Regulatory Report - August 2022
National Grid ESO (NGESO) published its early view of winter 2022-23 in an aim to provide the electricity industry adequate time to prepare for the coming winter.
BEIS released a consultation seeking to review the energy intensive industries (EII) exemption scheme.
Ofgem published several decisions on changes to the Default Tariff Cap methodology ahead of winter 2022-23.
Ofgem published its decision confirming an 80% increase to the Default Tariff Cap, since the last update, to £3,549 for the upcoming cap period, covering 1 October 2022 – 31 December 2022.
The BEIS Committee issued its Third Report - Energy pricing and the future of the Energy Market in which it examines the financial strain placed on the energy retail market and the resulting impact on consumers as energy suppliers have failed.
BEIS published the outcome of its consultation Strengthening the Energy Savings Opportunity Scheme (ESOS).
The government published the outcome of its July 2021 call for evidence on Facilitating the deployment of large-scale and long-duration electricity storage (LLES).
Also covered in this Regulatory Report:
- Views sought on power CCUS future policy framework
- Government sets out decisions on CfD Supply Chain Plans
- Government consults on supporting wide-scale deployment of BECCS
- BEV registrations rise 21.2% month-on-month
- Floating ‘artificial leaves’ could accelerate clean fuel production
- Government reports on UK’s 1990-2020 GHG reduction efforts
- Scottish Government proposes zero emission heating for new buildings
NGESO publishes early view of winter 2022-23
On 28 July, National Grid ESO (NGESO) published its early view of winter 2022-23 in an aim to provide the electricity industry adequate time to prepare for the coming winter.
NGESO notes that a detailed analysis will be presented in the winter outlook report which will be published in autumn. It states that it is operating under the assumption that the peak demand on an average cold spell will be 59.5GW on the transmission and distribution networks, including a 1.2GW reserve. The base case assumes normal market conditions and that there may be some tight periods, but it is expected they are able to be managed using standard operational tools.
It also adds that it is taking actions to build resilience to potential risks and uncertainties due to a possible shortage of gas supply in Europe. These include delaying the closure of two coal power stations, with a combined five units, which together can deliver 2GW de-rated capacity. Currently, four of the five units have confirmed their availability. NGESO has not included these units in the base case margin assumptions as they will not be available in the market, instead they are additional. In addition, NGESO is considering options to increase the incentives for electricity customers to participate in the demand side response.
BEIS consults on proposed increase to EII subsidy relief
On 12 August, BEIS released a consultation seeking to review the energy intensive industries (EII) exemption scheme to consider whether there is a rationale for increased measures to mitigate the costs from renewable electricity policies for high electricity using businesses.
Under the current EII exemption scheme, high electricity using businesses, such as steel and paper mills, see a proportion of their costs relating to the Contracts for Difference (CfD), Renewables Obligation (RO), and Feed-in Tariff (FiT) made exempt. The EII scheme is designed to keep these industries internationally competitive by preventing electricity policy costs significantly adding to energy bills compared with those in other international jurisdictions. It also aims to limit the risk of carbon leakage where additional costs could discourage electrification of manufacturing processes and slow progress towards the UK’s net zero target.
The costs of funding the CfD, RO, and FiT schemes are recovered through obligations and levies placed on electricity suppliers, which are ultimately passed on to consumers through electricity bills. The EII exemption scheme currently provides a discount of up to 85% of the indirect costs of these support schemes, with the exempted costs then distributed among the remaining eligible consumers. However, following a commitment in its recent Energy Security Strategy, the government is proposing to increase the level of exemption from 85% of environmental and policy costs up to 100%, which would see prices for EII eligible companies potentially fall more into line with the EU-14 average. In its current form, the scheme reduces net electricity prices for EIIs by between £19/MWh and £37/MWh on average. A 95% subsidy intensity would see a reduction in average electricity costs of between £23/MWh-£37/MWh for eligible EII firms, while a 100% reduction would see a reduction of between £34/MWh-£38/MWh. However, it is noted that a subsidy intensity of 100% may lessen the incentive for businesses to invest in energy efficiency, which would support businesses to reduce their energy bills and emissions in the longer term.
The government said that its review reflects higher UK industrial electricity prices than those of other countries, which could hamper investment, competition and commercial viability for EIIs, and risk them relocating from the UK. Responses are requested by 16 September 2022.
Views sought on power CCUS future policy framework
On 25 July, the government published its Future policy framework for power with carbon capture, usage and storage (CCUS): call for evidence, seeking views and evidence on how it can best support the continued deployment of dispatchable gas-fired power generation with CCUS projects into the 2030s beyond Track-1 of the Cluster Sequencing process. This includes how the CCUS business model should be evolved over time, how competitive allocation can be introduced in the 2020s, the removal of barriers to deployment, how economic benefits can be maximised through future policies, how the power CCUS sector is expected to develop, and how power CCUS could work with wider electricity markets, taking account of the recent Review of the Electricity Market Arrangements (REMA) consultation.
Responses are requested by 17 October and will help inform the policy framework for power CCUS as well as feed into other policy initiatives, such as REMA.
Government sets out decisions on CfD Supply Chain Plans
On 9 August, the government published the outcome of its February 2022 call for evidence on proposed amendments to Contracts for Difference (CfD) Supply Chain Plans.
It said that while it would not be changing the Supply Chain Plan 300MW threshold or taking forward its proposal to negotiate Supply Chain Plans at this stage, the proposal to introduce a graduated penalty system will remain in scope.
On the same day, it published the outcome of its May 2022 consultation on updating the CfD Allocation Round 5 (AR5) Supply Chain Plan questionnaire, confirming its decision on implementing various amendments to the questionnaire ahead of AR5. Alongside this, the government published final versions of the Supply Chain Plan questionnaires and guidance on how to complete the questionnaires and on the Supply Chain Plan process as a whole for CfD AR5.
Government consults on supporting wide-scale deployment of BECCS
On 11 August, BEIS opened a consultation on the government’s proposed business model for incentivising power Bioenergy with Carbon Capture and Storage (BECCS) deployment in the UK.
The consultation is seeking views on proposals for a business model, including the main design elements and the actions the government can take to enable the deployment of BECCS at scale, through addressing market failures, deployment barriers and risks to investment. Having set out several options, the government is also seeking views on its current minded-to business model, which is combination of a Contract for Difference for electricity generation (CfDe) and a Contract for Difference for carbon (CfDc).
The business model is expected to incentivise baseload power generation as this maximises the scale of negative emissions. The benefit of negative emissions for the whole economy outweighs the additional costs to the power sector of baseload generation in preference to dispatchable, flexible generation. Strike prices for the CfDe and CfDc should be set such that combined revenues of the two payment streams are sufficient for a BECCS plant to recover its lifetime costs within the duration of the contract. Costs associated with running the biomass generation plant are aimed to be recovered through the CfDe and costs associated with the carbon capture and storage capabilities of the plant are to be recovered through the CfDc.
Responses are requested by 7 October and will be used to inform the selection of a preferred business model and its design.
Changes to Default Tariff Cap methodology published
On 4 August, Ofgem published several decisions on changes to the Default Tariff Cap methodology ahead of winter 2022-23. This includes its decision on changes to the cap wholesale methodology, including moving from six-monthly cap updates to quarterly cap updates and a reduced notice period of 30 working days. This decision also introduced a mechanism for recovery of backwardation costs over six-months into the methodology. To accompany this the regulator published updated guidance on the treatment of price indexation in future cap periods.
In addition to this update, Ofgem published its decision to update the smart metering allowances for credit and prepayment (PPM) meters in the cap for cap period nine and has set the allowance for credit Smart Metering Net Cost Change (SMNCC) at £9.37 and the PPM SMNCC at -£28.69 per typical dual fuel customer. It has also decided to apply an adjustment to the cap for non-prepayment meter (non-PPM) customers to account for unexpected standard variable tariff (SVT) demand costs incurred by suppliers over cap period eight but decided not to adjust for cap period nine or for shaping and imbalance costs across either period.
These changes will take effect at the beginning of the next cap period on 1 October 2022. Furthermore, the regulator gave notice of a delay to its decision on the COVID-19 true-up process and debt-related costs.
Ofgem confirms price cap increase for winter at £3,549
On 26 August, Ofgem published its decision confirming an 80% increase to the Default Tariff Cap, since the last update, to £3,549 for the upcoming cap period (9a), covering 1 October 2022 – 31 December 2022. This figure applies to a typical direct debit dual fuel customer. For other payment types, the standard credit cap has increased to £3,764, and the prepayment meter (PPM) cap level has increased to £3,608. The regulator provides a breakdown on what has caused the increase in the cap, including the increase in wholesale costs primarily due to the Russian invasion of Ukraine, more volatility, and backwardation costs.
BEIS Committee publishes energy pricing report
On 26 July, the BEIS Committee issued its Third Report – Energy pricing and the future of the Energy Market in which it examines the financial strain placed on the energy retail market and the resulting impact on consumers as energy suppliers have failed. In an effort to address this, the committee has recommended that Ofgem improves its regulatory oversight, its decision-making processes, the use of its enforcement powers, and the quality of its governance, stating that there was a significant consensus that Ofgem had failed to deliver on its duties and is responsible for a significant and structural failure of supervising an essential market.
The committee recommends that any future CEO and Chair of Ofgem should be required to report annually to the committee and to BEIS on the measures in place to ensure effective accountability and transparency. The report contains additional recommendations to the government and Ofgem to reform the Supplier of Last Resort (SoLR) process in order to recoup costs more fairly whether through general taxation or energy bills and for Ofgem to undertake an immediate review of the costs and benefits of the Default Tariff Cap to inform decisions about its operation and alternative forms of price protection.
Phase 3 of ESOS to increase energy and carbon savings
On 28 July, BEIS published the outcome of its consultation Strengthening the Energy Savings Opportunity Scheme (ESOS), which is a mandatory energy assessment scheme for organisations in the UK that meet the qualification criteria. It stated that there was widespread support for the proposals to increase energy and carbon savings for those that participate in ESOS.
Proposals to be adopted for Phase 3 include:
- A standardised template for including compliance information in the ESOS report.
- The reduction of the 10% de minimis exemption to up to 5%.
- The addition of an energy intensity metric in ESOS reports.
- Requirement to share ESOS reports with subsidiaries.
- Requirement for ESOS reports to provide more information on next steps for implementing recommendations.
- Requirement for participants to set a target or action plan following the Phase 3 compliance deadline, on which they will be required to report against for Phase 4.
- Collection of additional data for compliance monitoring and enforcement.
The document also sets out a summary of feedback received on two further options, which will inform developments in future phases. This includes extending the scope of the scheme to include medium-sized businesses, not already part of a corporate group containing a large business, and mandating action on audit recommendations.
Long range electricity storage policy to be developed
On 3 August, the government published the outcome of its July 2021 call for evidence on Facilitating the deployment of large-scale and long-duration electricity storage (LLES).
Having reviewed the responses, and externally commissioned analysis, it set out several conclusions that have been reached in relation to LLES. This includes that it has an important role to play in achieving net zero, as it will help to integrate renewables, maximising their use and contribution to security of supply. It will also help to manage constraints in certain areas. The consultation outcome adds that it also provides low carbon flexibility, replacing some unabated gas generation. In addition, it will diversify the technology mix and support meeting the 2035 decarbonation power sector targets. It also highlighted barriers to deployment citing the current market framework due to their high upfront costs and a lack of forecastable revenue streams.
As such, the government confirmed that it will ensure the deployment of sufficient LLES to balance the overall system by developing appropriate policy to enable investment by 2024. While most respondents identified a cap and floor type mechanism as the most suitable to enable investment in LLES, the government said that detailed design work is needed to assess the benefits and interactions of such a scheme with the energy system.
It added that it will carry out further analysis on the costs and benefits of intervention in the market for LLES, including its contribution to energy security and possible market distortions. It will also consider options including a cap and floor, and an optimised Capacity Market in addition to wider flexibility operational signal sharpening being considered under the Review of Electricity Market Arrangements (REMA). In addition, it will work with Ofgem to develop an appropriate policy to enable investment in LLES.
BEV registrations rise 21.2% month-on-month
July figures, released by the Society of Motor Manufacturers and Traders on 4 August, show that there has been a rise in battery electric van (BEV) registration in July by 21.2% month-on-month, and a 55.7% rise on July 2021. The growth comes amid industry investment towards net zero, despite an overall contraction of - 20.7% in the light commercial vehicle (LCV) market in the same month, with 8,895 BEVs registered year-to-date.
Mike Hawes, SMMT Chief Executive, said: “The LCV market is struggling to recover post-Covid as global supply chain shortages and economic headwinds make the business environment even more challenging for both manufacturers and operators. In these circumstances, the continued growth in electric van uptake is admirable as the industry strives to deliver its net zero commitments. Given the importance of the commercial vehicle sector to Britain’s economy, its environmental ambitions and the need to keep society on the move, the next Prime Minister must look to restore economic confidence and support the sector’s transition to zero emission mobility.”
Floating ‘artificial leaves’ could accelerate clean fuel production
On 17 August, the University of Cambridge published an article on the development of floating ‘artificial leaves’ by its researchers that can generate clean fuels from sunlight and water. The university states the autonomous devices take inspiration from photosynthesis and, since they are low-cost and light enough to float, they could generate a sustainable alternative to petrol without taking up space on land.
To protect the devices against water filtration the team used thin-film metal oxides and materials known as perovskites, which can be coated onto flexible plastic and metal foils. The devices were also covered with micrometre thin, water-repellent carbon-based layers that prevented moisture degradation. It is expected that, if scaled up, the technology could eventually operate at a large scale at sea.
Government reports on UK’s 1990-2020 GHG reduction efforts
On 9 August, the government published the UK’s Eighth National Communication, including its Fifth Biennial Report, as required under the United Nations Framework Convention on Climate Change (UNFCCC).
The report sets out the actions the UK is taking to fulfil its UNFCCC commitments, providing details on its efforts to reduce greenhouse gases (GHG) between 1990 and 2020 and its support for developing countries in tackling climate change. It highlights that the UK is making good progress, with 2020 GHG emissions 49.5% lower than 1990 levels and has been leading the way in addressing climate change through, for example, playing an important role in securing the Paris Agreement in 2015 and hosting COP26 in November 2021. It also notes the UK’s ‘world-leading ambition’, having legislated in 2019 to reach net zero by 2050.
Scottish Government proposes zero emission heating for new buildings
On 29 July, the Scottish Government published its New Building Heat Standard: consultation – part two.
This sets out proposals that would mean direct emissions heating systems (DEH), such as those run on fossil fuel, would no longer be installed in any homes and non-domestic buildings warranted from April 2024 and would be replaced by alternatives such as heat pumps, solar and electric energy.