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January 2016

By Market Insight Team | Posted January 14, 2016

December 2015 – in brief

Generation
The government unveiled revised proposals for cutting the subsidies available to small-scale renewables projects through the feed-in tariff scheme. While rates within the scheme will still be reduced significantly, the cuts will be less severe than originally proposed by the government. 

Delivery
Official statistics confirmed that the carbon intensity of the UK’s electricity generation was continuing to fall as the deployment of low-carbon technologies continued to grow. Emissions from power stations by 2014 were markedly lower than they had been two years earlier.

Usage
Energy and climate change secretary Amber Rudd welcomed the Paris climate agreement as crucial for “our long-term economic and global security”. The agreement, signed by all 195 UN member states, delivered a commitment to keep global warming “well below” 2°c, as well as to support climate change adaptation.

Covered in this Regulatory Report:

Generation

Government eases cuts to renewables support scheme
The government has softened its proposals for reducing the subsidies available through a key renewables support programme.  

On 17 December, Department for Energy and Climate Change set out the conclusion of its review of the feed-in tariff (FiT) scheme. The FiT is intended to promote the uptake of a range of small-scale renewable and low-carbon electricity generation technologies, and is available to both household and business consumers.

Introduced in 2010, the scheme requires energy suppliers to make tariff payments, to accredited projects, on both the generation and export of renewable and low-carbon electricity. But the costs of the scheme to end bill payers have increased markedly in recent years, as deployment has substantially exceeded expectations. This was part of the reason why, last year, the Office for Budget Responsibility suggested that the UK was at risk, by 2020-21, of overspending on low-carbon subsidies by as much as £1.5bn.

However, stakeholder engagement workshops, held by the government over the past few months, heard significant concerns about the impact that the initially-proposed FiT cuts would have had on renewables industry jobs and the wider economy. As a consequence, while the government has decided to implement a reduction in FiT tariffs, these will not be as severe as set out in its original consultation.

For example, solar PV installations smaller than 10kW will, from January 2016, receive a generation tariff of 4.39p/kWh - up from the 1.63p/kWh on which the government consulted.

The government has set the new tariffs to result in a rate of return of 4.8% for solar PV, 5.9% for wind and 9.2% for hydro power. It also decided to limit new FiT spending to £100mn a year up to April 2019, and to re-implement pre-accreditation for community energy projects.

In an accompanying impact assessment, the government acknowledged that its changes would likely impact on employment in the sector. It estimated that between 9,700 and 18,700 solar jobs would no longer be supported by FiTs.

An amended FiT order has been laid in Parliament, with the changes expected to come into force on 8 February 2016.

Responding, industry group the Solar Trade Association (STA) raised concerns about the implications of the measures, but recognised that the new proposals represented an improvement on the government’s original plans. Paul Barwell, CEO of the STA, said: “Commercial rooftop solar has been a small but growing part of the solar rooftop market. However, even with these lower tariffs, the nature of high electricity self-consumption and a maturing commercial market should ensure solar is still a good choice for many power-hungry businesses across the UK looking to reduce their bills and use the empty space on their roofs.”

Industry association Renewable UK also welcomed the government’s changes, calling them a victory for “people power”. It said that the cuts “remain challenging” but would still allow a considerable amount of capacity to be deployed. CEO Maria McCaffery praised the reintroduction of pre-accreditation for community projects, saying it would help maintain investor confidence in renewables. But she was concerned that the new deployment caps might make it harder for small businesses to take advantage of the scheme.

Carbon intensity of UK generation continues to fall
The UK has continued to reduce the carbon emissions from its generation of electricity, official statistics have shown.

On 17 December the government released a new report on the progress made towards decarbonising the country’s power generation. It showed that total emissions from power stations in 2014 were 394g/kWh, down 18% from 482g/kWh in 2012. The government expects further decreases in the coming years owing to the UK’s unilateral carbon price floor and EU environmental regulations.

The report also showed that, over this period, low-carbon generation - encompassing nuclear power and renewables - steadily increased its share of the UK total, rising from 30% in 2012 to 39% in 2014. Nuclear power generated 9.7% less electricity in 2014 than the previous year due to unplanned outages, but renewables production grew by 21%. 

Small-scale solar to lose Renewables Obligation support in April  
The government confirmed on 17 December that it would close the Renewables Obligation (RO) to new solar PV generating stations of 5MW and below from 1 April.

The RO is one of the main support mechanisms for major renewable electricity projects in the UK. It places an obligation on UK electricity suppliers to source an increasing proportion of the electricity they supply from renewable sources, in turn creating a revenue stream for renewables generators.

Along with the RO’s closure to new sub-5MW solar, the government has also confirmed that it will remove “grandfathering” for schemes in England and Wales accredited since 23 July 2015. This means that these projects will no-longer be guaranteed the same level of support they received at the time of accreditation. 

Subject to parliamentary approval, the changes are expected to come into force on 1 April 2016. Meanwhile, a banding review has been launched that proposes to cut the support for building and ground mounted installations to 0.8 Rocs/MWh from 1 June.

Parliamentary committee to focus on decarbonisation
The House of Commons energy and climate change committee (ECCC) has vowed to focus its work on investor confidence – particularly in the renewables sector – over the next five years.

The ECCC carried out a consultation over summer 2015 on its priorities for this Parliament. A third of the responses, which were published on 18 December, recommended that it prioritise driving investment, while four in 10 advised it to pay particular attention to government policies for tackling energy efficiency. Decarbonisation and climate change was also an important issue for respondents, with lowering emissions from transport regarded as a particular concern.

Overall, the ECCC vowed to encourage the government to promote international action on climate change and to deliver a “robust” Fifth Carbon Budget. It also said it would scrutinise the decarbonisation of heating and transport.

Union calls for new nuclear and gas 

The GMB union has pushed for the government to deploy more nuclear and gas power stations given the unreliability of wind generation.

In a statement on 28 December, GMB general secretary Paul Kenny warned that from October to December 2015, there had been 12 days when the UK’s wind fleet was performing at 10% or less of its total capacity. Saying that renewables could not deliver reliable baseload power, Kenny announced that GMB would publish a regular “wind watch” to help inform public debate on the technology.

Kenny concluded: “Unless there is a scientific breakthrough on carbon capture, nuclear and gas are the only shows in town. Those advocating renewable energy have to accept this". 

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Delivery

Capacity market secures future electricity supplies

The government’s second capacity market auction was held in December, with a view to ensuring the security of Britain’s power supplies in winter 2019-20.

The capacity market provides a payment for reliable sources of capacity, alongside electricity revenues, to ensure generators deliver power onto the system when needed. It is expected to encourage the investment required to replace older power stations and thereby provide back-up for more intermittent and inflexible renewables generation sources. The costs of the scheme are ultimately passed on to end users through their energy bills. 

In the second auction, just over 42GW of the capacity procured came from existing generation, with a further 1.9GW from interconnectors and new-build generating units. An additional 448MW of capacity came from unproven demand side response, such as businesses lowering demand.

In terms of the successful technologies, around 21.8GW (47%) of cleared capacity was gas, followed by nuclear power at 7.6GW (16%), and 4.7GW (10%) of coal/biomass.

Energy minister Andrea Leadsom said the result represented a “good deal” for consumers, which was secured through “fierce competition”. 

Government relaxes advanced meter requirements
The government has agreed to allow advanced meters to count towards companies’ targets for installing smart meters in non-domestic premises until 2017.

Smart meters provide a range of advanced functions, including accurate monitoring that will bring an end to estimated billing. The government wants the technology rolled out to every household and two million non-domestic properties by 2020. Currently, companies are allowed to count advanced meters (which can store half-hourly data and transmit this to the supplier like a smart meter, but lack other “smart” features) towards the total of smart meters they have installed.

On 17 December, the Department for Energy and Climate Change (DECC) set out the conclusions of a consultation, held in May last year, that proposed ending this arrangement for advanced meters in April 2016. But it has now decided that advanced meters will still contribute to targets until April 2017 for large suppliers, and August 2017 for small suppliers. It was convinced by a majority of responses to the consultation that not extending the end-date would have caused disruption to the roll-out, delaying benefits to energy users. 

National Grid buys more back-up power
System Operator National grid announced on 11 December that it had secured 3.8GW of additional power supplies for next winter via the Supplemental Balancing Reserve (SBR).

The SBR is a mechanism designed to ensure that rapid-response generation capacity is on hand during the winter to respond to spikes in demand. It is run as a tendering process, with operators bidding to receive payments to ensure their capacity is available. The 12 successful gas and coal power stations will receive a total of £122.4mn.

National Grid has several other measures at its disposal for meeting demand over winter, which include paying large energy users to cut their demand at peak times. 

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Usage

Government welcomes Paris climate deal 
Energy and climate change secretary Amber Rudd has called the Paris Agreement “an important step forward” in the low-carbon transition.  

Rudd said that the deal was crucial for “our long-term economic and global security”, and sent a clear signal to investors, businesses and governments that the clean energy transition would continue. The government expressed confidence that the deal will provide the certainty needed to drive investment in decarbonisation, and that the UK was well-positioned to reap the benefits.

The agreement, signed by all 195 UN member states, expressed a commitment to keeping global temperature rises “well below” 2°c: the point at which scientists say it will become dangerous. This will be achieved through the development of low-carbon energy sources, coupled with support for climate change adaptation.

In addition, the signatories also promised to review their climate commitments every five years from 2025, and to update them according to scientific developments. They will also be subject to independent review to ensure that they are implementing their proposals.

Speaking to Parliament on 14 December, Rudd explained that the UK’s main focus at the conference had been to persuade other nations to join the agreement, partly because the UK’s own emissions were relatively small on the global scale (at 1.2% of the total).

Rudd reaffirmed the government’s commitment to Climate Change Act 2008 and defended recent decisions to cut support for renewables and carbon capture and storage. These decisions were, she said, taken because the government was not willing to sacrifice security of supply and value for money during the decarbonisation process.

GIB invests in business energy efficiency 
December saw the UK’s Green Investment Bank (GIB) pledge to invest a total of £16mn into two major energy efficiency programmes.

The GIB was created by the previous coalition government. It was capitalised with an initial £3.8bn of public funds to back green projects on commercial terms and to mobilise other private sector funding into the UK’s green economy.

On 8 December, the GIB announced £8.4mn of funding to fit 90,000 LED lights across Santander’s premises in the UK. A total of £17.5mn is being provided, with the remainder coming from partner Sustainable Development Capital Limited. The project will run to the end of the year and should halve the bank’s lighting energy use.

The GIB’s head of investment banking Ed Northam said: “The relatively simple action of installing LED lighting can have a big impact on efforts to reduce the cost of electricity and cut energy demand while creating a better environment for customers, clients and employees.”

The GIB also provided NHS Tayside with £7.7mn for energy and efficiency projects on 9 December. Perth Royal Infirmary and Stracathro Hospital will both benefit from new energy-saving measures including insulation and LED lighting, and a new energy centre will be built at Ninewells hospital. This will provide 90% of the electricity and 100% of the heat for the hospital and Dundee Medical School.

Energy intensives to be compensated for renewables policy costs 
The European Commission announced on 17 December that it had approved the UK government’s decision to grant energy-intensive industries (EIIs) compensation for the cost of renewable energy policies.

The government announced in 2014 that it planned to compensate EIIs for the costs of the feed-in tariff and Renewables Obligation (RO); however, these plans required approval under State Aid rules from the European Commission.

Guidance will be published by the government in January 2016 and payments will be backdated to when clearance was given. Business Secretary Sajid Javid said: “This is very welcome news and meets a commitment we made to deliver energy compensation for the steel industry by the end of the year. Relief from energy costs will save our steel industry hundreds of millions of pounds.”

Coalition to work towards electrification of transport 
A cross-section of car manufacturers, sustainability groups and international agencies has pledged to work towards the electrification of 20% of global road transport by 2030.

The Paris Declaration on Electro-Mobility and Climate Change noted that transport represented 23% of current carbon emissions from energy use, and that they were on track to rise by 20% in the next 15 years. In order to limit global climate change to below 2°c, organisations including the International Energy Agency, Clean Air Asia and the Renault-Nissan Alliance pledged to work together to tackle the challenges and opportunities represented by electric transport.

Government aims to improve energy-efficient products guide
The government is seeking views on how its long-running Energy Technology List (ETL) scheme can continue to support energy efficiency.

In a call for evidence opened on 11 December, it invited responses on how effective the ETL is and how it can be improved as part of its wider investigation of the business energy efficiency tax landscape.

Since 2001, the ETL has encouraged organisations to acquire energy-efficient equipment and has grown to include 16,000 products. It has become a significant procurement tool for major UK companies. It aims to simplify investment decisions and help in overcoming information barriers, as well as reducing transaction costs for buyers and sellers.

The government intends to ensure the ETL continues to deliver value for money as it fulfils this role and is interested in stakeholder views that can help to inform its development. In particular, it would like insight on the barriers that organisations encounter when buying energy-efficient technologies, examples of similarly successful policies from other countries, and experiences of using the ETL. Responses are invited by 29 January. 

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