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May 2016

By Market Insight Team | Posted May 06, 2016

April 2016 – in brief

Generation

National Grid has projected that electricity demand in Britain this summer will be at its lowest level on record, partly due to the rise of decentralised solar power. Gas demand will be slightly higher than last year as higher levels of the resource are now being used in power generation.

The government has announced plans to more than triple Britain’s interconnector capacity. It has adopted the recommendations of its new National Infrastructure Commission on the need for measures to help balance electricity supply and demand.

Delivery

Energy suppliers have been given an extra six months to install advanced meters in business properties. The decision followed industry concerns that there are too few smart meters available.

The Association for Decentralised Energy has announced plans to develop a code of practice for demand-side response aggregators. This aims to give businesses the confidence to engage in the sector.

The Energy Networks Association has proposed new milestones to assess projects wanting to be connected to the electricity grid. This will allow stalled developments to be dropped from the connections queue to prevent other projects from being held up.

Usage

The Carbon Trust has urged businesses to take advantage of the new Energy Savings Opportunity Scheme. It found the programme could save the average company around £360,000 a year.

The National Audit Office has criticised the government’s approach to energy efficiency, and called for a reformed approach to installing energy-saving measures in homes and businesses. 

Covered in this Regulatory Report:
 


Generation

Electricity demand to fall again this summer

Peak electricity demand this summer will be at an historic low, according to National Grid.

The system operator published this year’s Summer Outlook report for electricity and gas on 7 April.  It expected peak demand to reach 35.7GW; down from 37.5GW last year and the lowest level on record.

The report projected minimum demand at 18.1GW, again lower than the 18.4GW last year.

This reduction is largely driven by the increasing levels of embedded generation on the system. This is connected to the grid at the distribution level, whereas National Grid can only account in its report for transmission-level generation.

The company estimated that the amount of embedded onshore wind generation would, going forward, remain stable at a little over 4GW - while the existing 9.3GW of solar power would rise by about 200MW per month.

Based on forward pricing, National Grid expected that the UK would be a net importer of electricity via its interconnectors this summer.

Gas was projected to be the favoured fuel in power generation, significantly outpacing coal. However, the report did note that, for lower-efficiency gas plants, the price differential would be narrow and might easily shift with fuel or carbon prices. Gas demand is therefore expected to be higher than last year at 36.5bn m3 - or 200mn m3 per day.

Gas supply from the North Sea and Norway will remain similar to 2015, but imports from the Netherlands will be limited. This will probably lead to an increase in the level of liquefied natural gas being imported to the UK. 

Government increases interconnector ambitions

The government has said it will support more than tripling the UK’s electricity interconnection to other European countries, following the recommendations of an influential new study.

The National Infrastructure Commission (NIC) released its Smart Power report in March, calling for higher levels of interconnection to help balance supply and demand on Britain’s electricity network.

By allowing the import of electricity, interconnection can increase security of supply and integrate more clean energy into the system. In a response to the NIC’s recommendations, published on 13 April, the government increased its commitment to building new interconnector capacity from 5GW to 9GW, on top of the 4GW already deployed. These new connections will be focused on those countries with flexible flow-carbon generation, such as Norway and Iceland.

Additionally, the government said it would pursue making the country a world leader in electricity storage, helping to optimise the use of renewable electricity. It will tackle regulatory barriers to the new technology, and seek to incentivise its deployment.

The government is currently working with energy regulator Ofgem to pave the way for greater demand flexibility, such as piloting new business models. It will aim to make it easier for small-scale flexible generation like diesel generators to be used to balance the grid, and co-operate with National Grid to raise awareness of the opportunities for large energy users to participate. 

Think tank backs new framework for low-carbon subsidies

A think tank has warned of a “significant” risk of a gap in low-carbon generation in the mid-2020s.

The Green Alliance released its Beyond Subsidy report on 14 March, noting that despite government subsidies, investment in major power infrastructure was faltering. A major issue, it said, was the long construction times on the small range of low-carbon technologies the government has decided to support: nuclear power, offshore wind and tidal lagoons.

There is also uncertainty as to the future course of the Levy Control Framework (LCF) - the government’s budget for low-carbon subsidies. The think tank argued that this had become less necessary, as competitive allocation of support had reduced the risk of cost overruns, and that the LCF constrained the speed of renewables deployment through its funding caps.

To remedy this, the Green Alliance recommended that the LCF focus on the cheapest, easiest-to-deliver projects using subsidy-free contracts, and additional support for energy efficiency. It argued that forward funding visibility would be crucial so developers could invest in the necessary supply chains to bring immature technologies to fruition. 

Capacity mechanisms may distort energy markets, warns EU

The European Commission (EC) has identified “significant shortcomings” in the capacity mechanisms that some countries have devised to ensure their energy security.

The UK’s capacity mechanism allows generators and demand-side response providers to bid for steady streams of payments in return for ensuring that electricity capacity is available to the system when needed.

Last April, the EC began a state aid inquiry into the use of such mechanisms around Europe to see if they delivered on their objectives without distorting competition. Specifically, the EC looked at the capacity mechanisms deployed by 11 countries, including France and Germany, but not the UK.

In a report published on 13 April, the EC said that capacity mechanisms were, in general, poorly targeted and did not offer value for money. It did, however, highlight that allocating capacity payments by competitive auction was much more cost-effective, as is the case in the UK.

The EC said that half of member states had not adequately established the need for their capacity mechanisms prior to implementation, and many had excluded certain technologies. It concluded that an improvement was needed in member states’ approach to making these judgements, and the way in which the mechanisms were designed. 

Low carbon heating increasingly popular with businesses

Businesses are increasingly taking advantage of financial support for low-carbon heat technologies, according to official figures.

Published on 21 April, government data showed that during the first quarter of the year there were 816 applications for support under the Renewable Heat Incentive (RHI) scheme. This was a 10% rise on the preceding quarter and up 51% compared to the third quarter of 2015.

Biogas was particularly popular; there were over 200 applications for support in March alone, despite overall applications for biogas numbering less than 150 at the start of the year. This sharp increase, the government acknowledged, may be due to applicants securing their tariff before a 10% drop came into effect in April.

The popularity of large-scale combined heat and power installations has also spiked, with five applications for them made in the first quarter of this year.

In all, 15,834 RHI applications have been received since the RHI started in late 2011, totalling 2.8GW of capacity. So far, 14,307 installations have been accredited, totalling 2.4GW. These schemes have generated 7,277GWh, 84% of which came from biomass boilers.

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Delivery

Suppliers get more time to install advanced meters

The government has decided to keep in place a rule that allows energy suppliers to count the installation of advanced meters towards their targets for the smart meter roll-out.

Last March, the government consulted on ending the advanced meter exception, but has now explained that it will be extended by six months.

Suppliers are required to offer all smaller non-domestic customers a smart meter by 2020. These meters offer a range of advanced features that will increase the accuracy of billing - as well as a range of intelligent connective features. Advanced meters lack some of these more sophisticated features, but do offer improved accuracy.

The government had earlier suggested that allowing the exception to expire this April would force suppliers to roll-out the benefits of smart meters to customers more quickly. However, a clear majority of respondents to its consultation disagreed; they argued that, as there were too few smart meters available to meet the 2020 target, this would in fact delay the benefits to consumers.

The exception is now set to end on 28 April 2017 for larger suppliers, and 17 August 2017 for smaller ones.

Industry plans code of practice for demand-side response

The Association for Decentralised Energy (ADE) has confirmed it will outline best practice for companies that co-ordinate demand-side measures by businesses.

The ADE announced on 29 April that it will develop a code to set common standards across the sector, giving customers the confidence to participate in demand-side response (DSR).

Demand-side response sees large energy-using organisations increasing or decreasing their demand when directed, in exchange for payments. For example, National Grid’s new Demand Turn-Up service incentivises participants with energy-intensive processes like pumping and heating to shift them to off-peak times. Aggregators co-ordinate the DSR measures of many sites, so that they can offer the grid operator a more substantial package of demand response than would be available from a single operator.

The code will set out how aggregators should treat their customers and help them understand how different services work.

Director Tim Rotheray said: “The proposed code will ensure high standards, provide businesses peace of mind when they come to choosing how they provide demand side response.”

Industry group plans to speed up electricity connections

The Energy Networks Association (ENA) has set out plans for reducing the number of delays to electricity connection projects.

The industry group has opened a consultation on “milestones” that seek to provide grounds for deprioritising connections for projects that have stalled.

Currently, where there is limited capacity on a distribution network, its operator must queue customers who request a connection. But these new proposals would allow the operator to withdraw connection offers to developers if they fail to show progress by meeting the milestones, and reallocate the capacity to other customers whose plans are on track.

The issue of limited connections has become more pressing in recent years as renewables developers seek grid connections for their generation projects. The plans should allow network operators to make quicker, more efficient use of existing electricity network capacity.

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Usage

Companies urged to take advantage of energy savings 

Businesses could save an average of £360,000 a year if they take advantage of a new government energy efficiency scheme, a report by the Carbon Trust has found.

The company published an analysis on 31 March of the work that it had undertaken with businesses on the new Energy Savings Opportunity Scheme (ESOS). It found that, on average, businesses could save 20% off an annual energy spend of £1.8mn by implementing the energy-saving measures identified by ESOS.

The scheme is compulsory for all businesses with a turnover of above €50mn or over 250 staff. They are required to assess their energy use every four years, identify possible improvements, and submit an assessment to the Environment Agency.

The deadline for the first assessment was last December, though the Environment Agency added a grace period during which it said it would not expect to pursue enforcement measures.

The Carbon Trust said that almost every company with which it had worked could do more to improve their energy management. More than 40% of the organisations that achieved compliance under ESOS had estimated their usage, showing a “clear deficiency in the measurement practices that underpin good management of energy”. Furthermore, less than 4% were meeting international best practice through the ISO50001 energy management standard.

Of the roughly 9,000 organisations eligible for ESOS, the Carbon Trust found that a “significant” number were still not compliant - even under the extended grace period. If they wish to avoid enforcement action, their only option will be to achieve certification under ISO 50001.

The most popular recommendations for manufacturing, construction and office-based companies were energy management, lighting, heating and metering improvements. The Carbon Trust was concerned that many firms were still not taking advantage of well-established technologies such as LED lighting.

Energy efficiency programmes fell short: NAO

The government’s latest energy efficiency schemes have been less effective and more expensive than their predecessors, according to the National Audit Office (NAO).

The NAO released a report evaluating the cost-effectiveness of the Green Deal and Energy Company Obligation (ECO) on 14 April. The Green Deal provides loans to homeowners to make improvements with the money paid back via their energy bills, while ECO requires suppliers to carry out energy efficiency improvements to customers’ houses.

The report criticised the government for failing to outline clear success criteria for the Green Deal, meaning that its progress could not properly be assessed. However, it was clear that the scheme had under-performed: by the end of 2015, only 14,000 households had taken out loans.

Together, ECO and the Green Deal proved much less cost-effective than previous energy efficiency policies, although this was partly because they had focused on harder-to-treat homes whereas previous schemes had implemented low-cost improvements.

The government expected ECO to have saved 24mn tons of CO2 by the end of 2015 - less than a third of the savings delivered by preceding schemes - while the Green Deal has saved “negligible” amounts. 

Green Investment Bank sale nears completion

The privatisation of the Green Investment Bank (GIB) has reached an “important milestone” with the passing of new government legislation, the chair of the organisation has said.

The Enterprise Bill - which will soon be signed into law – will clear a path for the bank’s privatisation, plans for which were announced in 2015. Speaking on 20 April, Lord Smith of Kelvin said that the move would help the GIB, which was established by the coalition government during the last Parliament, to raise additional capital to invest in green energy projects.

Some stakeholders have raised concerns that privatisation could lead to the removal of the green objectives enshrined in the bank’s mission statement. In response, the GIB has set up a special shareholder company, which will hold veto powers over attempts to change its objectives.

Motor industry calls for investment in electric vehicles

A trade group has warned the government that it must invest in charging infrastructure and training or the UK will miss out on tens of billions of pounds in benefits from electric vehicles.

In a report presented on 13 April, the Institute of the Motor Industry (IMI) estimated that electric vehicles could add £51bn to the economy each year and create 320,000 jobs. However, realising these benefits will require investment in skills, as only 1,000 technicians in the UK are fully qualified to work on all electric and hybrid vehicles, and 81% of independent garages struggle to recruit highly skilled staff.

CEO Steve Nash said: “It’s vital we take the appropriate steps now if we want to ensure that the UK has the skilled workforce it needs across the whole industry to support and service these vehicles.”

Green Business Fund announced

A new fund has been launched by the Carbon Trust to help small and medium-sized enterprises lower their energy costs.

Announced on 18 April, the Green Business Fund will provide capital grants for energy efficiency overhauls, as well as offering cost-savings assessments, implementation advice and energy training for staff.

Business may apply for their share of a £7mn pot on a first-come, first-served basis, with a maximum grant of £10,000. Eligible companies can apply for a capital contribution to cover up to 15% of an energy efficiency project or equipment replacement cost.

It is expected that the fund will help up to 2,000 companies. 

Pubs concerned by energy tax changes

Breweries and pubs will see their energy costs increase by £44mn overall as a result of recent policy changes, an industry association has warned.

The British Beer & Pubs Association (BBPA) wrote to energy and climate change secretary Amber Rudd on 21 April, highlighting that changes to the Carbon Reduction Commitment (CRC) and Climate Change Levy (CCL) could lead to individual pubs paying £900/ year more for their energy.

The CRC, which is a mandatory carbon reporting and pricing scheme for large organisations, is being abolished as it is thought to provide too great an administrative burden on businesses. The CCL - a tax paid on the electricity and gas consumed by industrial, commercial, agricultural and public services firms - is being steadily increased from 2019 to make up for the loss in revenue to the Treasury.

The BBPA called for the government to provide the industry with greater visibility of upcoming changes to CCL rates. CEO Brigid Simmonds said: “There are many changes coming down the tracks. It is important that both large and small businesses are given clarity and a fair deal.”

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