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September 2017

By Market Insight Team | Posted November 13, 2017

Generation

The government’s latest auction for renewables subsidies saw significant savings delivered across all successful technologies, with the most striking cost reduction coming in offshore wind. New offshore wind will be delivered for as little as £57.50/MWh from 2022-23 – a fall of more than 50% since the first auction held back in 2015.

Energy UK has outlined what the industry’s priorities are for Dieter Helm to consider under the ongoing independent review of the cost of energy. The trade association sent a letter to Helm, detailing 10 priorities, including providing a clear policy on energy efficiency requirements, and establishing fit for purpose cost controls to support the cost of decarbonisation, ensuring security of supply.

Delivery

Ofgem has announced the allowances of several electricity distribution network operators (DNOs) will be cut by a combined £204mn. It follows prior warnings of a “tougher” round of price controls following “clear evidence” the cost of investment required in networks was “significantly lower”. Following a review of the DNOs’ investments, Ofgem found less had been spent than previous expected – leading to the reduction.

The government will remove the Data Communications Company (DCC) opt-out and extend the DCC’s monopoly into the non-domestic sector. The DCC opt-out policy allowed energy suppliers to use communications services over than those provided by the DCC for any SMETS2 meters installed at non-domestic premises. However, the government found this policy to be “no longer appropriate”.

Usage

Policy Exchange has called on the government to establish a new Energy Efficiency Delivery Unit and for Energy Performance Certificates to be linked to business rates, incentivising landlords to invest more in energy efficiency. It explained energy efficiency is key in boosting productivity and decarbonisation, suggesting that “quick wins” could lead to annual savings of £1.3bn for businesses.

A new campaign launched by The Climate Group aims to fast-track the uptake of electric vehicles (EVs) and infrastructure. EV100 wants members to swap their large diesel or petrol vehicle fleets to EVs as well as installing electric battery charging infrastructure by 2030. Heathrow Airport, HP, IKEA, Unilever and Vattenfall are among the first 10 members to sign up to the campaign.

Also covered in this Regulatory Report:

Government plots new changes to non-domestic renewable heat scheme
EU makes contingency plans to protect carbon market from Brexit
New Ofgem guidance reflects energy intensives exemption from RO scheme
Manufacturers call for energy network improvements
Non-domestic energy efficiency sector sees confidence flatline
Government looks to boost green business investment
Rising carbon prices could cut company profits


Generation

Renewables auction delivers significant savings

New offshore wind will be delivered from as little as £57.50/MWh from 2022-23, after the government’s latest auction for renewables subsidies cleared below expectations.

The government announced on 11 September that eleven new energy projects had been successful in the auction. These were worth up to £176mn and are set to generate 3.2GW of electricity, with the average strike price being £66.13/MWh. All successful technologies, including Advanced Conversion Technologies and Dedicated Biomass with Combined Heat and Power brought about significant savings. But offshore wind delivered the greatest fall in price per unit generated – dropping over 50% since the first auction held back in 2015.

The strike price for a project refers to the amount of money the government guarantees the developer for each unit of electricity they produce. Suppliers then pay developers the difference between the wholesale cost of electricity and the strike price – this is recovered through a levy on consumer bills. The government said that the capacity delivered will cost up to £528mn/year less than it would have in the absence of competition.

Commenting on the results, Energy Minister Richard Harrington said: “The offshore wind sector alone will invest £17.5bn in the UK up to 2021 and thousands of new jobs in British businesses will be created by the projects announced today.” Elsewhere, Energy UK urged the government to set out an “ambitious, long-term plan” for further decarbonisation through the Clean Growth Plan. The trade association also called for certainty to be provided to the timing for further auctions, allowing all technologies to compete for contracts.

Similarly, renewables groups such as Renewable UK called for the government to allow this “young, ambitious industry” to go even further with further “fiercely competitive auctions”.

 

Energy UK delivers list of priorities for cost review

Energy UK has outlined what the industry’s priorities are under the ongoing independent review of the cost of energy.

The trade association sent a letter to Dieter Helm, the economist leading the review, with a list of 10 priorities. These included providing a clear policy on energy efficiency requirements, establishing fit for purpose cost controls to support the cost of decarbonisation, ensuring security of supply, and the upgrade to a smart energy system.

Energy UK said that there is a strong case to develop a roadmap around energy efficiency requirements and provide for business, commercial and large users to improve the emissions performance for their business premises. It also called for a “major ramp up” when it comes to energy efficiency investment in both homes and businesses. The letter said the government should create an environment that supports research and development funding for low-carbon technologies, linked to education, delivering innovations across a wide spectrum of technologies. This, it claimed, would also encourage businesses to reduce their energy costs.

Chief Executive Lawrence Slade said, for the review to be successful, “the whole industry will need to feel included and represented as part of it.” Slade added that there was a risk of continued uncertainty and potentially detrimental intervention into the energy market. This, Slade warned, could result in a negative impact on investment.

Government plots new changes to non-domestic renewable heat scheme

In a new consultation, the government detailed a range of proposed changes to the non-domestic Renewable Heat Incentive (RHI) scheme.

Released on 5 September, the consultation delivers on the government’s commitment to undertake further detailed work on eligible heat uses and to consult on subsidy limits for very large installations. These pledges were made in its response to a 2016 consultation, and it has now outlined proposals on both of these issues. The non-domestic RHI bridges the gap between the cost of renewable heating systems and conventional alternatives.

Moving forwards, the government said it was keen that the scheme continues to play its part in hitting decarbonisation targets and the UK’s renewable energy goal, while remaining good value for money.

The government also sets out proposals on eligibility rules where multiple installations are accredited under the RHI at a single site. It explained this is to ensure continued value for money and robust budget management of the scheme. The consultation also looked at a number of other cross-cutting issues. These include evidence requirements in relation to environmental permits and restricting the use of estimated metering data.

EU makes contingency plans to protect carbon market from Brexit

Driven by concerns that a sudden UK exit from the EU’s emissions trading scheme could crash the price of carbon, the European Union is making moves to ensure Brexit does not damage its carbon market.

On 10 September, the Financial Times reported that the European Parliament was set to amend legislation governing the EU’s carbon trading scheme (EU ETS) due to concerns over the prospect of a sudden UK exit. The EU ETS, a cap and trade system, limits the overall volume of greenhouse gases that can be emitted by power plants, heavy industry and the aviation sector. This then allows companies to trade emissions allowances on an open market.

Speaking with the FT, Peter Liese MEP explained the move would avoid a situation where UK companies can sell their emissions allowances under the scheme in one large chunk. Liese added that while they hoped for an agreement on the UK-EU divorce, “unfortunately” care had to be taken to ensure the prospect of a hard Brexit is suitably prepared for.

 

New Ofgem guidance reflects energy intensives exemption from RO scheme

Ofgem is seeking feedback on updated guidance for the Renewables Obligation (RO), which reflects the exemption of energy-intensive industries (EIIs) from the indirect costs of the policy.

The government released its decision to exempt EIIs from up to 85% of the costs of the RO on 19 July, deeming benefits for large-scale industry justified the higher bills for non-eligible businesses and households. The government is planning to lay down the legislation in October, to implement the exemption from 1 January 2018.

The guidance also includes the updated formula to calculate a supplier’s RO Certificates. Responses are invited by 6 November 2017. The regulator is seeking feedback on whether the updated guidance can be made clearer or improved, whether there are any omissions within the guidance and if respondents feel the approach taken in administering the exemption is sensible.


Delivery

Distribution network operators to see allowances reduced

Ofgem has announced the allowances of several electricity distribution network operators (DNOs) will be cut by a combined £204mn.

The news follows the regulator’s final assessment of DNO performance in the previous price control (DCPR5), which ran from 2010 to 2015, with confirmation of a reduction in spending allowances for the remainder of the current price control period on 15 September. Ofgem said, following a review of DNOs’ investments, it found the operators spent less than previously expected. This was due to lower than expected demand, making potential upgrade projects unnecessary.

Allowances were reduced by a total of £74mn for SSE, Scottish Power, UK Power Networks, and Western Power Distribution. Furthermore, with the latter two having cancelled a number of investment projects, their allowances were reduced by a total of around £130mn.

Final adjustments will now be made through the remainder of the RIIO-ED1 price control, which runs until 2023. Fully half of the reduction in distribution costs will be factored into 2018-19, with the remaining reductions split evenly over the remainder of the price control period.

Government to remove DCC opt-out

The government has announced it will remove the Data Communications Company (DCC) opt-out and extend the DCC’s monopoly into the non-domestic sector.

The DCC opt-out policy allowed energy suppliers to use communications services other than those provided by the DCC for any SMETS2 meters installed at non-domestic premises. The reason behind such a policy was that a competitive market was already established for communications services in the non-domestic advanced metering market. However, in response to a 2016 consultation, the government deemed the policy to be “no longer appropriate”.

In explaining its decision, the government said evidence supported the position that smaller non-domestic consumers were unlikely to benefit from the full range of smart metering services if the opt-out were to be retained. It added that there was no evidence of an alternative provider coming forwards with a service that was on par with that of the DCC.

Manufacturers call for energy network improvements

The government should “crack on in the coming months” and deliver a roadmap for minimising business energy costs, according to manufacturers in EEF’s 2017 Infrastructure Appraisal.

Published on 14 September, the appraisal found that in the eyes of manufacturers, the quality of core networks such as energy supply and roads had declined over the last two years. Energy price concerns were cited as being the key reason for why the quality of the provision of energy supply has been perceived to have deteriorated.

To fix issues, manufacturers called for the delivery of annual energy policy statements jointly between government, Ofgem and National Grid. These would transparently set out policy intentions and their cumulative impact on bills. The manufacturers also called for a reduction in UK energy price disparity, through setting out metrics to monitor the competitiveness of UK industrial energy supplies for various types of user against competitor countries. The paper also called for the delivery of technology neutral auctions for low-carbon technologies.


Usage

Energy efficiency can save UK businesses £1.3bn a year

Policy Exchange said the government should establish a new Energy Efficiency Delivery Unit in a new report, published on 25 September.

Such a unit, the report explained, would bridge the gap between viable projects and available capital. Clean Growth also called for Energy Performance Certificates to be linked to business rates, incentivising landlords to invest more in energy efficiency. It explained that energy efficiency is a crucial part of boosting productivity and decarbonisation, suggesting that “quick wins” could result in savings of £1.3bn for businesses annually. It set out how the opportunity for productivity gains could extend past businesses to the NHS, which could save £200mn a year.

The report went on to suggest that schemes such as the Energy Saving Opportunity Scheme (ESOS), a mandatory energy assessment scheme which sees qualifying organisations carry out energy efficiency assessments every four years, can be used “much better”. It called for ESOS to be extended to cover public sector institutions, such as the NHS, where the energy saving potential is “large and cost effective”. It added that reporting on progress should be made mandatory.  

The report’s author, Joshua Burke, said: “Businesses and public sector organisations spend the equivalent of nearly 5% of GDP (£22bn) on energy every year but too many organisations still aren’t investing enough in energy efficiency. It needs to be seen as a major strategic investment which is both good for the environment and good for profitability.”

Burke added: “What will ultimately drive energy efficiency projects are the perceived strategic and productivity benefits rather than energy and carbon savings, and this is how it should be framed and communicated to ensure traction across all management levels of businesses.”

New campaign targets faster electric vehicle uptake

A new campaign launched by The Climate Group will strive to fast-track the uptake of electric vehicles (EVs) and infrastructure.

EV100 wants members to swap their large diesel or petrol vehicle fleets to EVs as well as installing electric battery charging infrastructure by 2030. Heathrow Airport, HP, IKEA, Unilever and Vattenfall are among the first 10 members to sign up to the campaign. Specifically, companies joining EV100 must make a public commitment to fast-track EV uptake in one or more of four commitment areas by 2030. These areas include supporting staff use of EVs and supporting EV uptake by customers, both through infrastructure, and placing requirements in service contracts for EV usage.

The Climate Group said the initiative was being launched at a time when the transport sector is the “fastest-growing” global contributor to climate change. As businesses own a sizeable segment of all registered vehicles on the road, EV100 will draw on business leadership to accelerate the transition to electric transport, making EVs “the new normal” by 2030.

Helen Clarkson, Chief Executive Officer at The Climate Group, said: “EV100 will use companies’ collective global buying power and influence on employees and customers to build demand and cut costs. The members being announced today see the business logic in leading a faster transition and addressing local air quality issues in their markets. They are setting a competitive challenge to the auto industry to deliver more EVs, sooner and at lower cost.”

Non-domestic energy efficiency sector sees confidence flatline

The latest EEVS Insight Energy Efficiency Trends survey has revealed a “relatively quiet” second quarter of 2017 for the non-domestic energy efficiency sector.

Supplier confidence flatlined after 12 months of incremental rises that saw the EEVS/Bloomberg Market Monitor shift from negative sentiment into positive. Despite the stall in confidence, the report said the confidence indicator remains “well above” neutral and the sector is anticipating a return to an upward trajectory in the next three months. Few material changes resulting in a quiet period reflect the flattening in sentiment, the report explained.

Customer demand (18%) remains the principle concern for the sector. Brexit negotiations also remain high on the business agenda with concerns around “policy uncertainty” seeing an uptick –14% cited it as their main worry. The survey further found the sector’s view on government remains negative, with six out of 10 suppliers considering energy efficiency policy to be ineffective.

Government looks to boost green business investment

The government has launched a new taskforce, seeking to build on the UK’s global leadership in green finance as part of the low-carbon transition.

Announced on 18 September, the taskforce has assembled senior financial experts who will be tasked with accelerating the growth of green finance. The government explained that while the green finance agenda has gained global momentum in recent times, it must go even further to hit climate change commitments. Specifically, it said an estimated $13.5tn of investment is required between 2015 and 2030 in the global energy sector alone for countries to meet Paris Agreement targets.

Green finance includes private sector investments in technologies, infrastructure and innovative start-ups that can create jobs and allow businesses to expand, boosting economic growth while reducing greenhouse gas emissions. Government recognised most of the needed investment will have to come from the private sector.

Claire Perry, Climate Change Minister, said: “Britain has already shown the world that a strong economy and efforts to tackle climate change can, and should, go hand in hand. Now is the time to build on our strengths and cement our position as a global hub for investment in clean growth.”

Rising carbon prices could cut company profits

If carbon prices were to rise to $100/ tonne (£77.41/ tonne), almost half of listed global companies would face a rise or fall of more than 20% in earnings, a new framework developed by Schroders has found.

The global investment manager’s new model sets out the extent to which company profits and investor returns could be at risk from more aggressive climate policies and higher carbon prices. Carbon prices, which are costs applied to pollution, encouraging companies and other organisations to reduce emissions, will have to clear $100/ tonne, Schroders said, if the international target of 2°C global warming limit to be met.

The Carbon Value at Risk (Carbon VaR) framework highlights the inadequacies of traditional measures of climate risk and problems investors face evaluating the impact of climate change on company profits. It works through looking at companies’ business models and profit drivers, instead of just environmental measures. Schroders said it assesses the impact of rising carbon costs on a company’s profitability more accurately than those provided by carbon footprint analysis. 

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