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June 2016

By Market Insight Team | Posted June 07, 2016

May 2016 – in brief


The government confirms that it will bring forward by a year its key policy mechanism for ensuring the security of Britain’s power supplies. The move is intended to help ensure the lights stay on and to incentivise the development of new gas power plants, which are regarded as crucial to the UK’s low-carbon transition.

The Industrial & Commercial Energy Association expresses alarm about government plans to reform the Renewable Heat Incentive. The group calls on the government to keep offering support for solar thermal and to maintain subsidies for biomass boilers at current levels. 


National Grid confirms that demand on the electricity system was lower than anticipated last winter. This was due to milder-than-expected weather and the increasing amount of generation units connected directly to the distribution networks.

Energy regulator Ofgem unveils research into the projects backed by its Low Carbon Networks Fund. The report says the projects proved that innovative technologies like active network management and demand-side response could deliver real benefits to customers.


The International Energy Agency urges cities to take the lead in progressing towards decarbonisation goals. A new report by the organisation finds that both the growth in energy demand and opportunities to decarbonise are at their greatest in urban areas.

A new Ofgem survey reveals that business energy users have an increasingly positive view of the process for switching between electricity and gas suppliers, and are becoming more engaged in the energy market. 

Covered in this Regulatory Report:



Key energy security scheme to be implemented early 

The government has confirmed that its main policy mechanism for ensuring the security of Britain’s electricity supplies will be introduced a year earlier than had been planned.

The capacity market aims to help ensure the lights stay on by offering a payment to reliable sources of capacity, alongside their electricity revenues, to deliver power onto the system when it is needed. This, it is hoped, will also ensure that the government secures the investment that is needed to replace older power stations and provide back-up for more intermittent low-carbon generation sources.

Auctions for capacity market contracts have already been held to secure supplies for winters 2018-19 and 2019-20. But, earlier this year, the government set out plans to hold an auction for winter 2017-18, in light of concerns over tightening electricity margins over the next few years.

While system operator National Grid has been provided with tools to help balance the system, the government believes that the capacity market would have a “less distortive impact” and would therefore be preferable. An auction, into which both power generators and demand-side response providers can bid, will be held early next year.

The government has also outlined plans to provide gas-fired generation projects with a better chance of success in the next “T-4” auction, to be held in December. The development of new gas plants is regarded by the government as a key component of the UK’s low-carbon transition, helping to replace coal plant as they come off the system over the next decade. However, only one new gas plant was successful in the first two capacity market auctions, as the clearing price was not high enough to make new investment viable. 

Business group criticises renewable heat reform plans

The Industrial & Commercial Energy Association (ICOM) has called plans to reform the government’s key policy mechanism for incentivising renewable heat “disappointing”.

The Renewable Heat Incentive (RHI) provides a subsidy, payable for 20 years, to eligible, non-domestic renewable heat generators and producers of biomethane for injection based in Great Britain. This includes, for example, small businesses, hospitals and schools as well as district heating schemes – where, for example, one boiler serves multiple homes.

In a consultation published earlier this year, the government outlined plans to cut RHI support for biomass boilers substantially. But, In its response, issued on 3 May, ICOM said that the technology had been the most popular within the scheme, and warned that reducing the tariff would see a reduction in sales. The organisation also warned that, if biomass boiler sales fell, they would likely be replaced with fossil fuel technologies.

The decision to end support for solar thermal technology was also said to be damaging: it was, ICOM noted, the technology most associated with the renewables sector, and the removal of its tariff would send a message that green energy was not important.

Ross Anderson, director of ICOM, added: “All too often the non-domestic heating sector is the “poor relation” to the domestic sector. If this government truly wants the RHI to encourage the uptake of renewable heating systems within the non-domestic market it needs to create a scheme that is both workable and robust.”

Rules tightened for renewables subsidy scheme

The government has unveiled plans to tighten rules ensuring that projects that apply for a key renewables subsidy mechanism are actually built.

The contracts for difference (CfD) scheme is the government’s new policy for supporting the deployment of large-scale renewables generation. Support is allocated according to competitive auction - leading to lower costs for consumers. There are three CfD auction rounds planned over the next five years.

At present, projects that are awarded a CfD but then fail to deliver on schedule can be excluded from future allocation rounds for a period of 13 months. However, the department is now proposing that this exclusion period should be extended to 24 months. It said that, when the Non Delivery Disincentive was established, it had been anticipated that allocation rounds would occur as frequently as annually, but this had not proved the case.

The consultation, issued on 26 May, also proposed to amend regulations to make clear that, In the case of a CfD for a windfarm extension project, the policy is that the site of the extension only - not the site of the entire windfarm including the extension - would be excluded.

A separate consultation also seeks to explore how regulatory barriers could be removed to allow for the co-location of battery storage technologies at sites that are awarded a CfD. 

Energy legislation clears final hurdle

The government’s new energy legislation gained Royal Assent and became law on 12 May, as opposition parliamentarians in the House of Lords decided not to press further for changes to its provisions related to onshore wind subsidies.

The act contains two key elements: its closes a renewables subsidy scheme – the Renewables Obligation (RO) - to onshore wind, and gives powers to the new regulator for the North Sea oil and gas industry with a view to supporting extraction from the basin.

Late in the passage of the legislation, the government blocked an attempt by Labour Peer Lord Grantchester to broaden the grace period criteria for the closure of the RO to new onshore wind. Labour’s proposals would have meant that four more windfarms in Scotland would qualify for the scheme, at an extra cost to consumers of approximately £7mn.

The passage of the bill was welcomed by trade association RenewableUK. The organisation’s chief executive, Hugh McNeal, said: “The government has said that in the future the UK’s electricity will be generated by gas, nuclear and renewables and not from coal. Onshore wind is now the cheapest of these options. With the pain of the Energy Bill finally behind us, we need to look forward and find sensible ways to take advantage of wind power to ensure consumers’ electricity bills are as low as possible.”

Farmers condemn cuts to biogas support

The National Farmers Union (NFU) has expressed “deep disappointment” over the government’s plans to reduce its support for the Anaerobic Digestion (AD) sector.

The government has proposed that, from January 2017, feed-in tariff (FiT) subsidies for small-scale biogas plants are reduced by 27% and that tariffs for larger plants fall to zero.

The FiT is a government scheme designed to encourage uptake of a range of small-scale renewable and low-carbon electricity generation technologies through a tariff that pays out for each kilowatt-hour of renewable power produced. 

Jonathan Scurlock, NFU chief adviser on renewable energy, said the proposals were more evidence of a government “determined to throttle the life out of the emerging renewable energy market”. He said: “After slashing support for the growing solar and biomass industries, this seems like the unkindest cut of all.”  



Power margins secure last winter: National Grid 

System operator National Grid has confirmed that there was sufficient electricity generation to meet demand in Britain last winter.

The company said that demand had been lower both than was forecast, and that was seen during the previous winter of 2014-15.

Weather-corrected transmission system demand was 52.3GW -1GW less than had been forecast in National Grid’s Winter Outlook Report. This difference was attributed to a number of factors, including increases in local embedded generation. These projects are connected to the distribution network, and are therefore not directly visible to National Grid.

Another factor was customer demand management, which includes businesses taking steps to increase their energy efficiency.

GB was well supplied with gas, from “highly diverse” and flexible sources, over winter 2015-16, the report found. National Grid cautioned that, although this supply diversity benefited GB gas security, it could present new challenges in operating the system.

Innovation projects showing potential, says Ofgem 

Energy regulator Ofgem published a report on 28 April, compiled by analysts EA Technology, which examined the key learning outputs of projects completed under the Low Carbon Networks Fund (LCNF).

The LCNF has provided £500mn to support projects, led by distribution network operators (DNOs), trialling technologies such as electric vehicles and local generation.

DNOs manage the local distribution networks, which take power from the national transmission networks and deliver it to energy users. The report said their projects had proved that innovative technologies like active network management and demand-side response could deliver real benefits to customers. Some had the potential to deliver further benefits, but were held back by external or economic barriers, such as requiring smart meters. 

Energy users concerned by cost of policy reforms

Industry group the Association for Decentralised Energy (ADE) - whose members include major manufacturers British Sugar and Boots UK - have reported growing concerns that an upcoming government review could increase energy costs for businesses by millions of pounds.

Hundreds of industrial manufacturers in the UK generate their own power onsite and use the local electricity networks instead of the national transmission network. These manufacturers do not pay certain network costs as they do not use the transmission network - these avoided costs are referred to as “embedded benefits”.

The government announced in March that it had asked Ofgem to undertake a review of these benefits over fears diesel engines were gaining too many subsidies through the capacity market scheme. But Dr Tim Rotheray, director of the ADE, said: “Asking a local generator to pay for the transmission network is akin to charging drivers for the use of a toll road even when they took alternative routes.”



Cities in the front line for cutting emissions: IEA

Cities must take the lead in the transition to a low-carbon energy sector, a report by the International Energy Agency (IEA) has argued.

In its annual Energy Technologies Perspectives report, published on 1 June, the intergovernmental organisation said that urban areas accounted for about half the global population, but represented almost two-thirds of global energy demand and 70% of carbon emissions from the energy sector. This meant that they needed to play a leading role if climate goals were to be achieved.

The research also highlighted the potential for urban buildings to provide useful space to self-generate the electricity they consumed: by 2050, rooftop solar could technically meet one-third of cities’ electricity demand, the IEA said.

The report further found that urban buildings offered significant demand potential for the roll-out of the most efficient technologies, like energy-efficient windows and appliances.

IEA executive director Fatih Birol said: “Because cities are centres of economic growth and innovation, they are ideal test-beds for new technologies - from more sustainable transport systems to smart grids - that will help lead the transition to a low-carbon energy sector.”

More businesses looking to switch suppliers

A new survey has revealed that business energy users have an increasingly positive view of the process for switching between electricity and gas suppliers.

On 25 May the energy regulator Ofgem issued research, prepared by analyst BMG, on Micro and Small Business Engagement in Energy Markets. The report found that nearly two thirds of businesses (64%) had switched gas or electricity suppliers in the past five years. The proportion of all businesses that had switched supplier in the last 12 months increased marginally - up to 25% in 2015, from 23% a year earlier.

Two thirds of businesses were satisfied with their current energy suppliers’ services overall. Satisfaction was highest for the supplier meeting their customers’ business needs (72% satisfied), but lower for the information provided on available tariffs and options (51% satisfied). However, around two fifths (39%) of businesses said they tended to distrust energy suppliers to be completely fair in their dealings with customers, while just over a quarter (26%) trusted them. A third of businesses said they were satisfied with the competitiveness of energy prices.

Just under half of businesses (48%) said they regarded comparing prices as easy, while nearly four in 10 (39%) felt the opposite way. The majority (61%) also believed that switching supplier was easy.

Approaching half (47%) of all businesses had researched other supplier or tariff options in the last year. While cost savings remain the key factor in firms’ decision to switch, other significant triggers include awareness that a contract was coming to end, and receiving a renewal notice from an existing supplier.

The report also found that there had been a shift away from extending/rolling-over contracts towards negotiating new contracts with existing suppliers this year. The propensity to negotiate a new contract with an existing supplier was particularly noticeable among businesses with higher-than-average energy expenditure. 

Confidence in the business energy efficiency sector hits “all-time low”

Industry confidence in the business energy efficiency sector hit an “all-time low” in the first quarter of 2016, Bloomberg New Energy Finance’s latest Energy Efficiency Trends Survey has revealed.

Published on 3 June, the survey showed a continued downward trend of national orders, as well as a drop in confidence with regard to the government’s management of energy efficiency policy. The market sentiment indicator reached -4 in the survey, the first time in the history of the survey that it has been in negative territory.

The survey also confirmed that high efficiency lighting is still growing in popularity, and in the first quarter of 2016 was included within almost eight out of 10 energy-saving projects. In the second half of last year, solar PV enjoyed a surge in activity, possibly as a result of the upcoming cuts to the feed-in tariff support scheme.

In response to the special question on the upcoming referendum, the vast majority of supplier respondents (79%) answered that it would be in the sector’s best interests for the UK to remain in the EU.

Climate change policies not harming UK’s competitiveness

The government’s planned Fifth Carbon Budget, which would set a greenhouse gas emissions target for 2030, would not harm the competitiveness of the UK’s businesses, a report by the Grantham Research Institute on Climate Change and the Environment has found.

A carbon budget is a quantity of greenhouse gas emissions that can be emitted in total over a specified time. The UK has set a series of these budgets, in five-year periods, to decarbonise the economy in the most cost-effective manner.

Issued on 10 May, the analysis showed businesses were no less competitive globally as a result of existing policies that aimed to reduce emissions; in fact, ambitious and well-designed climate change policies were likely to create opportunities for the majority of British businesses to expand in economies around the world.

The report concluded: “The UK is well-positioned to benefit from a global transition to a more resource-efficient and renewable economy, provided flexible structural policies allow it to utilise its comparative advantages.”

Scottish commercial landlords warned over new energy rules 

Commercial property landlords in Scotland are not ready for the implementation of new energy efficiency regulations, an independent property and construction consultancy has warned.

From 1 September 2016, owners of buildings greater than 1,000sq metres will be required to provide an “action plan” when they sell or rent out their properties. They will also be required to ensure that energy improvement data, including the plan and Energy Performance Certificate (EPC), are submitted to the Scottish EPC register.

Analysis by Tuffin Ferraby Taylor (TFT) has warned that around 70% of commercial property owners are yet to prepare their action plans, detailing measures that will improve the energy performance of the buildings. 

UK businesses hailed as leading electric vehicle adoption

11 UK organisations have been awarded “Go Ultra Low Company” status by a campaign group in recognition of their leadership on the move towards electric motoring.

The organisations include Microsoft UK, the University of Birmingham and the London Fire Brigade. The latter runs a car fleet of 57 vehicles, 100% of which will become electric this year.

Transport minister Andrew Jones said: “It’s great to see a growing number of British fleets going green and I would encourage other businesses to learn from these Go Ultra Low companies and benefit from the huge fuel and tax savings offered by electric vehicles.”


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