Contents:
Week in Energy
Policy updates:
- Payments to small power generators set to be cut
- Queen’s Speech pledges energy market action
- Government continues clean energy drive with new investment
- Ofgem moves to approve new electricity links to other countries
Industry updates:
- National Grid forecasts better electricity margin for winter
- GB’s biggest gas storage facility to close
- Lighting continues to dominate non-domestic energy efficiency
Week in Energy
Monday 19/06 – Ofgem gives preliminary approval for three new interconnectors to France, Germany and Norway to operate under the cap and floor regime. SNP Westminster Leader Ian Blackford announces the new SNP frontbench team, with Drew Hendry MP appointed Spokesperson on Business, Energy and Industrial Strategy.
Tuesday 20/06 – Ofgem announces that it will cut embedded benefits to distributed generation, as it will prevent market distortion and help save on energy bills. The government announces £35mn of funding from the BEIS Energy Innovation Programme, which will go to smart heating systems and innovation in using hydrogen as a heat source. It is announced that the Rough gas storage facility is to permanently close.
Wednesday 21/06 – The Queen’s Speech sets out the government’s legislative programme for the next two years, with bills focusing on smart meters and nuclear energy included. Business and Energy Secretary Greg Clark writes to Ofgem, calling on the regulator to address current issues in the energy market using existing powers. New analysis from Philips Lighting finds that UK organisations are not doing enough to reduce emissions.
Thursday 22/06 – Trade association Eurelectric says that if the UK is to continue participation in the Internal Energy Market without the jurisdiction of the ECJ and without automatically applying EU legislation, then a non-domestic dispute resolution mechanism and a broader governance framework must be developed. SSE publishes its Sustainability Report, revealing it has achieved its carbon reduction target of halving carbon intensity of electricity generated by 50% by 2020.
Friday 23/06 – The National Audit Office says that the strategic and economic benefits of the Hinkley Point C nuclear power station project are uncertain, while claiming that the government has not sufficiently considered the costs and risks of the deal for consumers in a new report.
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Policy 1 | Payments to small power generators set to be cut
The energy regulator Ofgem has confirmed it will change the transmission charging arrangements for embedded generation in order to lower bills for energy users.
Plant connected to the low-voltage local network do not pay for Transmission Network Use of System (TNUoS) charges. Because distributed generation is assumed to be used locally, it is considered to reduce the net power exchange with the high-voltage network. Since TNUoS charges are related to the amount of power on the high-voltage network, any energy supplier with distributed generation in its portfolio pays lower charges, being billed “net” of distributed generation. How much of that saving is passed on to the distributed generator depends on how it has negotiated a power purchase agreement with the supplier. Some other benefits of the current arrangements include how embedded generators allow large electricity users to avoid so-called Triad charges – an incentive on customers to avoid using power at peak periods.
Since last year, Ofgem has highlighted concerns about these electricity transmission network charging arrangements for smaller embedded generators, including the exemptions and payments collectively known as “embedded benefits.” Ofgem particularly raised concerns about how it was a distortion that an energy supplier could to use sub-100MW embedded generation to reduce charges for use of the national electricity transmission system, and how smaller embedded generation could be paid to help others avoid them.
The solution Ofgem has decided on will see the Transmission Network Use of System demand (TNUoS) residual payments removed, replaced by a new payment equivalent to the avoided Grid Supply Point costs. This will mean the payment small generators receive will be reduced from around £47/kW now to £3/kW and £7/kW over the three years from 2018 to 2021. The payments had been set to rise to £70/kW over the next four years.
Last year, it was found the payments collectively cost customers around £370mn. This was one of the reasons, according to Ofgem Chief Executive Dermot Nolan, why the regulator chose to make the change. Nolan said: “We are concerned that the current level of the payment is distorting the market and is set to increase further. Our role is to protect customers and make sure costs are kept as low as possible. That is why we are taking action by reducing this payment.” The regulator claimed the move would save consumers £7bn by 2034.
However, while energy users may save on bills, concerns have been raised that some businesses may lose out, if they have their own generators. The Association for Decentralised Energy (ADE) – the group that represents smaller generators – felt the decision “does not address the heart of the issue”. The ADE explained the “heart” was “Ofgem’s approval for the rapid rise in the cost of the transmission network from £943mn in 2007 to £3.7bn in 2021.”
Tim Rotheray, ADE Director, said: “We are disappointed that the much larger national benefits that small generators deliver by reducing use of transmission networks remain unexamined, and Ofgem’s new review must investigate how lowering use of the transmission network can save consumers money over the long term.”
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Policy 2 | Queen’s Speech pledges energy market action
Although many of the bills brought forward by the government in the Queen’s Speech focussed on Brexit, the speech also offered some insight into what new energy legislation will look like – with the smart rollout and nuclear power on the agenda.
The commitment to ensure “smart meters will be offered to every household and business by the end of 2020,” as laid out in the Conservative general election manifesto, was reiterated in the speech. The government will introduce a bill which, it says, will enable it to continue to support the effective and efficient completion of the smart meter rollout past the 2020 deadline.
The main elements are an extension of the government’s ability to make changes to smart meter regulations, by five years. It also will introduce a Special Administration Regime. This will provide insurance for the national smart meter infrastructure in the unlikely event the company responsible goes bankrupt.
Commenting, Energy UK Chief Executive Lawrence Slade said: “The industry has already installed nearly 7mn smart meters in the UK. Suppliers remain committed to ensuring all households and businesses are offered a smart meter by 2020 and that the rollout is carried out efficiently and delivers a positive experience for consumers.”
Another key piece of legislation that the government will put forward is the Nuclear Safeguards Bill, that will establish a UK nuclear safeguards regime as the UK leaves existing European arrangements.
Nuclear power supplied 20.3% of the UK’s electricity in Q4 2016, with the nuclear sector warning even with the new bill there remains “much work to do” to make sure the UK continues meeting international obligations for nuclear safeguards. The government said the legislation would also continue its reputation as a “responsible nuclear state” and protect UK electricity supplied by nuclear power.
On the energy market more broadly, the government said it would support initiatives to improve switching and transparency. Shortly after the Queen’s Speech Business, Energy and Industrial Strategy Secretary Greg Clark wrote to Ofgem asking them for an assessment of what action they could take to ensure fairness in the energy market.
On the energy elements of the speech, major business organisation the CBI said: “Putting customers at the heart of the energy market is a must. Major market interventions aren't the answer, and it is crucial that the government, regulators and industry work together to empower customers and help them to manage bills.”
The speech also stressed the UK remains committed to taking a lead in the global response to climate change. Background notes to the speech stated: “The Paris Agreement is the right global framework for protecting the prosperity and security of future generations, while keeping energy affordable and secure for our citizens and businesses.”
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Policy 3 | Government continues clean energy drive with new investment
The government has announced £35mn of funding from the BEIS Energy Innovation Programme to support smart heating systems and innovation in using hydrogen as a heat source.
The funding was revealed by newly appointed Climate Change Minister Claire Perry on Tuesday, 20 June, when speaking at the Rushlight Showcase. Under the new investment, £10mn will support the second phase of work by the Energy Systems Catapult on its Smart Systems and Heat Programme. The programme seeks to help develop local energy plans alongside Local Authorities. It also strives to bring down the cost of energy bills and support the development of the UK’s low-carbon heating projects.
A further £25mn is set to be invested in potential uses of hydrogen gas for heating. This will also go towards testing the possibility of domestic gas pipes for hydrogen and developing a range of innovative hydrogen appliances, including boilers and cookers. The investment follows the government’s commitment to doubling energy innovation investments to £400mn/ year by 2021, as set out in the Industrial Strategy green paper.
Perry reiterated the government’s aims for the UK to be a “global leader in innovation, science and research” while drawing on how the Industrial Strategy would help towards delivering ambitious CO2 reduction targets.
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Policy 4 | Ofgem moves to approve new electricity links to other countries
Ofgem has advised that it is minded to grant permission for three new electricity interconnector projects through Window 2 of its “cap and floor” regime framework, in a consultation document published Monday, 19 June.
In its consultation document, the regulator said it expects these projects to be “in the interests of GB consumers as well as connected countries and Europe as a whole.” It stated that the benefits to consumers from new interconnector projects could include; reduced electricity bills by allowing access to cheaper generation, the improved security of supply and the ability to assist in the decarbonisation of the energy industry.
The new interconnectors, proposed at 1.4GW each, would connect Great Britain with France (GridLink), Germany (NeuConnect) and Norway (NorthConnect). The projects have now passed the initial project assessments, and Ofgem will make its final decision in September. The regulator has also evaluated the potential impact that the planned Aquind interconnector to France, approved outside of the cap and floor framework, could have on these new projects.
Ofgem also advised that the five interconnectors identified under Window 1 are expected to reach a final investment decision soon, at which point Ofgem will complete its final project assessments. The Window 1 schemes include two interconnectors to France, as well as connections to Ireland, Norway and Denmark.
Industry 1 | National Grid forecasts better electricity margin for winter
National Grid has predicted an improved generation margin for electricity across winter 2017-18, as well as “plenty” of supply sources available to supply UK gas demands.
The system operator’s Winter Review and Consultation document, issued on Thursday, 15 June, outlined its expectations regarding the supply and demand of gas and electricity across next winter.
Its provisional estimates give the range of de-rated capacity margin between 3.7GW – 4.9GW, placing it well within the GB Reliability Standard requirement. This equates to a generation margin between 6.2% and 9.9% above expected national demand, depending on different calculation methods. As a result of the growth in embedded generation and demand side response strategies, National Grid now evaluates generation margins by looking at both transmission demand and underlying demand to capture the effects of the changing generation model.
With this being the first full year of the capacity market energy security policy, National Grid will be keeping close watch on the security of the electricity supply. The capacity market operates with suppliers competing in an auction framework to act as reserve generators in the case of higher than expected demand. National Grid highlighted that there are several generators who did not win allocations in the auctions for this winter who could be called upon if market conditions cause a fall in generation capacity elsewhere on the grid.
Forecasts relating to gas supply for winter 2017-18 are given in very broad ranges to reflect the deviation from forecasts seen last winter. For example, on the day of peak demand in the UK last winter, Norway was providing close to its maximum capacity, whilst LNG and gas from the IUK interconnector were providing their lowest contributions of the season. This winter the main sources are expected to be from Norway, Qatari LNG and domestic UK production.
The consultation document also provided an analysis of how the system performed across winter 2016-17 compared to forecasts.
A notable trend was the increase in customer demand management, whereby large industrial and commercial consumers adapted their energy usage to reduce pressure on the grid at times of peak demand. Last winter it peaked at 2GW, which was comparable to the previous year, but the number of days that it was implemented increased from 36 to 48.
The demand for gas for use in electricity generation was higher than expected due to low global gas prices and reduced imports of electricity through interconnectors. As such, gas-powered generation accounted for almost 50% of GB demand across the winter. The demand for gas not used to generate electricity was close to forecast in most categories. Overall, the fluctuation in gas origin and delivery volumes has meant that National Grid had to compensate with increased operational flexibility.
National Grid has asked that any views on the outlook for winter 2017-18 be submitted before 14 July to assist with future analysis.
Industry 2 | GB’s biggest gas storage facility to close
It was announced on Tuesday, 20 June following an in-depth investigation that the UK’s largest gas storage facility, Rough, off the Yorkshire coast cannot safely return to commercial operations.
In a press release, operators Centrica Storage Limited said the site had reached the end of its design life. The cost of refurbishment or complete restructuring were deemed to be economically unviable given the limited role of storage in the UK gas market today. It will now seek to recover the remaining gas in the reservoir.
The UK has eight other smaller storage sites, but the retirement of the Rough facility represents a 70% loss in the UK total storage capacity. At its maximum output Rough was able to meet 10% of GB gas demand.
Despite concern in the media, there has been a negligible impact on gas prices as a result of the closure, as the site was already expected to be offline until April 2018.
The impact on supply and price volatility may be felt if a period of very cold weather hits the UK over the next few winters.
A government spokesperson commented: “The UK has highly diverse and flexible sources of gas supply through domestic production and extensive import capability. We expect healthy margins this winter as we continue to upgrade the UK’s energy infrastructure.”
Industry 3 | Lighting continued to dominate non-domestic energy efficiency
The latest Bloomberg/EEVS energy efficiency survey was released on Tuesday, 20 June, showing high levels of optimism from both non-domestic energy efficiency suppliers and consumers relating to energy efficiency measures, However, some negativity remained in relation to government energy efficiency policies.
The Energy Efficiency Trends Vol.19 report explored key trends in Q1 2017. The report found that businesses and other organisations are increasing the amount they spend on energy efficiency projects, with the median reported spend now reaching £260,000. Replacing existing lighting with high efficiency options remained the most popular measure, while solar PV and energy management systems saw below-typical levels of uptake.
Customer payback expectations softened slightly, moving towards four years. The quarter also saw almost 40% of consumers reporting payback expectations of five or more years for their energy efficiency investments.
The report also included a special feature on customer satisfaction which showed that consumers were highly satisfied and gave “almost universally positive” feedback. The only area of concern was consumer worries regarding value for money, where 58% of respondents answered that they were only “mostly satisfied.” Almost all respondents (81%) said that they would recommend their energy efficiency supplier to other colleagues and organisations.
