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October 2016

By Market Insight Team | Posted November 17, 2016

October 2016 – in brief

Generation

National Grid confirmed that the risk of electricity blackouts this winter had fallen, as more electricity would be available than had been anticipated. The system operator said that the improvement was a consequence of additional power capacity available and a reduction in the electricity expected to be exported to Ireland.

The government’s spending watchdog warned that schemes encouraging the development of renewable electricity would likely exceed their budget by the end of the decade. The Office of Budget Responsibility criticised the government for being too slow to recognise that the sector was developing faster than had been anticipated.

Delivery

An Ofgem survey has found that businesses can make a major contribution to the stability of the power system by adjusting their demand to match the level of supply. But it explained that firms were concerned about the extent to which their operations would be impacted by the deployment of demand-side response measures.

The government launched the first phase of an initiative that aims to support the development of heat networks across the UK. Local authorities and public sector bodies have been invited to bid for a share of £39mn to support their projects.  

Usage

Credit rating agency Fitch has warned that the expected growth in battery technology and electric vehicles (EVs) over the next two decades presents a major risk to the global oil sector. The report advised oil companies to “react early” to this challenge.

A report released by the Carbon Disclosure Project (CDP) has revealed a majority of multinational firms have not yet developed strategies to successfully meet the goals of the Paris agreement. While 85% of these companies had set emissions reductions targets, just 14% had set objectives as far as 2030 and only 9% had targets that could be considered “science-based”.

Also covered in this Regulatory Report:

Generation

Energy supplies secure this winter: National Grid

System operator National Grid has said that the risk of blackouts this winter has fallen, with more sources of electricity available than had earlier been expected.

The system operator published its Winter Outlook report on 14 October. It suggested that Britain’s capacity margin – the extent to which the supply of electricity on the system would exceed the expected level of demand from consumers – would stand at 6.6% this winter. This is higher than the 5.5% margin projected by National Grid earlier in the summer.

The report explained that the improved forecast had been driven by two key factors. Firstly, it is now expected that capacity at the Eggborough coal-fired power station will be available. The plant had been due to close ahead of the winter, but having secured a contract to provide system services will now stay open until next March.

Secondly, National Grid has reduced its expectation of the level of electricity that will be exported to Ireland. This is a consequence of an outage on the East-West interconnector, which usually exports power from Britain. 

A total of 73.7GW of capacity is expected to be available over the winter, with a de-rated generation capacity – on which National Grid bases its analysis – of 55GW.

The level of demand from consumers is forecast to peak at 52.7GW. The system operator noted that, although recent winters had been mild, it was not complacent, adding that the electricity margin was expected to be “tight but manageable”.

National Grid further said it expected there to be sufficient gas available to meet demand. A reduced level of exports to both Ireland and to continental Europe would mean that demand was lower this year than last, the report explained.

Low-carbon subsidy cap to be breached, report warns

The government’s spending watchdog warned on 19 October that the UK was on course to exceed its budget for subsidising low-carbon electricity.

Spending on green energy schemes such as the Renewables Obligation, contracts for difference, and the feed-in tariff are ultimately recovered from consumers through their energy bills. In 2012, the coalition government announced that it would cap this spending at £7.6bn through to 2020-21.

Last June, however, the Office for Budget Responsibility (OBR) said its forecasts showed that spending on these programmes was likely to reach £9.1bn by the end of the decade, as the pace of growth in the renewables sector had been faster than expected.

The government subsequently made a series of policy reforms intended to bring spending back under control. This included the early closure of the Renewables Obligation to new onshore wind projects.

But, in its new forecast, the OBR said it still expected the spending cap to be exceeded by just over £1bn in 2020-21, meaning that further policy reforms could be necessary.

The report criticised the government for having responded too slowly to indications that spending could be higher than anticipated. It further argued that the design of the government’s low-carbon subsidy cap had undermined confidence among renewables investors.

Government tightens delivery incentives for green energy projects

Renewable electricity projects will be given stronger incentives to ensure they come online on schedule, under reforms announced by the government. 

The contracts for difference (CfD) scheme invites developers of green electricity projects to bid into an auction for the award of subsidy contracts that “top up” the revenue that they can receive in the wholesale market.

The government confirmed in October that CfD projects that had either not signed their contracts or had failed to meet key delivery milestones would be excluded from future auctions for 24 months.

The current exclusion period stands at only 13 months; the government said that the extension was necessary to recognise the fact that auctions were not happening as frequently as had initially been anticipated.

UK hits all-time low in renewables investment rankings

The UK has fallen to 14th in EY’s quarterly index of the most attractive locations for renewables investment - its lowest position to date.

Issued on 26 October, the latest report explained that the UK was “bucking the trend” towards an overall improvement in Europe, as a result of its vote to leave the European Union, and the dismantling of the Department of Energy and Climate Change.

The report stated that, despite progress on offshore wind, the UK’s renewables sector was facing an “unknown future”, with the most easily deployable technologies of wind and solar seemingly absent from the government’s plans.

Elsewhere, European countries actually regained ground after falling behind emerging markets in May 2016. Germany was the highest-placed European nation in fifth, France rose one place to seventh, while Belgium, Sweden, Ireland, Norway and Finland also climbed. The US remained in top place in the index, followed by China and India.

 Nuclear power key to industrial strategy, says trade group

The government has been encouraged to work with the nuclear power industry to ensure the sector plays an important role in the UK’s industrial strategy.

On 4 November the Nuclear Industry Association submitted a statement to chancellor Phillip Hammond setting out its key asks ahead of this month’s Autumn Statement. It argued that focusing on nuclear power as a replacement for ageing fossil fuel plants had “massive” economic and export potential and would help in the battle against climate change.

The statement called on the government to release, as soon as possible, its planned roadmap for the establishment of small modular reactors, so that the UK industry could capitalise on “increasing international interest”.

Policy clarity would, the NIA explained, also be important in light of the UK’s vote to leave the European Union. Investors in key infrastructure projects required confidence that a stable policy framework would be maintained.

Tom Greatrex, CEO of the group, said: “Combined with a target to move away from fossil fuel production, new nuclear and modular reactors, combined with renewables as part of a lower-carbon mix, will be a vital component of the UK’s reliable and secure electricity generation future.”

Delivery

Firms varying energy demand can stabilise power system: Ofgem

Large industrial and commercial companies can play a major role in ensuring the stability of the electricity system, according to energy regulator Ofgem.

The survey, issued in October, said that these firms had the capacity to increase or lower their electricity demand by substantial volumes, if this were necessary to help the power system remain in balance.

But several barriers were said to be inhibiting the deployment of this demand reduction capacity, despite its potential to make the system more flexible. For example, businesses were said to be concerned about the impact that it would have on their operations. Moreover, the financial benefits of demand response remained unclear.

Ofgem said that it would conduct further analysis of the survey alongside a new call for evidence on system flexibility that it will soon be launching.

Heat networks pilot launched

The government has launched the first phase of a £320mn project to support the deployment of heat networks in the UK.

Sometimes described as “central heating for cities”, heat networks remove the need for boilers and electric heating in every building. They can deliver cheaper and more efficient heating than most building-level solutions, but their expansion in the UK is currently being constrained by a number of barriers.

In the pilot phase of the government’s project, £39mn has been made available to local authorities and public sector bodies, who can seek grants and loans to support their heat network schemes. The deadline for applications to the funding round, which will be administered by Salix Financing, is 28 November.

The main funding round is expected to open in 2017 and to run for four years.

Smart meter programme delayed again

The government’s plan to roll-out smart meters across the UK has suffered a further setback after the company responsible for managing the programme’s communications infrastructure failed to “go live” at the end of October.

This was the latest in a succession of delays to the Data and Communications Company (DCC), which is a subsidiary of Capita, becoming operational.

The launch had initially been expected in 2015, but was then re-scheduled for this March. A further delay pushed the launch date back to August, at which time the government then said that it was aiming to “go live” by the end of September - only for that date to be missed as well.

Many industry experts have expressed significant concern about the government’s ability to meet its target for smart meters to be offered to every home and business in the country by 2020.  

The government believes that the technology will increase consumers’ awareness of their energy usage and therefore help them to reduce their bills. But business groups have raised doubts that the savings available will be worth the cost of the roll-out.

Usage

Oil sector at risk from growth in batteries and electric vehicles: report

The likely growth in battery technology and electric vehicles (EVs) over the next two decades presents a major risk to the global oil sector, credit rating agency Fitch has warned.

In a report issued on 18 October, the agency argued that a “leap forward” in technology could transform the viability of EVs as an alternative to the internal combustion engine. It said that this would be “resoundingly” negative for the oil sector, as transport accounted for over half (55%) of oil consumption. Meanwhile, renewables could "significantly increase their market share as batteries help solve the problem of intermittent supply".

The report did note that, even if there were to be swift advances in battery technology, barriers to a rapid shift in demand would remain high. The transition to EVs was expected to be slow as it would need to be preceded by significant levels of infrastructure investment.

Fitch calculated that, even with a fast growth rate in EV sales, it would be nearly 20 years until these cars comprised even a quarter of the global fleet.

However, it also said that reduced transport fuel demand could disrupt the oil market. A market facing falling demand would, it explained, present a significant risk for all companies in the sector, with long periods of low prices and investment uncertainty.

The report advised oil companies to “react early” to the expected challenge of new technologies. It said that many were already taking steps - including diversification into batteries or renewables, which would help guard against the threat that the markets turned against them.

Multinationals yet to embrace Paris agreement

A majority of multinational firms have not yet developed strategies to successfully meet the goals of the Paris agreement, according to a report released by the Carbon Disclosure Project (CDP).

Issued on 25 October, the report explained that, while 85% of these companies had set emissions reductions targets, just 14% had set objectives as far as 2030, and only 9% had targets that could be considered “science-based”.

The report outlined how the currently-set targets are still only a quarter of the way to delivering the necessary emissions reductions.

Chief executive Paul Simpson said that the choice for companies had never been clearer - to seize opportunities and “lead the way” in the transition to a sustainable economy or continue as usual and face “serious risks”.

It did note that, over a five-year period, 62 companies in the sample had succeeded in decreasing emissions, whilst also increasing revenue. The CDP said that this highlighted the opportunity for innovative companies to turn emissions reductions from risk management to business success.

The CDP further stated that, although there remained a distance to go with regards to bringing goals and actions in line with the Paris agreement, many companies were already taking meaningful action, with more anticipated to join them over the coming years.

Treasury backs call for action on energy efficiency 

Improved energy efficiency can play an important role in tacking the UK’s energy challenges over the coming decades, chancellor Phillip Hammond has said.

Speaking in the Commons on 25 October, Hammond responded to a suggestion from Labour MP Caroline Flint that the government earmark revenues from shale gas development to fund new energy efficiency measures.

While opposing the proposal, Hammond said that the UK would need to invest “eye-wateringly” large sums of money over the coming years “just to ensure that the lights stay on”, and it consequently made sense to consider ways of reducing demand.

Government urged to be more ambitious on energy saving

A new report has called on the government to introduce mandatory minimum energy performance standards at the point-of-sale for all buildings.

The study, prepared by the Association for the Conservation of Energy (ACE) and the Regulatory Assistance Project, was published 6 October and said that existing and planned policies for carbon abatement from buildings would be insufficient to meet the UK’s carbon budgets.

It recommended a series of interventions, stating that the new minimum performance standards could serve as the “cornerstone” of the development of a competitive market for high-quality low-carbon retrofit.

LED bulbs could easy energy security concerns, says environmental group

New research released by Greenpeace has claimed that a shift to LED light bulbs in homes could reduce peak electricity demand in the winter by 5%.

The report, issued on 14 October, argued that this transition could be achieved relatively quickly, adding that the total cost of partially upgrading all UK homes to energy efficiency LED lights would be around £1.7bn.

Meanwhile, a similar switch in office and other commercial buildings could save around 4.5GW of peak electricity demand.

Greenpeace chief scientist Doug Parr said: “It is high time the government created an energy system that no longer relies on fossil fuels as part of a 21st century industrial revolution that the UK should embrace.”

GIB funds energy from waste project

The Green Investment Bank (GIB) has committed £28mn of debt finance to a new energy-from-waste (EfW) plant near Edinburgh.

It is expected that the 14.1MW Millerhill plant will treat up to 155,000 tonnes of waste and generate 94,000MWh of electricity annually upon completion. It will also be combined heat and power (CHP) ready, allowing it to supply excess heat from its operations to nearby homes and businesses.

Speaking on 6 October, Ed Northam, head of investment banking at the GIB, said: “It’s important that materials are re-used and recycled wherever possible, but it’s equally important that infrastructure is developed to increase the amounts of energy recovered from waste that can’t be reprocessed.”

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