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March 2017

By Market Insight Team | Posted April 04, 2017

March 2017 – in brief

Generation

The UK’s climate watchdog – the Committee on Climate Change (CCC) – has revealed that low-carbon policies will place a significant upward pressure on businesses’ costs in the years ahead. The finding came in an assessment on the impact of green energy policies on business energy bills. It looked at energy costs across the commercial, manufacturing and energy-intensive sectors, finding that the proportion of operating costs from low-carbon policies could more than double across all sectors by 2030 against 2016 levels.

The Spring Budget deferred many of the key decisions for the energy sector, but confirmed that new low-carbon cost controls will be introduced later in the year. The new mechanism, to replace the current spending envelope for renewables, will be announced in the second Budget to be held later this year. Information on how the government will price carbon into the 2020s was also delayed.

Delivery

Businesses have been awarded subsidies to help balance Britain’s power system by turning off their equipment when demand is high. As part of the so-called Transitional Arrangements auction industrial and local businesses across the UK will earn just over £14mn in revenue by turning down or shifting non-critical processes at peak.

A new report has found that paying to keep ageing power stations available to the system over the last three years has cost £180mn, only for that service not to be used. The Energy and Climate Intelligence Unit (ECIU) found the gap between supply and demand had remained comfortable over the past couple of years, in part due to increased adoption and deployment of smarter technology.

Usage

MPs are to investigate the role that electric vehicles (EVs) can play in the low-carbon transition. The business, energy and industrial strategy select committee will examine the different barriers to the development of an electric vehicles market, and how the government can optimise EVs as a part of its industrial strategy.

A new survey has found that suppliers of energy efficiency technologies in the business sector are increasingly sceptical of government action to support the industry. Bloomberg New Energy Finance (BNEF) revealed fewer than 10% of suppliers felt steps being taken by the government were supporting the sector. 

Generation

Low-carbon policies to impact business operating costs

The UK’s climate watchdog – the Committee on Climate Change (CCC) – has said that the government’s low-carbon policies will put a significant upward pressure on businesses’ costs in the years ahead.

The finding came in an assessment of the impact of green policies on business energy bills, released by the CCC on 16 March. It found that energy costs, at present, account for around 0.9% of operating costs across the commercial sector, 2.0% across manufacturing and 3.8% for the more energy-intensive sectors. The costs from low-carbon policies specifically were 0.2% for the commercial sector, 0.4% for manufacturing and 0.7% for more energy-intensive. The CCC’s central projection suggests that, to 2020, these figures could increase to 0.3%, 0.6% and 1.0% respectively. By 2030, the report said that these proportions could more than double to 0.5%, 1.0% and 1.6%.

In order to ensure that low-carbon policies did not undermine the competitiveness of the UK manufacturing sector, the report said the government would need to ensure that its package of compensation and policy exemptions for firms in the sector remained “predictable and reliable”. Measures that would exempt energy intensives from some of the costs of the government’s green levies are currently being progressed through Parliament.

The report also emphasised that much of the pressure placed on bills by low-carbon policies could be offset by investments in energy efficiency technologies. These would help businesses to reduce their demand for energy and therefore lower their overall costs.

New cost controls to be introduced for green levies

The government’s Spring Budget confirmed that new low-carbon cost controls will be introduced later in the year, but mostly deferred key decisions for the energy sector.

The industry had been expecting to learn more about the government’s plans for supporting investment in low-carbon power infrastructure into the 2020s, while there were also rumours about further interventions into the retail energy market following another round of price increases from the big energy firms. But in the Budget statement, delivered on 8 March, chancellor Phillip Hammond confirmed that these policy details would not be revealed until later in the year.

However he did reveal that the Levy Control Framework (LCF), which caps the overall level of consumer-funded subsidies available to green electricity projects in the UK, would be scrapped in favour of a new mechanism to control renewables subsidies. Analysts have repeatedly warned that the government is due to over-spend the current cap, set at £7.6bn in 2012 prices through to 2020-21. More clarity on future low carbon cost controls will be provided in the second Budget to be held later this year.

Details of how the UK will tax carbon into the 2020s were also delayed until later in the year. Currently, these prices are determined by a combination of the EU’s carbon trading scheme – the EU Emissions Trading Scheme (EU ETS) – and the UK’s unilateral carbon price support mechanism.

With the UK to leave the European Union, it is widely expected to leave the EU ETS as well. This means government must clarify how it plans to price carbon into the next decade. At the budget, Hammond said that, starting in 2021-22, it would target a total carbon price and would set the specific tax rate for each year at a later date.

Bumper year for green energy certificates sees shortfall in covering costs

The amount of generation under a government scheme to back large-scale renewables rose 23.6% to 69.1TWh in 2015-16. This was equivalent to 23.4% of the total electricity supplied in the UK, Ofgem E-Serve’s annual Renewables Obligation (RO) report, published on 22 March, revealed.

The RO requires suppliers to source an annually increasing proportion of the electricity they supply from renewables. This is evidenced by presenting Renewable Obligation Certificates (Rocs) to the regulator Ofgem. Suppliers source these certificates from renewable generators accredited under the scheme or, where they cannot find the certificates, they pay into a “buy-out fund”. This fund is used to pay the costs of Ofgem E-Serve, the scheme administrator.

The increase in generation contributed to a 26.5% rise in the number of Rocs issued in 2015-16 to 90.4mn. This was 7.1% over the total UK supplier obligation of 84.4mn Rocs and meant that suppliers met 99.9% of their obligation through Roc submission, the highest since the RO began. There were so little buy-out and late payment that there was insufficient money to meet the costs of the scheme, and E-Serve will discuss how to address this shortfall with stakeholders.

BEIS confirms changes to electricity capacity scheme

BEIS has confirmed the introduction of a raft of reforms to the capacity market, which it says will “improve and simplify” the scheme’s rules and regulations.

The capacity market is designed to ensure sufficient reliable capacity is available by providing payments to encourage investment in new capacity or for existing capacity to remain open.

Among the changes, issued in a consultation response on 22 March, was an amendment to the regulations so that capacity market supplier settlement’s calculations were based on gross instead of net demand.

It said current arrangements meant embedded generators were benefiting from a “double payment” that handed them a competitive advantage and potentially distorted the outcome of capacity market auctions.

 UK is third furthest from hitting EU 2020 renewable energy target

New figures reveal that, of the EU member states, the UK is among the furthest away from its 2020 target for sourcing energy from renewable sources.

The research, published by Eurostat on 14 March, showed that renewables sources accounted for 8.2% of final energy consumption in the UK in 2015. Lower proportions were only recorded in four other countries – Luxembourg, Malta (both 5.0%), the Netherlands (5.8%) and Belgium (7.9%).

The EU’s renewable energy directive has set a binding target of 20% final energy consumption from renewable sources by 2020. To achieve this, EU countries have committed to reaching their own national renewables targets which range from 10%-49%. The target incentivises the decarbonisation of the transport and heat sectors, as well as electricity.

The figures revealed that the UK was 6.8 percentage points (pp) shy of its 15% target for 2020, with only the Netherlands (8.2pp) and France (7.8pp) further away.

11 member states have already met the target; Sweden leads the way with more than half (53.9%) of its energy coming from renewable sources. The share of energy from renewable sources in final energy consumption for the whole of the EU was 16.7% in 2015. 

Delivery

Businesses paid to turn down demand at peak periods

Businesses have been awarded subsidies to help balance Britain’s power system by turning off their equipment when demand is high.

The contracts were awarded as part of the so-called Transitional Arrangements auction, which the government has implemented to help promote the development of new technologies in meeting Britain’s security of supply challenge over the next few years.

At £45/kW/year, the auction price was an increase from £27.50/kW/year that was awarded at last year’s auction. Around 312MW of demand-side response (DSR) capacity was secured for delivery in 2017-18, with 275MW of this unproven.

Industrial and local businesses across the UK will earn just over £14mn in revenue by turning down or shifting non-critical processes. This may include temporarily switching of unnecessary lighting, pumps and motors.

Boosting spare capacity “very expensive and potentially unnecessary”

Paying to keep ageing power stations available to the system over the last three years cost £180mn, only for the service to not be used, a new report has found.

The Energy and Climate Intelligence Unit (ECIU) issued its Overpowered: has the UK paid over the odds for energy security? report on 13 March. It said that, despite rising fears of blackouts in the UK, the gap between supply and demand had remained comfortable over the past couple of years, and that the system operator National Grid had found it increasingly unnecessary to call on back-up power capacity.

Last winter (2016-17) saw a prolonged spell of cold weather, a busy power station maintenance schedule and relatively low availability of imports from France. But, despite these factors, the report said National Grid did not need to call on any contingency measures to keep the electricity system stable. This suggested that spending on insurance policies to ensure energy security had been excessive.

ECIU analyst Jonathan Marshall said: “The clear message from this report is that paying to boost spare capacity in Britain’s electricity system can be very expensive, and potentially unnecessary.”

Peak charging comes into effect for medium business customers

Around 170,000 small to medium business customers have seen significant changes to the way electricity is charged from 1 April.

These businesses will have had advanced metering equipment installed at their premises, which will allow suppliers to read their meters on a half-hourly basis. From 1 April suppliers are obligated to use this half-hourly data to charge their customers. This could mean higher electricity costs during peak periods (late afternoon and early evening in particular) and lower costs at night, although this will depend on the contract the consumer has with its electricity supplier.

Other changes include charges for the agreed or assumed peak demand for a meter from the local network owner, and switching to a peak charging regime over the winter months for other network charges. The changes mean a consumer that avoids electricity usage during peak periods will likely see lower charges than those that do not.

Usage

MPs to investigate electric vehicles market

On 16 March, the business, energy and industrial strategy select committee announced the launch of an inquiry into the role that electric vehicles can play in the low-carbon transition.

The committee will examine the different barriers to the development of an electric vehicles market, alongside how the government can optimise electric vehicles as part of its industrial strategy.

Charging infrastructure and incentives that can increase sales will also be considered, as will the ability of the government’s road transport decarbonisation strategy to respond to potentially disruptive shifts in the market.

Committee chair, Ian Wright said: “If the UK is to meet its decarbonisation goals and move successfully to a prosperous low carbon economy, then a thriving electric vehicles market is vital.”

This followed the announcement of detailed new legislation to be introduced to help boost the electric vehicles market, outlined by Transport Secretary Chris Grayling on 6 March.

Grayling, speaking during the Second Reading of the Vehicle Technology and Aviation Bill, argued that measures included in the bill will create the right environment for an EV market to develop. He said that the government had a “clear goal” that by 2050, almost all cars and vans in the UK should be emission-free, and wanted to accelerate that transition.

Measures in the bill include new powers that will drive the roll-out of EV infrastructure at key locations and enable common technical standards.

The bill’s aims were broadly supported by Labour, said Shadow Minister for Transport Richard Burden. However, Burden stressed that ministers should not be given a blank cheque through the broad powers proscribed.

Energy efficiency suppliers wary of government policies

A new survey has found that suppliers of energy efficiency technologies in the business sector are increasingly sceptical of government action to support the industry.

The quarterly report, issued by Bloomberg New Energy Finance (BNEF), said that by the fourth quarter of 2016 fewer than 10% of suppliers felt steps being taken by the government were supporting in the sector. Confidence in the government’s management of the wider UK economy had also continued to slide.

Despite this, industry confidence continued to increase and the report claims this trend is likely to continue in the forthcoming quarter. The report attributed this to a sustained rise in UK-based orders. It outlined how orders saw growth again during the quarter, with over eight out of 10 suppliers reporting either stable or increasing orders over the past three months.

Consumers in the sector said that spending on energy efficiency projects had remained strong in the quarter even though it dipped slightly, primarily due to a reduction in the number of projects with over £500,000 in value. However this was slightly offset by a rise in the number of smaller value projects (£50,000-£100,000). Consumers also reported strong uptake of energy saving technology during the fourth quarter, with many of the leading technologies outperforming typical (fourth-quarter average) levels.

Industry group calls for long-term energy efficiency strategy

The government should set out “a clear long-term strategy” to improve the energy efficiency of the UK’s buildings, according to The Sustainable Energy Association (SEA) on 14 March,

The industry body, which made the call in its Wrap then Heat report, said a national strategy could modernise the housing stock and create nationwide benefits and employment opportunities. It highlighted the need for new buildings to be built to higher standards that minimise running costs and emissions, and for a major upgrade of existing buildings.  It proposed policies to move to a market “where the running costs of a home are reflected in its value”.

European Parliament and Council reach deal on appliance standards

Negotiators from the European Parliament and European Council have agreed on the introduction of a more stringent scale for measuring the energy efficiency of household appliances.

Under the plans, the new, simplified labelling structure would be introduced by the end of 2019, and future rescaling would be triggered when 30% of products sold on the EU market fell into the A bracket, or 50% fell into A and B. The labels would accompany the products in printed format and their online versions and product information would be searchable and downloadable.

The agreement further said that, in the event of updates that would influence the energy efficiency of a product that had already been purchased, the supplier should inform the customer.

Businesses still failing to comply with energy efficiency scheme

Around 3,000 of the 10,000 organisations that must participate in a government energy efficiency scheme have yet to meet the compliance requirements and are at risk of enforcement action, the Environment Agency has confirmed.

The Energy Savings Opportunity Scheme (ESOS) is a mandatory energy assessment programme for UK organisations that meet the qualification criteria. These include having over 250 employees or an annual turnover of more than €50mn. Businesses must undertake audits of the energy used by their buildings, industrial processes and transport to identify cost-effective energy savings.

Failing to undertake an energy audit ahead of the ESOS compliance deadline could see organisations facing the maximum penalty of up to £50,000, and up to £500 for each working day that it fails to address this for a maximum of 80 working days.

New technologies to transform electricity industry: WEF

The World Economic Forum (WEF) has said that the adoption of certain technologies in OECD (Organisation for Economic Co-operation and Development) countries could create more than $2.4tn of value for society and industry over the next 10 years.

Three trends – electrification, decentralisation, and digitisation – were converging to produce “game-changing disruptions”, said WEF in its The Future of Electricity report, issued on 10 March. This included the increased adoption of technologies such as distributed storage, smart meters and electric vehicles. The paper also noted that this trend in increasingly putting “consumers in the driving seat”.

 It claimed additional value would come from new jobs and the reduction of carbon emissions derived from “increasing the efficiency of the overall system, optimistic capital allocation and creating new services for customers”.

 

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