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March 2018 Regulatory Report

By Market Insight Team | Posted April 04, 2018

Generation

Speaking before the Lords EU Energy and Environment Sub-Committee, Energy and Clean Growth Minister, Claire Perry has confirmed the government intends for the UK to remain in the EU’s carbon trading scheme (ETS) until the end of 2020. This would be to the end of the phase three – as both the EU and industry have recommended – rather than the date the UK leaves the EU. Perry’s confirmation saw the price of EU ETS carbon reach its highest price since September 2011 at €12.77/t.

Elsewhere, when speaking at an industry event, Perry revealed the government is planning to take a formal review of the Capacity Market (CM) later in the year. This would assess key questions such as contract lengths and the potential of opening the auction up to renewables. The move was welcomed by Energy UK, which felt it could provide the opportunity for some “common-sense” changes.

Delivery

Ofgem has proposed a significantly lower range of returns for investors under its new regulatory framework from 2021 for network companies. It set out the framework on 7 March, claiming that the “tougher approach” could deliver savings of over £5bn to energy users. Meanwhile, the cost of equity allowances – the amount network companies pay shareholders – would be set between 3-5%. This was noted as being the lowest rate ever proposed for energy network price controls in Britain.

The government’s latest smart meter statistics have shown that over 10mn smart and advanced meters were operating across homes and businesses in Great Britain at the end of 2017. This was said to be 71% higher than 31 December 2016 and an increase of 17% on the previous quarter. In terms of installations, 16,800 smart and advanced meters were installed in smaller non-domestic sites in Q4 2017 – 7% higher than Q3.

Usage

The Commons Public Accounts Committee (PAC) has warned the Green Investment Bank (GIB) may never live up to its original ambitions as its green intentions had not been sufficiently protected during the sale process. It said it was unclear whether the bank, under Macquarie ownership, would continue supporting the government’s energy policy or climate goals. It also criticised the sale process itself.

National Grid has said that gas will be necessary to meet 2050 carbon targets and called for action on its future. It made a raft of recommendations, including a lead official to cover cross-departmental issues relating to the role of decarbonised gas in the whole energy system and for that official to manage a decarbonisation of gas strategy.

Also covered in this Regulatory Report:


Generation

Perry offers clarity on UK future in EU carbon trading scheme

Appearing before the Lords EU Energy and Environment Sub-Committee on 21 March, Energy and Clean Growth Minister Claire Perry revealed the government plans to stay in the EU’s carbon trading scheme (ETS) until the end of 2020.

Perry was joined by Jonathan Holyoak, BEIS Director: EU Energy and Climate Change who confirmed the government was still working through the details with the EU on how the ETS would work through the Brexit implementation period. However, Perry confirmed to the committee that this was with the idea of giving certainty through to at least the end of phase three for participants – adding that the government recognised it needed to provide certainty and would make sure its intention to remain until the end of phase three was “absolutely clear”.

In the aftermath of Perry’s confirmation, the EU ETS carbon price reached €12.77/t – its highest price since September 2011. As of 27 March, it had risen as high as €13.47/t.

Speaking after the session, Committee Chair Lord Teverson welcomed Perry’s comments. Teverson said: “It’s now imperative that the Government agrees the specifics with the EU as soon as possible, and then quickly moves on to setting out its plans for carbon pricing and funding action on climate change post-Brexit.”

In terms of the government’s plans post-Brexit, Perry told the committee that the government would examine ways to send out stronger carbon pricing signals in the UK – potentially outside of the EU ETS. Perry explained that while it did want to continue participating – and welcomed the improvements made in the phase four reforms – the EU ETS had not historically provided a strong carbon pricing signal.

Perry said: “If there is a long-term opportunity to improve carbon pricing signals in the economy by amending or changing the relationship with the ETS, we would be short-sighted not to take that. We’re not looking to create uncertainty and disruption but we have a duty to see if there is a better and deeper scheme.”

More broadly, Teverson asked Perry what the government’s aims are for preserving and enhancing the UK’s climate action during the EU withdrawal process. Perry outlined them as being threefold, beginning with maintaining ongoing leadership within that space and continuing to “act aggressively” on decarbonisation of the UK economy. Elsewhere, the UK wants to remain a helpful member of European shared efforts within this area said Perry, adding it was clear Europe needs as much collective action as possible.

As a third aim, Perry said the government wants to raise ambition to the 2020 “crunchpoint” – when countries must set out how to meet the aims of the Paris Agreement – and make sure that multilateral frameworks work.

Perry assured the UK would not import from countries with lower standards than its own on leaving the EU. The minister said that the UK needs to be as robust and ambitious as current legislation, as emissions targets will not be met without it. Furthermore, leaving the EU will not impact the UK’s attempts to meet its own climate targets as they are driven by domestic policy. Perry said it would affect the remaining EU-27 more, as they would have to do more to meet the bloc’s collective targets.

In terms of replacing EU funding, Perry felt a combination of public and private investment will prove the solution.

Government sizes up revamps of energy auctions

Energy and Clean Growth Minister, Claire Perry, has confirmed that the government will undertake a formal review of the Capacity Market (CM) later in the year.

On 20 March, Renews reported that the review into the government’s auction to ensure security of supply will assess key questions such as contract lengths, potentially opening the auction up to renewables and assessing how the system could work better in combination with battery storage and balancing services. Perry was speaking at an industry event when making the comments. They were welcomed by Energy UK, which said it could provide the opportunity for “common-sense changes”.

Then, later in the week, in an interview with The House Magazine, Perry suggested that the government was planning to hold fresh auctions for both onshore wind and solar.

Perry outlined that the government was “looking carefully” at how to increase onshore wind deployment in areas of Scotland and Wales, though stopped short of providing a timeline. Furthermore, Perry said: “We are getting to subsidy free generation now for offshore and solar. So, I wouldn’t be expecting us to be investing subsidy in those that contracts [that] can be used to go after technologies that are further away from the market.”

RHI changes should be expected in 2019 spending round

BEIS Permanent Secretary Alex Chisholm has said that changes to the Renewable Heat Incentive (RHI) should be expected in the government’s 2019 spending round, noting that in each of the last three the approach and budget for the RHI had been adjusted for the period ahead.

Chisholm was speaking before the Public Accounts Committee (PAC) on 21 March, as it held an oral evidence session into the progress of the RHI. Chisholm drew on the fact that BEIS would be doing a wider review of all the possible options for reducing carbon emissions in the heat system over the course of 2018, examining the optimum mix of low carbon heating technologies for the future. Chisholm said this was timely considering the 2019 spending round.

Elsewhere, Dan Osgood, Direct for Heat and Business Energy at BEIS, said initial forecasts for the RHI had been over-optimistic. Chisholm argued that, owed to the fact the UK had hardly any renewable heat, it was important for the government to set ambitious targets.

Offshore Wind Industry sets out vision for 2030

The UK Offshore Wind Industry Council (OWIC) has outlined the offshore wind industry’s ambitious vision for 2030 as it begins work with the UK government on a “transformative” Sector Deal.

The vision, revealed on 20 March, includes pledges such as £48bn investment in UK infrastructure; a five-fold increase in export value to £2.6bn a year; 27,000 skilled jobs across the UK – up from 11,000 today; and a £2.4bn a year reduction in total electricity system costs, causing costs to energy users to fall. The industry said that with the Sector Deal, it aims to generate one third of the UK’s electricity from offshore wind by 2030. When considered with the Clean Growth Strategy, it said that it would mean industry more than doubles its capacity from 13GW deployed or contracted today to 30GW by 2030.

The trade association also announced that the sector’s engagement with the government on the development of the deal will be led by Baroness Brown of Cambridge, who is currently the UK’s Low Carbon Business Ambassador and Vice Chair of the Committee on Climate Change.


Delivery

Ofgem sets out new price controls for networks

Ofgem is proposing a significantly lower range of returns for investors under its new regulatory framework from 2021 for network companies.

On 7 March, Ofgem set out its proposals, stating that its “tougher approach” would deliver savings of over £5bn to energy users over five years. It suggested the next round of network price controls should run over a five-year period as opposed to eight, while the cost of equity allowances – the amount network companies pay shareholders – would be set between 3-5%. This was noted as being the lowest rate ever proposed for energy network price controls in Britain. It also proposed a targeted innovation support programme to support strategic challenges across the sector; and wider scope for opening high value network upgrades to competition across the gas and electricity sectors. 

Ofgem urged networks to step up their use of innovation even further moving forwards to maintain high levels of reliability while enabling support for new technologies, including electric vehicles, electricity storage and local renewable generation.

Smart meter installations rise in Q4 2017

The government has revealed over 10mn smart and advanced meters were operating across homes and businesses in Great Britain at the end of 2017, a rise of 71% on 31 December 2016.

The government is committed to ensuring that every home and small business in the UK is offered a smart meter by the end of 2020. Its smart Metering Programme aims to rollout over 50mn smart gas and electricity meters to homes and businesses. Published on 27 March, the latest figures revealed a 17% increase in meters in operation in Q4 when compared to Q3 2017. In Q4 2017, the report said that 16,800 smart and advanced meters in small non-domestic sites had been installed which worked out as a 7% increase on the previous quarter. As of 31 December 2017, the report said that 1.06mn smart and advanced meters were now in operation across smaller non-domestic sites across Great Britain.

To date, over 11mn smart and advanced meters have been installed across Great Britain by both large and small energy suppliers – 91% of these coming in domestic properties.

O2 finds 5G technology key to next generation of smart energy grids

O2 has said that 5G technology can help to unlock the next generation of smart energy grids and reduce the risk of blackouts and brownouts.

In its report, The value of 5G for cities and communities, it set out that 5G technology can deliver productivity savings of around £6bn a year for UK cities. In the case of energy, it could save the UK economy £3.4bn annually by mitigating the loss of productivity caused by blackouts and brownouts. It further explained that fitting low-power, low-cost 5G sensors to the grid could help detect and respond to spikes in demand. It was also suggested that 5G technology would support the government in its bid for a widescale roll out of electric vehicles by 2040 by providing the extra capacity needed for charging them.

The report also suggested that 5G can drive more dynamic energy pricing, based on real-time demand, while using it to remotely dim or brighten smart LED street lamps could save UK councils an estimated 70% in energy bills.


Usage

GIB failed to live up to original ambitions: report

The Commons Public Accounts Committee (PAC) has said that the Green Investment Bank (GIB) failed to live up to original ambitions and there is no guarantee that it ever will.

It published its report into the GIB on 14 March, in which it explained the reasoning it may never live up to original ambitions is because its green intentions had not been sufficiently protected. PAC said that BEIS had no way of assessing whether GIB had achieved its intended objectives of both encouraging green investment and creating a lasting institution.

The GIB was sold to Macquarie for £1.6bn in August 2017 and PAC found that the measures put in place to protect the GIB’s green purposes were not sufficient to ensure it is an enduring institution. It warned that it was unclear whether the new Green Investment Group (GIG) would continue supporting the government’s energy policy or have an impact on the UK’s climate change goals. The report explained that BEIS had prioritised reducing public debt during the sale and maximising the amount of money it received for the bank, instead of continued delivery of its green objectives. Furthermore, the sale had taken “far longer than planned” and the process was considered reactive, with several compromises made by BEIS.

Deputy Chair of PAC, Sir Geoffrey Clifton-Brown, said the way in which the GIB was sold was “deeply regrettable”. Cliffton-Brown said: “Government did not carry out a full assessment of the Bank’s impact before deciding to sell, nor did it secure adequate assurance over the Bank’s future role. We expect the Government to keep us updated on the GIG’s future activities in the UK but there are broader lessons here – not least for how Government evaluates public assets and, when relevant, prepares them for sale."

National Grid sets out future for gas and calls for action

In its Future of Gas report, National Grid said it was unable to identify a credible scenario in which 2050 carbon targets can be met without gas.

It published its report on 9 March, noting that through decarbonisation of gas and gas networks, new opportunities for the UK economy can be unlocked and carbon emissions can be reduced. However, to do so, National Grid said action was needed now on policy gaps and barriers. The report examined gas under three key themes – decarbonisation of heat, transport and industry; gas in the context of the whole energy system; and future networks and markets. Among a raft of suggestions, some of the main ones were appointing a lead official to cover cross-departmental issues relating to the role of decarbonised gas in the whole energy system; this official managing a decarbonisation of gas strategy; the first Carbon Capture Usage and Storage (CCUS) projects commencing in the 2020s, ensuring it is available at scale in the 2030s; and taking low-regret steps to increase penetration of decarbonised gas despite the absence of policy clarity on issues such as the future role of hydrogen.

National Grid’s report was followed by a report by Reuters, which said the government had rejected calls for a gas storage capacity review. Following price spikes and outages during freezing weather conditions, operators of gas storage sites, gas reliant industries and storage developers met with BEIS officials to try and encourage an inquiry into gas storage capacity.

However, on 20 March Reuters said the government refused a review – stating the onus was on the market to determine whether it made sense to invest in new gas storage, while it believed any supply shortages would cause sufficient price rises that would attract gas from alternate sources.

Energy efficiency key to ensuring energy security

The UK Energy Research Council (UKERC) has concluded that energy efficiency and demand reduction both have important roles to play in energy security strategies.

On 26 March, it published its report, The Security of UK Energy Futures, drawing on how National Grid’s gas deficit warning had shown the importance of a reliable energy system. The report had three main conclusions, with the first outlining the role for energy efficiency and demand reduction. It explained that through reducing energy demand, exposure to risks such as price shocks and energy shortages can be reduced. UKERC explained the relationship between decarbonisation and energy security was not straightforward. Despite imports being cited as insecure, they can enhance security through providing additional sources of energy, lowering costs and increasing diversity – their origin and whether they are dominated by risky sources or supply routes are important considerations.

The report also found that many risks can be mitigated, and system security improved significantly through investing in system flexibility. It cited increasing demand side response as having a “particularly positive impact” on system reliability.

Think tank highlights benefits of accelerated EV uptake

Green Alliance has called for a strategy to speed up the roll out of electric vehicles (EVs) in the UK while drawing on the benefits EVs could potentially bring.

The think tank published its research on 19 March, warning that Britain was “falling behind” in the global sift to EVs. It said that the government’s forthcoming “Road to Zero” strategy was a good opportunity to try and change that. It called for the ban on the sale of fossil-fuel vehicles to be brought forward to 2030 and said uptake could be accelerated through a comprehensive fleet-led strategy.

There would be three benefits to this – rapid EV adoption would cut costs quicker; the 2030 target would reduce the gap to meeting carbon budgets by 60-85%; while getting ahead on EVs can see the UK become a net vehicle exporter, considering it currently has a £5bn trade deficit in conventional vehicles.

Following UK example could cut global carbon emissions by 3%

In 2016, the UK was able to achieve “an unprecedented drop” in carbon emissions by making full use of natural gas instead of coal, according to researchers at Imperial College London and the University of Sheffield.

The study was published on 25 March and explained that the UK government’s carbon pricing policy had been the biggest driver behind the fall. Due to natural gas becoming much stronger in the UK in recent years, it has made it more profitable for companies to use it over coal.

The study suggested that if other countries adopted the same strategy, following the UK’s example, then global carbon emissions could be cut by 1 gigatonne per year (3%) in less than five years. Furthermore, it set out that doing so would not require the construction of new gas infrastructure or increasing supplies. Instead, it would involve using existing infrastructure to its full capacity.

The researchers noted that while switching from coal to gas is by no means a long-term solution, it would help to reduce emissions quickly and at a low cost as renewable capacity continues to be developed.

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