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May 2015

By Market Insight Team | Posted May 08, 2015

April 2015 - in brief

Generation
As the General Election campaign continued, the political parties used their manifestos to detail a diverse range of proposals for the energy sector. The Conservatives said they would continue to focus on promoting competition in the market, while Labour pledged interventions to cut prices and promote transparency.

National Grid released its outlook for the security of the UK’s energy supplies this summer, concluding that they would be adequate to meet demand. However, the system operator also warned of the increasing challenges that the system would confront over the years ahead, and said that these could make further interventions a necessity.

Delivery
The energy regulator Ofgem rejected a proposal to delay the mandated implementation of a half-hourly settlement process for large, non-domestic energy users. Ofgem is concerned that a delay to the existing schedule would diminish the incentive for suppliers to move their customers towards half-hourly settlement as soon as possible.

Business group the Institute of Directors (IoD) released a report warning that the government’s smart meter programme could become an IT “disaster”. The organisation called for the roll-out to be either abolished or heavily reformed, with the meters instead delivered on a voluntary basis to those houses with the highest energy consumption. 

Usage
Research commissioned by Edie revealed a growing awareness among businesses of energy demand and management, as well as a greater willingness to manage energy use proactively. The report also highlighted a divide in strategies between private and public sector respondents.

EDF Energy won a £1bn/ year contract to supply electricity to central and local government properties such as hospitals and schools. The four-year contract was secured following a competitive tender process.

Also covered in this Regulatory Report:

Generation
Parties make energy pledges for next Parliament
National Grid says supplies adequate for the summer
Green Investment Bank reaches milestone on wind fund
Onshore wind to deliver cheapest electricity
No delay to half-hourly settlement for large energy users

Delivery
No delay to half-hourly settlement for large energy users
Business group urges reform of smart meter programme

Usage
Businesses thinking more about energy management
EDF Energy wins government supply contract
Electric vehicles see surge in sales
Streamline energy efficiency legislation, say green builders
EU launches action over efficiency standards breach


Generation

Parties make energy pledges for next Parliament
The major political parties have set out their priority issues for the energy sector in the next Parliament, through the publication of their General Election manifestos.

The UK will need to build a significant amount of generation capacity over the next two decades, with fossil fuel power stations coming offline and challenging renewables and decarbonisation targets to be achieved. The parties offered a variety of perspectives on how these challenges could be met, while keeping bills as low as possible for consumers.

The Conservatives’ manifesto, published on 14 April, affirms the party’s support for renewables, but also commits to scrapping subsidies for new onshore wind projects. The party says the technology has failed to win public support and that enough of it is already in the planning pipeline for the UK’s 2020 targets to be met. The Conservatives affirmed their support for the development of the UK’s shale gas industry and for the delivery of new nuclear power projects in the UK.

The manifesto also committed the party to implementing the recommendations of the Competition and Market Authority’s (CMA) ongoing inquiry into the energy markets.
Published on 13 April, Labour’s manifesto said that the party would implement a 20-month energy price freeze, and would give the energy regulator Ofgem the power to force suppliers to cut their prices from this winter. This is intended to combat a lack of competition and transparency in the market, which Labour argues has “allowed the large energy companies to get away with increasing bills when wholesale prices rise, but not cutting them when they fall”.

Labour also unveiled plans to support small businesses through the ending of “unfair contracts” and automatic roll-overs onto more expensive tariffs. At the same time, the party will set about implementing long-term structural reforms, forcing the separation of the generation and retail arms of the Big Six, while companies will also be required to buy and sell all their power through an open exchange or “pool”.

Ofgem would be abolished, with Labour’s reforms enforced by a “tough” new regulator empowered to remove suppliers’ licences “if they repeatedly harm the interests of consumers”.
The Liberal Democrats confirmed they would set decarbonisation targets as part of their so-called “Five Green Laws” that would aim to safeguard the UK’s environment. The party would set an indicative target of 60% of electricity being generated from renewable sources by 2030 in order to decarbonise the power sector, and would use emissions performance standards in order to phase-out unabated coal generation by 2025.

The Scottish National Party said that it would aim to reform the UK’s green subsidy mechanisms so that they were more favourable to the offshore wind sector and to renewables projects in Scotland. The party also called for a review of the transmission charging regime, which it said was jeopardising the future of the Longannet coal-fired power station.

UKIP said that it would seek to rejuvenate the UK coal industry and would move away from the “green” agenda that the UK has pursued in recent years. The party would abolish Climate Change Act 2008 and would end subsidies for onshore wind and solar plants.

By contrast, the Greens said they would invest £35bn in renewables with an aim of delivering 42GW of offshore wind and 24GW of solar PV by the end of the decade. The party also said it would seek to break up the Big Six by separating their generation and supply arms.

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National Grid says supplies adequate for the summer
The system operator National Grid has said that the UK’s electricity and gas supplies will be “adequate” in the summer ahead, but warned of the increasing complexity facing the system.

Released on 13 April, the company’s 2015 Summer Outlook report said that overall the electricity network was in “good shape” to meet operational challenges, and that demand for gas could be met by a range of sources. North Sea supplies are expected to be at similar levels to 2014, but LNG supplies are far harder to predict given the variable demand in East Asia.

Peak weather corrected summer demand for the high summer period was the lowest ever projected, at 37.5GW. This reflects the increase in embedded solar photovoltaic installations, and the fact that the peaks in generation capacity from these installations coincide with periods of peak demand. Embedded solar PV units are connected directly to the distribution system, and their capacity has nearly doubled from 2.4GW in February 2014 to 4.4GW a year later.

But National Grid also warned that the system was facing increasing operability challenges. While supply diversity in the UK helps to support system security throughout the year, uncertainty over precisely which sources will be utilised on a given day leads to increased unpredictability. The issue is further exacerbated by the growing level of renewables on the system. This makes all aspects of system operability more challenging, and requires greater network flexibility during the summer period. National Grid said that, in the future, addressing this challenge was likely to require higher levels of intervention from the system operator.

Forward prices suggested that coal would remain the favoured fuel for generation, even after the increase in the UK’s carbon price support rates on 1 April. However, the report also noted that the effective price for power from gas and coal was “very marginal”, and that only a small shift in prices could spark increased competition between the two.

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Green Investment Bank reaches milestone on wind fund
The UK Green Investment Bank (GIB) has reached “first close” on commitments of £463mn for its planned £1bn fund to invest in operating offshore wind in the UK.

The new fund is the first of its kind to be dedicated to offshore wind. The initial investors are a group of pension funds and a major sovereign wealth fund, while a further £200mn has been directly provided by the UK GIB. The fund has an expected lifespan of 25 years.

Two projects have already been transferred into the fund: Rhyl Flats, a 90 MW, 25-turbine windfarm operated by RWE Innogy UK; and Sheringham Shoal, a 317MW, 88-turbine project operated by Statkraft off the coast of Norfolk.

Shaun Kingsbury, chief executive of the UK GIB, said: “Attracting additional capital and creating a liquid market for operating assets is an important step in reducing the cost of offshore wind and supporting the continued growth of the sector.”

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Onshore wind to deliver cheapest electricity
Continued progress on cost reduction could see onshore wind become the lowest-cost new generation technology in the UK by 2020, according to a report.

Published on 2 April, the study was published by the Onshore Wind Cost Reduction Taskforce, which has been established by industry body RenewableUK. In order to achieve the target, onshore wind would need to compete with new gas-fired power station generation, which has a predicted cost of £65/MWh-£75/MWh in 2020. The report said that, to realise this ambition, industry would need to drive down the cost of connecting to the grid by exploiting technological innovation, and should seek to increase planning approval rates through engagement with the government on the consumer benefits of an effective planning system.

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Delivery

No delay to half-hourly settlement for large energy users
The energy regulator Ofgem has rejected a request to delay its plans to mandate the use of real half-hourly usage data to settle bills for large energy users.

The P272 code modification would represent a move away from the current arrangements, in which bills for these users are calculated using one of a number of customer “profiles” that correspond to average usage. The modification should ultimately mean that customers’ invoices will better reflect their energy usage.

The change is currently due to be implemented in April 2016. However, the BSC Panel—the industry body that scrutinises such changes— requested that this be delayed by a year. This, in part, reflected concerns that Ofgem’s planned implementation date would result in unnecessary inconvenience for customers who might require mid-contract changes. But Ofgem said it was concerned that the delay would reduce the incentive for suppliers to begin moving large energy users to half-hourly settlement as soon as possible.

The regulator said that it remained open to consideration of alternative solutions that could help address the risks outlined, and it invited proposals from the industry.

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Business group urges reform of smart meter programme
The government’s planned roll-out of smart meters to homes and businesses across the UK should be “halted, altered or scrapped”, according to the Institute of Directors (IoD).

Smart meters provide consumers with real time information on their energy usage. The technology is expected to bring substantial benefits to energy users, allowing them more effectively to manage their consumption, and in turn both supporting environmental objectives and helping to lower energy bills. The government plans to install smart meters in all homes and small businesses by the end of the decade.

However, in a report published on 30 March, the IoD warned that, in its current form, the project could be the next government IT “disaster”.

The group accused the UK government of implementing a roll-out that exceeded the requirements of EU legislation, and said that the Department for Energy and Climate Change’s cost-benefit analysis of the programme was “so heavily redacted as to be almost unreadable”. The group also expressed concern that the pace of modern technological innovation could well leave the current generation of smart meters obsolete by the time the roll-out is complete, meaning yet more costs as reinstallation becomes necessary.

The IoD concluded that the risks of the project were “staggering”; it recommended that the government move towards either abolishing the programme entirely or implementing significant reforms. Among its recommendations, the report suggested that the requirement for an in-home display should be removed, and that the roll-out should be limited to only those homes that have a high energy usage.

Dan Lewis, senior infrastructure advisor at the IoD, said: “Without a change of direction, whoever wins the General Election is at risk of overseeing a spectacular failure in the next Parliament. They would be well-advised to consider a fresh start.”

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Usage

Businesses thinking more about energy management
Research commissioned by Edie has found a growing level of engagement from businesses in measures that can help them to support their energy management.

Published on 9 April, the survey found that behaviour change and technology upgrades remained the principal mechanisms through which organisations were seeking to improve their energy efficiency. On-site renewables remained the least prioritised measure, with the complexity of installation remaining a major barrier to deployment.

The report also highlighted a shift in emphasis from cost reduction to consumption reduction, which it suggested could be driven by the recent falls in oil and gas prices.

Resourcing was said to be the most significant barrier to implementing energy efficiency improvements, with over six in 10 (62%) respondents to the survey suggesting that it was problematic. Also highlighted were the difficulties in engaging employees, choosing the appropriate technologies and verifying the savings made.

Just over a third (34%) of respondents in public sector organisations considered institutional inertia as a barrier to greater energy efficiency, compared with two in 10 (20%) respondents working for private sector organisations.

The report said that private companies were more likely to be making changes to lighting or seeking to drive efficiency through behavioural change. Public sector respondents were more likely to be evaluating “plug-and-play” solutions that could be simply installed by a contractor and that called for little in the way of change in employee behaviour. These solutions include voltage optimisation and insulation.

The study also demonstrated growing awareness among businesses of the government’s Energy Savings Opportunity Scheme, with more than eight in 10 (82%) saying they had heard of it.
Sarah Beacock, skills and capability director at the Energy Institute, said: “The increasing sophistication of techniques used by energy managers responding to this survey can also be seen through their organisations' current focus of activity. In particular, by making more effective use of data and changing and developing their processes they can effectively build on the savings already seen through replacing technology and leading behavioural change”.

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EDF Energy wins government supply contract
The Crown Commercial Service has re-awarded EDF Energy the £1bn/ year contract to supply electricity to thousands of public buildings and sites across central and local government. The sites include schools, the NHS, and the Highways Agency.

Announced on 27 March, the contract will run for four years, and is equivalent to the provision of 9.6TWh of electricity. As part of the deal, organisations will be provided with expert advice on energy efficiency in order to help them reduce their consumption.

Vincent de Rivaz, CEO of EDF Energy, said: “We are proud to again be awarded the contract to supply the public services that millions of people depend on every day. We are also committed to tackling climate change and helping our customers reduce their energy consumption. That is why we will offer our expertise to support the government’s drive for increased energy efficiency.”

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Electric vehicles see surge in sales
New cars sold in 2014 emitted an average of 2.6% less CO2 than in 2013, in part due to rising levels of electric car ownership, statistics from the European Environment Agency have shown.

Released on 15 April, the figures showed approximately 38,000 electric vehicles being registered in 2014, up by 57% compared to 2013. 6,700 of these were sold in the UK. But this meant that, of the 12.5mn new cars registered in 2014, electric vehicles continued to represent a “very small” proportion.

Average emissions levels in 2014 were below the targeted 130gCO2/km in 17 of the 28 EU member states.

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Streamline energy efficiency legislation, say green builders
The chief executive of the UK Green Building Council (UK GBC) has called for the government to provide more clarity on energy efficiency regulations for buildings.

In an interview with the Business Green website on 20 April, Julie Hirigoyen said that commercial buildings lacked a trajectory towards the government’s “zero-carbon” target, which is currently being pursued for UK homes.

Hirigoyen continued that, with the government’s forthcoming review of the Carbon Reduction Commitment (CRC) and the Energy Saving Opportunity Scheme (ESOS) in 2016, "we would hope to see some rationalisation and synergy where the requirements of the policies overlap." She said that, for smaller non domestic organisations, currently energy efficiency regulations can be a “burden”, but that they were nevertheless “helping to drive” industry acceptance of the case for sustainable buildings.

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UK emissions continue to fall
Statistics released by the government have shown a continuing decrease in the UK’s greenhouse gas emissions.

The figures, released on 14 April, suggested a reduction of 47.9MtCO2e in the fourth quarter of 2014, compared to the same period in 2013. When measured on a temperature-adjusted basis, total greenhouse gas emissions for 2014 have been provisionally estimated at 538.6MtCO2e - a decrease of 23.6MtCO2e (4.2%) compared to 2013.

The UK’s emissions have been on a consistently downward trend over the past few years, and on a temperature adjusted basis dropped by 16% in the year to the fourth quarter of 2014, compared to the year to the first quarter of 2009. The government says the fall has been driven by the declining use of coal in power generation.

Emissions in the energy supply sector have decreased by around 25% since the first quarter of 2009.

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EU launches action over efficiency standards breach
The European Commission has begun action against 27 EU member states over failures to meet the standards of the Energy Efficiency Directive. The directive is a key instrument in delivering the EU’s target of a 20% cut in primary energy consumption by the end of the decade. The transposition of the directive into national law is intended to ensure coherence in member states' policies towards this goal.

Announced on 26 March, the Commission’s action is an infringement procedure for the states’ failure to notify the Commission of the national measures through which they will transpose the directive. The deadline was set for 5 June 2014, but every state other than Malta has failed to comply.

The Commission continues to monitor transposition and reporting progress and said it would address any shortcomings in the coming cycles.

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