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November 2015

By Market Insight Team | Posted November 02, 2015

October 2015 – in brief

Generation

National Grid unveiled its assessment of the security of the UK’s electricity and gas supplies for the winter ahead. It found that electricity margins would be “tight but manageable”, with additional sources of capacity being paid to be available at time of system stress. The gas system was expected to be secure, with a diverse array of supply sources available.

EDF Energy announced the completion of a major deal, with China General Nuclear Power Corporation, that moved the company a step closer to the construction of the Hinkley Point C nuclear power station. The two companies agreed terms on a UK partnership that could also see them developing new nuclear power plants in Suffolk and Essex.

Delivery

A government-commissioned report highlighted the potential for the deployment of demand-side response (DSR) technologies in the UK, but also warned of significant barriers. The study, prepared by Frontier Economics, found that DSR solutions could help to lower wholesale prices and level out peaks in demand, but that their cost-effectiveness remained to be proven.

The energy regulator Ofgem confirmed that it was to introduce competition in the connection of new sites, such as businesses and housing developments, to distribution grids. It expects that competition in the £500mn market will drive down costs to consumers.

Usage

Environmental group the Green Alliance argued that the introduction of a new feed-in tariff for energy efficiency could save the UK £2.5bn by 2030. The finding came from research by the organisation into how demand-side measures could produce savings compared to generation.

The Environment Agency released updated guidance for the new Energy Savings Opportunity Scheme. It suggested that the agency would not generally seek to pursue enforcement measures for non-compliance with the scheme until the new year, if businesses have started the process of attaining compliance.

Also covered in this Regulatory Report:

  • UK will need 54% emissions cut by 2030, report says
  • Supply security top priority for businesses
  • Think tank says framework needed for decarbonising heat
  • Industry group calls for European grid co-operation
  • Businesses lack confidence in energy efficiency policies
  • IEA warns Paris pledges insufficient to tackle climate change
  • Government welcomes progress on electric vehicles
  • Green Investment Bank chair welcomes move to private sector

 

Generation

Energy supplies secure for winter, National Grid confirms
System operator National Grid has confirmed that it expects Britain’s electricity margins to be “tight but manageable” this winter.

The company published its Winter Outlook Report on 15 October. It anticipated that the “de-rated” margin – the gap between available generation and expected demand for the coming winter – would be 5.1%. But this is in large part a consequence of the additional balancing services available to National Grid, which sees the company offering payments to sources of capacity to be available at times of peak demand. While this principally comprises mothballed or back-up generation, 133MW of back-up capacity will be provided by businesses who have signed up to reduce their demand if necessary.

National Grid explained earlier in the year that, without these balancing services, the margin this winter could have fallen as low as 1.2%.

Cordi O’Hara, National Grid’s director of UK market operations, said: “Electricity margins are manageable throughout the winter period and we believe we have the right tools in place to manage the system.” The company said that its balancing services tools had been acquired in a way that offered “value for money” to consumers.

Gas supplies are expected to be comfortable this winter, owing to stable flows from the North Sea and Norway, and increasing capacity to import Liquefied Natural Gas. There is, however, reduced space in gas storage sites compared to last winter.

EDF Energy signs major agreement on new nuclear plant
EDF Energy has signed a Strategic Investment Agreement with the China General Nuclear Power Corporation (CGN) for the construction and operation of the proposed Hinkley Point C nuclear power station in Somerset.

The government believes that the development of new nuclear power plants has a crucial role to play in ensuring both that the UK’s power supplies remain secure and that long-term environmental objectives are met. It is hoping to support the development of a new fleet of UK nuclear power stations during the 2020s.

Under the terms of the Hinkley agreement, signed on 21 October, EDF Energy would hold a 66.5% stake in the project, with GCN holding a 33.5% share. EDF intends to bring in other investors, but the company will maintain its stake at 50% or above.

EDF has already achieved planning consent for the plant, design approval for the EPR reactor that will be used, and a nuclear site licence. In 2013 it also agreed, with the government, a “contract for difference”, which will see the plant subsidised for the power it generates. The plant is expected to begin operating in 2025, should EDF make a Final Investment Decision to go ahead with its construction. EDF and CGN have also agreed terms for a UK partnership for the development of nuclear power stations at Sizewell C in Suffolk and Bradwell B in Essex.

Energy and climate change secretary Amber Rudd said: “The government will support new nuclear power stations as we move to a low-carbon future. Hinkley Point C will kick start this and is expected to be followed by more nuclear power stations, including Sizewell in Suffolk and Bradwell in Essex. This will provide essential financial and energy security for generations to come.”

UK will need 54% emissions cut by 2030, report says
The government’s climate watchdog the Committee on Climate Change (CCC) has said that the UK will need to cut its greenhouse gas (GHG) emissions by more than half (54%) compared to 1990 levels, if it wants to meet long-term EU targets.

In a report published on 13 October, the CCC examined the current international context for its advice to the government, later this year, on the level at which the UK’s Fifth Carbon Budget should be set. This budget will place a limit on the amount of greenhouse gases that can be emitted by the UK between 2028-32.

The 54% estimate took into account the pledge, made by EU member states, to cut the bloc’s overall emissions by at least 40% below 1990 levels by 2030. The UK has supported rules for dividing this reduction between member states, which implies a substantially higher level of effort from richer countries such as the UK, Germany and France.

In a second report, issued on 22 October, the CCC detailed some of the key changes that will be necessary in the energy system over the next 15 years, in order to keep the UK’s low-carbon transition on track. The study suggested that it would be possible, by the early 2020s, for new onshore wind and solar projects to provide power for the system without requiring government subsidies – as long as fossil fuel plants faced the full cost of their emissions. Under the report’s scenarios, offshore wind and nuclear power could be subsidy-free by the late-2020s.

Supply security top priority for businesses
Businesses consider security of supply to be the foremost priority for the energy sector, a survey by the CBI and AECOM has found.

The organisations published their Annual Infrastructure Survey on 29 October. It showed that nearly three quarters (74%) of businesses regarded energy security as crucial, with just over four in 10 (43%) saying the same about affordability and 30% saying it about lowering carbon emissions. The report showed that almost nine in 10 (88%) businesses wanted to see the government simplifying the energy efficiency policy landscape, with 32% of manufacturers regarding simplification as very significant.

Almost all (97%) respondents wanted the government to take action to ensure investment in a diverse and secure energy system. Energy costs also remain high on the business agenda, with 91% of companies expecting the government to play a role in managing these costs. Given that energy costs are expected to continue to rise, the report said this finding “should come as no surprise”.

Think tank says framework needed for decarbonising heat
Parliamentary think tank Carbon Connect has pressed the government to adopt a long-term decarbonisation strategy for the heat sector.

The group published on 14 October a new study, Policy for Heat: Transforming the System. It considered what the government could do to decarbonise the heat sector; options included improvements to building energy efficiency, supporting district heating schemes, decarbonising the gas industry, and devolving responsibility for heat networks to local councils. But the study placed particular emphasis on the need for a cross-party consensus to ensure the establishment of long-term goals for what was a “vital” national interest.

Chaired by Labour MP Jonathan Reynolds and Conservative MP Rebecca Pow, the report recommended that the government extend its existing low-carbon heat support scheme, the Renewable Heat Incentive (RHI), to 2020. But it said that the rules governing the scheme would need to change in order for it to truly foster widespread deployment of these technologies.

Carbon Connect further argued that the government should announce a replacement for the Energy Company Obligation (ECO) household energy efficiency programme before it expires in 2017. This would be necessary to avoid a “policy hiatus” on household energy efficiency, the improvement of which has slowed substantially over the past two years.

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Delivery

Government study backs DSR for businesses
A government commissioned report has highlighted the potential for the future development of Demand-Side Response (DSR) technologies.

Released on 15 October, the report, by Frontier Economics, said that, as reliance on intermittent generation sources like wind increased over the next 20 years, the need for DSR technologies in the UK would grow.

Frontier suggested that industrial and commercial (I&C) sectors had significant potential for the deployment of these solutions across a range of end-uses. In particular, it said that water pumping, industrial refrigeration and – to a lesser extent – hot water could potentially supply hundreds of megawatts of DSR each. Another “highly significant” source could be the dimming of lighting, which has already been demonstrated successfully in the US.

It has also been suggested that there is up to 20GW of I&C back-up generation currently installed within the UK. However, not all of this is available to demand response aggregators – who can enlist end users to participate in schemes to curtail their demand – given the largely fixed costs of acquiring a site for DSR.

Energy regulator plans competition in grid connections
Owners of Britain’s local power grids will see the introduction of new rules that force them to open up competition in the electricity connections market.

In an announcement on 28 October, the energy regulator Ofgem said that the electricity connections market was worth over £500mn/ year, with hundreds of thousands of connections made annually to new housing estates and business premises. Currently the regional electricity distribution networks (DNOs) are the sole providers of a number of the essential services needed to make connections. But Ofgem has now introduced the first ever code of practice for DNOs, which sets out what they must do to improve competition. The DNOs must follow these rules or face the potential for enforcement action by Ofgem.

Maxine Frerk, senior partner for electricity distribution at Ofgem, said: “Our code of practice will ensure that independent companies are treated fairly and consistently across the country. This means housing developers, businesses and other organisations will get real choice in who delivers their connections, leading to quicker completion and higher customer service standards.”

Industry group calls for European grid co-operation
The trade association for the EU’s electricity industry has laid out its vision for the future energy markets, saying that member states must seek increasing opportunities to co-operate.

In a paper published on 8 October, Eurelectric called for a move away from “national mind-sets” and towards regional markets that would deliver a common approach to issues such as the integration of growing levels of renewable energy.

The organisation accepted the need for countries to implement national policies that helped to ensure their security of supply, but it argued that these should be open to cross-border participation.

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Usage

Government urged to back energy efficiency
UK policy-makers are giving too little thought to the benefits of energy efficiency, environmental think tank the Green Alliance has said.

In its Getting More For Less report, published on 20 October, the group claimed that the government could save approximately £2.5bn by 2025 if new power stations had to compete against energy efficiency measures in the capacity market scheme.

The capacity market is a government mechanism, introduced last year, that is designed to bolster the UK’s security of electricity supply. It provides a payment to generators for guaranteeing that their power stations will be able to supply electricity when needed.

The report argues that Demand Side Response (DSR) should be given access to funding via the scheme, saying that this would make it possible to cost-effectively avoid the need for expensive new power plants. The Green Alliance found that a feed-in tariff for “negawatts” of demand reduction could fund energy efficiency measures equivalent to 6.4GW by 2030, saving the UK £2.4bn on new infrastructure.

The report argued that cheaper energy efficiency measures had been neglected by policy-makers for various reasons. A key driver was consumer preference: a high upfront cost was attached to the installation of measures, and there were significant “hassle” costs involved in having them installed.

Amy Mount, lead author of the report, said: “Negawatts are a no-brainer for consumers. Not only are they the cheapest way to reduce carbon emissions, they also reduce the pressure on the electricity system by reducing peaks in demand. These policies would save the UK huge amounts of money, by avoiding the construction of unnecessary power stations. If government wants to reset energy policy for the benefit of consumers this is where they should start.”

Firms given time to comply with energy savings scheme
The Environment Agency has confirmed that it does not expect to immediately take enforcement action against companies who are not compliant with the Energy Savings Opportunity Scheme (ESOS).

ESOS is a mandatory energy assessment programme for all UK organisations that employ more than 250 people or that have an annual turnover of over €50mn. It was implemented by the government to comply with EU regulations and requires businesses to perform energy assessments every four years - identifying their major sources of energy use and cost-effective saving measures.

The government hopes that ESOS will deliver £1.6bn in overall benefits to the UK, mostly in the form of energy efficiency savings to businesses. But recent media reports suggested that only a fraction of eligible businesses were going to make the original 5 December deadline for compliance.

In updated guidance to the scheme, released on 8 October, the Environment Agency said that enforcement action will “not normally” be taken against companies failing to meet the deadline, provided that notification is made by 29 January 2016.

Companies fully compliant with the international industry standard ISO50001 do not need to carry out ESOS assessments, but it may only cover parts of the organisation. Those committing to ISO50001 will not be at risk of enforcement so long as they achieve certification by 30 June 2016.

Businesses lack confidence in energy efficiency policies
Analysts Energy Efficiency Verification Specialists (EEVS) have recorded a sharp fall in confidence in the government’s ability to administer energy efficiency policies.

The company’s latest Energy Efficiency Trends, published on 12 October, examined confidence in the sector during the second quarter of 2015. It found that confidence in the government’s management of energy efficiency policy among those who deliver measures to households and businesses had hit an all-time low – with over 60% of respondents believing it had been ineffective.

The research also showed that high-efficiency lighting continued to outperform other technologies and was incorporated into over six out of 10 energy efficiency projects. Lighting controls (34%) and general building controls (31%) were also popular.

The research showed that public buildings (21%) for the first time overtook offices (15%) as the principal commercial property type to benefit from energy efficiency upgrades, with manufacturing sites (17%) also overtaking offices.

IEA warns Paris pledges insufficient to tackle climate change
The International Energy Agency (IEA) has welcomed the emissions reduction pledges made by countries in advance of the Paris climate summit, but has warned that they will not be enough to prevent dangerous climate change.

In its World Energy Outlook Special Briefing, published on 21 October, the IEA said that over 150 countries had made greenhouse gas reduction (GHG) pledges, covering almost 90% of emission-causing activities.

But according to the analysis, based on current pledges the world is still on a pathway for a 2.7˚c increase in temperature by 2100 - rather than the targeted limit of 2˚c. IEA executive director Fatih Birol said: “The energy industry needs a strong and clear signal from the Paris climate summit. Failing to send this signal will push energy investments in the wrong direction, locking in unsustainable energy infrastructure for decades”.

Government welcomes progress on electric vehicles
The government’s junior transport minister Andrew Jones has hailed the work of businesses in driving the adoption of electric vehicles, and said the next five years will represent a “tipping point” in their uptake.

In a speech at the Society of Motor Manufacturers & Traders, delivered on 22 October, Jones confirmed that nearly 21,000 ultra-low electric vehicles (ULEVs) had been sold in the UK between January and September this year – an increase of 140% against last year.

“Best of all”, Jones said, was that two-thirds of ULEVs in the UK were bought by businesses, adding: “The progress we’ve seen in the ULEV market has been breath-taking. The government has lent its support, and British businesses have responded. So that today, an unprecedented, irreversible shift is taking place in the automotive market. We have arrived at the future of business mobility, and there’s no going back.”

Green Investment Bank chair welcomes move to private sector
The chair of the UK’s Green Investment Bank (GIB) has welcomed government action to move the organisation into the private sector, so as to facilitate an expansion in the scope of its investments.

The GIB was established by the coalition government to finance green projects and mobilise private sector investment. The Treasury confirmed earlier this year that it would seek to privatise the bank.

In remarks made on 15 October, GIB chair Lord Smith of Kelvin said: “GIB has ambitious plans to double the size of our businesses over the next three years and expand into new parts of the UK green economy like energy storage, heat networks and low carbon transport. To do this we need to secure a long-term funding plan based on new investors and the ability to borrow. We can only achieve that if GIB is de-classified as a public sector body, which is the intention of the legislation proposed by the UK Government.”

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