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April 2016

By Market Insight Team | Posted April 03, 2016

March 2016 – in brief

Generation

The government unveiled its spending plans in the Budget, confirming its intention to hold renewables subsidy auctions worth £730mn before the end of the decade.

A consultation was opened on reforming the Renewable Heat Incentive (RHI), with the aim of improving the scheme’s cost-effectiveness. The changes seek to ensure that the RHI remains affordable and provides value for money for consumers.

Delivery

Energy regulator Ofgem reported that the long-term cost of connecting offshore windfarms to the energy system had been reduced by at least £700mn as a result of competitive tendering for the transmission links.

A report by the National Infrastructure Commission (NIC) found that greater flexibility in the UK’s electricity network could save consumers £8bn a year. Interconnection, demand-side response and energy storage all have their part to play in improving the system, the NIC said.

The Commons select Committee on Science and Technology issued a call for evidence on the government’s policies on smart meter technology. 

Usage

The government confirmed plans to reform the energy tax landscape facing businesses, with a view to reducing its compliance burden on companies. It intends to abolish the Carbon Reduction Commitment and raise Climate Change Levy rates to make up for the lost revenue.

The Competition and Markets Authority (CMA) set out its provisional decision on remedies for the UK energy market, following a two-year investigation. It recommended new measures to improve the transparency of the business energy market. 

Covered in this Regulatory Report:


Generation

Osborne announces low-carbon spending plans

Chancellor George Osborne used the Budget to announce plans for further spending on low-carbon subsidies during the current Parliament.

Speaking in the Commons on 16 March, Osborne said that, to support the development of large-scale renewables projects in the UK, up to £730mn would, through to 2020, be allocated to subsidy auctions as part of the contracts for difference (CfD) scheme.

CfDs are the government’s new support mechanism for low-carbon generation projects, and were introduced as part of the Electricity Market Reform programme introduced in the last Parliament. The first auction, held early last year, offered support for a range of renewables technologies, such as onshore wind and solar power.

However, the government has said that the subsidies provided over the next five years will aim specifically at supporting the development of the UK’s offshore wind industry. It is targeting the installation of 10GW of offshore wind capacity by 2020, and for this to double over the subsequent decade.

The Budget also launched the first phase of the government’s programme to support the development of small modular nuclear reactors in the UK. It is hoped that these could make a valuable contribution to the UK’s energy security and environmental goals.

Meanwhile, at least £50mn will be invested over the next five years in new energy technologies, such as storage and demand-side response.

Osborne confirmed that the carbon price support (CPS) rate would remain frozen until 2020, at £18/ton, and then in the subsequent year it would be uprated with inflation. The UK introduced the cap to support UK business competitiveness and to limit increases in energy bills.

The government will set out its longer-term plans for the CPS in this year’s Autumn Statement. 

Government reforms renewable heat support scheme

The government has launched a consultation on reforms to the Renewable Heat Incentive (RHI). The changes aim to improve the cost-effectiveness of the scheme, while ensuring that it remains attractive to potential applicants.

The RHI provides a stream of subsidy payments to households and business who install renewable heat technologies, such as heat pumps and biomass boilers.

Heating accounts for around half of the UK’s energy use and a third of its greenhouse gas emissions, so decarbonising the sector is regarded as an important component of the UK’s climate change policy.

The changes to the non-domestic RHI scheme will seek to encourage the use of large-scale biomass boilers, as small and medium ones have until now proved more popular – in part because they receive higher payments. The consultation also proposed a cut in the tariffs offered to very efficient combined heat and power biomass systems, so as to avoid paying these disproportionately high subsidies.

Energy and climate change secretary Amber Rudd said the changes would help make the scheme accessible to a wider range of consumers. 

Energy Bill reaches final hurdle in Parliament

The government’s Energy Bill received its Third Reading in the House of Commons on 14 March, meaning it will soon pass into law.

The primary purpose of the Bill is to provide the Oil and Gas Authority (OGA) – the new regulator of the North Sea industry – with a “strategic direction”. Energy and climate change secretary Amber Rudd, who led the debate on the Bill in the Commons, said that the OGA’s focus would be kept very narrow so that it could concentrate on maximising the economic recovery of oil and gas from the North Sea.

The Bill will also close the Renewables Obligation (RO) subsidy mechanism to new onshore wind projects from this April, a year earlier than had originally been intended. This follows concerns that spending on low-carbon subsidies is in danger of spiralling out of control and exceeding the budget allocated through to the end of the decade. Onshore wind projects will be allowed to apply for RO subsidies beyond April if they are able to meet a series of strict “grace period” conditions.

Meanwhile, provisions in the Bill will also mean that planning decisions for large-scale onshore wind projects will be devolved to local authorities.

Shadow energy and climate change secretary Lisa Nandy criticised the Bill as having “nothing to say about the major energy challenges we face”. She said that the proposed legislation did not recognise the need to build new generation or aid domestic energy market competition.  

Government makes case for new nuclear power

The government has restated its commitment to the development of new nuclear power stations, claiming that the construction of EDF’s Hinkley Point C will help tackle “a legacy of underinvestment in UK’s energy infrastructure”.

In a statement on 12 March, the government argued that nuclear power was the only low-carbon technology able to generate continuous, reliable electricity. This meant that it could make an important contribution to energy security, given the intermittency of technologies like wind and solar power.

Hinkley Point C would be cost-competitive, the government said, receiving a guaranteed price for its power of £92.50/MWh - compared to £110/MWh for offshore wind. It will meet 7% of the nation’s electricity demand for the next 60 years, bringing billions of pounds of investment and supporting 25,000 jobs.

The government also emphasised the safety of the technology, saying the UK’s nuclear regulations were among the most stringent in the world.

The statement concluded: “Hinkley will be a significant step forward in our transition to a low-carbon future, a milestone in our efforts to reduce emissions, and to meet our climate change commitments.”

Doubling global renewables would save trillions, report says

Research from the International Renewable Energy Agency (IRENA) has found that the benefits of doubling the share of renewables in the global energy mix would significantly outweigh the costs.

The International Renewable Energy Agency (IRENA) published its findings on 17 March. It concluded that, given the technologies’ impact on air pollution and climate change, increasing the share of renewables to 36% by 2030 would save up to $4.2tn annually. This would be 15 times the cost of doing so - around £770bn/year. Currently, 18% of the world’s energy is renewably sourced, a figure expected to reach only 21% by 2030.

The energy transformation is well underway in the electricity sector, with renewables on course to meet 30% of UK power demand by 2030. But significant work remains necessary in the heating and transport sectors.

Director-general Adnan Amin said that this would be “not only the most economic pathway, but also the most socially and environmentally conscious. It would create more jobs, save millions of lives from reduced air pollution and set us on a pathway to limit global temperature rises.”

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Delivery

Competition for offshore wind links saves £700mn 

The long-term cost of connecting offshore windfarms to the grid has been cut by at least £700mn as a result of competitive tendering for transmission links, Ofgem has said.

Analysis commissioned by the energy regulator, published on 18 March, showed that choosing the most competitive bidders to provide high-voltage links to offshore renewables projects saved hundreds of millions of pounds for each contract’s 20-year duration. The first competitive round was estimated to have saved £244mn-496mn, the second £326mn-595mn, and the third £102mn-154mn.

The fourth tendering round will open in April to select a company to connect the Burbo Bank Extension offshore windfarm in the Bay of Liverpool. A fifth round is scheduled for this autumn.

Ofgem’s acting senior partner for networks Maxine Frerk said: “The regime attracts new companies into Britain’s energy market and it has brought in £2.7bn investment so far. We expect a further £2bn of investment in the projects for tender rounds four and five.”

Smart revolution to save £8bn a year, says infrastructure commission

The government’s National Infrastructure Commission (NIC) has said smart technologies will make the UK’s energy system more flexible and save consumers billions of pounds.

Analysts believe that improving the flexibility of the energy system would allow the UK to make better use of its electricity generation through either reducing demand or shifting it to off-peak periods. This could be achieved by using storage heating or demand-side response measures: turning down energy-using equipment or activating back-up power generation during peak times.

Energy storage, which stores electricity when it is plentiful for use when it is scarce, could have a similar impact. It could store excess power from intermittent renewables like solar and wind power so that this could be used, and so that owners of such technologies did not need to be paid to stop generating.

The NIC’s report found that increasing levels of interconnection to other countries’ electricity grids could also have a part to play. They would allow for more electricity imports from abroad, where power prices are often lower. Interconnection is already helping to reduce energy bills for UK consumers, but the UK currently has relatively low levels of interconnector capacity available to it.

The NIC calculated that maximising the use of demand-side response, storage and interconnectors would provide the country with savings ranging from £2.9bn-8bn each year by 2030.

MPs to investigate smart meters

The House of Commons’ science and technology committee has issued a call for evidence on the government’s policy on smart meters.

Smart meters are electricity and gas meters with a range of advanced functions. They can hold more detailed data than traditional meters and can transmit this data directly to suppliers to make billing more accurate. The government believes that the technology will give consumers more control of their energy use and help encourage uptake of energy efficiency measures. It is seeking to ensure that smart meters are rolled out to homes and businesses across the UK by 2020.

However, the government’s decision to have suppliers install the meters in consumers’ homes has proved controversial. The committee is therefore undertaking a full investigation, scrutinising: how mart meters are expected to affect consumer behaviour; the impact of the time use tariffs; and the use of information from smart meters to better inform national electricity generation and storage.

Submissions are welcomed until 20 April. The Committee expects to start taking oral evidence in May.

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Usage

Chancellor unveils changes to energy tax regime

The Treasury has announced plans to reform the energy tax landscape for businesses, with a view to reducing its complexity.

On 14 March the government confirmed its intention to abolish the Carbon Reduction Commitment (CRC) at the end of the 2018-19 compliance year. The CRC is a mandatory greenhouse gas emissions reporting and pricing scheme for large public and private sector organisations. It requires them to measure and report their emissions to the government, and buy allowances for every ton of carbon they emit. However, it has been criticised as being unnecessarily complex and burdensome.

To make up the loss in revenue, the Treasury will increase the rates paid by organisations under the Climate Change Levy (CCL) in April 2019. This is a tax on the electricity and gas used by industrial, commercial, agricultural and public services firms.

CCL rates will also be rebalanced. Currently electricity is taxed at nearly three times the rate of gas; this will be reduced to 2 and a half times from April 2019, and will be equal by 2025. This is intended to encourage organisations to move away from using gas in favour of electricity, thereby supporting the UK’s environmental goals.

In order to protect energy-intensive industries from the impact of these increases, the discount available to them on CCL rates through Climate Change Agreements (CCA) will be increased. Furthermore, the current eligibility criteria for CCAs will be retained until 2023.

A consultation will also be issued in the summer on a new reporting framework for energy and carbon emissions, which will be introduced by April 2019.

Energy investigation finds microbusinesses need protection

The Competition and Markets Authority (CMA) delivered the provisional remedies of its energy market investigation on 10 March, recommending reforms to the business energy market.

The UK’s competition watchdog began its investigation at the request of Ofgem in June 2014, after the regulator expressed concern that the energy industry was not delivering full value to consumers. It identified weak levels of engagement among customers, which it said gave suppliers “unilateral market power” that they could exploit to increase their profits. The CMA estimated that, from 2007-14, the Big Six suppliers had made £280mn/ year of excess profits in the SME market, of which £230mn (82%) came from microbusinesses.

In response, the CMA recommended a series of remedies; these particularly focused on improving the transparency of prices so that microbusinesses could better engage in the market and find the best deal.  It suggested that suppliers be required to disclose their microbusiness contract prices, and post their out-of-contract and deemed contract prices online. This would give small firms a clearer picture of what other microbusinesses were being charged, and would also help price comparison websites serve the sector.

Additionally, the CMA believes that termination fees or other restrictive conditions in auto-rollover contracts should be abolished so that customers are free to switch. Customers would, under the CMA’s plans, also be given longer windows in which they can provide notice of termination, and would be provided with further information to help them engage. 

London mayoral candidates set out energy plans

The Conservative and Labour candidates for London mayor have outlined their support for low-carbon technologies, saying that they would if elected support solar power, local energy and district heating schemes.

Labour candidate Sadiq Khan announced on 9 March that he would create a non-profit company designed to provide Londoners with a range of energy services. It would offer advice on self-generation and improving energy efficiency, as well as buying clean energy from across the city for use in Greater London Authority and Transport for London buildings.

Conservative Zac Goldsmith’s proposals, released on 11 March, pledged the creation of local energy co-operatives and working with designers to integrate solar panels into new buildings.

Both candidates said they would work to make London’s roofs available for solar panels, and would encourage district heating schemes drawing on waste heat from the Underground network. 

Energy efficiency sector losing confidence, survey shows 

Optimism among suppliers of energy-saving measures has fallen for the fourth quarter in a row, a new report has shown.

Published on 22 March, Bloomberg New Energy Finance’s latest Energy Efficiency Trends said that the downward trend in confidence throughout the year had continued into the fourth quarter. The market monitor - reflecting order books, staffing, sales and satisfaction with government policy - fell to just 17 points in the latest report, close to the all-time low of 13. This was primarily due to falling order numbers, although staffing levels and overseas sales both increased.

By contrast, customers have become increasingly optimistic, with the number of businesses commissioning energy-saving projects rising to over 80% in the fourth quarter - compared to a long-term average of around 70%. Lighting technologies (both energy-saving bulbs and lighting controls) remained the popular type of modification for business properties.  

Green Investment Bank details plans to protect environmental mission

The Green Investment Bank (GIB) has provided new information on the “special share” that it will create to guarantee that it continues to focus on green projects following privatisation.

The government confirmed last year that it would move the GIB into the private sector so it could raise higher levels of capital.

A new organisation, called the Green Purposes Company, will be established, and will have special control over the GIB’s legal obligation to invest in green projects. The Royal Society, the Law Society and the Institute of Chartered Accountants will select three trustees for the Green Purposes Company.

GIB chairman Lord Smith of Kelvin said: “The special share will provide a lock over our green purposes by an independent third party, in place of the current protections.”

Welsh government backs energy efficiency schemes in colleges

The Welsh government has announced that two energy efficiency schemes for the education sector are the latest to receive support from Invest to Save Fund.

Finance and government business minister Jane Hutt announced on 17 March that Grwp Llandrillo College will receive £200,000 to help install LED lighting at its Rhos on Sea campus, saving roughly £37,000 and 125 tons of CO2 each year. £551,000 has also been pledged to Coleg Gwent to install a range of energy-saving measures across four sites. This will reduce energy spend by £76,000 and cut CO2 emissions by 365 tons.

This brings the Welsh government’s investment in cutting carbon across the public sector to £14mn. 

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