change secretary Ed Davey confirmed the final results on 2 January, hailing the relatively low price as “fantastic news” for both households and businesses.

The successful bidders in the auction were largely existing stations. EDF Energy put in bids to the auction offering 7.9GW of power, and secured agreements for 28 out of its 29 existing generating units. A 1.8GW gas plant in Manchester will also be built under a 15-year contract awarded through the mechanism.

The total cost of this guarantee of energy supply will be £0.99bn. The government expects future wholesale prices to fall as a consequence of the supply security the capacity market offers.

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Small nuclear potential should be explored, say MPs
The government should take a proactive role in driving forward the development and deployment of small-scale nuclear power in the UK, an influential committee of MPs has said.

In its report Small Nuclear Power, published on 17 December, the energy and climate change select committee explores the potential of reactors that produce below 300MWe. This includes technology such as small modular reactors (SMRs), which are designed to be manufactured off site before being installed on a modular basis. The committee concluded that SMRs could play a “key role” in delivering low-cost, low-carbon electricity and could “guarantee the development of UK skills and intellectual property”. To achieve this would, the report said, require proactive and determined support for the technology from government.

The report says that the barriers to the deployment of SMRs are similar to those faced by conventional large nuclear power facilities. Uncertainty over capital cost and lead times are both identified as problems for developers, as well as the lengthy period for receiving regulatory approvals. Potential instability in political and social support could also be a challenge, the report said.

To overcome these challenges, the committee urged the government to take a “proactive role” in driving forward the development and deployment of small nuclear reactors in the UK. In the first instance, the committee said the government should help to establish the right conditions for investment; for example, through supporting the regulator to bring forward approvals in the UK, and by setting out a clear view of siting options. But it cautioned that sharing the costs between the public and private sector may be necessary, and that the government should examine where such technologies would fit into low-carbon support schemes. However, the report said that policy-makers main focus must be kick-starting the UK’s nuclear new build programme.

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Tariff guarantees planned for non-domestic RHI
The government has released a policy paper detailing plans to launch tariff guarantees in the non-domestic Renewable Heat Incentive (RHI).

Under the RHI, businesses that have green heating technologies (such as heat pumps or boilers) installed on-site can gain a subsidy for the renewable heat generated. The aim of the guarantee would be to provide greater clarity on the level of subsidy that a project would receive under the scheme, making the RHI more bankable for installations with long lead-in times. To be eligible for the tariff guarantee, the government is proposing three additional eligibility criteria for applications (beyond the standard RHI criteria): installation capacity, time limit for commissioning, and achieving financial close. Responses to the paper are invited until 20 January.

Separately, the energy regulator Ofgem reported, on 17 December, that there is now 1GW of installed capacity accredited under the scheme, which opened three years ago.

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Government backs North Sea carbon storage
The government has said it will provide £2.5mn to encourage the development of carbon storage projects in the North Sea.

Despite legally binding targets to reduce greenhouse gas emissions, much of the UK’s electricity is generated from fossil fuels, which emit carbon dioxide into the atmosphere. Carbon capture and storage (CCS) is a process that involves capturing and storing this carbon dioxide, easing concerns about the continued use of fossil fuels within power generation.

Confirmed on 17 December, the money, which will be delivered by the Energy Technologies Institute (ETI) and will come from DECC’s Innovation Fund, aims to help companies to identify the next phase of sites that can store emissions. It is hoped that the funding will catalyse further support from other partners and industry.

Project proposals are invited by 5 February. Successful companies could begin work on developing their CCS projects by spring.

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Delivery

Smart meters reach record installation levels
The smart meter roll-out continues to gain momentum, according to the government’s latest statistics.

The figures, published on 18 December, showed that in the third quarter of 2014, 15,300 advanced meters and 700 smart meters were installed in smaller non-domestic sites. This progress means that 515,300 smart and advanced meters are now operating in smaller non-domestic sites across the UK (18.9% of all smaller non-domestic sites).

Despite the continuing roll-out, the energy regulator Ofgem has backed a recommendation from MPs that it should, along with the government, set out how it intends to minimise the cost of installing smart meters and ensure that cost savings are passed on to users.

Meanwhile, the energy regulator responded on 11 December to a report that criticised preparations for smart metering, issued by the public accounts select committee last year. Ofgem vowed to monitor measures to protect customers in the roll-out of the technology, and if necessary to introduce further protections. However, the regulator added that costs would most effectively be controlled by market competition between suppliers.

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£2.8bn benefit to UK economy from smart grids: report
Politicians should ensure plans for smart grid development are incorporated into their wider energy policy platforms in the run up to the 2015 general election, industry group Smart Grid GB has said.

A smart grid is an electricity supply network that uses digital communications technology to detect and react to local changes in usage. In Making Smart Choices for Smart Grid Development, which was published 15 December, the organisation claimed implementing smart grid technologies would have an “overwhelmingly favourable benefit to cost ratio” and could contribute £2.8bn to the economy by 2030. The report studied 11 smart grid applications – three of which it said warrant immediate investment. The technologies with the most potential were, according to Smart Grid GB, self-healing grid, automated voltage control and enhanced fault prevention.

But the group said that, for these benefits to be realised, the government and the energy regulator Ofgem must urgently investigate the costs and benefits of smart grid investment, while policy-makers must place emphasis on the development of the smart grid when designing policies.

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Engineers highlight cost of power cuts
The UK is now so dependent on electricity networks that a significant disruption would cost the economy billions of pounds, according to a new report.

In its Counting the Cost: The Economic and Social Costs of Electricity Shortfalls in the UK report, which was published on 27 November, the Royal Academy of Engineering (RAENG) said that the likelihood of a significant power outage remains low, but the cost of such an event would be damaging to the economy.

To prepare for such an event, the report recommends improving communications in power outage situations as well as better demand-side response - especially from the commercial sector. It also suggests that community and local social networks are established in order to mitigate the impact on the most vulnerable in society.

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Usage

Southampton tops local authority energy index
25 local authorities have been ranked competitively on their energy efficiency performance, in an index launched on 10 December.

The index, compiled by Knauf Insulation and supported by the UK Green Building Council, ranks the authorities on measures including energy efficiency in the community and housing, as well as energy management within council buildings and the infrastructure overseen by the authorities.

The top performing authority was Southampton, with a score out of 100 of 74.12, followed in the top five by Kingston-Upon-Hull, Peterborough, Leeds and Coventry. The worst performing authorities on the index were Thurrock, Wirral, Brighton and Hove, Derby and Swindon, which scored 36.78.

Best practice on how to improve efficiency differed from area to area; however, a broad set of best practices was also produced with the report. Key recommendations included setting a public target for energy reduction and to report progress against that target.

The rankings also provided potential strategies to improve energy management for each individual authority based on how they scored. It was recommended that councils develop local micro-generation schemes, especially on council-owned property, and that they purchase low or zero carbon energy. The Index also urged local authorities to consider the opportunity presented by creating municipal energy companies.

The producers of the index called for increased collaboration between local authorities, energy companies and Green Deal providers to raise public awareness and understanding of community energy programmes.

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Councils invited to bid for new electric vehicle fund
Local authorities are being invited by government to bid for a new £35mn fund to boost the uptake of ultra-low emission vehicles (ULEVs).

The funding, which is being made available from The Office for Low Emission Vehicles (OLEV) and delivered through the Go Ultra Low City Scheme, is intended to facilitate a “step change” in the uptake of ULEVs.

The scheme complements other government initiatives to support low emission vehicles schemes, such as the £30mn bus scheme and the £20mn taxi scheme, but aims to provide local authorities with support to increase the use of ULEVs by households and businesses. It will do this by providing funding for councils to install charging points for electric vehicles or to introduce low emissions zones.

Transport minister Baroness Kramer said it was an “unequivocal signal” from the government about its level of commitment to making ULEVs a practical and viable choice for more people.

The deadline for submitting initial outline bids is 20 February. Shortlisted cities will be invited to submit final bids by late August with the winner being announced in the autumn.

The government also confirmed in the bid guidance that the £35mn will not necessarily be divided equally between winning bidders and will instead be awarded according to the quality of bids – and the amount of funding requested.

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Fold policy costs into general taxation, report says
The government should replace the green levies on electricity bills with funds from general taxation, trade association the Energy and Utilities Alliance (EUA) has said.

In its manifesto, published on 10 December, the EUA says households with electric heating currently face paying £360 a year in green levies by 2030, more than a quarter of their projected total energy bill. To prevent these households from falling into fuel poverty, the EUA advocates rolling the costs of the policy initiatives currently funded through green levies into general taxation.

Other recommendations included reviewing the case for strategic investment in long-term gas storage for the UK, committing to the universal smart meter roll-out, and giving greater priority to energy efficiency measures for non-domestic properties.

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Low-carbon policies to increase business energy bills
The government’s low-carbon policies are set to increase average commercial sector energy bills between15% and 48% between 2013 and 2030, the government’s climate watchdog has said.

In its third report on the impact of meeting the carbon budgets, the independent Committee on Climate Change (CCC) analyses the impact of the government’s green policies on domestic and non-domestic users over the next two decades. It claimed that, although energy bills would increase, the rise would have a limited impact as energy comprises only a small part of total business operating costs.

On average in the commercial sector, the report claimed energy costs make up 0.5% of total costs and the impacts of the green levies 0.1%. To mitigate the impact of the bill rises the CCC urged businesses to explore opportunities in energy efficiency. It estimated that a 10% energy saving can be achieved through implementing energy management and building fabric efficiency measures.

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Government urged to prioritise green energy
The next government must take urgent action to facilitate the transition to a low-carbon economy, according to think tank the Aldersgate Group.

In a manifesto, published on 2 December, the group identified six key priorities for the next government, which it said would “effectively address today’s big environmental challenges, whilst maximising economic benefits for the UK”. In particular it called on the government to facilitate the move to a low-carbon economy and to prioritise energy and resource efficiency. But for the full benefit of these measures to be realised it was vital, the report said, that the government helped equip the UK’s workforce with the right skills to benefit from the opportunities offered by the transition.

The group also called on the government to increase financial flows towards low-carbon and environmental projects and ensure the UK continues to benefit from progressive European environmental standards, irrespective of the UK’s future relationship with the EU.

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Lima climate talks maintain momentum
Policy-makers from nearly 200 countries have approved a 43-page document that lays the foundations for a new global climate deal to be agreed later this year.

The Lima Call for Climate Action, which was agreed on 14 December, attempts to resolve some of the pressing issues ahead of a meeting in Paris in December 2015 that should result in a new global climate change deal. In particular, the document says all countries have “common but differentiated responsibilities” to deal with global warming and to limit temperature rise to less than 2°C. The deal is not legally binding and gives each country until March to announce the amount it will agree to cut.

Energy and climate change secretary Ed Davey hailed the document as “showing a will and commitment to respond to the public demand to tackle climate change”.

 

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