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December 2015

By Market Insight Team | Posted December 09, 2015

October 2015 – in brief

Generation
Energy and climate change secretary Amber Rudd delivered a major speech setting out the government’s energy policy priorities. Rudd confirmed that Britain would aim to close out all of its unabated coal-fired power stations by 2025, while she also backed the development of new nuclear power and offshore wind.

Chancellor George Osborne issued the Autumn Statement, detailing the government’s spending priorities. Osborne announced that the UK’s energy-intensive industries were to be permanently exempted from covering the cost of some of the government’s green policies.

Delivery
National Grid called on “last resort” measures to ensure that the UK’s electricity demands were met on 4 November. The failure of several power stations and low wind speeds led the company to issue its first Notice of Inadequate System Margin since 2012.

Junior energy minister Lord Bourne welcomed the progress that has been made in rolling out smart meters to small businesses across the UK. His comments came as the government unveiled new figures that showed that 621,000 smart and advanced meters had been installed in UK business premises.

Usage
Industry groups praised plans to move towards a single business energy tax and a streamlined energy efficiency reporting framework. Organisations including the Association for Decentralised Energy said the steps towards simplifying the existing regime would make it more effective in incentivising action on energy efficiency.

The deadline for organisations to comply with the new Energy Savings Opportunity Scheme (ESOS) passed on 5 December. Evidence suggested that late into November there remained a high level of non-compliance among eligible firms.

Covered in this Regulatory Report:

 

Generation

Government outlines energy policy “reset”
Energy and climate change secretary Amber Rudd delivered a major speech on 18 November setting out the focus of the government’s energy policies for the coming years.

Rudd said that energy security and affordability would be prioritised, but that climate change was regarded as a major threat to long-term economic security and that emissions cuts would therefore continue to be pursued.

The speech confirmed that the government would, to aid the low-carbon transition, aim to ensure the closure of all UK coal power plants by 2025. Rudd said: “One of the greatest and most cost-effective contributions we can make to emission reductions in electricity is by replacing coal fired power stations with gas.” The government will consult in the spring on how this transition can be delivered.

Rudd also said that nuclear power had a central role to play in the UK’s energy future. She argued that the technology was “safe and reliable”, and welcomed EDF Energy’s plans to construct a new nuclear power project at Hinkley Point C in Somerset.

But she added: “It is imperative we do not make the mistakes of the past and just build one nuclear power station. There are plans for a new fleet of nuclear power stations […]. It also means exploring new opportunities like Small Modular Reactors, which hold the promise of low-cost, low-carbon energy.”

In terms of its support for renewables, the government has decided to focus on offshore wind development. It intends, before 2020, to hold three further auctions for renewables subsidies as part of the new contracts for difference regime, but only if the industry is able to meet strict targets on cost reduction. Rudd said: “The industry tells us they can meet that challenge, and we will hold them to it. If they don’t there will be no subsidy. No more blank cheques.”

Rudd also described the importance of ensuring effective competition in the energy retail markets. Noting the energy market investigation currently being conducted by the Competition and Markets Authority (CMA), she said: “It is […] not clear that all business customers are benefiting from competition in a market that lacks transparency. The CMA shouldn’t duck these issues.”

The speech was well received by business groups. Rhian Kelly, business environment director of the CBI, called it “an encouraging sign that the government is looking at ways to bolster our long-term energy future”. She said that it was vital for the government to give investors clarity on the future of UK energy policy, as there was insufficient confidence at present to enable the construction of new gas power stations.

The Institute of Directors (IoD) praised the government’s balancing of the need for the reliable provision of electricity with environmental goals. The replacement of coal power stations with gas generation would be a cost-effective way of cutting emissions, said the organisation’s senior energy advisor Dan Lewis. It would also represent an important opportunity to support the development of the UK’s shale gas industry.

Lewis welcomed the government’s focus on security of supply, which was the top energy priority of the IoD’s members. Both gas and nuclear power were, he said, “safe, cleaner forms of energy we can produce at home”. He argued that the government ought to concentrate on making nuclear power as cost-effective as possible, and said it was right to reduce subsidies for renewables as their costs came down.

Osborne backs energy intensives with renewables cost exemption
Chancellor George Osborne laid out plans to ease the pressure of rising energy costs on energy-intensive industries (EIIs), as he delivered his Autumn Statement on 25 November.

EIIs are, he confirmed, to be exempted from the costs of the Renewables Obligation (RO) and small-scale feed-in tariff (FiT) policies. These schemes support renewables deployment in the UK, but their costs – covered through consumers’ energy bills – have increased markedly in recent years.

Overall, the exemption is expected to benefit affected organisations to the tune of £410mn/ year by the end of the Parliament.

Among other important announcements, Osborne also confirmed that the government would double its funding for energy research. This will incorporate a new £250mn research programme for nuclear power to look at the potential for small modular reactors, with the aim of making the UK a world leader in this emerging field.

Support for renewable heat and energy efficiency will be reformed. Cost-saving measures will see subsidies available to households and businesses under the Renewable Heat Incentive (RHI) rise to £1.15bn in 2021, £700mn less than would otherwise have been the case. Meanwhile, a new, “cheaper” energy efficiency programme will replace the Energy Company Obligation (ECO), which concludes in 2017.

The government will provide £295mn over five years to improve the energy efficiency of schools, hospitals and other public sector buildings. Separately, over £300mn of funding for up to 200 heat networks will generate enough heat to support the equivalent of over 400,000 homes.

Government told to avoid complacency on energy security
The British Chambers of Commerce (BCC) has warned the government against assuming that the UK’s energy supplies will remain secure in the years ahead.

The organisation’s Bursting the Bubble report, published on 5 November, said that the UK’s oil and gas demand would remain high for the near future, but that the nation faced a “perfect storm” of aging infrastructure, high energy prices and diminishing indigenous fossil fuel reserves.

The BCC pressed the government to take “firm and immediate action” to live up to the promises that it had made on enhancing energy security. Too much focus was, it argued, being placed on the electricity sector due to its importance in the low-carbon transition, at the expense of fuel for transport and heating.

The report advocated a “realistic” approach to the need for fossil fuels: one that would maximise the UK’s own resources and the economic benefits from it.

Energy Bill progresses through Parliament
The government’s Energy Bill has completed its passage through the House of Lords and will now be scrutinised by MPs in the Commons.

The bill has two main elements. Firstly, it closes the Renewables Obligation (RO), a green subsidy scheme, to new onshore wind projects from 2016. The RO has served as the government’s principal mechanism for supporting the deployment of onshore wind in the UK, but there have been concerns that the spiralling costs of the scheme risk pushing up consumers’ bills.

This element of the bill was strongly opposed in the Lords by Labour and Liberal Democrat Peers, and they successfully tabled amendments to delete the relevant provisions. However, the government has already signalled its intent to reinstate the measures as the bill passes through the Commons.

The bill also establishes the Oil and Gas Authority (OGA) as the new regulator of the North Sea industry. The creation of the OGA is intended to help maximise economic extraction of oil and gas from the basin, which is still responsible for up to 45% of the UK’s gas supplies.

 

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Delivery

System operator calls on businesses to help balance the grid
System operator National Grid was forced to call on “last resort” measures to ensure the UK’s electricity demand was met on 4 November.

The tightened power supply margin was caused by unexpected outages at power stations, with a dark and still evening meaning that supply from wind and solar installations was also limited.

The outages caused National Grid to issue a so-called “Notice of Inadequate System Margin” (NISM) for the first time since 2012. A NISM is a signal that the company can send to the market calling on generators to help it to manage the system by making more power available.

Specifically, the NISM requested 500MW of extra power during the time of maximum demand in the early evening. The market responded to this request by offering to supply power at significantly higher prices than under normal conditions. One generator, Calon Energy, sold electricity to the system at £2,500/MWh, compared with the typical price at that time of about £60/MWh.

The tighter supply picture also saw National Grid make use for the first time of its Demand Side Balancing Reserve (DSBR) mechanism. As part of this service, a number of large energy users volunteered to reduce their demand during winter weekday evenings (between 4pm and 8 pm) in return for a payment.

National Grid has previously stated that such measures are “only to be used as a last resort, after all other actions available in the market have been exhausted”. A number of power stations are also held in reserve as part of the grid’s Supplemental Balancing Reserve (SBR) tool.

Energy analysts at Jefferies Bank said that, while the NISM could have been just “one of those things”, it could also be a sign of system stress as the UK’s coal-fired stations are phased out of service. “It is self-evident that the UK power system is under increasing stress. Eventually that stress will manifest itself via security-of-supply events”, the company said.

Government hails smart meter progress
Junior energy minister Lord Bourne has said smart meters are already delivering a significant improvement in consumer engagement in the energy markets.

The comments came as government figures showed that over 621,000 smart and advanced meters had been installed in non-domestic premises around the UK.

Speaking on 11 November, Bourne said the technology would offer micro-businesses control over their energy consumption by providing real-time data. They would also offer convenience, as businesses would not need to read their meters, saving “time and hassle”.

While acknowledging that the government faced significant hurdles in attempting to complete the smart meter roll-out by 2020, Bourne said that it was worth meeting these challenges “head on” given the potential benefits that smart meters could deliver.

He concluded: “Whilst I do not underestimate the challenge that lies ahead, I am optimistic and excited about the both the journey and the destination. The government is committed to delivering smart metering by the end of 2020. It can be done if we all – government, suppliers, network operators, Smart Energy GB and its national and grassroots partners – work together.”

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Usage

Organisations welcome review of business energy efficiency
Organisations have been responding to government proposals to reform the business energy tax and reporting framework.

From 28 September to 9 November, the Treasury ran a consultation on plans to make substantial changes to the existing framework. It sought views on simplifying the current suite of policies - several of which overlap - and reforming the way in which firms report their energy use and emissions data to the government.

An example of the existing policy overlap can be seen in the fact that the Climate Change Levy (CCL) taxes businesses on their energy use, while the Carbon Reduction Commitment (CRC) requires them to report their usage to the government, so that they can be charged for their carbon emissions. The government suggested that this should be simplified into a single approach based on the CCL.

In its response, the Association for the Conservation of Energy (ACE) backed the proposals, saying that overly-complex compliance requirements could distract businesses from actually improving their practices. But it pointed out that simplification meant more than just having fewer policies, but also making better use of the information already provided.

The Grantham Research Institute at the London School of Economics (LSE) agreed that a process of streamlining the current framework would be beneficial. However, it also argued that businesses should be taxed through a price on the carbon content of their energy, rather than on the amount of energy they consumed.

The government’s exchequer secretary Damian Hinds said: “The complexity of the business energy tax landscape has been identified as holding back investment in energy efficiency and decarbonisation and I recognise that some businesses are currently required to report emissions and energy consumption multiple times in different ways. We want to simplify and reduce compliance costs for businesses.”

Deadline passes for mandatory energy efficiency scheme
The formal deadline for organisations to demonstrate compliance with the Energy Savings Opportunity Scheme (ESOS) passed on 5 December, with ongoing concerns over the low levels of compliance.

ESOS is a mandatory self-assessment energy efficiency scheme for organisations with over 250 employees or €50mn turnover/ year. The scheme is administered by government organisation the Environment Agency (EA).

The EA published a blog on 20 November, which said that over a thousand organisations (of an estimated 10,000 eligible) had given notice of their compliance. The organisation expressed confidence that there was widespread awareness of ESOS obligations, having contacted every company it believed to be eligible on multiple occasions and having completed a survey showing that nearly nine in 10 (89%) organisations were aware of it.

The EA said it believed that many affected organisations were close to compliance; it noted that, in the past, around half of all eligible firms participating in similar schemes had only provided notification of compliance in the last weeks before the deadline.

GIB to keep green focus when privatised, says CEO
The House of Commons Environmental Audit Committee has been told that privatising the government’s Green Investment Bank (GIB) would not see it lose its focus on low-carbon sectors.

In evidence to the committee published on 4 November, GIB CEO Shaun Kingsbury said that the bank had established a working business model and a strong track record, and that private investors would be interested in building on this progress. Moving the GIB into the private sector would help it secure the capital needed to build on its momentum, he added.

The comments responded to concerns from the committee that, if privatised, the GIB might become more risk-averse and would therefore not invest in more challenging green projects.

London mayor commits to energy efficiency
Mayor of London Boris Johnson has hailed the progress made towards reducing energy usage in 110 London businesses as part of his Business Energy Challenge. Organisations that cut their usage included Arsenal Football Club, which installed a series of energy-friendly upgrades across their Emirates Stadium ground, office block and youth academy. This incorporated the installation of light sensors and the updating of a computer-based management system that controls and monitors mechanical and electrical equipment.

Collectively the organisations made energy savings equivalent to 24,000 homes and prevented 188,000 tons of CO2 emissions.
In comments made on 17 November, Johnson said: “London’s businesses continue to prove that economic prosperity and green business practices can go hand in hand, making our city a leading example for others to follow.”

Electric vehicles drive need for network upgrade: report
A research project has found that around a third of local electricity networks will need improvements as the uptake of electric vehicles increases in the UK.

Released on 4 December, a report by the My Electric Avenue group found that the cost of this upgrade could be reduced by over £2bn by utilising new technologies for network reinforcement. Traditionally network reinforcement would mean replacing underground wiring; however, with new technologies it will be possible to limit the charging of EVs if the local electricity grid reaches a certain level of demand.

Project director Dave Roberts said: “The automotive sector has well established and effective communication channels to discuss industry issues. However, historically there has not been much cross-sector communication between the automotive and energy industries. My Electric Avenue has brought these two sectors together and has started dialogue, and this needs to develop further as vehicle manufacturers announce plans for increasing numbers of higher performance plug-in vehicles.”

Appliance energy efficiency could save €410bn by 2030, research finds
Global energy demand could be reduced by 9% if the strictest energy efficiency requirements for appliances were adhered to globally, according to the European Commission.

The Commission published a report on Savings and Benefits of Global Regulations for Energy Efficient Products on 30 October. It found that, in 2013, 87 countries had comparative energy efficiency labels in place for products, and that 73 had set minimum requirements for products to meet. These countries accounted for 90% of global GDP.

Research cited in the report estimated that energy efficiency standards for products had saved 17% on final electricity demand in the EU, and could save 10%-25% worldwide.

The paper said that the greatest savings potential was found in the areas of electronics, lighting, heating and hot water.

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