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February 2018

By Market Insight Team | Posted March 16, 2018

February 2018 – in brief

Generation

The government has hailed the record low prices achieved in the recent Capacity Market auctions, stating they had secured future energy supplies at the lowest cost for both homes and businesses. The T-4 auction cleared at a record low price of £8.40/kW/ year on 8 February, while the T-1 auction achieved a price of £6.00/kW. Existing generation and Combined Cycle Gas Turbines dominated successful agreements in both auctions.

The National Audit Office (NAO) published its assessment of the Renewable Heat Incentive (RHI) on 23 February, concluding that it has not delivered value for money. The NAO’s report found that take-up of the scheme had been significantly lower than expected, while ambitions for the renewable energy produced under the RHI and carbon reduction targets had been watered down.

Delivery

Ofgem has delivered its outline business case for the implementation of a reform package that will look to achieve reliable next-day switching. Under the plans, there will be a one-day working objection window for domestic switches. In the case of non-domestic switches, there will be a two-day working objection window.

The National Infrastructure Commission (NIC) has welcomed the progress that has been made in transforming the UK’s energy networks, but found that the government has been slow overall in taking decisive action on the country’s infrastructure needs. The NIC welcomed the work done by BEIS and Ofgem in helping the UK become a world leader in storage and securing cost-effective, low carbon generation.

Usage

Freezing weather conditions have placed a strain on the UK’s gas supplies and caused prices to rise. On 1 March, National Grid warned the UK was running out of supplies and issued the first Gas Deficit Warning since the mechanism was introduced in 2012. The warning was issued as supply losses had suggested that the UK would not have enough gas supply to meet demand.

Labour leader Jeremy Corbyn has outlined his vision for the UK post-Brexit, stating that Labour would want to remain part of the Internal Energy Market and Euratom. Corbyn also stressed that cooperation was key in tackling climate change.

Also covered in this Regulatory Report:


Generation

Capacity Market auctions deliver record-breaking prices

The government has hailed the record low prices achieved in both the T-1 2018-19 and T-4 2021-22 Capacity Market auctions for securing future energy supplies at the lowest cost for both homes and businesses.

The T-4 auction cleared at a record low of £8.40/kW/ year on 8 February. This was a significantly lower price than the £22.50 that was achieved in last year’s T-4 auction. A total of 50.41GW was secured, with existing capacity (86%) proving to be the most successful. Combined Cycle Gas Turbines (CCGT) were the most successful technology type, making up just under half (45.66%) of the capacity procured. This was followed by nuclear (15.72%) which saw 16 Capacity Market Units (CMUs) successful in winning agreements.

The auction also saw interconnectors win a record amount of capacity. A total of 4.6GW won agreements. This included existing links to France, the Netherlands and Northern Ireland. Around 2.2GW of new build interconnectors were also successful.

Commenting on the results, Chief Executive of Energy UK, Lawrence Slade, said: “This Capacity Market auction clearing low once again proves that competition is successful at providing security of supply at the lowest cost to consumers. This auction along with those preceding it have supported innovative, emerging technologies whilst ensuring we get the best value from existing assets.”

The T-4 auction mirrored the results of the T-1 2018-19 auction, which also saw existing capacity (81%) dominate agreements, with CCGT (38.21%) the most successful technology type. The T-1 auction also cleared at a record low of £6.00/kW.

Report deems RHI scheme “not value for money”

The National Audit Office (NAO) has found the Renewable Heat Incentive (RHI) has not delivered value for money in its assessment on the scheme, published on 23 February.

The RHI has aimed to encourage a switch from fossil fuel heating systems to renewable and low-carbon alternatives in homes and businesses in Great Britain. It does this by offering participants a financial incentive to make this switch. However, the NAO’s report found that take-up of the scheme had been significantly lower than expected.

As of December 2017, just 78,048 installations had been made under the RHI. The government had targeted 513,000 by 2020. Around 17,955 of these installations had come under the non-domestic RHI for industry, businesses and public sector organisations. Based on current rates of take-up, the report said the RHI will achieve 111,000 installations by March 2021. This accounts for only 22% of the government’s original expectations.

The scheme has also seen ambitions for subsidised renewable energy production and carbon reduction targets reduced significantly. The renewables target had been reduced by 65%, while the carbon reduction goal had been lowered by 44%. The report noted that the government is on track to achieve these revised objectives, but the reduced ambitions of the RHI have not yet fully been replaced elsewhere.

The report noted that because of the cost control measures put in place by government, the budget issues seen in the Northern Irish version of the scheme have been avoided.

Clark gives assurances on government’s commitment to nuclear

Speaking before the Lords Economic Affairs Committee, Business and Energy Secretary Greg Clark has confirmed the government remains committed to new nuclear.

Giving evidence on 20 February, Clark was asked whether the substantial cost reductions seen in offshore wind through September’s Contracts for Difference (CfD) auction had caused the government to rethink its plans for the energy mix. Clark said it had not, explaining that renewables – despite their cost reductions – were unable to dependably provide power in the same way that nuclear was able to. Clark added that it remained government policy “to seek a broad mix of different supplies of energy for the future.”

The Business and Energy Secretary also gave assurances that if there were any delays to the government’s new build nuclear programme, the UK had the power to compensate. The government’s energy auctions were cited as providing further insurance.

Clark also confirmed that focussing on nuclear within the Industrial Strategy was part of the work to bring future costs down. He said that it would ensure the state could make the most of what looks set to be a “long-term relationship” with private operators.

Ministers warned of risks to offshore wind projects

The UK risks spurning an opportunity to lead in floating offshore wind farms, unless it opts to extend a subsidy scheme according to industry leaders.

The Financial Times reported on 18 February that the 60MW Forthwind and 10MW Dounreay Tri projects - both off the coast of Scotland - are under threat because they will not be generating electricity in time to meet the deadline for accrediting under the Renewables Obligation (RO) to receive RO certificates (Rocs). The RO scheme is set to close to new applicants in October. Industry leaders have said that these floating projects can be deployed in deeper and windier waters further offshore, presenting a long-term opportunity.

RenewableUK has called for an 18-month extension for application to the RO scheme through to April 2020. Maf Smith, Deputy Chief Executive, explained: "Without this first group of projects we will not be able to build UK expertise and that would be a huge lost opportunity."

Smith explained that floating offshore wind drew on similar skills to offshore oil and gas, meaning existing jobs and expertise can be preserved as North Sea fossil fuel resources decline. It also presents an export opportunity for UK design and engineering, Smith added.

Research charts pathway to lower industrial energy prices

A report by University College London researchers, produced for the Aldersgate Group, has found that UK industry pays a third more on average for electricity than its European counterparts.

Published on 5 February, the report explained that industry in Europe had benefited from better interconnectors, more cross-border trading and long-term supply contracts. It recommended that when the UK leaves the European Union, it does so in a way that supports increased interconnection with European power grids and cross-border electricity trading.

It made six recommendations in total, including removing barriers to, and thus increasing investment in mature low-cost renewable energy, such as onshore wind. The government should also look to coordinate investment in power generation and network infrastructure more efficiently, the report said.


Delivery

Ofgem delivers outline business case for Faster Switching

Ofgem has published its outline business case for the implementation of a reform package that will look to achieve reliable next-day switching.

On 12 February, the regulator said it will proceed with reform package 2a (RP2a). RP2a will introduce a Central Switching Service (CSS) to harmonise the gas and electricity switching processes where appropriate. Under the plans, there will be a one-day working objection window for domestic switches. In the case of non-domestic switches, there will be a two-day working objection window.

Between 2018 to 2035, the primary benefits of the switching programme are forecast to be improved reliability - with regards to reducing time and inconvenience for customers and costs for suppliers; and faster switching. Ofgem believes the benefits that RP2a will bring could be up to £1,069mn, stating it is confident that it offers the highest potential positive combination of monetised and non-monetised net benefits for homes and businesses. A Full Business Case is to be published in Q2 2019.

NIC welcomes progress on smart electricity network

The National Infrastructure Commission (NIC) published its first Annual Monitoring Report on 16 February, in which it welcomed the progress that been made in transforming the UK's energy networks.

The NIC previously published a report in March 2016, offering six recommendations to move towards a smarter electricity system. The government endorsed all recommendations when responding in 2017 and in the time since, the NIC noted that all of them have been taken forward.

It noted how recommendations on storage and demand flexibility were taken forward in the government and Ofgem’s Smart Systems and Flexibility Plan, while both had also announced their intention to create greater independence for the system operator – with Ofgem consulting on future regulatory arrangements.

The NIC hailed the “clear commitment” that had been shown by the government and Ofgem to deliver the benefits of a smart electricity system identified in its initial report. The NIC called on both to continue levelling the playing field for demand-side response and other flexible forms of capacity, ensuring they can compete in the energy, capacity and ancillary services markets.

National Grid consults on electricity system operator forward plan

On 12 February, National Grid issued its first annual forward plan for the electricity system operator (ESO) in which it outlined what its priorities are and what it will deliver for its customers and stakeholders in 2018-19.

The forward plan lays out a range of deliverables which relate to managing systems balancing and operability; facilitating competitive markets; facilitating whole system outcomes; and facilitating competition in networks.

National Grid also set out how it will deliver value in line with the seven principles that Ofgem has set out for the system operator. Responses to on the priority and focus of its plans are invited by 5 March.


Usage

Freezing weather sees Gas Deficit Warning issued

On 1 March, National Grid warned that the UK was running out of gas and appealed for more from suppliers while using commercial contracts with suppliers to reduce gas use by industry.

It introduced the country’s first Gas Deficit Warning (GDW) since the mechanism’s introduction in 2012. It had forecast the UK was facing a demand shortfall of 49.5mn cubic meters (mcm) after freezing weather conditions and “significant supply losses”. In the event of a deficit, large energy users – such as industry and large businesses – are asked to use less gas to redress the balance. Households are asked to do so as a last resort. The deficit was withdrawn early on 2 March after supplies fell back into balance, with coal-fired and wind-power generation easting the strain on gas-fired power generation units.

The events caused significant price rises with within-day wholesale gas prices hitting new highs. An initial 74% rise took them to 200p per therm (th), while after the warning had been issued they surged to 350p/th – their highest level in over a decade.

Jonathan Marshall, Energy Analyst at the Energy Climate Intelligence Unit (ECIU) said a “perfect storm” had led to the events. Marshall explained: “The UK is largely isolated in its dependency on gas, with a huge over-reliance in the power and heating sectors. Experts have long warned about putting too many eggs in the same basket, with events such as today the undesirable outcome.”

The weather saw supplies from Norway, the Netherlands and Belgium impacted. National Grid said that with the “extremely cold weather “continuing, high demand was expected to continue and that it would “monitor developments closely”. 

Corbyn sets out Labour energy ambitions, post-Brexit

On 26 February, Labour leader Jeremy Corbyn delivered a speech on his party’s vision for Britain after Brexit, vowing energy cooperation with Europe going forwards.

Corbyn confirmed that Labour would want to remain a part of EU agencies, such as Euratom and the Internal Energy Market (IEM), and of tariff-free trading rules “that have served us well, supporting our industrial sectors, protecting workers and consumers and safeguarding the environment.”

The Labour leader added that it was key for the UK to work with other countries “to confront the four greatest and interconnected threats facing our common humanity”, one of which was climate change. Corbyn said that climate change, pollution and environmental degradation could only be tackled by working together, adding that many of the UK’s closest allies in “that struggle” were based in Europe.

Corbyn cited Green Alliance analysis, which had estimated trade in low carbon goods and services had contributed over £42bn to the economy in 2015. He noted how this is forecast to increase fivefold by 2030 but that standards to ensure barrier-free trade must be maintained to see this happen.

Corbyn explained: “These include eco-design and energy labelling standards, greenhouse gas emission standards for vehicles, the internal energy market, construction product standards, chemicals regulation and nuclear safety and safeguards.”

Perry assures UK remains attractive market for renewables

The UK is still an attractive and stable environment for renewable energy investment, Energy and Clean Growth Minister Claire Perry has said.

Perry was speaking before the Environmental Audit Committee on 21 February, as part of the committee’s inquiry into Green Finance. The minister also set out how the UK’s auction for renewables subsidies, the Contracts for Difference scheme, was an effective mechanism that had driven down the costs of a number of renewable technologies.

On the Clean Growth Strategy and carbon targets, Perry reiterated that the UK was on track to deliver 97% and 95% of the fourth and fifth Carbon Budgets. While there has been talk of the gaps within the strategy, Perry assured that she was confident that the current rate of change in the low-carbon economy would fill these and bridge the gaps towards the Carbon Budgets. The minister added that she would be disappointed if the government had to call on flexibilities in order to meet these targets, however that was something that remained a potential option.

Report warns of impact on low carbon sector from post-Brexit trade

Think tank, the Green Alliance, has called on the government to prioritise trade with the EU after Brexit, to ensure it can reap the benefits from the low-carbon sector.

The report, published on 21 February, warned that the future success of the UK’s low-carbon sector is at risk from the government’s post-Brexit trade strategy. The report said a trade strategy that builds on the UK’s expertise in the low carbon and renewables sector would improve access for British businesses to a market estimated to be worth £17tn worldwide.

It explained the UK faces a choice of aligning with either the EU or the US. It added that with over half of the UK’s low-carbon trade being with the EU, it made sense to keep regulation aligned. This was especially in areas such as electricity to reduce the possibility of rising costs to homes and businesses.

Chaitanya Kumar, Senior Policy Adviser at Green Alliance and report author, said: “The government’s current approach to trade risks undercutting its own clean growth strategy, which aims to build a thriving low carbon economy in the UK. Alignment to make low carbon trade with the EU as simple as possible will be central to achieving that goal.”

BEIS announces £30mn of investment in V2G technology

The government has allocated £30mn of funding in a bid to unlock the potential of electric vehicles through research into vehicle to grid (V2G) technologies.

On 12 February, BEIS announced that 21 V2G projects had been awarded investment to fund research, design and development, with the goal of exploring and trialling both the technology and its commercial opportunities. BEIS said that V2G technologies can enable electric cars and other vehicles to deliver electricity back to the smart grid, helping to power both homes and businesses. The investment ties in with the government’s ambition, as set out within the Automotive Sector Deal, to be at the forefront of low-emission and electric vehicle production.

Transport Minister Jesse Norman commented: “As the number of electric vehicles grows and their battery capabilities increase, there is a huge opportunity for them to make a significant contribution to a smart grid.”

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