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October 2015

By Market Insight Team | Posted October 03, 2015

October 2015 – in brief

Generation

Manufacturers organisation EEF has called for the government to rethink the energy taxes paid by large energy users, saying they are ineffective and undermining competitiveness. The Carbon Price Floor (CPF) would, the organisation said, cost energy users an estimated £23bn between 2013-20, but only £6.5bn of this would support low-carbon development.

The government announced on 9 September further plans to reform renewables support schemes to protect bill payers. In particular, pre-accreditation has been ended in the feed-in tariff (FiT) scheme, meaning developers can no longer secure a guaranteed level of support.

Delivery

Smart meter installation levels have continued to increase as the roll-out gathers pace. The latest government statistics released on 10 September show there are now 538,400 smart and advanced meters operating in smaller non-domestic sites across Great Britain. Analysts Morgan Stanley have said that the 2015 capacity market auction, intended to boost security of supply, is “unlikely to clear above the 2014 level and could be somewhat lower”, partly thanks to the participation of interconnectors.

Usage

Major reforms to the energy efficiency tax landscape for businesses have been proposed in a consultation launched by the government. A single reporting framework and single tax for energy efficiency are planned, with incentives also being considered.
The energy regulator Ofgem released in-depth research into the state of the retail and wholesale energy markets. While the markets are falling short of a number of Ofgem’s strategic objectives, competition is increasing.

Also covered in this Regulatory Report:


Generation

Manufacturers call for rethink on green taxes

The government needs to move away from green taxes that punish businesses and instead use incentives to aid carbon reduction, manufacturers’ organisation EEF has said.

Introduced in 2013, the Carbon Price Floor (CPF) is designed to set a minimum price on carbon, which steadily increases and encourages manufacturers to switch to greener fuels.

But, in a report published on 14 September, EEF said that the CPF would cost energy users an estimated £23bn between 2013-20, but that only £6.5bn of this would achieve its intended aim of supporting investment in renewables.

The organisation argued that there were a “bewildering” array of mechanisms and schemes designed to cut carbon; but these were ineffective and made the price of power for larger energy users “much higher than those faced by European competitors”.

Other schemes have also had a significant financial impact, the report found. The Carbon Reduction Commitment, which is intended to drive energy efficiency upgrades, was estimated to cost businesses almost £900mn in 2015-16 alone. The research suggested that an energy efficiency tax discount would better drive investments in energy efficiency.

Commenting, EEF director of policy, Paul Raynes, said: “The current system of energy taxation is too complex and is hurting Britain’s competitiveness. So instead of simply hitting firms with the big stick of ever-higher carbon taxes and levies, we should be offering them the carrot of tax breaks to invest in potentially very profitable advanced low-carbon technologies.

“Additionally, EEF would like to see government do more to ensure the opportunities presented by decarbonisation can be maximised by the UK’s manufacturers; a vital component of this is improving the environment for low-carbon innovation in the UK.”

Government aims to cut renewables subsidy costs

The EU should increase its ambition on reducing emissions by 2020 to avoid stalling progress on climate action in the next decade, according to campaign group Sandbag.

The EU Emissions Trading Scheme (EU ETS) operates on a “cap and trade” principle. A limit is set on the total amount of greenhouse gases that can be emitted by factories, power plants and other installations in the system. The cap is reduced over time so that total emissions fall, providing an incentive for investment in low-carbon power technologies.

A report issued by Sandbag on 3 August said that, under current policies, domestic economy-wide emissions could fall by as much as 29% by 2020, resulting in a large surplus of carbon allowances within the EU ETS. The group consequently recommended cancelling 1.5bn allowances from Phase III of the scheme, bringing the EU to a 25% emissions target for 2020 - above the 20% target already established. 

The report suggested that a surplus of 2.1bn allowances will have accumulated within the EU ETS by that year. This would mean that, even if 1.5bn allowances were cancelled, there would remain a “buffer” of roughly 600mn allowances that could be returned to the market if allowances subsequently became scarce.

Government urged to rethink green cuts

A coalition of organisations has called for the government to reconsider its stance on cutting support for renewable energy by scaling back the feed-in tariff (FiT) scheme.

The group - which includes businesses like Panasonic and IKEA, NGOs such as Greenpeace, and community energy groups - published an open letter to the government on 17 September.

They fully acknowledged that subsidies for renewable technologies “cannot go on indefinitely”. But they argued it was “absolutely essential” that decisions to cut back were made after appropriate consultation with stakeholders, in order to maintain investor confidence and enable a stable transition. The group raised concerns that the government’s policy changes would put at risk 20,000 jobs in the sector and that nearly 1mn fewer homeowners, businesses and groups would be able to take part in the government’s “solar revolution”.

The letter noted that a key objective of the FiT was “to give people a direct stake in moving to a low-carbon economy”, and that 78% of the public wanted the government to enable investment in local renewables. It said it was “vital to engage society meaningfully” in decarbonisation, and that the proposed changes to the FiT failed to meet this objective.

Report highlights potential of integrated energy system in Scotland

The Carbon Trust has set out a vision of how Scotland could meet emissions targets and create jobs using an integrated energy system.

In a report, released on 16 September, the company acknowledged that Scotland was on track to meet its renewable electricity targets, but that work needed to be done on heating and transport infrastructure in the next five years. It highlighted Scotland’s high heat demand, dense urban population and limited interconnection to other country’s electricity grids.

Drawing on the example of Denmark’s success, the report suggested that Scotland should seek to integrate electricity, heat and transportation by using a “comprehensive economic evaluation” to identify areas for innovation, as well as improving infrastructure planning. This would require that Scotland worked towards reducing costs for bio-energy and offshore renewables, developing energy storage, district heating and energy management software, and further re-engaging consumers.

The report explained that Combined Heat and Power (CHP), where excess heat from power generation is used to heat water nearby, would be essential. In particular it said that the technology would be needed in district heating schemes; as a precedent, Denmark has integrated its wind energy into its supply by having its traditional power plants with CHP provisions store heat when winds are strong.

Major businesses sign up to decarbonisation targets

Commitments to cuts of 80%-100% of greenhouse gas emissions, or to procure 100% of power from renewable sources, have been made by 172 major businesses, states, regions, and cities, according to a new report.

Released on 28 September, the research by the non-profit organisations Carbon Disclosure Project and The Climate Group said that competitiveness, efficiency and values had served as the three primary drivers of these targets. The goals were common across a range of different sectors and companies, with Nike, IKEA Group and UBS all targeting 100% renewable electricity by 2020. Overall the report found that businesses were not having to “choose between being socially responsible and being profitable”, as the two formed a symbiotic relationship.

Evan Juska, head of policy for The Climate Group, North America said: “What surprised us was the diversity of companies and sub-national governments setting ambitious climate targets. They differ in location, size, energy use, and ideology. But they share a belief that reducing emissions makes sense for both customers and constituents.”

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Delivery

Smart meters installations continue to rise

There are now 538,400 smart and advanced meters operating in smaller non-domestic sites across Great Britain, figures published by the government have revealed.

Smart meters for gas and electricity have a range of functions. They allow energy users to clearly monitor their live energy use, and transmit and receive information from suppliers. It is anticipated that the technology will end the need for estimated readings, saving consumers money and granting them more control over their usage. Advanced meters do not have this full suite of functions that are available on a smart meter, but are able to store detailed half-hourly data - unlike traditional meters.

The statistics, released on 10 September, showed that in the second quarter of 2015 there were 18,700 smart and advanced meters installed in smaller non-domestic sites. This represents a 21% increase compared to the first quarter of the year.

In the market as a whole, as of 30 June 2015, there were a total of 2.7mn meters operated by the larger energy suppliers in smaller non-domestic sites in Great Britain. 2.2mn of these meters were electricity meters and 0.5mn were gas meters.

The roll-out of smart meters is supplier-led. The government has set a target for the technology to have replaced traditional meters in domestic properties and smaller non-domestic sites by the end of 2020.

Interconnectors to deliver supply security at lower cost

Investment bank Morgan Stanley has said that the 2015 capacity market auction is “unlikely to clear above the 2014 level and could be somewhat lower”.

The capacity market is a government scheme designed to guarantee security of electricity supply by providing a payment for reliable sources of capacity, alongside electricity revenues, to ensure that generators are able to deliver power to the grid when needed.

Morgan Stanley released its Canary in the Coalmine report on 9 September. It projected that the 2015 UK capacity market auction would probably have lower prices than last year’s, specifically owing to the inclusion of interconnectors.
Electricity interconnectors provide cross-border transmission capacity across European member states. Britain currently has 4GW of interconnector capacity, including 2GW to France (IFA), 1GW to the Netherlands (BritNed), and 1GW to Ireland.

In the first capacity market auction, in December 2014, 49.26GW of capacity was secured at a clearing price of £19.40/ kW - a cost to energy users of £0.96bn. Nuclear power and coal plants were particularly successful in the auction.

Morgan Stanley said the addition of 2.9GW of interconnection to compete in this year’s auction was “much more important” than the removal of old coal capacity, and “could put meaningful downward pressure” on the clearing price.

The study showed that adding this amount of capacity to last year’s auction would likely have caused it to clear at £16.1/kW -17% lower than the realised clearing price.


Usage

Government to reshape business energy efficiency taxes

The government has unveiled plans for major reforms to the energy efficiency tax landscape for businesses.

In a consultation, published on 28 September, the government said it wanted to “streamline taxes in a way that reduces variations in tax rates faced by different users, simplifies the tax system and strengthens the price signal”.

The Treasury proposed to achieve this by replacing the existing Carbon Reduction Commitment (CRC) and Climate Change Levy (CCL) schemes with a single new energy consumption tax based on the CCL.

The CCL is a tax on energy delivered to non-domestic users in the UK. Its aim is to provide an incentive to increase energy efficiency and to reduce carbon emissions. Currently, organisations pay the main rates of CCL if they are in the industrial, commercial, agricultural, or public service sectors.

The consultation also contains plans to develop a single reporting framework, which incorporates “the most effective elements from the range of reporting schemes and delivers a significant net reduction in compliance costs associated with reporting schemes”.

The Treasury acknowledged that reporting requirements were unnecessarily burdensome and could overlap. It said that any new framework would be developed through the prism of the existing Energy Savings Opportunity Scheme (ESOS), which the government has implemented to comply with EU legislation.

Finally, the government confirmed that it was open to considering options for new incentives for energy efficiency. It argued that the benefits from potential savings might not alone act as a sufficient driver of uptake, and that it would consider the development of further incentives under strict value for money considerations.

Responses to the consultation are invited by 9 November. The government’s final plans are scheduled to be released to accompany the 2016 Budget.

Ofgem finds customer service falling short in retail market

Energy regulator Ofgem released its annual report into the retail energy market on 9 September.

The report aims to analyse conditions in the gas and electricity markets, promote transparency and improve understanding. It assesses how the markets are performing against the regulator’s criteria including fair prices, competition, customer service and environmental concerns.

The report finds that non-domestic users accounted for around 65% of total electricity consumption and around 40% of total gas consumption in 2014. This is despite the sector accounting for a proportionately far smaller number of users than the domestic market.

Despite signs of growing competition and an increasing number of suppliers, the regulator concluded that the market was “falling short of delivering our strategic outcomes for consumers”. Customer service was highlighted as a particular area of concern, with price and consumer satisfaction showing no correlation.

While consumption fell among non-domestic consumers on average in 2014, average prices rose for all sizes of business customer apart from the largest gas consumers.

Businesses back strong agreement at Paris talks

Industry association the Confederation of British Industry (CBI) has called for governments to deliver a strong and binding climate deal at the forthcoming talks in Paris.

Speaking at an event organised by the Green Alliance, the organisation’s director-general John Cridland said that strong commitments to reduce greenhouse gas emissions made sense both from a business and environmental standpoint. He spoke of balancing costs against benefits, and said that total costs to the planet of climate change “could exceed four and a half trillion pounds by the end of the century”. He warned that, due to globalisation, events like flooding on the other side of the world could disrupt supply chains.

Cridland added: “Politicians and negotiators should be confident that business is behind them in securing a lasting climate deal."

Government confirms funding for low-carbon vehicles

The government announced the winner of the £10mn Ultra Low Emissions Battery Prize on 9 September.

Intended to incentivise the development of next-generation electric and hybrid vehicles in the UK, the prize was awarded to a consortium led by Warwick manufacturing group.

Business minister Anna Soubry also announced plans for a £20mn scheme to fund feasibility studies into low-emissions vehicles, led by the Office for Low Emission Vehicles (OLEV). The competition will support the development of new technology for road vehicles aimed at delivering significant reductions in CO2 and other emissions. Speaking at the Low Carbon Vehicles Event 2015, Soubry said: “Together these projects will help keep the British low-carbon vehicle industry at the cutting edge – generating valuable trade and investment opportunities and new highly-skilled jobs.”

Green Deal Assessments fall again

Government statistics have shown that Green Deal assessments fell in August by 39% compared to July.

The Green Deal was launched in 2013 as the government’s flagship energy efficiency scheme; however, uptake has been slow and the government ended funding for the Green Deal Finance Company after the General Election, citing poor value for money from the scheme.

A government report, released on 17 September, showed that almost 600,000 Green Deal Assessments were lodged up to the end of August, but that only 8,579 were undertaken in that month: the fourth lowest monthly figure since the programme began.

The report found that energy efficiency improvements had been made to 1.3mn homes in the first seven months of the year, but that 96% of these came through the Energy Company Obligation (ECO). Slightly more than half of all these measures were installed in low-income and vulnerable households.

Eurelectric highlights barriers to energy efficiency investment

The association for the European electricity industry has highlighted a “pressing need” to prompt energy efficiency investment throughout Europe. In a position paper published on 17 September, the organisation said that policy-makers and EU member states needed to revise the way in which energy efficiency investments were being promoted through financing. It said there was a need for greater use of private investment to fund schemes, rather than putting costs on energy bills. This could include Energy Performance Contracts or Energy Savings Agreements, which “will help close the remaining gap to reach the 20% energy efficiency target for 2020”. The paper further advocated the development of financing tools that could help to clearly demonstrate the business case for investment in energy efficiency.

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