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November 2017

By Market Insight Team | Posted December 04, 2017

Generation

The government’s Budget revealed there will be no new low-carbon levies until the weight of current costs has fallen, which it forecast would occur in 2025. Effectively, this rules out new low-carbon spending for the moment and has disappointed the renewables industry. In contrast, the business community has welcomed greater clarity on the UK’s carbon price, which will remain at the same level, and recognition that businesses are facing cost pressures from the UK’s electricity prices.

The Industrial Strategy, published on 27 November, placed clean growth as one of its priorities. The government said it will maximise the advantages for UK industry from the global shift to clean growth. While much of the document reiterated previously announced measures, it did say the exemption from renewables costs for energy intensive industries could be extended.

Delivery

The Energy Networks Association has outlined how innovators working alongside network companies could bring near to £1.7bn of benefits to the UK energy sector over the next ten years. It released a consultation on its Electricity Network Innovation Strategy on 20 November, setting out short, medium and long-term innovation plans.

Ofgem has issued an update on residual charging arrangements as part of its Targeted Charging Review Significant Code Review. In the update, it said residual charges should be recovered from suppliers instead of generators, or a combination of suppliers and generators. It will assess four potential approaches for residual recovery and publish a consultation on its preferred decision in summer 2018.

Usage

The UK government has proposed moving the compliance deadlines for UK operators in the EU’s carbon trading scheme to before the date the UK leaves the EU. It has done this to provide certainty and to avoid an amendment to the EU ETS Directive, which would see UK allowances no longer valid for compliance from 1 January 2018. Meanwhile, EU ETS reforms designed to strengthen the system were endorsed by member states on 22 November.

In both the Budget and Industrial Strategy, the government has given its backing to electric vehicles. The Budget set out over £500mn of support, while an Automotive Sector Deal was unveiled in the Industrial Strategy. This deal will ensure the UK can take advantage of emerging markets in ultra-low emission vehicles.

Also covered in this Regulatory Report:


Generation

Budget leaves renewables facing levy-free future

The Budget has revealed there will be no new low-carbon levies until the weight of current costs has fallen. Government expects this to happen in 2025.

The renewables industry had been waiting for a new mechanism to replace the Levy Control Framework (LCF), which is set to expire in April 2021. The LCF was established to control electricity consumer costs arising from government energy policies. It did this by setting a cap on the forecast costs of energy policies funded through levies on companies and paid for by consumers – however the government confirmed it would be replaced in the March Budget. This followed research from the National Audit Office, which had found the government had not exploited the full potential of the LCF and this had led to a failure in securing value for money.

The government itself determined the LCF was no longer the “right vehicle” to reduce costs and provide investors certainty. This was as the majority of costs now relate to signed contracts. The new control does not impact existing commitments, such as the confirmed £557mn for future auctions for renewables subsidies.

Elsewhere, the government set out how the total carbon price – the cost applied to carbon pollution to drive a fall in emissions – was set at the right level. This will remain the case until unabated coal use has come to an end. The Budget confirmed that the Climate Change Levy (CCL) main rates for 2020-21 and 2021-22 will be set at Budget 2018. Chancellor Philip Hammond also confirmed transferable tax histories will be available for oil and gas assets from November 2018. This is in a bid to encourage new entrants and investment.

The renewables industry expressed disappointment at the Budget, with the majority labelling it a missed opportunity. James Court, Head of Policy and External Affairs at the Renewable Energy Association (REA), said: “Considering this is coming only a couple of months after the much vaunted Clean Growth Plan, it’s hugely disappointing. Onshore wind and solar are already cheaper than new build gas, and we have seen huge cost reductions happening in offshore wind, energy from waste and biomass. These are the technologies of the future and the Government should be backing them, not blocking their progress.”

Meanwhile, RenewableUK Chief Executive Hugh McNeal said that while the industry had a “little more certainty”, “what is missing is the ambition to take full advantage of the UK’s global-leading renewables industry at such a crucial time for our country.”

From a business perspective, the CBI warned businesses will have to consider the implications of the new control for low-carbon levies. However, the CBI did welcome the “greater clarity for the UK carbon price. Director-General, Carolyn Fairbairn, said it “will be welcomed by investors, but it is important that this is matched with the provision of sufficient support to energy-intensive industries, including manufacturing.”

EEF’s Head of Climate, Energy and Environment Policy, Roz Bulleid said the challenge businesses face with the UK’s uncompetitive electricity prices had been “rightly recognised”. Bulleid said: “We look forward to seeing more detail, but the commitments on carbon pricing and low-carbon levies both look promising in this respect.”

Although, Bulleid added the EEF were disappointed there was nothing on the energy efficiency scheme promised in the Conservative manifesto. Bulleid explained: “This would help improve productivity while also cutting companies exposure to the electricity price disparity between the UK and its competitors.”

Industrial Strategy places clean growth as a priority

The government has pledged to maximise the advantages for UK industry from the global shift to clean growth in its Industrial Strategy, published on 27 November.

Within the strategy, the government said it agrees with the principle of a “whole systems approach” to the decarbonisation of energy. It prioritised the development of smart systems for cheap and clean energy across all sectors and the transformation of construction techniques to improve efficiency. It also reiterated its commitment to reducing business energy costs. Notably, it said it will consult on widening the eligibility for renewables costs exemption schemes for energy intensive industries.

Meanwhile, the strategy revealed that the nuclear sector is in “advanced discussions” with the government on a range of proposals to increase competitiveness. Industry-led proposals for the Nuclear Sector Deal will focus on how substantial cost reductions can be achieved across the UK’s new build.

RenewableUK welcomed clean growth being put “at the heart” of the strategy, though said it was “disappointing” the strategy hadn’t set out how onshore wind could be used.

The Nuclear Industry Association drew on how the Industrial Strategy had recognised nuclear is a “vital part of our energy mix” and explained the “significant progress” with regards to the sector deal.

Nuclear “an integral part” of future energy mix

A new report by ResPublica has said that new nuclear should not be viewed as a renewables alternative, but as an “integral part” of the wider solution to meeting the government’s aim of a sustainable, low carbon, secure energy mix.

Launched on 10 November, it said nuclear would hand the UK security of supply in the medium to long-term. This could act as a “springboard”, allowing for further innovation in renewable and battery technologies. The think tank argued that no one technology would be able to meet the government’s carbon reduction commitments.

Director of ResPublica, Phillip Blond, explained: “Committing Britain to the new nuclear programme is vital to securing this country’s electricity mix, technological advantages and role as a world-leader in low-carbon, secure electricity through Brexit and beyond.”

Large energy users issue warning on UK gas security

Trade associations, unions and energy storage companies have written to Business and Energy Secretary Greg Clark, expressing concerns on the UK’s gas security.

In a report by The Times, on 16 November, the letter from the leaders of the Major Energy Users Council (MEUC) and the Energy and Utilities Alliance (EUA) said Brexit posed a “clear problem”. This was as it could make it harder to rely on imports from other countries within the European Economic Area. The letter also drew on the UK’s lack of storage capacity after the largest storage facility in the country, Rough, was closed to new gas injections.

The letter said: “This rising level of exposure to the vagaries of the international gas market, combined with an inadequate level of UK gas storage, will increase both the likelihood and impact of short-term demand-supply imbalances on both gas and electricity price volatility, to the detriment of all consumers.”


Delivery

ENA outlines network innovation strategy

The Energy Networks Association (ENA) has released a consultation on its Electricity Network Innovation Strategy.

Issued on 20 November, it outlined how innovators could work alongside network companies to deliver close to £1.7bn of benefits back to the UK energy system over the next decade. Innovation projects can play a key role in helping network companies learn how to manage the changes taking place within the energy system.

Projects include network companies providing quicker and cheaper network connections for generators, integrating battery storage into the grid and more effective plans for supporting the roll-out of electric vehicles charging infrastructure.

Short, medium and long-term innovation project plans were set out, while it outlined a roadmap to address both challenges and uncertainties facing the sector. This includes how third party innovators could more easily identify opportunities for new projects, how network companies can get the best value from innovation projects and ways network operators can collaborate further on tacking industry issues.

Ofgem issues update on residual charging arrangements

Ofgem has said residual charges should be recovered wholly from suppliers, or through a combination of suppliers and generators.

It released a working paper on 6 November as part of its Targeted Charging Review Significant Code Review. The review follows concerns that the current framework for residual and cost-recovery charge is resulting in inefficient use of the networks and unfair outcomes for consumers. Any changes will look to reduce distortions, increase fairness, and take into account proportionality and practical considerations. It explained that it will assess four potential approaches for residual recovery in-depth. These are fixed charges, capacity demand charges, gross consumption charges and the current baseline.

The assessment will consider the financial incentives for on-site generation or storage, the contribution the responses relate to residual charging could make efforts to encourage energy efficiency, and potential interactions with other policy aims.

Ofgem will follow up with a consultation on its minded-to decision in summer 2018.

Government updates Smart Meters Bill

The government’s Smart Meters Bill has been amended to include half-hourly settlement (HHS) of electricity imbalances.

Smart meters mean that consumers’ half-hourly consumption can be recorded and remotely read. HHS then uses this information to settle and charge customers based on their usage every half hour. This is said to improve accuracy and timeliness of the settlement process which, previously, had relied on estimates or profiles of usage. The amendment provides Ofgem with powers to make changes to enable HHS data to be calculated using data from smart meters.

The bill concluded the Public Bill Committee stage on 30 November and will now move onto the Report Stage, ahead of its Third Reading in the House of Commons.


Usage

UK aims to limit Brexit impact on EU carbon market

The UK government has moved to address concerns over the impact on the UK of leaving the EU’s carbon trading scheme (EU ETS).

If the UK leaves the EU ETS in March 2019, there is the risk that UK operators will undertake a “mass sell-off” of allowances. This would add to the current market surplus, depress the carbon price and have a negative impact on the entire system. It has been estimated a “hard Brexit” could see 220mn allowances issued by the UK offloaded onto the market between 1 January 2018 and 29 March 2019. Therefore, on 6 November, the government issued a consultation proposing to bring forward the compliance deadlines for UK operators to before 29 March 2019, when the UK is set to leave the European Union. The EU had made an amendment to the EU ETS Directive which would mean that allowances issued by the UK from 1 January 2018 are no longer valid for compliance. While they would be freely allocated and auctioned as normal, they would be assigned a country code and would not be able to be surrendered.

The UK government claimed this itself would have “negative and disruptive effects on the carbon market” and said that its proposed move would not only add clarity for companies within the scheme, but would also avoid the need for the amendment.

Despite this, EU ETS reform – including the Brexit “no deal” clause – was endorsed by member states on 22 November. The measures ensure the system can help the EU deliver on its target of cutting greenhouse gas emissions by at least 40% by 2030. They also have taken steps to protect industry against the risk of carbon leakage, tighten the oversupply of carbon allowances, encourage innovation and promote the use of low-carbon technologies.

The UK voted in favour of the measure, while its consultation closed on 24 November. Subject to responses, the government is planning to lay the legislation in December, with changes taking effect from 1 January 2018.

Government gives backing to electric vehicles

Making his Budget speech, Chancellor Philip Hammond set out over £500mn worth of support for electric vehicles.

Speaking on 22 November, Hammond said: “Our future vehicles will be driverless, but they’ll be electric first. And that’s a change that needs to come as soon as possible.” To this end, Hammond said a new £400mn charging infrastructure fund will be established. An extra £100mn will be invested in a Plug-In-Car Grant, while a further £40mn will go towards charging research and development. Hammond also confirmed the law would be clarified so that people who charge electric vehicles at work will not face a “benefit-in-kind” charge from 2018.

These measures were reiterated and further supported within the Industrial Strategy, that outlined how developing UK leadership in low carbon transport was a “shared priority”.

An Automotive Sector Deal was unveiled, ensuring the UK “continues to reap the benefits from the transition to ultra-low and zero emission vehicles”. It explained that the sector was an area of “genuine competitive advantage” to the UK when it comes to electrification and was “perfectly placed” to take advantage of emerging markets in ultra-low emission vehicles. It said that through the Advanced Propulsion Centre, the government was already supporting the development of low carbon technologies that will form the basis of future vehicle supply chains. 

Climate talks see launch of coal closure alliance

The COP23 climate conference in Bonn saw the launch of the Powering Past Coal Alliance, a global coalition of nations, regions and states striving to end the global use of unabated coal power.

The initiative was launched by the UK and Canada on 16 November and is targeting over 50 partners by next year. Members of the alliance commit to taking actions such as establishing coal phase out targets and committing to no further investments in coal-fired generation. Meanwhile, no major decisions were taken with regards to policy at the conference, with the goal for countries to begin drafting rules and processes for implementing the Paris Agreement.

A BEIS Committee meeting heard from climate experts that progress had been made and that next year’s meeting in Poland would be “important” in terms of key decisions.

Following Donald Trump’s decision to withdraw the US from the Paris Agreement and funding of other climate initiatives, French President Emmanuel Macron called on Europe to plug the gap. Macron would “meet the challenge” of replacing the US when it comes to funding the Intergovernmental Panel on Climate Change, pledging not to miss “a single euro”.

Green Investment Group launches energy solutions offering

The Green Investment Group (GIG) has launched a new service which seeks to help medium and large energy users reduce energy costs and cut carbon emissions, with no upfront costs for the user.

Revealed on 29 November, the Energy Solutions service will offer end-to-end technical and funding support. It will allow private and public organisations to take distributed energy and energy efficiency projects from the earliest phase of development into operations and management. GIG will also offer a “pay-as-you-save” Energy Services Agreement (ESA). Businesses will face no balance sheet impact but benefit from a programme of investment in energy assets, involving a diverse range of technologies such as power generation, heating and cooling, batteries and lighting.

Bill Rogers, Head of Distributed Energy and Onshore Renewables, said that organisations would no longer have to choose between investing in new energy infrastructure or channelling available funds into core operations. Rogers explained Energy Solutions would hand businesses greater certainty and control over energy costs, as well as increased business resilience. Rogers added: “By utilising the latest distributed energy and energy efficiency technologies, organisations can generate, store, use and actively manage energy more efficiently.”

Government launches non-domestic smart competition

A new £8.8mn competition has been launched with the aim of developing innovative approaches to energy management using non-domestic customers’ smart meter data.

The government revealed the competition on 27 November. It aims to drive innovation in the energy services market in three priority non-domestic sectors. These are hospitality, retail and schools. It will help organisations in these sectors cut their energy costs and become more energy efficient, while also contributing to UK emissions reduction goals and boosting productivity.

At the same time, the government said it will also help to both develop and strengthen the market for energy management products and services for smaller non-domestic sites.

Up to nine projects, distributed across the three sectors, will be selected to receive initial funding.

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