Regulatory Report - January 2022

Generation

BEIS published a consultation seeking views on its proposed approach to recovering the costs of heat networks regulation. The consultation also seeks views on the design and operation of the proposed approach to cost recovery, which will be administered by Ofgem.

The Centre for Policy Studies (CPS) published a report on highlighting that the government can level up and decarbonise the economy simultaneously by introducing a carbon border tax, alongside a selection of other policies.

Delivery

Ofgem approved WACM4 for CMP381 Defer Exceptionally High Winter 2021/22 BSUoS Costs to 2022/2023. The modification caps Balancing Service Use of System (BSUoS) costs at £20/MWh from 17 January to 31 March 2022, up to a limit of £200mn.

Ofgem is consulting on its draft forward work programme (FWP) which sets out the key activities it intends to undertake in 2022-23.

Western Power Distribution (WPD) noted a project that it hopes will create a viable solution for Distribution Network Operators to unlock the flexibility from residential low carbon heat.

Usage

Transport Scotland has published its Draft Vision for Scotland’s Public Electric Vehicle Charging Network report.

YouGov published the results of a recent survey, which found that 37% of UK residents reported not being able to afford to heat their home to comfortable levels during very cold weather.

Also covered in this Regulatory Report:

• New scheme to produce hydrogen from biomass launches
• EDF announces joint venture to generate 1GW of energy in Celtic Sea
• Procurement target for T-1 CM auction sees significant uplift
• 7% of respondents very likely to change current energy source in next 3 years
• Zap-Map survey shows improving EV driver confidence
• £100mn of government funding to support Sizewell C nuclear project
• Switching rates hit the lowest level on record

Generation

BEIS consultation on heat network regulation cost recovery

On 29 December, BEIS published a consultation seeking views on its proposed approach to recovering the costs of heat networks regulation. The consultation also seeks views on the design and operation of the proposed approach to cost recovery, which will be administered by Ofgem.

Heat networks are seen as an important part of the UK’s transition to net zero and, as the integration of heat networks grows within the energy system, it is recognised that greater regulation is required to enforce consumer protections. In its consultation, BEIS announced the appointment of Ofgem as the heat network regulator, recognising its comprehensive experience regulating the energy market. Citizens Advice has also been appointed as the consumer advocacy body for heat networks in England and Wales.

BEIS currently estimates that the total ongoing costs to cover Ofgem and Citizen Advice’s regulatory activities would be £6.5mn per year and is seeking views on several proposals in its consultation for the recovery of these costs from consumers. BEIS outlines four approaches to the recovery of heat network regulation costs. The default approach would be to spread the costs across heat network consumer bills which is expected to add £10 or more to bills per year. BEIS recognises that this increase could create risks to the market’s competitiveness against other higher carbon alternatives and result in barriers to the growth of the decarbonisation of the heat networks market.

BEIS’s preferred cost recovery regime for heat network regulation is therefore to spread the total costs of heat networks, gas and electricity regulation evenly across heat network, gas, and electricity consumers. By spreading these costs across roughly 55mn gas and electricity consumers, rather than just ~475,300 heat network consumers, these costs are expected to be reduced to approximately £1.40 on average per heat network customer per year in BEIS’ central case. An additional £0.10 would be added to gas and electricity consumers per year for what they currently pay for Ofgem’s gas and electricity regulation and Citizens Advice’s consumer advocacy functions.

CPS: government can decarbonise with carbon border tax

The Centre for Policy Studies (CPS) published a report on 11 January highlighting that the government can level up and decarbonise the economy simultaneously by introducing a carbon border tax, alongside a selection of other policies. The report highlights that meeting environmental targets presents an opportunity to revitalise areas and support the levelling up agenda.

A carbon border adjustment mechanism (CBAM) would provide a level of insurance against ‘carbon leakage’ and give British industries the reassurance they need that taking steps to decarbonise will not mean they are unfairly undercut by imports. At the next World Trade Organisation Ministerial Conference, the government should work collaboratively with other nations to advance the idea of CBAMs as a way to decarbonise their economies without compromising on competitiveness.  In addition, carbon pricing could be extended to more of the economy acting as a constant incentive for businesses to adopt cleaner methods of production – while also stimulating new opportunities for clean businesses. But its application in the UK is currently inconsistent and incomplete. To rectify this, the UK Emissions Trading System should be broadened out to include more of the economy.

New scheme to produce hydrogen from biomass launches

The government has launched a new scheme for technologies producing hydrogen from biomass and waste. The scheme will look to accelerate the commercialisation of innovative clean energy technologies and processes through the 2020s and 2030s to support the UK’s path to net zero.

The new Hydrogen BECCS Innovation Programme, funded through BEIS’s £1bn Net Zero Innovation Portfolio, will provide £5mn of government funding for technologies which can produce hydrogen via bioenergy with carbon capture and storage (BECCS). BECCS is the production of hydrogen via biomass and waste, with the ability to capture and store the carbon released during the process.

The announcement on 12 January means that applicants will be able to bid for a share of the government funding under phase one of the scheme. Each project will be able to bid for up to £250,000 to support project plans and help demonstrate the feasibility, with funding available to small businesses and large companies or research institutions and universities. A second phase will follow in early 2023, which will provide additional funding to at least two demonstration projects.

EDF announces joint venture to generate 1GW of energy in Celtic Sea

On 12 January, EDF Renewables announced a joint venture partnership with DP Energy to generate up to 1GW of low carbon, green energy in the Celtic Sea. The floating offshore wind project, Gwynt Glas, will provide power for approximately 927,400 homes – contributing to the Crown Estate’s ambitions for 4GW of capacity in the Celtic Sea. Work is already underway to identify a refined area of search, carrying out detailed constraint studies for the proposed location of the project. An area of interest encompassing some 1,500km2 has been identified, approximately 70km from the shore, with initial remote aerial surveys for marine mammals and birds taking place since spring 2021.

EDF Renewables UK Head of Offshore Wind Scott Sutherland said: “This is a great start to 2022 for us and we are very pleased to announce this partnership with DP Energy. We firmly believe Gwynt Glas will be a catalyst for further supply chain growth across the UK which is something we as a company are very supportive of. We will use our experience in offshore wind to help bring opportunities for local, regional and national companies on this project and on others, such our Blyth floating project and the two we are bidding for in the ScotWind process. Floating offshore wind is an exciting new technology and will bring much needed inward investment which can regenerate coastal economies and communities.”

Procurement target for T-1 CM auction sees significant uplift

The updated procurement targets for the upcoming Capacity Market (CM) auctions have been published, with the T-1 target increasing to 5.361GW and the T-4 target reducing to 42.1GW.

The T-1 (one-year ahead) auction (for delivery in 2022-23) had a provisional procurement target of 4.5GW set in summer 2021. In its updated analysis, National Grid Electricity System Operator (ESO) set out the factors that have changed in its underlying assumptions since then, which included: A -400MW adjustment to account for long-term Short Term Operating Reserve (STOR) capacity that has opted out of the CM but is expected to remain operational in 2022-23 and A 600MW adjustment due to additional non-delivery that has been assumed since the original procurement target was set.

This led to the ESO recommending a 200MW increase on the original target, taking it to 4.7GW. However, in his response to the recommendations, Secretary of State for BEIS Kwasi Kwarteng said he was increasing the procurement target to 5.361GW. He explained that while he agreed with the ESO’s analysis, the higher target reflected “the broader uncertainties within the power sector”.

Delivery

Ofgem approves £20/MWh cap on BSUoS until April

On 14 December Ofgem approved WACM4 for CMP381 Defer Exceptionally High Winter 2021/22 BSUoS Costs to 2022/2023. The modification caps Balancing Service Use of System (BSUoS) costs at £20/MWh from 17 January to 31 March 2022, up to a limit of £200mn.

The proposal was raised after BSUoS costs showed marked increases due to notably high gas prices driving up Balancing Mechanism offers from gas generators and tight margins. BSUoS prices have been significantly higher than National Grid Electricity System Operator forecasts, with the proposer highlighting a £625mn discrepancy between August and November 2021.

Any deferred costs will be spread equally across the 2022-23 financial year, starting on 1 April 2022, with the costs volume weighted across the day through each settlement period. If the actual costs of the total deferral are not known by 1 April 2022, i.e., the £200mn cap has not been reached prior to this, the recovery will initially be based on a forecast.

Ofgem considered that approving a £20/MWh cap appropriately reflects the higher end of recent BSUoS costs, and potentially reflects a level that users may not have foreseen. The regulator also noted that WACMs with a lower £/MWh cap may have caused the scheme to close early and are less likely to perform well. The modification was implemented on 17 January.

Ofgem sets out priorities in Forward Work Programme

Ofgem is consulting on its draft forward work programme (FWP) which sets out the key activities it intends to undertake in 2022-23. Issued on 17 January, the FWP outlines enhancements to Ofgem’s strategic change programmes and also includes long term changes to achieve net zero at least cost. Due to the recent market volatility, Ofgem has set out two main priorities: addressing market reforms; and the transformation of the retail market to ensure consumers are protected and that the market remains viable on the path to net zero.

The regulator notes that its priority for the remainder of 2021-22 is stabilising the retail market situation, continuing to protect consumers and taking steps to restore market confidence. Three key activities to achieve this are: making changes to the price cap; assessing how the supply licence protects consumers and accounts for market instabilities; and considering how best to support vulnerable consumers.

Project to unlock flexibility from residential low carbon heat

On 25 January, Western Power Distribution (WPD) noted a project that it hopes will create a viable solution for Distribution Network Operators to unlock the flexibility from residential low carbon heat – such as heat pumps – at scale in a way that is cost-effective, reliable, and equitable for customers. WPD states that the £15.28mn Equitable Novel Flexibility Exchange (Equinox) project is partly funded by Ofgem’s Network Innovation Competition and is currently planned to run from March 2022 to January 2026. The partners for the project are Passiv Systems, SP Energy Networks, Octopus Energy, SERO Homes, West Midlands Combined Authority, Guidehouse and the Welsh Government. The project aims to deliver substantial network benefits through the deferral or avoidance of network reinforcement due to the uptake of heat pumps in the upcoming RIIO-ED2 price control period and beyond. The announcement added that WPD is preparing its network for an additional 600,000 heat pump connections by 2028.

Usage

Transport Scotland draft vision for public EV charging

Transport Scotland has published on 26 January its Draft Vision for Scotland’s Public Electric Vehicle Charging Network report which explores the key areas relevant to the development of a Scottish public electric vehicle (EV) charging network. The report highlights that a key part of Scotland meeting its climate goals is to encourage the increased use of public transport and other forms of active travel. A shift to electric vehicles (EVs) is also required while meeting the ambition to reduce annual kilometres driven by 20% by 2030. In addition, the report outlines the main aspects for the draft vision for Scotland’s public electric vehicle charging network:

• People have access to a well-designed and comprehensive public network of charge points.
• The public electric vehicle network works for everyone regardless of age, health, income or other needs.
• Scotland has attracted private sector investment to grow the public electric charging network, ensuring it meets the needs of all people.
• The public charging network is powered by clean, renewable energy and drivers benefit from advancements in energy storage, smart tariffs and network design.
• People’s first choice wherever possible is active and public transport with the location of electric vehicle charging points supporting those choices.

Data from the report showed that since 2013, £50mn has been invested in the ChargePlace Scotland network of publicly available EV charge points. The network contains over 2,100 charge points, which delivered 783,000 charging sessions in 2020. In addition, the report stated that according to the Society of Motor Manufacturers and Traders, on a rolling 12-month average EVs made up 12.7% of new car sales at December 2021. This is a 24% increase on the rolling average at December 2020. In December 2021, sales of EVs made up over 21% of all new car sales in Scotland. The report concludes that the vision outlined leads the way to the next phase in growth of Scotland’s public charging network. It sates that along with its associated outcomes and priorities, over the next 12 months it will be reviewed and refined through engagement with stakeholders.

37% unable to afford to heat homes to comfortable levels

On 26 January, YouGov published the results of a recent survey, which found that 37% of UK residents reported not being able to afford to heat their home to comfortable levels during very cold weather. The data from the survey showed that only 28% said they could heat their house to a level that was warm but not as much as they would like. In addition, 49% of people from very low-income households (with a combined income of less than £15,000 a year), responded that they cannot afford to heat their home to a comfortable temperature when it is very cold outside. The survey also found that 25% of those with a household making more than £50,000 a year still say they cannot afford to heat their home to a temperature where they are comfortably warm.

32% of those in low-income households said they can heat their homes to a level where they are warm, but not as warm as they would like, 11% who can reduce the impact of the worst of the cold and 6% who cannot afford to heat their homes at all.

The report also looked at the reason people have for not putting on their heating as a first response to feeling cold. The data showed that the majority of the respondents are either trying to save money (51%) or cannot afford to keep their homes warm (24%).

7% of respondents very likely to change current energy source in next 3 years

The NatWest Greener Homes Attitude Tracker published on 24 January has found that 7% of homeowners are very likely to consider changing to a different energy source in the next 3 years. Of the 4,500 respondents 33% said they are unlikely to make green home improvements due to the perceived disruption it would cause. The tracker also found: one in five households are very concerned about the carbon emissions produced by homes in the UK, 55% of homeowners have already made positive changes to the environmental sustainability of their property and 33% of UK households that are looking to buy a property over the next decade believed the Energy Performance Certificate (EPC) rating of a property was a 'very important' factor.

Zap-Map survey shows improving EV driver confidence

On 30 December, Zap-Map released the results of a new survey of electric vehicle (EV) drivers, showing that they are increasingly confident about driving long distances. The poll revealed that more than 90% of drivers are extremely happy with their EV and would not want to replace it with a petrol or diesel car. The data highlights the positive impact of EVs on drivers who have benefited from a great driving experience, low running costs and low emissions. Less than 1% wanted a return to a petrol or diesel vehicle. Driver satisfaction was notably higher for both battery-electric and plug-in hybrid vehicles, with EV drivers reporting a satisfaction score of 91 out of 100 (battery-electric 92, plug-in hybrid 84), compared with only 74 for petrol or diesel vehicle ownership. For the first time, drivers were also asked about the furthest distance they have travelled in an EV in a single journey. 53% said they have driven more than 200 miles in their EV in a single trip with 24% saying they have driven more than 300 miles in one trip. Over 7% have driven more than 500 miles in a single journey. For around 31%, between 101 and 200 miles was their longest trip in an EV, while for 15% it was less than 100 miles.

£100mn of government funding to support Sizewell C nuclear project

On 27 January, BEIS announced £100mn to support the continued development of the Sizewell C nuclear project in Suffolk. The £100mn option fee will be invested by EDF into the project to help bring it to maturity, advance to the next phase in negotiations and attract investors, with the government to take certain rights over the land of the Sizewell C site and EDF’s shares in the Sizewell C company in return. If Sizewell C reached a Final Investment Decision, the government will be reimbursed the £100mn option fee with a financing return, and if it does not reach this milestone the government would ask for either Sizewell C Company shares or the Sizewell C site, or if EDF is unable to provide these assets the money will be refunded by EDF together with a financing return. When complete, the Sizewell C project is expected to generate 3.2GW of electricity which would power the equivalent of 6mn homes.

Switching rates hit the lowest level on record

ElectraLink published the December switching rates on 17 January, which showed levels dropping to the lowest on record. ElectraLink stated that a combination of voluntary transfers and Supplier of Last Resort (SoLR) transfers increased the market share of the former ‘Big Six’ for the first time in a decade. Large legacy brands held accounts with 56% of customers in GB at the end of August 2021, with this rising to a market share of 59% of customers at the end of December 2021. December 2021 saw changes of supplier (CoS) hit a record low with 112,000 switches completed – a 77% drop on the levels in December 2020. The data showed that were 4.984mn successful switches in 2021 overall, 18% less than 2020. The CoS process was used over 11.2mn times – a 36% increase on 2020 due to supplier mergers and SoLRs