Regulatory Report - February 2023

Generation

The National Audit Office released a report on the design and implementation of government policy aiming to support consumers with the rising cost of energy bills since Autumn 2021.

The government announced that it will establish a number of new departments, with some designed to replace aspects of the Department for Business, Energy & Industrial Strategy (BEIS).

Delivery

Ofgem confirmed the Default Tariff Cap for the next cap period (1 April – 30 June 2023) will be set at £3,280 for a dual fuel household paying by direct debit based on typical consumption.

Following an announcement and a letter from Ofgem at the end of January, setting out how it intends to address inappropriate supplier prepayment meter practices, there have been a number of developments.

BEIS opened a consultation seeking views on the methodology and tolerance levels that will apply in Year 3 (2024) and Year 4 (2025) of the Smart Meter Targets Framework.

Usage

The Climate Change Committee (CCC) published a new report titled Investment for a well-adapted UK, through which it argues that ‘a lack of leadership is preventing essential investment to prepare the UK for climate change.’

The UK Government launched a new Energy Efficiency Taskforce, to be Co-Chaired by NatWest’s CEO Alison Rose.

Also covered in this Regulatory Report: 

• Capacity Market Auction results announced
• Government plans for low carbon hydrogen certificate scheme
• Government publishes action plan to improve planning system for NSIPs
• Lords Committee concludes Boiler Upgrade Scheme failing to deliver
• Government launches £32mn scheme to promote energy efficiency
• Report calls on UK Government to increase clean energy investment
• RenewableUK recommends actions to improve investment in UK energy

Generation

NAO reviews government support schemes

On 7 February, the National Audit Office (NAO) released a report on the design and implementation of government policy aiming to support consumers with the rising cost of energy bills since Autumn 2021. The report sought to provide a basis for early scrutiny of how BEIS developed and implemented the initiatives. Schemes covered under the review included the Energy Price Guarantee (EPG), the Energy Bill Relief Scheme (EBRS), the Alternative Fuel Payment, the Non-Domestic Alternative Fuel Payment, and the Energy Bill Support Scheme (EBSS), amounting to an estimated cost of £69bn.

The report observed that BEIS had to set up the schemes on accelerated timelines, aiming for most homes and businesses to receive support in time for the winter. However, it also found that developing and implementing schemes at speed heightened risks to value for money and overspending. The NAO identified that most of the schemes carry a high risk of ‘deadweight’, which is where the government provides financial support to households and businesses which do not need it. This risk was accepted by BEIS, who did not have access to datasets that would have allowed targeted support to be delivered in a short timeframe. Fraud and error were identified as risks that the government needs to manage as it considers altering, ending, or replacing the current schemes. Detailed assessment of the potential for fraud and error could not be completed to the usual standard owing to the accelerated timescale for implementation. That means much of the assessment is being done on an ongoing basis. For the EPG and EBRS schemes, which were delivered in the shortest timeframe, BEIS delivered funds to suppliers they identified at “high risk of not being prepared to deliver the scheme”. Risks were identified to be the highest in the non-domestic schemes, since the non-domestic market includes a greater number of energy suppliers and significant variation in energy usage and intensity between customers. Plans to mitigate these risks were built into the scheme delivery, such as a requirement for suppliers to provide detailed reconciliations to underpin their payment claims retrospectively.

The NAO concluded that BEIS “deserves credit for working quickly to introduce the schemes so that most households and businesses received support in time for winter” but by moving at speed, it had to make compromises. The most significant was a need to provide nearly universal support to guarantee that those who needed help received it. Until more data is available, it is not possible to tell how much support went to households and businesses that did not need it and so the question of how effective these schemes were in terms of value for money remains largely unanswered.

Government establishes DESNZ

On 7 February, the government announced that it will establish a number of new departments, with some designed to replace aspects of the Department for Business, Energy & Industrial Strategy (BEIS). To cover BEIS’ energy remit, the government announced a new Department for Energy Security and Net Zero (DESNZ), to be responsible for securing the UK’s long-term energy supply and reducing energy bills.

As part of the accompanying cabinet reshuffle, Rt Hon Grant Shapps MP was appointed as Secretary of State for Energy Security and Net Zero, Rt Hon Graham Stuart MP as a Minister of State in the Department for Energy Security and Net Zero, and Andrew Bowie MP as a Parliamentary Under Secretary of State in the Department for Energy Security and Net Zero.

Capacity Market Auction results announced

On 14 February, National Grid ESO (NGESO) announced the results of the T-1 Capacity Market Auction for delivery year 2023-24. The Final Auction Report stated that 5,782.777MW was procured across 269 Capacity Market Units (CMUs) at a clearing price of £60.00. The target capacity for the auction had been 5,800MW. Of the CMUs that were awarded capacity, 4,634.03MW was from existing generation and 744.13MW was from new build generation. Gas fired generation was awarded the largest capacity at 2,619.18MW, with nuclear 1,411.75MW and battery storage 621.01MW.

On 21 February, NGESO announced that the T-4 Capacity Market Auction for delivery in 2026-27 has cleared in Round 3 with a clearing price of £63/kW/year – the highest rate for a T-4 auction to date. The Final Auction Report stated that 43,000.955MW has been procured across 542 CMUs. The target capacity for the auction had been 43,044MW. Of the CMUs that were awarded capacity, 31,770.96MW was from existing generation and 3,450.62MW was from new build generation, while the remainder came from a mixture of new and existing interconnector capacity and demand side response. Gas fired generation was awarded the largest capacity at 29,038.83MW, followed by interconnector capacity at 6,854.36MW, and pumped storage at 1,789.92MW.

Government plans for low carbon hydrogen certificate scheme

Following a commitment set out in the British Energy Security Strategy 2022, on 9 February the government announced its plans to introduce a low carbon hydrogen certificate scheme by 2025 to help verify the sustainability of low carbon hydrogen and build transparency and confidence across the sector. A consultation seeking views on the design elements of the certification scheme was published on the same day, with responses requested by 28 April 2023.

Through the consultation, the government outlined the priority design features of the scheme and a set of principles to guide its development. It also set out its minded-to positions on the fundamental scheme design, the information to be included on a certificate, the chain of custody approach, additional design considerations and the delivery and administration of the scheme.

Government publishes action plan to improve planning system for NSIPs

On 23 February, the government published its action plan to deliver reforms across government to improve the planning system for Nationally Significant Infrastructure Projects (NSIPs). This includes ensuring that the system can support future infrastructure needs by making the system better, faster, greener, fairer, and more resilient.

The action plan sets out the issues with the current system and the evidence base for reform, as well as detailing five reform areas. This includes setting a clear strategic direction for infrastructure planning; operational reform to support a faster consenting process; realising better outcomes for the natural environment; recognising the role of local communities and strengthening engagement; and building a more diverse and resilient resourcing model. With regards to the reform around better outcomes for the natural environment, the government noted its plans to implement a new Offshore Wind Environmental Improvement Package to accelerate the delivery of new offshore wind infrastructure while ensuring appropriate consideration of environmental impacts.

The government intends to consult in spring 2023 on some of the key aspects of the reforms.

Delivery

Ofgem announces Default Tariff Cap level at £3,280

On 27 February, Ofgem confirmed the Default Tariff Cap for the next cap period (1 April – 30 June 2023) will be set at £3,280 for a dual fuel household paying by direct debit based on typical consumption. This is a reduction of 23%, nearly £1,000 from the current cap period, which is set at £4,279. The most significant cause of the decrease is the reduction in wholesale costs, as a result of lower demand over winter and high gas storage levels. However, customers will still be protected by the Energy Price Guarantee (EPG), meaning from 1 April, a typical dual fuel direct debit domestic consumer will pay around £3,000. For those on standard credit payment, the cap has been reduced by £1,051 to £3,482 for typical dual fuel consumption, and for those on prepayment meters, the cap has been reduced by £1,034 to £3,325. Ofgem also confirmed an allowance for the new Energy Company Obligation Plus (ECO+) scheme under the cap, from 1 April 2023.

Ofgem’s review into PPM practices

Following an announcement and a letter from Ofgem at the end of January, setting out how it intends to address inappropriate supplier prepayment meter (PPM) practices, there have been a number of developments. This includes a letter issued to domestic suppliers on 3 February setting out the regulator’s expectations for all domestic suppliers to immediately pause the installation of PPMs under warrant until the supplier has conducted a review of how this work is being carried out and managed. On the same day, the regulator sent an open letter to non-domestic suppliers, reminding them of the fair treatment of customers that is expected. It was then reported by the government on 10 February that all energy suppliers have now committed to ending the forced installation of PPMs and that Lord Justice Edis has issued directions to magistrates courts to stop approving warrants to force-fit PPMs. This was reiterated in a letter issued from Ofgem to suppliers on 15 February, where it provided an update on its Market Compliance Review (MCR) of PPM installation practices. On 21 February, Ofgem published an update on the scope and structure of its MCR and the likely timelines and on the same day issued a call for evidence on the use of PPMs, with responses requested by 7 March.

Views sought on 2024-25 smart meter installation requirements under Smart Meter Targets Framework

On 7 February, BEIS opened a consultation seeking views on the methodology and tolerance levels that will apply in Year 3 (2024) and Year 4 (2025) of the Smart Meter Targets Framework, with responses requested by 21 March 2023. It was agreed in June 2021 that, under the Smart Meter Targets Framework, BEIS would conduct a mid-point review to assess the progression of the smart meter rollout and whether the model and methodology used remained appropriate. The framework first took effect from the beginning of January 2022 and set energy suppliers in GB annual installation targets on a trajectory to 100% smart coverage by end 2025, subject to an annual allowance or ‘tolerance level’ that applies across industry as a percentage of each supplier’s customer base.

After completing its review, BEIS is consulting on three proposals. This includes an amendment to the structure of requirements regarding domestic and non-domestic installations; updates to the rollout model to use the latest evidence and validate assumptions; and a ‘churn adjustment’ to apply for non-domestic installation requirements in Year 3 of the framework only, with no ‘churn adjustment’ for domestic installation requirements in either remaining year.

Usage

CCC: investment priorities for climate change adaptation

On 1 February, the Climate Change Committee (CCC) published a new report titled Investment for a well-adapted UK, through which it argues that ‘a lack of leadership is preventing essential investment to prepare the UK for climate change.’ It highlights that, in common with work towards net zero, a major programme of investment is needed to meet the UK’s climate adaptation needs, but unlike net zero the government has not defined its priorities. The report, therefore, sets out new analysis of the UK’s adaptation investment priorities and several recommendations, including:

The refresh of the Green Finance Strategy in 2023, together with Third National Adaptation Plan (NAP3), should clarify where the government expects adaptation actions to be funded through public sources and where private investment is expected.

The update to the Green Finance Strategy in 2023 and NAP3 should set out steps to ensure that the UK Sustainability Disclosure Requirements initiatives (including the Green Taxonomy) are effective in improving the understanding of adaptation investment needs, directing finance towards adaptation, and ensuring that regulators and auditors have the necessary expertise to monitor the quality of reporting and provide incentives for organisations to report on their adaptation actions.

The need for investment in adapting to climate change should be included within mandates/strategic priorities for all relevant industry regulators and implementing agencies through resilience standards aligned to national-level objectives.

The Office for Budget Responsibility should undertake a full review of how the impacts of climate change in the UK will affect the UK’s macroeconomic performance and public finances, building on the analysis in their 2021 Fiscal Risks Report.

The UK should build on the work of the Transition Plan Taskforce to define common standards for what high-quality adaptation plans should look like.

Financial regulators should provide directional guidance for financial institutions to measure physical climate risk and their contribution to climate adaptation (and maladaptation) outcomes across portfolios and loan books.

UK Public financial institutions (such as the UK Infrastructure Bank, British Business Bank, UK Export Finance, and British International Investment) should create adaptation finance strategies and launch new sustainability-linked instruments tied to adaptation outcomes.

Energy Efficiency Taskforce launched

On 21 February, the UK Government launched a new Energy Efficiency Taskforce, to be Co-Chaired by NatWest’s CEO Alison Rose. The remit of the taskforce will be to devise a workplan to help reduce total UK energy demand by 15% by 2030, when compared to 2021 levels, across domestic and commercial buildings and industrial process. £6bn of government funding will be available from 2025 to support this objective, in addition to the £6.6bn allocated this Parliament – taking the total to £12.6bn this decade.

Priority areas of the taskforce will include identifying barriers and opportunities in existing market and regulatory frameworks to delivering the demand reduction ambition, working with the private sector to increase the availability of green finance linked to installation standards and quality, and working with the Department for Energy Security and Net Zero (DESNZ) to gather, monitor, and respond to data that shows progress towards the 15% demand reduction target.

Lords Committee concludes Boiler Upgrade Scheme failing to deliver

On 22 February, it was announced that, following an inquiry into the UK Government’s Boiler Upgrade Scheme, the Lords Environment and Climate Change Committee has concluded that the scheme is failing to deliver on its objectives, due to a low take-up of grants. The committee has found that the promotion of the scheme has been limited, with low overall public awareness of low-carbon heating systems and that, even with the help of the grant, the upfront costs are too high for many households. To address these shortcomings, a number of recommendations have been made including that the government provides greater clarity to industry and consumers on feasible options for low-carbon home heating, and that it rolls over the remainder of the scheme’s first year budget into the second year and establishes a review to consider extending the scheme.

Government launches £32mn scheme to promote energy efficiency

On 7 February, the government announced the launch of a new scheme that is intended to make existing heat networks in England and Wales more energy efficient to help reduce emissions and household bills. The £32mn Heat Network Efficiency Scheme is set to upgrade old and inefficient heat networks, by replacing out-of-date equipment with energy efficient alternatives and introduce cutting-edge data monitoring systems to check equipment performance. The improvements made to the heat networks are set to prevent customers experiencing heat and, or hot water breakdowns, and reduce instances where homes and corridors become too hot due to heat escaping from inefficient piping.

Report calls on UK Government to increase clean energy investment

A report by Energy UK, issued on 20 February, has stated that the UK Government’s targets to address climate change and energy security through the build out of clean, homegrown energy can only be achieved by ensuring that the UK continues to attract international private sector investment into low carbon projects. The report warns that the investment climate for UK low-carbon generation has seen a significant deterioration. Energy UK attributes this difficult environment to inflation, interest rates, supply chain difficulties, and increased competition from abroad, along with the government’s recent Electricity Generator Levy (EGL), which it states has caused concerns for the viability of new clean energy projects. The report estimates that overall costs for new low carbon generation projects have increased by 20-30%, which it states are further held back by “systemic regulatory uncertainty, and lengthy delays to planning and grid connections”. To this end, Energy UK makes several recommendations to the government, including a rethink of the EGL, to include an investment allowance similar to that of the oil and gas sector, and reformation of the Capital Allowance Regime to enhance incentives for low carbon investment.

RenewableUK recommends actions to improve investment in UK energy

Ahead of the Spring Budget scheduled for 15 March, RenewableUK has published a report detailing actions the UK Government could take to ensure that the UK remains a desirable target for private investment in new clean energy projects amid increasing competition globally. The report Retaining the UK’s leadership in renewables states that in order to deliver the government’s 50GW offshore wind target, including 5GW floating, £155bn of private investment will be needed. It also notes that as the US and EU are improving policy and regulatory environments for investors, the UK must similarly offer fiscal incentives for developers and supply chain companies. Recommendations include a streamlining the planning process to allow key infrastructure projects to progress at a faster rate, setting sustainable prices for renewable electricity, and reforming Contracts for Difference auctions to enable the development of the future renewables pipeline.