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December 2016

By Market Insight Team | Posted January 31, 2017

December 2016 – in brief

Generation

The government welcomed the news that further power supplies had been secured for coming winters in the latest capacity auction. Over 52GW of electricity supplies was procured for winter 2020-21, helping to ease concerns about the potential for blackouts. But most of the contracts went to existing power plants, with the auction falling short on the government’s aim of incentivising a new fleet of gas-fired power stations.

Meanwhile, the trade group for the EU’s electricity industry has called on the European Commission not to allow new policies to undermine the effectiveness of the bloc’s carbon trading scheme. It also built the case for further reform of the scheme, which the UK has said it will actively support irrespective of the UK’s vote to leave the EU.

Delivery

The UK’s system operator has sold a majority stake in its gas distribution business. National Grid announced that it had entered into an agreement to sell a 61% interest in the arm, with the deal valuing the business at around £13.8bn. The chief executive of National Grid, John Pettigrew, said the sale represented an “important milestone” in the system operator’s evolution.

An organisation that represents UK manufacturers has called for the introduction of a new scheme to increase the uptake of energy efficiency measures. EEF said that, despite 15 years of energy efficiency policy in the UK, there remained a significant number of cost-effective opportunities that were yet to be exploited within the manufacturing sector.

Usage

The government has confirmed that it will take steps to strengthen a policy scheme that seeks to encourage emissions reduction within heavy industry. In a consultation response, the government announced that it would increase the buy-out price for Climate Change Agreements.

The Bonfield Review, set up by the government in 2015, has recommended that a quality mark should be established for all energy efficiency and renewable energy measures in order to provide more confidence to consumers.

Also covered in this Regulatory Report:

Generation

Government secures power supplies for coming winters

A range of power projects have won government contracts to help ensure the lights stay on over the next few years.     

The government’s “capacity market” policy pays subsidies to power plants and projects able to vary their demand in return for them being available to the electricity system at times when supplies might be low. The latest auction, held in December, sought to secure the nation’s electricity supplies for winter 2020-21.

Over 52GW of electricity supplies were secured in the auction, and it was existing power plants that won the vast majority of the contracts on offer. This included 24GW of gas plants and nearly 8GW of nuclear power. Almost 6GW of coal was also successful, despite the government’s pledge to phase the source out of the power mix by 2025. Meanwhile, a significant volume of smaller power projects, connected to the system at the distribution level, was also successful.

The overall cost of the contracts, which is recovered from consumers through their electricity bills, was lower than had been expected by analysts. The successful bidders will be paid £22.50/kW - an overall cost to consumers of £1.2bn.

Business and energy secretary Greg Clark said: “Our homes and businesses need an electricity supply they can rely on all year round. We’ve provided them with that certainty, at a low cost to bill payers, years in advance. Technological innovation, as part of our low-carbon future, will create jobs and opportunities across the UK.

“We are rebuilding an archaic energy system, bringing forward brand new gas power and innovative low-carbon capacity like battery storage to upgrade our energy mix.”

Industry group pushes for carbon market reform

A trade group representing the EU’s electricity industry has told European policy-makers not to allow new policies to undermine the functioning of the bloc’s carbon market.

Eurelectric issued an open letter to the environment ministers of EU member states on 14 December. The association said it would be important that the impact, on the EU Emissions Trading Scheme (EU ETS), of new policies related to energy efficiency and renewables was assessed in order to ensure that the framework underpinning the low-carbon transition remained coherent.

The group also detailed new proposals for strengthening EU ETS, which seeks to incentivise low-carbon investment in the EU by driving up the cost of emissions.

Meanwhile, the UK government has confirmed that it will also continue to make the case for reforming the EU ETS, despite the fact that it might no longer apply there following the nation’s departure from the EU.

Climate Change minister Nick Hurd said in a parliamentary debate that the UK would be a “full, active participant” in shaping the future of the scheme. Hurd explained that, whether the country remained within the EU ETS or not, it must strive to ensure that its European competitors developed a system that would allow them to play their full role in tackling climate change.

Hurd outlined several key areas of action: further steps to remove surplus allowances and keep the market liquid; ensuring adequate protection for those industries at risk of carbon leakage; reducing administrative burdens; and preserving the principle of fiscal sovereignty.

Plan to cut solar thermal subsidies dropped

The government confirmed on 14 December that it had abandoned proposals to remove solar thermal from the list of technologies eligible for subsidies in its Renewable Heat Incentive (RHI) scheme.

The RHI aims to support UK households and businesses in transitioning to cleaner sources of heat, further helping the nation to meet its long-term environmental goals.

A consultation on changes to the scheme was opened last year, and included a plan to withdraw support for solar thermal technology. But, of the 235 respondents to the consultation, 92% said that they did not agree that the government should implement the plans.

Many said they believed that solar thermal could have an important role in decarbonising the heat sector. Further, it was noted that the technology had relatively low upfront costs, and was capable of acting as a “valuable adjunct” to heat pumps and to biomass boilers.

The government also said that it had received evidence that continued support for the technology could drive further cost reduction than initially expected.

The evidence suggested that, if support were withdrawn, then there could be a “potentially significant detrimental effect” on both deployment and the supply chain, including UK manufacturing of solar thermal panels.

The RHI tariff for solar thermal will therefore remain at its current level of 19.74p/kWh.

Green Energy a "compelling investment opportunity", report says

The rapidly-falling cost of wind and solar power should attract investors worldwide to the renewables sector, according to the World Economic Forum (WEF).

On 22 December the WEF issued a Renewable Infrastructure Investment Handbook: A Guide for Institutional Investors. It explained that the cost of generating power from solar had dropped to around $100/MWh from $600/MWh just 10 years ago, while onshore wind costs had fallen to $50/MWh. The report said that the two technologies would be as cheap as fossil fuel technologies in two thirds of countries worldwide by 2018.

The WEF’s Michael Drexler said that solar and wind were not only commercially viable, but an “outright compelling investment opportunity”.

Scottish government concerned by privatisation of green bank

The Scottish government has expressed concern over the UK’s approach to privatising the Green Investment Bank (GIB).

The Edinburgh-based bank was set up by the then coalition government in 2012 and has since invested in a substantial portfolio of green energy projects. But, early last year, the UK government launched a process to move the GIB into private ownership.

In a letter to the UK government, Scottish economy secretary Keith Brown said he was troubled by reports that the completion of the process could result in the “complete break-up” of the bank’s portfolio, and could lead to an “asset-stripping exercise with significant financial rewards for any new owner”.

He added: “The veiled manner in which privatisation is taking place offers no reassurance that the future of the GIB is being modelled in line with the reassurances offered to the Scottish government in 2015 which state that the original purpose of the bank would be maintained.”

Delivery

National Grid sells stake in gas business

The UK’s system operator announced on 8 December that it had entered into an agreement to sell a majority stake in its UK gas distribution business.

The networks distribute gas to around half of the UK’s connected households and a significant proportion of businesses.

The stake has been acquired by a consortium known as the Quad Gas Group, whose members already have experience of investing in nationally critical infrastructure such as Heathrow and Thames Water. The deal values the business at around £13.8bn.

National Grid will receive a payment of £3.6bn from the consortium once the deal is completed, followed by a further £1.8bn in debt financing. The system operator will hold a minority interest in a new holding company for the business.

Chief executive of National Grid John Pettigrew said the deal represented an “important milestone” in the evolution of the system operator. “[It] is a good outcome for our customers, employees, and shareholders”, he added.

Manufacturers seek new energy scheme

The organisation that represents UK manufacturers has called for a new policy that can boost the uptake of demand-side response and energy efficiency solutions within heavy industry.

EEF published its report, Upgrading Power: Delivering a Flexible Electricity System, on 12 December. It said that, despite 15 years of policies aiming to drive energy efficiency, there remained a significant volume of cost-effective opportunities within the manufacturing sector. Its analysis said that this amounted to 14% of the sector’s electricity consumption, but that less than one in 10 companies took part in some form of demand-side response (DSR).

The report said that the government should implement a scheme that incentivised manufacturers to vary their electricity demand in response to stress on the power system. The government has already piloted this policy over the past couple of years, and believes that it could play an important role in helping to balance supply and demand.

Further, EEF said that the government should investigate how some of its other policies – such as the introduction of smart meters – could help manufacturers to utilise DSR technologies.

Engineer shortage could delay smart meter roll out

New research has suggested that a lack of qualified engineers could cause the government’s plan to roll-out smart meters to homes and businesses by 2020 to be delayed.

The research, by ECTA Training, found that almost one in five customers who had arranged for the installation of smart meters in their home had faced long delays because there were not enough engineers available to carry out the work.

Training director Kerry-Anne Berry said: “We estimate that up to 6,500 new smart meter engineers are currently required to help meet the government’s ambitious targets […] It is therefore vital that energy companies do more to promote careers in engineering, whilst the sector needs to examine means of funding extra training and development opportunities to ensure the smart meter roll-out is a success.”

Usage

Industry faces stronger incentives to cut emissions

The government has announced plans to strengthen a policy scheme that encourages UK industry sectors to reduce their greenhouse gas emissions.  

Climate Change Agreements (CCAs) see these sectors committing to reducing their energy use in return for a reduction in the so-called “Climate Change Levy” (CCL) – a cost added to their gas and electricity bills. The scheme therefore supports the government in its efforts to decarbonise the UK economy.

Participants remain compliant with the CCA and retain their entitlement to the reduced rates of the CCL by meeting their energy efficiency or carbon reduction targets or paying a “buy-out” fee. This buy-out price was set at £12/tonne of CO2e at the start of the scheme in 2012, and has since remained at that level.

However, in a consultation response issued on 9 December, the government confirmed that the buy-out price would, from 2017, be increased broadly in line with the Retail Price Index to £14t/CO2e. This would, the government said, restore its value in real terms, and would strike a balance between providing a strong incentive to abate emissions and limiting the financial impact on participants.

The government acknowledged that most respondents to the consultation had favoured the retention of the current buy-out price, but noted that these were largely organisations who participated in the CCA. Many warned the government against increasing the price in the current economic climate.

It was concluded that, although the rise to £14/tCO2e would impact participants using the buy-out mechanism, participants did not provide strong and compelling evidence on specific impacts that would justify the retention of the current price.

Review seeks to raise standards in energy efficiency sector

An independent review, set up by the government, has recommended that a quality mark should be established for all energy efficiency and renewable energy measures.

The review was established in July 2015 with the intention of investigating consumer advice, protection, standards and enforcement in the energy efficiency sector.

It found that the many competing quality standards was a source of confusion for consumers.

The report, led by Peter Bonfield, was issued on 16 December. It argued that, to achieve the quality mark, companies should be expected to demonstrate technical competence, quality performance, and customer-interfacing skills.

In total, the review offered 27 recommendations that related to issues such as consumer protection, smart meters, home energy technologies, and quality and standards.

Bonfield said: “I recommend a new approach, underpinned by strong standards and enforcement. This will bring clarity and confidence to consumers, whilst providing a simplified and certain route to market for those companies, large and small, wishing to operate and do business in the energy efficiency and renewable energy sector in the United Kingdom.”

Feedback is invited on the proposals until 31 January.

Labour party consults on industrial strategy plans

The Labour Party is seeking views from businesses, trade unions and the public on the development of an industrial strategy for a “high-wage, high-skill, low-carbon” UK economy.

The consultation, opened on 6 December, said: “It is imperative that we refashion our economy so that it alleviates rather than exacerbates the mounting global climate crisis, with a just transition to reduced energy consumption, a balanced energy policy, and meeting our commitments under the Paris agreement.”

The document was launched by shadow business and energy secretary Clive Lewis and shadow minister for industrial strategy Chi Onwurah. It further seeks views on issues including renewable energy, carbon capture and storage, retrofitting housing, and the fourth and fifth Carbon Budgets.

The consultation lasts for six weeks, closing on 16 February.

Electric Cars will cause diesel sales to "almost disappear"

Increasingly-capable electric cars, alongside falling consumer trust following the Volkswagen emissions scandal, will see the global diesel car market “almost disappear” within the next 10 years, according to analysts at UBS.

The financial services company said that the growth in electric cars combined with tougher emission regulations, had created a “perfect storm” against diesel, while the shift in consumer demand towards electric and hybrid alternatives was “likely irreversible”.

The report further said that the falling cost of electric and hybrid cars would eradicate the price advantage that diesel once had.

Scottish public sector urged to lead low-carbon transition

A trade group has said that Scotland’s public sector could lead the next phase of the country’s energy evolution.

Scottish Renewables explained that local authorities, NHS Boards, National Park Authorities, emergency services and other public organisations could all play a “key role” when it comes to Scotland meeting its future climate change targets, which include switching to the use of more renewable power, heat and transport.

Jenny Hogan, policy director of Scottish Renewables, said: “Public bodies can use their planning, procurement and economic development powers to lead Scotland’s transition to a truly low-carbon, sustainable energy system.”

London borough aims to halve electricity used by streetlights

The Green Investment Bank (GIB) has agreed a £6.8mn Green Loan with Barking and Dagenham London Borough Council to finance the installation of almost 15,000 low-energy LED streetlights.

In total, 14,790 streetlights will be installed and the council expects that the project will help to reduce its annual streetlight electricity consumption by half (3.5GWh). This would avoid 1,500 tonnes of greenhouse gas emissions per year and potentially save the council up to £21mn.

Edward Northam, head of investment banking at GIB, said: “Replacing traditional streetlights with LED lamps and installing central management systems can make public sector lighting stock more efficient, cost-effective, environmentally friendly and easier to manage.”

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