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July 2016

By Market Insight Team | Posted July 06, 2016

June 2016 – in brief

Generation

Energy and climate change secretary Amber Rudd confirmed that the goals of the UK’s energy policy remained unchanged in the wake of the vote to leave the EU on 23 June. Rudd said the government remained fully committed to action to address climate change, while at the same time ensuring costs to consumers were kept low and energy security maintained.

The conservative think tank Bright Blue released new research showing that the UK government could close all coal-fired power stations by 2023 and comfortably maintain the nation’s energy security. The government was urged to bring forward its existing target to close all of the nation’s coal plants by 2025. 

Delivery

The House of Commons energy and climate change select committee advocated transferring responsibility for balancing the energy system away from National Grid, and to a new, independent system operator. This, it said, would help to address concerns about National Grid’s conflicts of interest. The report also called for policy-makers to implement measures that promoted further innovation in energy technologies.

Consumer group Citizens Advice Scotland called for the deadline for the smart meter roll-out to be put back, so that suppliers were given more time to install the best technologies into homes and businesses across the UK.

Usage

The Competition and Markets Authority delivered the findings of its two-year investigation into the energy sector. Business groups welcomed the proposals, including increased price transparency and the establishment of a new system for “prompting” disengaged customers to seek out better energy deals.

The government confirmed it will legislate for a new carbon target. The Fifth Carbon Budget will be set with a 57% cut in emissions over the period 2028-2032, on a 1990 baseline. 


Covered in this Regulatory Report:
 

 


Generation

Government energy plans unchanged by Brexit vote 

The government has assured the energy sector that key policy goals will not be impacted by the UK’s vote to leave the European Union (EU) in the referendum on 23 June. 

Energy and climate change secretary Amber Rudd, who had campaigned for a “Remain” decision in the referendum, responded to the vote at the Business and Climate Summit in London. Her colleague at the department, energy minister Andrea Leadsom, supported the “Leave” campaign.

Rudd told the conference that, in the wake of the vote, the government remained fully committed to tackling the energy trilemma: ensuring energy security, keeping bills low, and decarbonising the gas and electricity supply. While, she said, the decision to leave the EU was “undoubtedly significant”, the country’s energy challenges remained the same.

The minister was particularly keen to emphasise the UK’s commitment to tackling climate change. She said: “Climate change has not been downgraded as a threat. It remains one of the most serious long-term risks to our economic and national security. I was lucky enough to lead the world-class team of British diplomats at last year’s Paris climate talks. Our efforts were central to delivering that historic deal. And the UK will not step back from that international leadership. We must not turn our back on Europe or the world.”

Rudd explained that Climate Change Act 2008, which underpins the UK’s environmental policy-making, had not been imposed by the EU, and had ensured “remarkable investment” in the low-carbon economy over the past five years. Investment in renewables has increased by 42% since 2010. In 2014, 30% of all of Europe’s renewable energy investment took place in the UK, and annual support for renewables is expected to double during this Parliament to more than £10bn.

But Rudd stressed that keeping the lights on would remain the government’s top energy-policy priority. This, she said, was being delivered through the government’s capacity market scheme, and significant investment was anticipated following the next capacity market auction being held later this year.

The government also remained committed to the development of new nuclear power in the UK, Rudd said. The groundwork has been undertaken for a fleet of new nuclear power stations, with proposals being taken forward to develop 18GW of capacity at six new sites across the UK. 

Coal closures won’t undermine energy security

Closing Britain’s remaining coal-fired power stations before 2025 will not undermine energy security, conservative think tank Bright Blue has said.

A report, published by the group on 7 June, suggested that, even if all remaining coal plant were closed by the end of the decade and the building of replacement capacity was slower than expected, the lights would stay on. In fact, the government was advised to bring forward its target date for the phase-out to 2023, in order to provide investors - particularly those planning new gas capacity - with certainty.

Author of the report and associate fellow of Bright Blue, Ben Caldecott, said: “Despite what some exaggerated claims suggest, coal phase-out even under a “high stress” scenario, will not result in the lights going out.”

Onshore wind vital to UK’s energy future, says business group 

Onshore wind plays a “pivotal” role in ensuring that low-carbon investment is affordable for homes and businesses, the CBI has said.

Speaking at an industry conference on 29 June, Rhian Kelly, the organisation’s business environment director, warned that the government should not take a stance against the technology; she noted that it was already the cheapest form of low-carbon generation and that it could, by 2020, be the cheapest form of energy overall.

She said: “By removing it entirely from the capacity we need to build, we risk taking a more expensive route to meeting our targets – in short, we will be getting less bang for our buck.”

Kelly said that the sector would only realise its potential if the energy policy framework were stable and investors were given confidence for the long term. In particular, she said that the government needed to clarify the level of funding that it intended to make available for low-carbon generation into the 2020s through the so-called Levy Control Framework. 

Commercial rooftops key to solar PV growth

Solar power costs will only continue to fall if the technology begins to grow in previously-sluggish markets such as business rooftops, the Renewable Energy Association (REA) has said.

In a report published on 7 June, the trade group said that the UK’s renewables industry was worth £15,913mn in 2015—an increase of £982mn on the year before. This represented an annual growth rate of 6.6%, compared to growth in the overall economy of 2.5%.

However, the REA warned that recent policy reversals were likely to have a negative impact on growth in 2016, and that the government needed new policies in order to meet its renewable energy targets - especially in heat and transport.

Nina Skorupska, chief executive of the REA, said: “The industry was blindsided this year with over a dozen sudden and severe policy changes, which we expect will be reflected in next year’s report. While many businesses have been left reeling and deployment has begun to slow, as an industry we will persevere, we will innovate, and we will continue to grow.”

Government defends cuts to renewables subsidies

Energy minister Andrea Leadsom has told MPs that the government’s reforms to the feed-in tariff (FiT) scheme were necessary as the programme was not affordable in its existing form.

Speaking in Parliament on 13 June, Leadsom said the changes to the FiT - which included the introduction of deployment caps—would reduce spending on the scheme from £1.7bn/ year in 2020 to £1.3bn/ year, and that they would overall save energy users £7.6bn over the next 20 years.

Uncontrolled spending on FiTs had, she said, had a “direct impact” on the energy bills of consumers, with the government now aiming to help organisations “really struggling to meet their electricity costs and to be competitive”. Leadsom also said deployment levels since the changes were implemented had been encouraging, with the sector reacting well to the changes.

The FiT is the government’s mechanism for supporting smaller-scale renewables generation and is widely utilised by small businesses. A fixed income for every kilowatt hour of electricity generated is earnt, whether it is used on-site or exported to the grid.

However, the Labour Party opposed the cuts, arguing that higher deployment of renewables technologies would limit the amount that the government had to spend on procuring fossil fuel capacity to ensure the UK’s energy security. 

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Delivery

MPs back energy system overhaul 

The House of Commons energy and climate change select committee has called for fundamental changes to the operation of the British energy system.

In a report released on 17 June, the committee suggested that responsibility for system operation should be transferred from National Grid to an independent system operator (ISO) nationally, and distribution system operators (DSOs) at the regional level.

The report said that National Grid’s technical expertise in operating the system must be weighed against the company’s potential conflicts of interests. The ISO model had, it argued, already proved successful in other countries.

Meanwhile, at the local level, distribution network operators would move away from their “blind, passive role” to one of taking responsibility for balancing the network. The committee said the benefits of this approach appeared to be universally acknowledged, but there was no clear roadmap to its implementation. 

The report also concluded that the roll-out of smart meters was not progressing with sufficient speed to support the transition to an energy system based on new technologies. It called for a “clear, holistic plan” to deliver the evolution of the energy networks.

Committee chair Angus MacNeil said: "Innovative solutions - like storage and DSR - to 21st-century energy problems have been held back by legislative and regulatory inertia. The government has committed to addressing these issues, and we will hold them to account on making good on this promise.”

Consumer group seeks delay to smart meter roll-out

Citizens Advice Scotland (CAS) has backed an extension to the smart meter roll-out deadline to ensure energy users do not miss out on the full benefits of the technology.

Smart meters give near real-time information on energy use and will bring an end to estimated billing, meaning consumers are only charged for the gas and electricity they consume. The government is requiring energy companies to offer smart meters to all their customers by 2020.

In a report issued on 23 June, CAS said it believed that the current deadline was likely to cause problems for vulnerable customers and increase the overall costs of the project.

The organisation instead recommended adopting the EU target of achieving 80% of smart meter installs by 2020 and 100% by 2025. It said this would reduce the number of earlier generation smart meters that needed to be deployed in order to meet the government’s deadline.

There were also concerns that the potential benefits of the smart meter roll-out may not be fully realised given the lack of integration between the programme and other energy-related activities that involve engaging consumers and businesses.

CAS said small and medium businesses would need an ongoing package of support to enable them to act on the data they received through their meters.

Energy spokesman David Moyes said: “We think many consumers in Scotland will be dis-advantaged [by the 2020 deadline] because they receive a less functional type of smart meter if they are installed too early.” 

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Usage

Competition watchdog reveals business energy reforms 

Business groups have welcomed the announcement of reforms to the energy market, following an investigation by the UK’s competition authority.

The Competition and Markets Authority issued on 24 June the final report of its investigation into the energy industry. The investigation was launched two years ago, after the sector’s regulator, Ofgem, expressed concern that competition was not functioning as it should, and referred the market to the CMA. In the intervening period, the CMA has gathered both oral and written evidence from a wide range of stakeholders. It had been due to report its final findings by the end of last year, but delayed this by six months to assimilate all of the evidence submitted.

The analysis underpinning the authority’s remedies suggested that there remained high levels of consumer disengagement in the microbusiness energy market. It said that, in 2013, approaching half (45%) of these firms were on their suppliers’ “default tariffs”, and could overall be paying over £220mn/ year more than would be the case in a fully competitive market. 

The CMA confirmed a number of remedies would be implemented in order to address this concern, and that these remedies would focus on improving price transparency.

Energy suppliers will now be required to publish all the prices they offer to microbusinesses so that firms can better understand whether they are receiving a good deal. At present, most tariffs for microbusinesses are not published as they are negotiated directly on a bilateral basis between customers and suppliers.

Energy companies will also be prevented from inserting termination fees and no-exit clauses into roll-over contract periods. This has, in the past, made switching away from these contracts expensive and unnecessarily complicated, the CMA said. With the announced reforms, microbusinesses will no longer be penalised if they want to switch to a better deal when the initial contract period has lapsed, and they will received greater notice periods about when their contracts are coming to an end.

The CMA confirmed the establishment of a new system for “prompting” disengaged customers to look for better deals. Microbusinesses that have been on their suppliers’ “default” tariffs for more than three years will be entered into a database accessible by other suppliers, who will then be able to write to the firms to tell them how much they could save by switching. The CMA explained that this new system would be subject to close controls: microbusinesses would be able to opt out, and suppliers would only be able to contact them by post – not by phone, text, or email.

The CMA will set out further details of the implementation schedule for these measures over the next few months. The implementation of the various proposals will be undertaken by the government and Ofgem.

The measures have won the backing of business organisations. Responding to the announcements, the Federation of Small Businesses (FSB) said: “Today’s CMA decision is a big win for FSB and for small businesses up and down the country. Transparency and fairness should be at the heart of a functioning energy market for small firms."

FSB national chairman Mike Cherry added: “Energy tariffs, published in a clear and comparable way, will make it much easier for small firms to secure a decent energy deal and empower them to make decisions that are right for them. Removing unfair terms and conditions from auto-rollovers will also ensure business owners are not caught off-guard when their contract expires."

New carbon limits to be implemented 

The government has approved the setting of a binding target of reducing the UK’s carbon emissions by 57% by 2032, compared to the level in 1990.

The UK’s carbon budgets are a series of five-year limits on how much carbon the UK can emit, and are designed to deliver an 80% reduction in emissions by 2050 in the most cost-effective way possible.

The Fifth Carbon Budget, presented to Parliament on 30 June, covers emissions reductions between 2028 and 2032. It will mean that, during the period, the UK will need to reduce its emissions to no more than 1,725 metric tons of carbon dioxide equivalent (MtCO2e). The announcement was praised by manufacturers group EEF, which said the decision had sent a “clear signal” and given certainty to investors. It had also eased concerns that last week’s “Leave” vote in the EU referendum would see the UK’s leadership on climate change watered down.

The move was further welcomed by environmental campaigners. Simon Bullock, Friends of the Earth senior climate campaigner, said: “After the huge confusion following the Brexit vote, we welcome the certainty this decision gives.”

Businesses could deliver 60% of emissions cuts needed to hit climate targets

The private sector is capable of cutting greenhouse gas emissions by the equivalent of three fifths (60%) of the emissions cuts pledged at the Paris climate talks, according to a new report.

Launched at the Business and Climate Summit in London on 28 June, the We Mean Business study suggested that the private sector could reduce emissions globally by 3.7MtCO2/ year by 2030, and that with the appropriate policy support it “could go even further”.

Steve Howard, chief sustainability officer at the IKEA Group, said: “Companies, investors, individuals, cities and regions all have a role to play. Action on climate change is not only the right thing to do, it brings business benefits.” 

Green Investment Bank backs Northern Ireland AD plants

A fund supported by the UK Green Investment Bank (GIB) has committed £10.5mn to two on-farm anaerobic digestion (AD) plants in Northern Ireland.

Announced on 20 June, the deal will see £8.7m invested in the 3MW Ballymena AD plant and 1.8mn invested in the 0.5MW Gorthill AD plant in County Londonderry. Together, the two plants are expected to generate over 20,000MWh of renewable electricity/ year.

Northern Ireland agriculture, environment and rural affairs minister Michelle McIlveen, said: “This project has seen close collaboration between technology companies, government and funding bodies, including the UK Green Investment Bank. It is a testament to our commitment to deliver a sustainable future for our agriculture sector. Projects such as this will play an important role in helping the poultry sector to address an environmental challenge.”

Campaign group predicts surge in electric vehicles 

Government-backed campaign group Go Ultra Low has predicted that the number of electric vehicles on UK roads could overtake the number of petrol and diesel cars in 10 years’ time.

In a study released on 29 June, the group found in a study that more than half of all new cars sold in the UK could be electric from 2027, and by 2040 all new cars sold will be electric. The report said that, in the not-too-distant-future, when the market reached a “tipping point”, at least 1.3mn electric cars would be sold each year. The group cited figures showing that Just over 1,000 plug-in cars were sold in 2011, which increased to more than 28,000 sold last year. There have been more than 60,000 electric cars registered in the UK in the past five years.

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