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March 2016

By Market Insight Team | Posted March 10, 2016

February 2016 – in brief

Generation
The government announces a number of important changes to its policy scheme for improving Britain’s energy security. The capacity market will be reformed so that it can help to incentivise the development of new gas plants in Britain.

A new survey finds that uptake of the non-domestic Renewable Heat Incentive scheme has been strongest within the leisure and commercial sector. Nearly nine in 10 (87%) applications to the scheme are to support the deployment of small biomass boilers.

Delivery
Plans for Britain to build electricity transmission interconnectors to other countries may be too expensive to be worthwhile, analysts at Aurora have warned. A report by the firm said that the drawbacks to developing more interconnection were receiving inadequate attention.

A new report finds that more than eight in 10 smart meter owners have taken steps towards reducing their energy usage, with over half saying the technology has helped them save money.
Industry association Scottish Renewables calls on the next Scottish government to set long-term goals for the development of green technologies. 

Usage
The European Commission unveils a new energy security package, which includes measures intended to ensure the bloc’s gas supplies.

Estate agents Cushman & Wakefield warn that a fifth of commercial properties in England and Wales could be barred from letting as they fail to meet new energy efficiency standards. Under new legislation, it will be unlawful to let out commercial properties below an E rating from 2018.

Covered in this Regulatory Report:

Generation

Government acts to strengthen energy security
The government has announced a number of important changes to its policy mechanism for improving Britain’s energy security. The proposed reforms to the capacity market scheme were set out in a consultation published on 1 March.

The capacity market seeks to ensure the security of Britain’s electricity supplies by providing a payment for reliable sources of capacity to ensure they can deliver power onto the system when it is needed.

But this offer of revenues has not been effective at promoting the construction of new gas plants, as the government had hoped. The development of these plants is regarded as an essential component of the UK’s low-carbon transition, helping to replace the coal capacity that will close over the next few years.

To help address this, the government announced that it would increase the amount of capacity that it would seek to procure in the next auction, due to be held in December. This will raise the price offered to successful projects, in turn helping to make new gas developments viable.

To improve Britain’s energy security in the short term, a further auction is likely to be held in January 2017, for the delivery of capacity in the following winter. Previously, the delivery of capacity supported by the mechanism was due to begin in winter 2018-19.

The government has also proposed “a robust system of checks” to ensure plants meet their commitments, and possibly harsher penalties for those who back out of contracts. Currently, those developers that fail to fulfil their contracts are fined £25,000/MW.

Energy and climate change secretary Amber Rudd said: “Ensuring that our families and businesses have secure energy supplies they can rely on now and in the future is not negotiable and I’ll take no risks with this.”

Biomass boilers most popular renewable heat technology
The government has unveiled new research on business attitudes towards a policy scheme that supports the deployment of renewable heat technologies in businesses.

Published on 14 February, the survey found that uptake of the Renewable Heat Incentive (RHI) had been strongest within the leisure and commercial sector, which represented more than half of applications. The agricultural sector contributed another third of applications, but the industrial and public sectors showed much less interest. Over eight in 10 (82%) of all applicants were from small businesses with 10 employees or fewer.

In almost three quarters (72%) of cases, installations were refits into existing buildings, with the most popular measure being small-scale (less than 200kW) biomass boilers. Medium-sized biomass systems were also popular, along with solar thermal and ground-sourced heat pumps.

The application process is becoming increasingly user-friendly, and satisfaction with the scheme remains high. Nearly nine in 10 (87%) of applicants were satisfied with the operation of their system, though fewer were happy with the cost of operating it. The government said this was likely driven by the increasing use of more-expensive wood pellets in the biomass systems. The most common reason given for installing a renewable heating system was the financial savings that they offered.

Government urged to ease burden of climate policies
The Confederation of British Industries (CBI) has used its Budget submission to urge the government to protect businesses from higher energy costs that could undermine their competitiveness.

Issued on 22 February, the CBI’s submission called for a regime of “globally competitive tax and regulation” for businesses to maintain their competitiveness on the international stage. This would require continuing the present freeze on carbon price support rates - the UK’s unilateral carbon tax - for at least one additional year. The CBI said that doing so would strike a balance between encouraging low-carbon investment and not disadvantaging UK companies relative to their competitors abroad.

In addition, the CBI recommended that the Carbon Reduction Commitment (CRC) and the Climate Change Levy (CCL) ought to be merged in order to simplify administration and the costs for businesses to comply. The CRC is an emissions reporting scheme for large public and private sector organisations, covering those emissions not already covered by formal national or international arrangements. The CLC is a tax on electricity, gas and solid fossil fuels that is supplied to business customers.

The government was also advised to outline a longer-term view on the trajectory of energy policy over the coming years. This would include providing a view on the level of subsidies that would be available to support low-carbon investment in the period beyond the end of the decade.

Future energy system to be more customer-focused, says industry
The future energy system will be more responsive to customer needs and increasingly decentralised, a major survey of industry leaders has found.

On 23 February trade association Energy UK published a report on the future of the system, based on interviews with stakeholders across the sector. Respondents were unanimous in believing that smart meters and smart grids would, in the future, provide customers with better control over their energy use. In addition, the trend away from centralised large-scale power plants would continue, with self-generation, local heating and distributed renewables sites becoming more important.

Stakeholders agreed that energy efficiency would rise in prominence; the report called for the government to set out a “long-term holistic policy framework” that prompted customer demand for the installation of energy-saving measures. However, the industry was less confident about the pace of electrification in the transport and heat sectors, which is regarded as an important step towards decarbonisation.Stakeholders largely believed that the previous coalition government’s Electricity Market Reform (EMR) programme had laid out the appropriate policy mechanisms to attract investment, but felt that future policy changes needed to be more transparently developed.

Stakeholders largely believed that the previous coalition government’s Electricity Market Reform (EMR) programme had laid out the appropriate policy mechanisms to attract investment, but felt that future policy changes needed to be more transparently developed.

European carbon price to rise slowly from current lows
Analyst Thomson Reuters has said that the European carbon price will be slow to rise, given the current lack of confidence in the system.

The EU Emissions Trading Scheme (EU ETS) operates under a “cap and trade” principle. A limit is set on the greenhouse gases that can be emitted within the scheme, and this cap is reduced over time so that emissions fall. Within the cap, companies trade emissions allowances with one another as needed.

Published on 1 March, Thomson Reuters suggested that EU ETS prices would recover slowly, having fallen by 45% in the first two months of the year. The price is likely to hit €10/ton in 2020, and €26/ton in 2030 (using real terms 2015 prices). In the shorter term, the price will likely average €6.6/ton through this year. This is 14% lower than in 2014, but still appreciably above the current level of around €5/ton.

Senior analyst Emil Dimantchev explained that efforts by the European Commission to reduce the surplus of permits in the EU ETS would slowly result in increasing prices. However, he warned that “until there is a balance between supply and demand of carbon permits, the EU carbon price remains very vulnerable to sentiment swings like the one that fuelled the price crash of early 2016”.

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Delivery

Analyst warns cost of new interconnectors may outweigh benefits
Plans for Britain to build electricity transmission interconnectors to other countries may be too expensive to be worthwhile, Aurora has warned.

On 8 February the analyst published its Dash for Interconnection report, which examined the costs and benefits of the EU-wide policy of increasing interconnection.

It said that, at present, the drawbacks to developing more interconnection were receiving inadequate attention, and that it was uncertain that consumers would see financial benefits from further projects.

The report acknowledged that increased interconnection could make an important contribution towards Britain’s energy security. However, “excessive” levels would lead to substantial costs to consumers, given the levies on bills that would be required to fund them. Additionally, it warned that interconnectors would allow cheaper European electricity to undercut generation in Britain, in which case they did not provide security - just a different type of “insurance”.

Smart meter owners taking action to save energy, survey shows
A survey has found that four out of five smart meter owners have taken at least one measure to reduce how much energy they use.

The survey, by Smart Energy GB, found more than half (52%) of users believed the new meters were helping them to save money, while around eight in 10 (79%) said they would recommend the technology to others. A strong majority (85%) of smart meters users said that their awareness of their energy use had increased. In addition, they were more confident in the accuracy of their bills and had a greater understanding of them.

Energy minister Lord Bourne said: “This is just one reason why smart meters play an important role in our energy strategy – taking just one step to reduce your energy footprint will help us to reduce emissions, move to a low carbon future and keep bills down”.

Scottish renewables industry seeks policy clarity
Industry association Scottish Renewables has called upon the next government at Holyrood to set renewables targets out to 2030.

Arguing that the need for a low-carbon transition had never been clearer, a “manifesto” by the group said that Scotland had to look beyond its 2020 renewables targets and set fresh ones for the following decade. It recommended that the country should aim to have half of all its energy sourced from renewables by 2030.

The first step towards delivering on these goals would, the manifesto said, come through leading the international renewables industry by example. Comprehensive reviews were necessary to ensure that the use of renewable resources, both onshore and offshore, was being maximised.

Secondly, the competitiveness of the Scottish industry could be increased through co-operation with the UK government. The Scottish government was advised to press policy-makers at Westminster to ensure subsidy schemes remained accessible to key renewable technologies.

Finally, the manifesto called on the Scottish government to bring forwards an Energy Innovation Strategy to raise Scotland’s profile as an international hub for renewables technology. This would focus on setting objectives for energy storage and creating a business case for investment in it.

Chief executive Niall Stuart said: “No one should be under any illusion: the challenges ahead are great, and while transport, electricity and heat all have contributions to make, no sector on its own can deliver the overall changes we need to ensure the continued growth of renewable energy in Scotland.”

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Usage

New EU rules aim to secure gas supplies
The European Commission (EC) has presented a new energy security package geared towards supporting the integration of the bloc’s market.

The package is built around four policies:  new regulations intended to ensure the security of gas supplies, increased EU oversight of intergovernmental energy agreements, and strategies on gas storage and heating and cooling.

The new gas regulations address the possibility of supply crises, and in particular outline a new “solidarity principle”. This is a last-resort measure, whereby gas would potentially be diverted from one member state to households and essential services in neighbouring countries that are experiencing a supply crisis. This proposal has proved controversial, and is being opposed by the UK government.

Moreover, in order to ensure that energy agreements signed by member states comply with EU law, the European Commission intends to perform compatibility checks to make sure that they do not breach competition rules.

The new gas strategy covers both the storage and Liquefied Natural Gas (LNG) sectors. Europe is a heavy importer of gas, and the Commission wants all countries to have access to LNG to ensure that they have a backup supply. This will require the building of a significant level of infrastructure to allow gas to be transported, while projects that can help prevent countries from being dependent on a single source of supply will be identified.

Finally, the heating and cooling strategy set out measures to ease barriers to decarbonisation. This will include making renovating buildings easier, sharing costs between tenants and landlords, using district heating schemes, and incentivising the use of renewables.

Commercial property owners risking energy efficiency fines 
Commercial estate agents Cushman & Wakefield warned on 17 February that nearly a fifth (20%) of business properties in England and Wales could be barred from letting, as they risk not meeting energy efficiency standards.

Under the new Energy Act, it will, from April 2018, be unlawful to let out a commercial property below an Energy Performance Certificate rating of E. Any building below this standard will be at risk of a substantial drop in value if action to improve its energy efficiency is not taken.

The research found that around 20% of all commercial buildings fell below this standard, and a similar percentage were near the cut-off point with an E rating.

Cushman & Wakefield said the new law represented a “significant tightening” of energy efficiency legislation. Currently, all properties need an EPC when being sold or let, but there is no legal obligation for landlords to carry out improvements.

Failure to comply with the new law may lead to penalties of up to £150,000.

Philip Webb, head of project management, said: “Owners should also bear in mind that occupiers will increasingly favour higher EPC-rated buildings which will have lower running costs, and help companies prove they have a strong sustainability track record.”

Green building growth to double, report suggests
The rate of green buildings being constructed across the world will have doubled by 2018, according to the World Green Building Council (WGBC).

On 16 February the WGBC reported new research showing that the number of companies with more than 60% of their construction projects certified as green will increase to 37% within the next three years. This will primarily be driven by companies within developing green building markets, such as Brazil, China, and India.

CEO Terri Willis said: “Green building is playing
a critical role in the development
of many emerging economies, particularly as their populations grow and create a pressing need for a built environment that is both sustainable and ensures a high quality of life.”

Welsh government launches energy efficiency strategy 
The Welsh government has announced a new energy efficiency strategy that it says will drive economic growth while also tackling fuel poverty.

Welsh natural resources minister Carl Sergeant launched the strategy on 23 February, saying it would allow Wales to take a lead on energy efficiency technologies. This will be achieved through more active promotion of the benefits of energy efficiency among people and organisations, building the supply chain to deliver improvements, and ensuring the workforce has the necessary skills to grow the sector. In addition, the Welsh government will support innovation in energy efficiency products, and establish clear funding mechanisms that will provide a framework for investors.

The news came alongside the announcement of £9mn funding for LED lighting and other energy efficiency measures across local councils in Wales.

Green Investment Bank pledges to continue low-carbon focus
The UK’s Green Investment Bank (GIB) has created a “special share” that will seek to ensure the GIB retains its focus on green projects when privatised.

The government is privatising the GIB so that it can access capital more easily, but concerns have been raised that this might see the bank shift its focus away from green projects. In a statement issued on 2 February, the GIB said that the new share would be controlled by an independent company, which would have the final say on attempts to change its “green mission”.

Chair of the GIB Lord Smith said: “I have always been confident that any new investor in GIB will be strongly committed to our green mission – our commitment to, and expertise in, green investment is the very reason they would be investing in us.”

Scottish councils roll out energy-saving streetlights
Local authorities in Scotland will spend £56mn on LED street lighting over the next 12 months, the Scottish Futures Trust has announced.

On 15 February the organisation estimated that nearly a third of all Scotland’s street lights would use energy-efficient LEDs by this time next year. These use half as much electricity, and their installation at South Lanarkshire Council has already saved £550,000. By 2021, Scottish councils are estimated to have spent £337mn on LEDs, achieving savings of £1.2bn and 2.6mn tons of CO2 over 20 years.

Associate director of the Trust Lindsay McGregor said: “With support from Scottish government and Zero Waste Scotland, £82mn has already invested over the last three years and all Scotland’s councils are at various stages of installing energy efficient lights. Our job is to help those who are in the very early stages to prepare robust business cases and secure funding for new LEDs to then reap the financial and environmental rewards once installed.”

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