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January 2017

By Market Insight Team | Posted March 06, 2017

January 2017 – in brief

Generation

The government unveiled its long-awaited industrial strategy, pledging to explore the potential for reducing the cost to consumers of decarbonising the power mix. It also said that the so-called “trilemma” framework - the balance between affordability, sustainability and security, which has underpinned energy policy for the past decade - required “updating” so that more focus was placed on the costs faced by consumers.

The Scottish government has used a new strategy to set itself a target of delivering the equivalent of half of Scotland’s energy needs from renewable sources by 2030. It is also seeking to become the first area in the UK to host onshore wind that is not subsidised, and has said that it will explore the potential creation of a government-owned energy company. 

Delivery

Business lobbyist the CBI has called on the government to ensure that all consumers have the opportunity to help balance supply and demand on the power system by varying their consumption in return for incentives. The group argued that moving towards a smarter and more flexible energy system would help meet energy and climate change targets cost effectively.

The government has confirmed plans for the role of the operator of Britain’s electricity system to be split off into a new, legally-separate company within National Grid. It argued that the move could mitigate concerns over the potential for conflicts of interest within the company, who at present both operates the system and owns a number of its key assets.

Usage

Plans to privatise the Green Investment Bank remain controversial, with opposition political parties expressing concerns about the move. The Scottish government has questioned the transparency of the privatisation process, though it has welcomed assurances that the bank’s strategic importance to Scotland will be considered during the sale.

MPs have urged the government to lower energy cost pressures on the steel industry, saying that this should be the focus of a new UK energy strategy over the coming months.

Also covered in this Regulatory Report:

Energy storage critical to low-carbon transition, says trade association
Spending watchdog criticises lack of funding clarity for CCS competition
Hendry Review gives backing to tidal lagoons
Brexit fears over interconnectors played down
New Green Deals to be offered to consumers

Generation

Decarbonisation costs to be reviewed 

The government has confirmed that it is to commission a review of the costs of decarbonising both the power and industrial sectors.

The pledge came as part of a new Building Our Industrial Strategy paper, published on 23 January. The review will inform the development of a long-term roadmap to minimise business energy costs: it will cover how best to support greater energy efficiency, the scope for using policy instruments to support further cost reductions in green technologies, and how the government can best work with energy regulator Ofgem to ensure markets and networks operate as efficiently as possible in a low-carbon system.

The government said that the so-called energy “trilemma” framework, which had underpinned the development of energy policy for the past decade, required “updating”. The term refers to the balance that policy-makers have sought between the security of energy supply, the cost of gas and electricity, and environmental sustainability. The strategy said that this needed to be modified to place a higher emphasis on affordability, and that it would also take account of the need to secure the industrial opportunities, for the UK economy, of more innovation.

The strategy explained that there remained a clear role for the government in energy policy. But it said markets were crucial to inventing new techniques for saving energy, delivering efficient means of energy generation and storage, and new ways to finance clean technologies.

The private sector would, the government said, drive the low-carbon economy in the future.

New energy strategy unveiled for Scotland

The Scottish government has set a target of delivering the equivalent of half of Scotland’s heat, transport and electricity needs from renewable sources by 2030.

The Draft Energy Strategy, published on 24 January, confirmed that Scotland would aim to become the first area in the UK to host onshore wind that received no government subsidies. It also said Scotland would aim to be a world centre for energy innovation.

The strategy detailed a renewed focus on making buildings more energy efficient, and said that policy in this area would be more “targeted” than it had been in the past. Key to this will be the implementation, this year, of a new energy efficiency programme, to which over £500mn has been committed. The vision is that, by the middle of the century, and where technically feasible, Scotland’s buildings will be near zero-carbon.

The draft strategy also explored the establishment of a Scottish government-owned energy company and the role that it could play in meeting the nation’s energy needs. It would support the growth of local energy projects, and would seek to empower communities to use the income from their developments.

Energy minister Paul Wheelhouse said: “The Scottish government is determined to support a stable, managed transition to a low-carbon economy in Scotland, recognising the very real need to decarbonise our heat supplies and transport system. The oil and gas sector will continue to play a vital role during that transition, because our economy will continue to require hydrocarbons over this period.”

Responses are invited by 30 May.

Energy storage critical to low-carbon transition, says trade association

A group representing the solar industry has called on the government to tackle the barriers to the deployment of energy storage.

In a report issued on 13 January, the Solar Trade Association (STA) said that substantial reductions in the costs associated with storage meant that the technology could now play an important role in the clean energy transition.

But the STA said that the deployment of storage was currently being inhibited by the technology’s lack of a clear regulatory definition under the current market arrangements. This meant that it was sometimes double-charged on the government’s environmental levies, making it less cost-effective to deploy.

The STA further claimed that stronger standards should be implemented so that consumers could be confident in the quality of the storage systems being installed.

Spending watchdog criticises lack of funding clarity for CCS competition

The National Audit Office (NAO) has said that a government programme to support the development of carbon capture and storage (CCS) in the UK was undermined by uncertainty about long-term funding requirements.

The competition was the second major attempt by the UK government to support CCS, but it was cancelled in 2015 as ministers remained concerned that the technology was too expensive. In a report issued on 20 January, the NAO said that the government had not delivered value for money on the £100mn spent in the course of the competition.

The Department of Energy and Climate Change and the Treasury had agreed that £1bn would be made available during the competition to take the CCS projects through to construction. But the NAO said that the two departments had failed to agree any subsidies that would then be offered to the schemes during their operation.

The NAO said: “The lack of agreement between the department and HM Treasury on a limit to the support through [subsidies] meant the department could not tailor its approach to the competition in a way that matched an agreed affordability constraint.”

Hendry Review gives backing to tidal lagoons

The government-commissioned Hendry Review has recommended that a tidal lagoon is built in Swansea Bay as soon as practically possible.

Former energy minister Charles Hendry was appointed, in May 2016, to lead a review into assessing the strategic case for tidal lagoons and the role that they could play in the energy mix. He published his findings on 12 January.

The report concluded that tidal lagoons could become a “cost-effective part of the UK’s energy mix”, even though it noted that the technology’s full impacts on the environment remained uncertain.

Hendry said that moving ahead with a pathfinder project in Swansea Bay would be “a no-regrets policy”. He explained: “I don’t believe there would be any debate in decades to come about whether this was the right thing to do, even if it ended up as the only lagoon constructed - but I would expect it is much more likely to be seen as the decision which started a new industry and all done at the cost of a small number of pence to consumers each year.”

Delivery

​Consumers can vary demand to help balance power system, says CBI

The CBI has said that the government must aim to allow consumers to participate in programmes that can help ensure the power system remains stable over the coming years. 

In a paper issued on 20 January, the business group said that so-called demand-side response (DSR) programmes would support the energy system as it transitioned towards less reliable green sources. But it said that, in order to help firms to become more engaged in these activities, market rules would need to be changed – and above all simplified – in a way that demonstrated the government’s commitment to reducing demand and not just building new power stations.

The paper said that this commitment could also be demonstrated by changing the rules of the government’s scheme for ensuring the lights stay on so that DSR schemes could bid for contracts on a level playing field with electricity generators.

The CBI affirmed its view that the development of a smarter and more flexible system could deliver major benefits for consumers.

Government confirms plans for more independent system operator

The government has announced plans for significant reforms to the way in which the power system is operated in the UK.

The proposals, unveiled on 12 January, would see the role of the electricity system operator (SO) split off into a new, legally-separate company within National Grid.

The SO’s responsibilities include balancing the system, running auctions that ensure there is sufficient capacity to meet demand, and coordinating aspects of industry rules and codes. However, some market commentators have expressed concern that, in fulfilling this role, National Grid, which also owns much of the system’s key infrastructure, has conflicts of interest.

In a policy paper, the government said changing the current arrangements could help facilitate the transition towards a more competitive and flexible system. The activities of a new SO would include developing balancing services, and reviewing the current arrangements for charging users of the network.

Brexit fears over interconnectors played down

The government and the system operator have played down concerns that Brexit will impact the development of new interconnectors to Britain.

Interconnectors allow Britain to import and export power to nearby countries. This can help to keep energy costs lower and boost energy security.

Speaking at an industry conference on 26 January, energy minister Jesse Norman said he felt it was “extremely unlikely” that Brexit would jeopardise projects currently being progressed, as the countries involved would maintain a mutual interest in increasing their interconnection.

Meanwhile Ian Graves, director of business development at National Grid, assured that the environment for developing interconnectors “remains good” despite the referendum outcome. Appearing before the business, innovation and industrial strategy committee on 25 January, he said that National Grid had an incentive to ensure the links were built, flexible and ready to use.

Usage

Proposed sale of green bank sparks controversy

Government plans to privatise the Green Investment Bank (GIB) have continued to cause debate among politicians and industry stakeholders.

The Edinburgh-based bank was established by the government in 2012, and both invests in and manages green infrastructure assets. Since its formation, it has helped to finance £11bn of UK green infrastructure projects, with £2.7bn of its own capital and further funding from private investors. The government announced, in 2015, that it was to begin a process to privatise the bank, saying that this would help it to continue investing in the low-carbon transition.

But the plan has been criticised by politicians across the political spectrum, with many believing that it could see the GIB’s focus on clean energy diluted. The UK Parliament’s environmental audit select committee recently said that it wanted to hear from ministers over the sale; chair Mary Creagh explained that the bank had had “notable successes”, and that the retention of its green identity should be a key objective of any sale.

While not confirmed by the government, it has been widely reported that Australian investment bank Macquarie is the leading bidder for the bank; media reports early in January claimed that it would embark on a process of selling off key assets if the deal was completed. These claims were countered by climate change minister Nick Hurd, who said that the government had “no interest” in selling the bank to an “asset stripper”. Hurd said that assertions that the sale of the bank represented a reduction in the government’s green ambition “could not be further from the truth”.

Hurd argued that, in its current format, the bank was restricted in its activities. He said that in future, the GIB “has to be a dynamic organisation, and it should be free to realise capital from packaging assets and to do things that a nimble entrepreneurial organisation, which is what it is, should be free to do.”

A report on 27 January from Bloomberg suggested the bank would be restructured – rather than stripped of assets - if sold to Macquarie. The bank would, it said, be split into two units: one for managing its existing loans; the other focusing on deals yet to reach financial close.

Meanwhile, the Scottish government has sought assurances that the strategic importance of the bank to Scotland will be fully considered during the sale process. On 2 February, Scottish economy secretary Keith Brown said that such assurances had been received, though greater transparency on the sale was still needed from the government.

Steel industry needs support on energy costs, say MPs

A group of MPs has urged the government to lower energy cost pressures on the steel industry.

The All Party Parliamentary Group (APPG) on Steel and Metal Related Industries released new research on 23 January. It called for the development of a new energy strategy over the coming months to include a renewed focus on reducing electricity costs for the steel industry.

The group said that, while measures to support low-carbon generation and energy efficiency were important, it was in the national interest to prioritise the provision of cost-competitive electricity.

Among its recommendations, the report said that the government should consider scrapping the UK’s unilateral carbon price, and offer manufacturers an exemption from the cost of policies that boost supply security.

New Green Deals to be offered to consumers

Investors Greenstone Finance and Aurium announced on 15 January that they had acquired the Green Deal Finance Company (GDFC).

Launched by the government in 2013, the Green Deal sought to address the fact that the UK has some of the most thermally inefficient housing in Europe. Green Deal loans provided consumers with accessible financing to improve their homes by installing energy efficiency products. But the loans were halted in 2015 as the scheme was suffering from low uptake.

The deal includes GDFC’s existing loan book, worth over £40mn. The new owners will continue to service these loans and will begin financing new ones in the next couple of months.

Government backs energy innovation projects

The government has confirmed that it is to invest £28mn in innovative energy technologies that support the low-carbon transition.

The funding broke down into £9mn for a competition to reduce energy storage costs, £7.6mn for advancing demand-side response technologies, and £9mn for a competition aiming to improve the energy efficiency of UK industry.

Climate change minister Nick Hurd said: “Innovation in energy will play an important role to shape our low carbon future to rebuild an outdated energy system.”

Smart meter users would recommend them, survey finds

A new survey has found that more than eight in 10 consumers would recommend the technology to others.

The government is hoping to roll-out smart meters to homes and businesses across the UK by 2020, believing they will make consumers more aware of their energy usage and therefore encourage them to take steps to lower their bills.  

The survey, published on 1 February by Smart Energy GB, showed that more than four fifths of those who had smart meters had actively sought to reduce their energy use, with a similarly high proportion utilising the technology’s in-home display.

Sacha Deshmukh, the organisation’s chief executive, said smart meters clearly enjoyed an “exceptionally high level of approval”.

Green Housing group urgers more energy powers for local councils

The UK Green Building Council (UK-GBC) has argued that cities and local authorities should have an important leadership role in supporting the delivery of sustainable new homes and communities.

The call came against the backdrop of the cancellation of national policies such as Zero Carbon Homes, which would have required all new homes from 2016 to mitigate all the carbon emissions produced on-site through regulated energy use.

UK-GBC said that, under existing regulations, local authorities could take a lead through mandating higher building standards for development on their own land. An option for an ongoing revenue stream was, it said, for local authorities to become municipal energy suppliers - an idea that many are already exploring.

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