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February 2017

By Market Insight Team | Posted April 03, 2017

February 2017 – in brief

Generation

The CBI has pressed the government to provide more clarity on its future plans for spending on large-scale renewables subsidies, through the new contracts for difference scheme. The business group said that longer-term policy certainty on this spending was necessary in order to provide investors with the confidence to progress their energy projects. It also advocated the publication of an annual report on the cost impact of all energy and climate policies.

Meanwhile, the government has taken steps to ensure that the lights stay on in the winter ahead, securing a guarantee of power supplies through the latest of its capacity market auctions.

Delivery

Energy regulator Ofgem has unveiled proposals to cut some of the revenues currently paid to small-scale power generators. The changes would reduce the payments that some of these so-called “embedded generators” receive for producing electricity at times of high demand, which are covered by consumers through their electricity bills.

Academics at the UK Energy Research Centre (UKERC) have warned that the costs of integrating intermittent energy sources into the electricity system will be much higher than necessary, unless steps to make the system more flexible are implemented. It said that an approach looking at the impact of renewables across the whole system would be “essential” to determining the best mix of technologies.

Usage

A new report by analysts at Bank of America (BoA) has said the availability of charging infrastructure continues to stifle the adoption of electric cars – although this may prove less of an issue than had first been feared. The report said that concerns over charging infrastructure were likely to ease as the range of electric vehicles increased.

Businesses have welcomed new guidance on commercial energy efficiency standards, saying that it provides “vital clarity”. New regulations mean that private non-domestic landlords will need to ensure that properties rented to businesses in England and Wales from April 2018 reach an Energy Performance Certificate (EPC) of E before granting a tenancy.

Also covered in this Regulatory Report:

Generation

Business group seeks energy policy reforms

The CBI has pressed the government to provide more clarity on the subsidies that it is willing to offer renewable electricity projects over the next few years.

The business lobbyist submitted a policy paper to the government ahead of the Spring Budget, which is set to be delivered by chancellor Philip Hammond on 8 March. It outlined the CBI’s view on how a long-term and cost-efficient framework for energy policy could best be delivered.

A key concern of the report is the lack of certainty, over the future direction of policy, currently facing investors in renewable electricity projects. At present, the schedule for subsidy auctions, known as contracts for difference (CfD), is only known months ahead, giving developers little long-term confidence in the government’s backing for the sector. The CBI used its Budget submission to argue that this was insufficient, and that the timing and funding of CfD auctions should be clarified at least four years in advance.

The government places a cap on the overall level of the consumer-funded subsidies available to renewable electricity projects through a mechanism called the Levy Control Framework (LCF). This cap, which covers spending under the CfD, the Renewables Obligation, and the small-scale feed-in tariff, has been set at £7.6bn (in 2012 prices) in 2020-21.

But the CBI argued that investors now needed visibility of the level of funding that would be offered into the next decade. It explained that, without this, developers would not be able to deliver the levels of green power generation needed to meet the UK’s long-term emissions targets.

The lobbyist further called for the government to use its new Emissions Reduction Plan, which is expected to be published later this year, to set out its wider ambitions for the power generation landscape. It also backed the establishment of a new annual report on the cost impact of all energy and climate policies.

Power supplies secured for next winter

The government has welcomed the outcome of its latest capacity market auction, which offered contracts to power generators and demand response providers so that they would help ensure the lights stayed on next winter.

The overall cost of the contracts, which is recovered from consumers through their electricity bills, was just over £378mn. This was a significantly lower cost than had been expected before the auction.

Around 54GW of capacity was procured overall: the level that the government believed was necessary in order to ensure that supplies remained secure. By fuel source, the single biggest contributor to this total was gas-fired power generation (22GW); this was followed by 10GW of coal and almost 8GW of nuclear power.

The government said that the auction had provided assurance about power supplies at a low cost to consumers.

Energy minister Jesse Norman added: “Reliable power supplies are essential for businesses to thrive and succeed. Thanks to this auction, homes and businesses can have confidence in the availability of that electricity at the lowest possible cost.”

UK unlikely to stay in EU carbon market

The UK is likely to leave the EU’s carbon trading scheme after Brexit, influential MEP Ian Duncan has said.

Duncan, a Scottish Conservative, has been steering reforms of the EU Emissions Trading Scheme (EU ETS) through the European Parliament over the past few months. These reforms were endorsed by MEPs on 15 February and then member states a couple of weeks later.

But, during a webcast on 9 February, Duncan said: “Were the UK to be part of a system over which it could have no influence, I think that would be very difficult.”

Other experts had suggested that it would be difficult for the UK to remain within a scheme that had its rules enforced by the European Court of Justice. 

The reforms being led by Duncan seek to reduce, from the beginning of the 2020s, the amount of allowances available to participants in the EU ETS, so that the carbon price increases and firms are given a stronger incentive to invest in low-carbon technologies.

Report highlights Scotland’s renewable energy progress

Scotland’s renewable electricity output has more than trebled since the end of 2006, a new report has revealed.

Energy in Scotland 2017, which was published on 23 February, detailed the milestones reached so far on the energy transition north of the border. It said that renewable sources had generated around 59% of Scotland’s electricity consumption in 2015 – against a target of 100% by 2020 – and that the level of electricity from green sources has grown five-fold since 2008-09.

The research further found that Scotland’s greenhouse gas emissions had been reduced by 40% since 1990, and that the 2020 target to install 500MW of community and locally owned renewable generation capacity has already been reached. It said that the low-carbon and renewable energy sector in Scotland supported over 43,000 jobs.

Scottish ministers have, over the past few months, repeatedly raised concerns about the UK government’s commitment to the renewables sector, and have criticised cuts to green subsidy programmes.

Lords back cost-effective decarbonisation

The UK should look to pursue a cheaper approach to decarbonising its economy, a Lords committee has said.

In a report, published on 24 February, the economic affairs committee said that the government should vary the pace of the emissions reduction required in order to achieve the UK’s long-term objectives, “rather than adhering to the linear approach mandated by carbon budgets”.

Carbon budgets place a restriction on the total amount of greenhouse gases that the UK can emit over a five-year period. The UK has met the first of these budgets, but experts have said that further policy action will be needed to keep pace with longer-term goals.

The report said: “Consumers may be paying an unnecessarily high cost to meet the carbon budget interim targets when future technological advances may bring the cost of renewable generation down substantially, as demonstrated by dramatic recent falls in the cost of solar and offshore wind.”

Delivery

Payments to small-scale generators to be cut

Small power generators that receive payments to help keep the lights on during times of high demand are set to lose a substantial portion of their income, after reforms announced by the energy regulator.

Ofgem set out plans on 1 March to cut the so-called Triad payments received by some “embedded” generators from the current level of around £45/kW to around £2/kW by 2020.

Embedded generators are plants that are connected to local distribution networks, and thus avoid paying the charges faced by those larger plants connected to the national transmission system. They receive Triad payments for helping suppliers to reduce the network charges they face during times of high demand. 

But Ofgem said it believed that the current level of payments was “distorting” the markets; the reduction would, it said, mean lower network costs for consumers on their bills. It estimated that the proposals could save consumers up to £7bn by 2034. A consultation on the proposals has been launched, with views invited by 10 April.

Energy system needs more flexibility, say academics

The costs of integrating intermittent energy sources into the power mix will be much higher than necessary unless the system becomes more flexible, the UK Energy Research Centre (UKERC) has warned.

Improving the flexibility of the energy system, and thereby helping to ensure a continued balance between supply and demand, is regarded as a key objective of the current policy framework. The ways to achieve this vary, and include, for example, the use of financial incentives to encourage businesses to turn down their power use at times when demand on the system is high.

UKERC released a new report on 21 February that reviewed the costs and broader impacts of incorporating “intermittent” generation, such as wind and solar power, onto the system. It called for a full-scale re-evaluation of the energy technologies currently being supported in the UK.

Co-author of the report Rob Gross said: “The conversation we have every winter, which is only about whether we have enough spare capacity to keep the lights from going out, is the wrong question. What we should be asking instead is not just how many power stations we need, but whether they’re the right kind of power stations to keep the system flexible enough.”

Work begins on Britain-France interconnector

Work is underway on a new £500mn interconnector between Britain and France. The ElecLink cable will have a capacity of 1GW, and is being funded by Eurotunnel.

Interconnectors link the energy networks of different countries, usually via subsea cables. They enable the trading of power across borders, lowering the prices paid by consumers.

Energy Minister Jesse Norman said: “As a government we are strongly supportive of greater electricity trading with our European partners in order to lower household bills and deliver energy security as part of our modern industrial strategy. We’ve created the right environment for cooperative links like ElecLink to attract investment and compete in the market without needing financial support from our tax and bill payers.”

Usage

Charging the key challenge for electric vehicles, says report

The availability of charging infrastructure continues to stifle the adoption of electric vehicles (EVs), according to analysts at Bank of America (BoA).  

The government has acknowledged the challenges of encouraging the uptake of EVs while charging infrastructure continues to be perceived by the public as insufficient. Policy-makers are currently steering legislation through Parliament that includes, among its objectives, the establishment of more charge points.

But in a report, issued on 16 February, the BoA argued that this may prove less of an issue than is currently feared. In particular, it said that public concerns over charging infrastructure were likely to ease as the range of EVs increased.

The report said that this range increase, combined with home-charging and superchargers, “could change the picture in 5-10 years”, and lead to more widespread adoption of EVs. This is regarded as a critical step towards the UK meeting its long-term environmental targets.

It also noted that some key players within the energy market were likely to benefit significantly from the roll-out of the technology. For example, the electricity distribution networks would likely benefit from the need to strengthen the power grid, while existing power generation capacity would be more extensively utilised.

Last year, though still comprising just over 1% of new cars sold, electric vehicle registrations rose by 30% in the UK. Furthermore, figures from industry group the Society of Motor Manufacturers and Traders (SMMT) revealed that alternatively-fuelled vehicle sales grew by one fifth to surpass 4% of market share for the first time in January.

The SMMT said that 4.2% of the 174,564 registrations were low-carbon models.

Businesses have welcomed new guidance on commercial energy efficiency standards, saying that it provides “vital clarity”.

Issued in February, the guidance related to the minimum energy efficiency standard for privately rented commercial buildings that will be introduced next year.

The document provides practical help to inform landlords whether their property is covered by the regulations, and the steps that they should take in order to ensure they comply with the minimum level of efficiency.

The regulations mean that, from April 2018, private non-domestic landlords will need to ensure that properties rented to businesses in England and Wales reach an Energy Performance Certificate (EPC) of E.

John Alker, policy director at industry group the UK-Green Building Council (UK-GBC), welcomed the guidance. He said: “The regulations have already had a galvanising effect on the commercial property industry, which has been working hard for the last few years to prepare for these regulations. This guidance provides vital clarity to commercial landlords about compliance and enforcement ahead of the regulations coming into force next April.”

Green builders make case for housing overhaul

More environmentally-friendly homes could play an important role in cutting fuel poverty, according to the UK Green Building Council (UK-GBC).

A new report by the group said that the construction and property industry could help to solve some of the biggest challenges facing the government, including the rising energy bills facing the fuel poor. It argued that the government should focus on providing policy certainty and on driving up standards across the housebuilding market.

Speaking at the launch of the report on 28 February, chair of the Prime Minister’s policy board George Freeman MP said: “[This study] will help to ensure that the government works cohesively across all departments to focus on the clear benefits to society from building efficient sustainable homes for everyone.”

Businesses fined over carbon reduction commitments 

Six businesses have been fined more than £41,000 collectively for breaching the requirements of a government energy scheme.

The Carbon Reduction Commitment is a mandatory initiative applied to large organisations in both the public and private sectors in the UK. Under the scheme, businesses must monitor and report CO2 emissions from their gas and electricity use, and must buy enough allowances to cover their annual emissions.

The organisations fined included 99p Stores and ALS Testing Services, with both facing penalties of £13,500. The University of Hull was fined £6,150.

Large companies should explain environmental impact

All large companies should be required to publish environmental reports detailing their green credentials, the Institute of Environmental Management and Assessment (IEMA) has said.

Responding to a government consultation on the issue, the IEMA identified a tendency for businesses to focus on short-term financial goals, rather than the benefits that could be derived from a long-term focus on adopting green practices.

The response argued that sustainability should be recognised as a “critical area” and be placed at the centre of reporting reforms.

Former ministers warn against sale of green bank

Two ministers in the previous coalition government have warned against the sale of the Green Investment Bank (GIB), saying that prospective buyers Macquarie could be set for a major windfall at taxpayers’ expense.

In a letter to business and energy secretary Greg Clark, Vince Cable and Lord Baker explained that a number of the bank’s assets were not yet operational – and that, once they were, they would be worth significantly more than at present.

The letter said: “While it is not possible to calculate the exact amount without detailed information on two of the offshore wind assets currently under construction, it is clear that this could amount to a windfall of hundreds of millions of pounds to Macquarie, at the expense of the taxpayer.”

The government is expected to complete the sale of the bank in the next few months.

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