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April 2015

By Market Insight Team | Posted April 02, 2015

March 2015 - in brief

Generation
Chancellor George Osborne delivered the last Budget of the Parliament. He set out reforms to the tax regime of the North Sea oil and gas industry, intended to boost production and safeguard the sector’s future. Osborne also announced the government was entering into negotiations over possible support for the proposed tidal lagoon project in Swansea Bay. Meanwhile, the government announced that it would reform the feed-in tariff (FiT) scheme, so that businesses with solar panels could move between premises and continue to receive the subsidies. 

Delivery
The smart meter roll-out continued to pick up pace, with installations in the fourth quarter of 2014 increasing over the previous quarter by 18%. Shortly before the end of the Parliament, the government set out its plans for ensuring a smooth transition towards the next generation of smart meters. However, both industry groups and MPs have expressed concern about the prospects for the programme. 

The energy regulator Ofgem revealed that it was minded to provide a “cap and floor” regime for three proposed interconnectors: two to France and one to Denmark. But the proposed Greenlink interconnector to Ireland is unlikely to be regulated through the regime as it has failed to demonstrate sufficient value for money for consumers. 

Usage
The government announced that some of the aspects of its compensation package for energy-intensive industries from the costs of decarbonisation were to be brought forward to 2015-16. The move is anticipated to save manufacturers around £25mn in total. The energy regulator Ofgem published a report on the new forms of business model entering the GB energy market. It believes that these new models could play a transformative role in the sector and deliver significant benefits for consumers.  

Also covered in this Regulatory Report:

Generation
Budget delivers North Sea tax cuts
Relocated businesses to keep solar subsidies
MEPs consider emissions trading reforms
Policy interventions needed to phase out old coal
MPs set out vision for UK energy future

Delivery
Smart meter roll-out gathers momentum
Energy regulator backs three new interconnectors

Usage
Industry to get early cost relief from low-carbon policies
Ofgem evaluates new business models in energy sector
UK accused of using ineligible measures for energy savings legislation
Government awards finance for heat networks
Low emissions vehicles get government funding boost
UK emissions fall in 2014 


Generation

Budget delivers North Sea tax cuts
Chancellor George Osborne used the last Budget of the current Parliament to reduce the taxes paid by North Sea oil and gas companies.

Speaking in the Commons on 18 March, Osborne said that the recent fall in oil prices represented a “pressing danger” to the North Sea industry. He set out reforms intended to ensure that the basin continued to attract investment and to “safeguard the future of this vital national asset”. 

In particular, the government reduced the Supplementary Charge by 10% from 30% to 20%, following on from the 2% cut announced last year. The Petroleum Revenue Tax was cut from 50% to 35% as part of an effort to extend the life of key infrastructure and promote investment in smaller-scale incremental projects in older fields. Osborne also confirmed the introduction of a new Investment Allowance, intended to boost investment in all stages of the industry life cycle, simplify the existing system of offshore allowances, and provide stability for investors. Finally an extra £20mn of funding is to be provided for a series of seismic surveys to boost offshore exploration.

The government expects that these measures will cost around £1.3bn. But they are anticipated to spur over £4bn of additional investment in the North Sea over the next five years, and by 2019 see oil production boosted by 15%. 

The announcements were hailed by the oil and gas industry. Malcolm Webb, Oil & Gas UK’s chief executive, said: “Today’s announcement lays the foundations for the regeneration of the UK North Sea. The industry itself must now build on this by delivering the cost and efficiency improvements required to secure its competitiveness.”

The Budget was criticised by environmental campaigners for its lack of focus on energy efficiency or renewables. However, the government did confirm that it would enter into the first phase of negotiations on a contract for difference (CfD) for a proposed tidal lagoon project in Swansea Bay.

CfDs are the government’s new mechanism for supporting the deployment of low-carbon generation, and will generally be allocated in a competitive auction format. However, given the relative immaturity of tidal technology, the government intends to enter into bilateral negotiations over CfD support for the Swansea Bay project – as it did with EDF Energy over support for the Hinkley Point C nuclear power project. It will seek, in this phase, to determine whether the project is affordable and offers value for money to consumers, while also considering whether it could help to drive down the costs of tidal lagoon power in the UK. 

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Relocated businesses to keep solar subsidies
From summer 2019 it will be possible for business energy users to move medium and large solar PV installations between buildings without losing subsidies through the government’s feed-in tariff (FiT) scheme, it has been confirmed.

At present, solar installations would lose FiT support if they were relocated between premises. But the changes, announced on 20 March, will mean that landlords and tenants who cannot be certain of having long-term ownership or lease of a building will be able to move their installation and keep their FiT tariff. The energy regulator Ofgem will be allowed to implement charges in order to recover the costs of the administration process. 

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MEPs consider emissions trading reforms
The European Parliament’s environment committee has backed proposals to introduce the proposed Market Stability Reserve (MSR) for the EU Emissions Trading Scheme (EU ETS) earlier than originally planned.

The EU ETS is a cap and trade system that seeks to gradually reduce the level of emissions from installations such as factories and power plants. Within the cap, which decreases over time, companies receive or buy emission allowances that they can trade with one another as needed. When established, the system was intended steadily to increase the cost of emitting carbon. However, the carbon price has stayed low over the past few years, owing to an over-supply of allowances within the scheme. This is the issue that the MSR aims to resolve, through holding back allowances from the market and thus raising the carbon price.

In a vote on 24 February, the environment committee supported the implementation of the MSR at the end of 2018 - as opposed to 2021, as had originally been planned by the European Commission. The committee also recommended preventing the automatic return to the market, from 2019, of a portion of the so-called “back-loaded” allowances that were removed from the market last year on a temporary basis.

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Policy interventions needed to phase out old coal
UK policy-makers will need to reconsider their approach to phasing unabated coal generation off the energy system, a think tank has said.

IPPR published its Scuttling Coal report on 12 March. It argues that the government is likely to be misguided in its view that the existing policy framework will result in a “dramatically reduced” role for coal in the generation mix during the 2020s. Above all, it raises serious concerns about the deliverability of the intended trajectory of the Carbon Price Floor, which DECC currently assumes will increase the price of carbon to £78/tonne by 2030. IPPR suggests that concerns about the mechanism’s impact on the competitiveness of UK industries, and its unpopularity with household consumers, mean that this trajectory is very unrealistic.

The report says that the government should introduce an Emissions Performance Standard (EPS) on old coal in order to deliver a phase-out of unabated generation. This, it says should be reinforced by reforms to the government’s capacity market that align the mechanism more closely with the decarbonisation process.

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MPs set out vision for UK energy future
The Commons energy and climate change select committee launched a report on 12 March in which it outlined a vision for the energy sector’s future.

The report said that by 2030 the system should be predominantly decarbonised, with a diverse mix of energy sources including nuclear power and shale gas. The committee also hoped that renewable energy technologies would over the next two decades mature to the point that government involvement in the market could be significantly more limited than at present.

The committee accepted that there would continue to be a need for some fossil fuels in the energy mix. But it hoped that carbon capture and storage could be fitted to new and existing power stations, with combined heat and power (CHP) systems also widely deployed to maximise efficiency.

The report said that three factors would be essential to the realising of the committee’s vision: the maintenance of political stability and strong leadership; the support and promotion for new technologies like demand side response; and building consumer trust in the energy market.

Speaking at the launch of the report, committee chair Tim Yeo challenged the rationale behind opposition to onshore wind. He said that the technology represented good value for money, producing around 30 times less CO2/kWh than gas and about 50 times less than coal. While saying that the UK should not “rule out” offshore wind, Yeo said that it would always be more expensive than onshore wind and solar. “Allowing opponents to rule out onshore wind altogether has only one certain consequence––to raise the cost of achieving the cut in greenhouse gas emissions to which Britain is legally committed”, Yeo claimed. 

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Delivery

Smart meter roll-out gathers momentum
Figures released by the government on 19 March have shown a marked increase in the pace of installation of smart meters at business properties.

The figures indicated that a total of 1,200 smart meters and 17,700 advanced meters were installed in smaller commercial properties in the fourth quarter of 2014. This represented an 18% increase in installation activity compared with the third quarter of the year.

A total of 586,300 smart and advanced meters were, up to 31 December 2014, installed in smaller non-domestic sites, with 521,600 of these operational. This represents 19.2% of all smaller non-domestic site meters operated by the larger suppliers.
Despite this progress, the smart meter programme has continued to attract criticism from business groups. The Institute of Directors (IoD) released a report on 30 March, which said that the roll-out should be either significantly reformed or abolished entirely to prevent a “government IT catastrophe”. 

The IoD’s concerns followed a report by the energy and climate change select committee that said that the government was likely to miss its target of achieving the full roll-out of smart meters to homes and businesses across the UK by 2020.

Meanwhile, the government opened a consultation on 24 March on two issues impacting the roll-out of smart meters to the businesses. It is seeking views on its belief that there should be no extension, beyond April 2016, of the option for suppliers to install advanced meters at commercial properties in order to contribute towards their roll-out obligations. Advanced meters are often technologically similar to smart meters; they are typically able to record and store information on energy consumption. However, they do not meet the essential technical requirements necessary to be considered “smart”.

The government is also considering whether it should end the option for suppliers to use communications services other than those provided by the central Data and Communications Company (DCC) for meters that they install at non-domestic premises. 
Responses to the consultation are requested by 15 June.

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Energy regulator backs three new interconnectors
The energy regulator Ofgem announced on 5 March that it is minded to support three new electricity interconnectors through  its new “cap and floor” regulatory regime.

Interconnectors enable power to flow between the UK and nearby countries, bolstering energy security. Ofgem’s new “cap and floor” mechanism sees developers build the interconnectors, and then receive a regulated return on their investment.

Ofgem intends to award the regime to the proposed FAB Link and IFA2 projects, which connect to France; and Viking Link, which will connect to Denmark. It is estimated that these three interconnectors will provide around £8bn of benefits to British consumers over 25 years, along with an extra 3.4GW of capacity.

However, Ofgem does not intend to progress the application for the proposed Greenlink interconnector between Great Britain and Ireland. It said that the proposal had not demonstrated sufficient value for customers.  

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Usage

Industry to get early cost relief from low-carbon policies
The government announced plans on 18 March to bring forward planned relief for energy-intensive industries (EIIs) from the cost of environmental policies.

Chancellor George Osborne confirmed that the government would introduce its planned compensation, from the costs of the small-scale feed-in tariffs scheme (FiTs), for EIIs in 2015-16. Osborne originally announced the compensation package at Budget 2014, saying that it was necessary in order to ensure that British manufacturers remained competitive internationally. Analysis by the independent Office for Budget Responsibility (OBR) put the savings to manufacturers from bringing forward this relief at £25mn.

Manufacturers’ association EEF chief executive Terry Scuoler said: “Bringing forward critical compensation for energy intensive industries will send a very positive message to key industries and any further support to efforts to boost exports and investment will be equally welcome.”

The plans remain dependent on the package successfully receiving state aid approval from the European Commission.

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Ofgem evaluates new business models in energy sector
The energy regulator Ofgem published a report on 25 February on the benefits and risks to consumers of innovative and disruptive business models in the energy markets.

Ofgem believes that these “non-traditional business models” (NTBMs) could play a transformative role in the sector, and deliver significant benefits for consumers. It says that their emergence within the energy markets is being driven by four factors in particular; namely the low-carbon transition, rapid technological innovation, the lack of consumer engagement in the market, and increasing focus on affordability and supporting vulnerable customers.

These non-traditional models include: publicly-owned organisations, which operate under specific objectives to reduce emissions or create community value; various forms of community ownership; niche, not-for-profit energy suppliers with social or environmental goals; private businesses that seek to provide innovative services; and hybrid ownership models including private, community and public interests.

But Ofgem thinks that aspects of the current regulatory arrangements in the sector might impact the emergence and long-term sustainability of NTBMs. For example, it says that, while regulation is a “cost of doing business” for all market participants, its complexity can be more of a burden for some new entrants and smaller participants. These businesses often have smaller customer bases over which to spread these costs.

Overall, the regulator explains, the benefits and costs of NTBMs are uncertain, and will depend on the particular form of the NTBM. For example, services that allow consumers to better their energy demand could make the system more resilient; however, a rapid uptake of distributed energy could have wider effects, such as necessitating greater system flexibility that can accommodate higher proportions of intermittent renewables.

Ofgem has requested views on the paper until 20 May. It will publish a summary of responses in the summer. 

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UK accused of using ineligible measures for energy savings legislation
The UK’s plans for meeting the requirements of the EU Energy Efficiency Directive lack credibility as they include potentially ineligible measures, a study has said.

On 16 March, the Coalition for Energy Savings (CES) published analysis of EU member states’ progress towards fulfilling the requirements of the directive. It said that, in updating its measures for meeting its targets under the directive, the UK had increased by 3% its accounting of measures that would be achieved beyond the 2014-20 period, and that were therefore ineligible. Overall, it said, these ineligible savings now represented 15% of the UK’s indicative national 2020 energy efficiency target. 

The CES also said that it had concerns about the savings that the UK anticipated through Climate Change Agreements, which quadrupled in its updated Article 7 notification. The report said that this might indicate double-counting, as “the UK also states that it has not been possible to provide a reliable estimate of the full extent of what CCAs will save prior to an evaluation of the scheme”. 

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Government awards finance for heat networks
The government has awarded an extra £3mn of funding to local authorities (LAs) across England and Wales to support the establishment of heat networks.

Heat networks supply heating from a central source, often through water pipes, and offer considerable efficiency and emissions reduction benefits.

The LAs are the fourth group of successful bidders within the government’s programme for scaling up the reach of the networks. They will be provided with grants ranging from £16,000 to £263,000 and will bring the overall number of heat network projects benefiting from government grants to 180.

Energy and climate change secretary Ed Davey said: “This money will help transform the way communities heat their buildings, schools and homes - as well as show how people and councils can work together to boost jobs and investment in their local area.”

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Low emissions vehicles get government funding boost
Major UK cities are to compete for £65mn of funding from the government to become centres of excellence for ultra-low emissions vehicles (ULEVs).

The scheme, announced on 11 March, will see a dozen cities compete for £35mn, with funding awarded to those that demonstrate the most promise to become “internationally outstanding examples” for the adoption of ULEVs. An additional £30mn will be invested in low emissions buses, replacing existing fleets with “cutting edge” alternatives to improve air quality.

Transport minister Baroness Kramer said: “This funding is an unequivocal signal from government that we are committed to making ultra-low emission vehicles a practical and viable choice for more people […} This can help to transform people’s quality of life in their cities and build a stronger economy and is an important step towards our 2050 vision, when almost every car and van in the UK will be an ultra-low emission vehicle.”

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UK emissions fall in 2014
Provisional statistics released by the government on 26 March showed that the UK’s emissions fell by 8.4% year-on-year in 2014.

The figures showed that the most significant progress towards reducing emissions was in the energy supply sector, with emissions down by 15% (27.6 Mt) on their 2013 levels. This was a consequence of a marked decrease in overall electricity generation, plus a change in the fuel mix for electricity generation. The government noted that there had, in 2014, been significantly less use of coal than there was in 2013, and that more renewables had come online. 

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