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August 2015

By Market Insight Team | Posted August 03, 2015

July 2015 – in brief

Generation

The government’s Summer Budget was delivered to the Commons, with chancellor George Osborne introducing some important energy reforms. It was confirmed that the government would undertake a review of the taxes levied on non-domestic energy users as part of its drive to increase productivity. Other changes included more investment support for the North Sea and the removal of the exemption from the Climate Change Levy for renewable electricity.

The government also unveiled plans to prevent its cap on low-carbon spending - the Levy Control Framework (LCF) - from being breached. Reforms are to be made to subsidy schemes such as the Renewables Obligation (RO) and the small-scale feed-in tariff (FiTs). These reforms have been criticised by the renewables industry.

Delivery

Trade body the Energy Networks Association (ENA) released a new in-depth guide to active network management (ANM). It aims to improve understanding of ANM’s potential as a network innovation, and in particular how it could reduce costs to consumers.

Responding to a report from the Lords science and technology committee, the government confirmed its intention to explore innovations such as demand management, smart grids and smart meters.

Usage

The investigation into the UK energy market, conducted by the Competition and Markets Authority (CMA), published its provisional findings. It highlighted a “striking variation” in the prices paid by energy consumers, and proposed remedies to boost consumer engagement. It also proposed the introduction of a “safeguard” regulated tariff for so-called “sticky” customers.

The government abolished plans to ensure that all new homes and non-domestic properties were “zero-carbon” by 2016 and 2019 respectively. The energy efficiency industry called the move “regressive”. 

Also covered in this Regulatory Report:

 


Generation

Budget brings key energy reforms

Chancellor George Osborne delivered the government’s Summer Budget on 8 July, introducing a number of reforms for the energy sector. Most significantly, the Budget confirmed the removal of the Climate Change Levy (CCL) exemption for renewable electricity.

The CCL is a tax, introduced in 2001, on energy delivered to non-domestic users in the UK. It is intended to provide an incentive for businesses to increase their energy efficiency and to reduce carbon emissions.

The government aims, by removing the exemption, to “correct an imbalance in the tax system by preventing taxpayers’ money benefitting renewable electricity generated overseas”. It also aims to ensure low-carbon generators provide “better value for money”.

A transitional period for the measure’s implementation began on 1 August. Suppliers will still be able to exempt, from the CCL, renewable power generated before that date, if they hold sufficient Levy Exemption Certificates (LECs) that relate to that electricity. The length of this transitional period will be discussed with regulators and impacted businesses through the summer and autumn.

An accompanying policy costings document suggested that the move would provide an additional £450mn for the Exchequer in 2015-16, escalating to £910mn in 2020-21. However, the change was strongly criticised by renewables groups, who said that it would result in a significant loss in revenues for generators in the sector.

Osborne further confirmed that the government would aim to deliver a “simple, fair and more efficient” environment for businesses, which would minimise burdens and improve incentives to invest and grow. As part of this, the Treasury will review the business energy efficiency tax landscape, and consider approaches to simplifying and improving the effectiveness of this regime. A consultation on the matter, to which industry participants will be encouraged to respond, is to be launched in the autumn.

The government said that it would continue to use the tax system to encourage positive environmental outcomes “where tax is an effective instrument to do so”. However, it has opted against extending the coalition government’s commitment to increasing the proportion of revenue from environmental taxes into this Parliament. It said that “such a target does not always reflect the success of government policy in achieving environmental outcomes”.

Osborne reaffirmed his belief in the need to maximise the potential of the UK’s oil and gas resources. The Treasury is to expand the North Sea investment and cluster area allowances to include additional activities that help maximise economic recovery of oil and gas.

The Budget announcements were complemented on 16 July by confirmation that the Department for Business, Innovation and Skills was to review barriers to growth and productivity in the energy sector. Its aim would be to cut “unnecessary” or “burdensome” regulations. The review will be part of the department’s “cutting red tape” programme, which is aiming to “get rid of unnecessary bureaucracy, “shine a light on out of date legislation” and boost the UK economy.  The government is seeking views on current regulations, the compliance burdens faced by companies in the sector, and whether the regulatory framework could more effectively support innovation and disruptive business models. 

Government to overhaul renewables support

The government announced a series of policy reforms on 22 July intended to prevent over-spending on low-carbon subsidies within the Levy Control Framework (LCF).

The LCF places a limit on the level of consumer-funded subsidies that the government can offer to low-carbon generators in the UK. The government’s analysis suggested that, without policy action, spend under the LCF could by 2020-21 reach £9.1bn (in 2012 prices) – comfortably beyond the £7.6bn cap for that year established under the coalition government.

Proposed measures to guard against this overspend include: removing sub-5MW solar from the Renewables Obligation (RO) from next April; removing grandfathering for solar PV projects not accredited under the RO as of the date of consultation; and ending preliminary accreditation for new projects under the small-scale feed-in tariff (FiT) scheme.

The department said it would shortly set out details of the budget for the LCF beyond 2020-21. It would also detail plans in the autumn in respect of future contracts for difference (CfD) allocation rounds. But it was confirmed that there would not be a CfD allocation round beginning this October, as had been expected.

National Grid expects adequate supplies for upcoming winter

System operator National Grid has forecast that electricity demand this winter will be “manageable”, and that supplies will remain secure.

The system operator published its Winter Review and Consultation Report on 15 July. It said that last winter peak demand had, due to warmer than average weather, reached 53.2GW, with the capacity margin at a comfortable 9%. The milder weather meant that National Grid did not need to employ its short-term balancing tools, which it has been given by energy regulator Ofgem to help manage supply and demand.  

For the coming winter, the report said that these balancing tools would help to keep the de-rated margin up at 5.1%. But it cautioned that, without the balancing services, the margin could fall as low as 1.2%.

The outlook was supported by a subsequent analysis by Ofgem, which published its Electricity Capacity Assessment report on 17 July. It concluded that National Grid had the tools in place to manage electricity demand this winter, but that uncertainty in the outlook for 2016-17 had increased.

Ofgem said that, with National Grid having procured 2.56GW of capacity through its balancing services this winter, the Loss of Load Expectation (LOLE) range had reduced to between 0 hours-4 hours - within the government’s reliability standard. But the report’s central view showed that LOLE for winter 2016-17 could range between 2 hours-15 hours.

Government changes carbon market regulations

The government opened a consultation on 17 July on proposed changes to the functioning of the EU Emissions Trading Scheme (EU ETS) in the UK.

The EU ETS aims to place a descending cap on emissions from installations such as power stations and factories, thereby helping to incentivise investment in low-carbon generation.

The changes introduce rules for the allocation of free allowances to installations, within the UK’s small emitters and hospital opt-out scheme, that must return to the full EU ETS because they have reached the upper emissions threshold for the opt-out. The regulations also clarify the existing rules on the start date of a permanent cessation of regulated activities by an operator in the EU ETS, in the circumstances where a temporary cessation becomes permanent. Responses are invited until 28 August.

Separately, the European Commission has unveiled plans to cut the number of free allowances under the EU ETS. It will do this by reducing the number of sectors eligible for the allocation of free certificates from 177 to 50. The proposed reform would mean a sharper reduction of the number of free certificates allocated every year, starting in 2021.

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Delivery

Networks group launches innovation guide

The Energy Networks Association (ENA) has released a new in-depth guide that seeks to improve stakeholders’ understanding of a key area of network innovation.

The Active Network Management (ANM) guide, which was prepared by Baringa Partners, was published on 15 July.

ANM involves the real-time management of generation and loads on the network; its purpose is to increase the use of network assets, without breaching their operational capacity. This process, it is believed, could reduce the need for network reinforcement, speed up connections and reduce costs to consumers.

The process can be used with both generation and demand customers on the transmission and distribution networks. Its key benefit is in enabling generators to connect more quickly and at a lower cost by including provisions for curtailing their output during constrained periods.

The guide aims to improve understanding of ANM across a range of stakeholders, so that “all customers can benefit from the progress being made towards a smarter, more efficient energy future”. It said that the technology was likely to evolve significantly in the future, allowing it to be used in a broader set of applications.

ENA chief executive David Smith said: "There is a great deal of momentum behind Active Network Management and the wider development of smart networks in the UK. Shared learning is vital if this progress is to be built on and customers are to see the benefits of the innovation taking place in our industry. The Good Practice Guide provides a snapshot of the current state of ANM and the lessons learnt so far, as well as addressing remaining challenges."

Government explores potential of demand response

The government has confirmed that it is undertaking research into the “existing and potential volumes” of demand-side response (DSR) in the UK.

On 1 July the Department of Energy and Climate Change (DECC) responded to a report, issued earlier this year by the Lords science and technology select committee, on The Resilience of the Electricity System. DECC said that the research would improve understanding of the characteristics of DSR, how the different types currently participate in the electricity market, and what the future potential of each might be within the capacity market scheme. The research will be issued this summer.

DECC said it remained committed to the roll-out of smart meters to all homes and micro-businesses by 2020. It recognised that the technology would have an essential role to play in facilitating DSR.

While assuring that it would continue to take all necessary steps to guarantee security of supply, the government acknowledged a need for more research as to the effect of a market stress event happening in two countries simultaneously. This would be particularly important given the UK’s dependence on interconnection with other countries.

The response also affirmed that the government was not planning to introduce a framework of incentives specifically for energy storage deployment. It said that “commercial markets are best placed to select the most cost-effective solution for each balancing need”.

 


Usage

Energy competition investigation reveals initial findings

The Competition and Markets Authority (CMA) published the provisional findings of its investigation into the energy markets on 7 July.

The report highlighted a “striking variation” in the prices paid by consumers for their energy; in particular, suppliers were said to be earning significantly higher revenues from customers on standard variable tariffs than those on other tariffs. It said that the Big Six firms faced insufficient competition for these standard variable customers; they were generally disengaged from the market, meaning that the companies were able to exercise “unilateral market power” over them.

The CMA said that two types of remedy could help to address the “adverse effects on competition” being driven by weak customer engagement. The first type would be “aimed at giving customers more information in order to help them make choices and thereby increase the competitive pressure on firms. Accordingly it has proposed a series of measures intended to improve consumer engagement – though it is also confident that this will be boosted over the next few years by important technological developments, above all the smart meter roll-out.

The second type of remedy proposed would seek to control market outcomes, through more significant interventions such as price controls. To this end, the CMA has suggested the introduction of a temporary regulated tariff, to be controlled either by the CMA or Ofgem. This would seek to protect so-called “sticky” customers – those disengaged from the market – while long-term reforms were implemented.

The CMA also pointed to a lack of transparency in the sector, which it said was hampering trust. It recommended that companies’ financial information be made more widely available, and that the impact of policy decisions on consumers’ bills be more effectively communicated.

But the report concluded that the business model of the Big Six energy firms - vertical integration - was not a primary cause for high prices in the energy sector. Consequently, the CMA does not intend to require these firms to separate their generation and retail arms.  

Government ends zero-carbon targets for buildings

The government has abolished plans for all new domestic and non-domestic buildings to be zero carbon from 2016 and 2019 respectively.

The policy would have required buildings to mitigate, through various measures, all the emissions produced on-site as a result of regulated energy use.

However, The Treasury’s Fixing The Foundations paper, which sought to outline a strategy for greater productivity, said that the government “does not intend to proceed with the zero carbon Allowable Solutions carbon offsetting scheme, or the proposed 2016 increase in on-site energy efficiency standards”.

The move has been condemned by a range of industry stakeholders. Julie Hirigoyen, chief executive of the UK Green Building Council (UK-GBC), said: “This arbitrary and regressive action was not mandated by the Conservative Party manifesto. Just last year the Conservative-led coalition government enabled the allowable solutions policy in legislation. This stop-start policy making approach gives industry no confidence in the government’s vision for a low-carbon economy.”

Green Deal funding ends 

The government announced on 23 July that it was to stop providing funding for the Green Deal Finance Company (GDFC), effectively ending the energy efficiency scheme. In a letter to the GDFC, junior energy minister Lord Bourne said that the decision had been made in light of low uptake and ongoing concerns about industry standards. Funding releases to the Green Deal Home Improvement Fund will also be stopped.

The government said that it would work with the building industry and consumer groups on a new value-for-money approach to energy efficiency. The Department of Energy and Climate Change has also commissioned an independent review to look at standards, consumer protection, and enforcement of future and existing schemes. 

Energy and climate change secretary Amber Rudd said: “We are on the side of hardworking families and businesses – which is why we cannot continue to fund the Green Deal. It’s now time for the building industry and consumer groups to work with us to make new policy and build a system that works.”

Osborne urged to fight European VAT ruling

A coalition of trade associations and businesses has signed a letter urging chancellor George Osborne to fight to protect the UK’s discounted rate of VAT for energy-saving materials, which is under threat after a decision by the EU Court of Justice's decision in June. The court ruled that the UK’s reduced 5% rate of VAT was unlawful and must be adjusted back to the standard commercial rate of 20%.

Issued on 3 July, the letter - signed by organisations that included the Solar Trade Association, UK Green Building Council and Mitsubishi Electric - pressed for a government statement on the ruling, so as to avoid “uninformed and commercially harmful press speculation”.

The letter highlighted the positive outcomes of the existing policy, including enhanced energy security and lower fuel bills. It said to the government: “We would like you to find all legal means possible to preserve as many of the reduced rates as you can so that policy delivery is not compromised.” It also called for a well-informed, evidence-based approach to energy policy going forward.

CRC seen as “burdensome” by participants

Participants in Phase 1 of the government’s Carbon Reduction Commitment (CRC) scheme found it to be “complicated and burdensome”, according to a government study.

The CRC is a mandatory carbon emissions reporting scheme. It covers large public and private sector organisations (excluding state funded schools in England) that use more than 6,000MWh/ year of electricity and have at least one half-hourly meter settled on the half-hourly electricity market.

The report, published on 20 July, said that the administrative complexity of the CRC was a driver of low customer satisfaction with the scheme, but that this had improved as the government took steps to simplify the reporting requirements. Many respondents also felt that, without revenue recycling, the CRC had effectively become a “tax” and could be more simply administered as such.

Voluntary Display Energy Certificates launched

Voluntary Display Energy Certificates (VolDECs) – the operational energy performance rating scheme for non-domestic buildings – are now available to the commercial property sector.

Announced on 28 July, the scheme has been developed to measure building energy performance in a consistent way and to provide a tool that aids improvements in efficiency. The scheme is based on the same methodology as the mandatory Display Energy Certificates (DEC).

In the pilot stage VolDECs were seen to provide a range of benefits; they addressed the issues associated with the landlord and tenant energy split, and the lack of relevant benchmarks to measure and compare performance in a “sensible and consistent way.”

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