Tom Crisp Editor 01603 604421

[email protected] Monday 26/02 – The government introduces the Domestic Gas and Electricity (Tariff Cap) Bill to the House of Commons. Energy UK says it is vital that the cap does not halt the increasing competition. The government also publishes its response to the findings of the ENERGY PERSPECTIVE 02 Competition and Markets Authority’s energy market investigation, The big short: GB gas market saying it supports the majority of the proposed remedies. In a major resilience – Gareth Miller speech, Labour Leader Jeremy Corbyn calls for the UK to remain part of the EU Internal Energy Market. POLICY 05 Tuesday 27/02 – The Business, Energy and Industrial Strategy Price cap Bill starts Committee holds its first public evidence session in its inquiry into parliamentary journey electric vehicles. The European Council approves the reform of the EU Government endorses CMA remedies Emissions Trading System for the period 2020-30. A survey by MPs hear second-hand market MoneySuperMarket finds that nearly a quarter of British households for EVs needs to develop have never switched energy supplier. Siberian weather sweeps across UK should prioritise low-carbon Britain. trade post Brexit Parliamentary update – Week 9 Wednesday 28/02 – The Competition and Markets Authority launches 2018 an investigation into the proposed merger of SSE Retail and npower. REGULATION 12 The Public Accounts Committee concludes that the Nuclear Decommissioning Authority “completely failed” in both the CMA rejects appeal on procurement and management of the contract to clean up the Magnox transmission rebate nuclear reactor and research sites. Ofgem consults on licence Ofgem confirms penalty on DCC for missed deadlines changes to allow distribution network operators to charge fees for developing a connection offer, even if the offer is unaccepted. The INDUSTRY STRUCTURE 16 “beast from the east” intensifies pressure on the GB gas and power

E.ON UK removes payment systems. discounts for customers Thursday 01/03 – National Grid issues its first ever Gas Deficit Iberdrola sees energy retail profits fall Warning in response to a series of significant gas supply losses, resulting in a forecast end of day supply deficit. Valero announces NUTWOOD 20 plans to invest £127mn to construct a 45MW combined heat and power unit at its Pembroke refinery. Latest BP annual assessment shows accelerating global Friday 02/03 – Prime Minister Theresa May confirms in a speech that energy transformation still fails Paris test – Paul Hatchwell post-Brexit the UK will look to secure broad energy co-operation with the EU. The Gas Deficit Warning is withdrawn by National Grid at MARKETS 22 4.45am as the market responds and supplies into the gas network increase. Research by the UK Energy Research Council finds that 70% of households would see a reduction in bills if energy policy costs were removed from electricity and gas bills and instead applied based on household income. E.ON UK confirms it will remove a range of discounts, such as those for paperless billing, seeing its average standard variable tariff rate increase by £22/ year.

Energy Spectrum 608 | 06/03/2018 | page 1

Last week, our gas market SEGAL, which delivers gas to the UK via St Fergus. put into practice plans for The curtailment at Kollsnes was as high as meeting demand in 58mcm/d before reducing to 16mcm by Thursday. extremis as temperatures At SEGAL flows were cut by 18mcm/d. And towards fell to around 10 degrees the tail-end of Wednesday, the South Hook LNG below seasonal norms. terminal experienced problems and was taken Gas demand reached offline, taking a potential 60mcm/d out of action, eight-year highs, and returning later during Thursday. within-day NBP gas Gareth Miller Heading into Thursday, reflecting the combination reached record levels on 1 CEO of these conditions, national transmission gas 01603 604400 March. g.miller@cornwall- demand was predicted to be 395mcm, whereas insight.com In this Energy Perspective, supply was forecast to flow at 350mcm. Line-pack, we look at how the system being the gas occupying all pressurised sections coped. We see that, whilst gas market price swings of the network, and a good measure of capability were large and sudden, there was never any real to deliver gas against demand, was very low at chance of disconnections. High flexibility values 290mcm. elicited an effective response to System Operator This contributed to the Gas Deficit Warning (GDW) warnings, and allowed the market to balance. issued by National Grid for 1 March, the first ever to Fears of a gas market failure and forced be issued. National Grid also said it had a disconnections, which lingered in the weekend requirement to buy locational gas and took the media, were overblown. The gas market has been unusual step of inviting shippers to post offers on designed to provide the price signal to balance the on-the-day commodity market (OCM) locational supply and demand. Against a stacked deck, it market “at all locations” in a bid to reduce demand. delivered. That should be welcomed, not seen as a Within day NBP gas prices responded very rapidly cause for panic. to the warning, and prices reached the record level Bull market of 350p/th in the OCM, the highest prices since its introduction in 1999. Day ahead prices also moved, Recent events are set in a context of supposed gaining a premium to European prices, and helping fragility in European gas markets, and in GB to deliver flows into Friday. specifically. Already this winter we have seen the unplanned shutdowns of the Forties pipeline in The combination ensured that by Thursday Scotland and the Baumgarten transmission hub in afternoon sufficient gas volumes were flowing Austria, coinciding with another cold weather spell towards the GB market as shippers responded to in December 2017. Furthermore, the GB gas the signal. By early Friday morning, the GDW had market has endured its first winter without the full been withdrawn. contribution of its largest storage asset – In the interim the system had to rely heavily on its Centrica’s Rough facility – with the site now only remaining Medium Range Storage facilities and an capable of providing a fraction of its maximum unprecedented increase in regassification of LNG 45mcm/d before it closes for good. at Britain’s three LNG terminals – South Hook So, on 28 February, when the cold really started to (once returned to operation), Dragon and Isle of bite, gas imports over interconnectors to the GB Grain. It has also been reported that some large were already reduced as demand in Europe industrial gas users moderated demand in return soared and gas stocks were at their lowest since for payment as a demand response to the market 2013. That situation was exacerbated by the lack conditions – a commercial rather than enforced of recent LNG shipments. Then came the loss of decision to change usage. gas imports to GB from the Netherlands via the Figure 1 illustrates the changing composition of gas BBL pipeline, which went offline for most of supply over the period. Wednesday. Gapping up Two further infrastructure issues occurred on 28- 29 February. Norwegian flows from the North Sea The gas market was also helped by conditions in were disrupted by problems at Kollsnes, from the power generation mix. Very cold weather where gas can be transported to the UK, and at usually coincides with low wind speeds, but

Energy Spectrum 608 | 06/03/2018 | page 2

f

between 28 February and March 1 transmission- consumer ascribed to continued supply. Its primary connected wind power output was close to concern was that during system events where we maximum, running at between 10GW and 11GW move to a SO command-and-control environment throughout the period and contributing between to manage a Gas Deficit Emergency (GDE) the 17% and 19% of total supply respectively. imbalance price would be frozen and may not be Figure 1: Daily gas imports/exports high enough to attract additional supplies to the market. Moreover, a gas emergency might necessitate the need to interrupt “firm” customers (e.g. households and smaller business), which would only occur after non-firm/ interruptible consumers (typically I&C) had given way. In such an event those “firm” customers would not be compensated for their involuntarily loss of supply (and shippers would not face the true cost of the emergency). As a result, it launched its first ever Significant Code Review, focussed on Gas Security of Supply. Ofgem proposed that customers were paid for providing involuntary Demand Side Response Source: National Grid & Prevailing View (DSR) during an emergency. It also capped imbalance prices at the Value of Lost Load for all This volume of wind power helped to cap days of firm load that was shed (set at £14/th). transmission gas demand, which otherwise would Monies collected during the GDE from imbalance have necessitated increased deployment of gas charges would be redirected to consumers for the turbines. Our estimate for Wednesday is that wind DSR involuntary service. power offset approximately 38.9mcm of potential gas demand, close to 10% of supply. On Thursday Alongside this, an obligation was placed on and Friday our estimate of the wind fleet’s National Grid to develop a centralised DSR offsetting impact to gas demand was around mechanism to encourage greater participation 47mcm, close to 12% of total gas demand. from Daily Metered (>58.6GWh/yr consumption) customers to offer a minimum of 100MWh of Meanwhile CCGTs had been providing an average response. This mechanism finally went live in of only 23% of GB’s power needs between October 2016 but, according to National Grid Wednesday and Friday, compared to 26% for coal- reporting on the scheme, it was not used in winter fired power stations and 23% for transmission- 2016-17, reflecting the benign market conditions. connected wind. The culmination of these measures is that today in Securitisation the gas sector there is a balancing market through After the initial panic, the gas market delivered. the within-day OCM that allows shippers and the This should not really be a surprise. The gas System Operator to trade. Gas imbalance prices market arrangements reflect 20 years of design are thus directly linked to OCM market prices. and reform decision to ensure interruptions of supply are minimised. Bilateral contract market design was first introduced to the gas sector in the 1990s, well ahead of the power sector. At its heart has been the incentive on shippers to trade gas volumes to avoid exposure to energy imbalance prices. These trading incentives have been subject of continuous improvement. Most notably in its Project Discovery work in 2010, Ofgem highlighted its concerns that gas trading arrangements did not adequately reflect the value the

Energy Spectrum 608 | 06/03/2018 | page 3

f

Box 1 – Key gas market events However, industry feedback on effectiveness of GBAs meant that in 2012 revised informational • 15 March 1997: System Marginal Sell price of mechanisms were introduced, and they continue approximately minus 1500p/th caused by failure to form the basis of the current system. These of injection demand for Rough due to compressor centre on the Margins Notice, which provides a failure. formulaic view of where demand may outstrip • 16 & 17 December 1997: System Marginal Buy available supply. They also include the GDW — price of 496p/th and 497p/th respectively, caused which gives the SO greater latitude than the GBA by system demand forecast to 85% of peak day to signal to the market that the system is at risk of demand, resulting in a breach in the Network not being able to meet demand. Code V-Factor, allowing National Grid to halt withdrawals from Rough storage. Finally, there is Operating Margin service. For this the SO is obliged to contract annually to access • GBA issued on 13 March 2006: The closing day- short-term gas to deal with system stresses (pre- ahead NBP price (for delivery 14 March) was 189.25p/th and the closing within-day NBP price and post-emergency). These are called down (for delivery 13 March) was 100.25p/th, caused by where other SO actions (e.g. trading in the OCM) the closure of Rough storage due to a fire in cannot immediately rectify operational issues. February, offshore outages (planned and Close out unplanned), weather colder than forecast amid ongoing cold spell. The robustness of these arrangements has been • GBAs issued for 4, 7, 9 and 11 January 2010: proven effective over several market events and Closing prices on the prompt market failed to gas market stress is certainly not a new climb above 50.00p/th caused by the UK being in phenomenon, as Box 1 illustrates. In each case, the middle of the coldest winter in 30 years, and crises have been avoided, and lessons learned disruptions to supplies from Norway. The and folded into adaptive reforms to improve problems here also saw National Grid undertake market responsiveness. locational balancing (East Anglia, East Midlands and North West) and constraint alleviation actions Last week we again saw the market working in on 4 January and 7 January. extreme circumstances, and the System Operator and shippers using the tools at their disposal. A Where real-time balancing actions are required, GDW prompted higher within-day and day-ahead this usually involves changing pressure in the prices and trading by shippers to cover the network (“linepack”) via running of compressors. imbalance. Scarcity rightly attracted the necessary There are also means for demand response. premium to trigger the flexibility reaction that was required to right the system. These measures, coupled with the fact that gas can be physically stored and ‘flexed’ within the Now the snow is melting and spring is in the air, it network within the balancing day, usually results in is likely that we will look back at last week and sufficient trading in response to price signals that conclude that the market did just fine. True, it was reflect short-term supply stresses. There is minimal windy, but operating margins held up. There will SO intervention, typically with National Grid be winners and losers, and that should be clearer entering the OCM once in every three days on as the effects of last week begin to appear through average. credit requirements. Margin call And wider questions about whether we should pay the insurance premium of developing storage as Over the years, we have also seen an evolution in opposed to the intermittent cost of price spikes informational levers intended to prompt action in every few years will no doubt ensue. But these are instances of forecast imbalance. policy questions for government, not a question of These first took the form of Gas Balancing Alerts market failure. (GBAs), which were implemented in December 2005, and a precursor to the GDW. The intent of GBAs was to inform shippers of a requirement to redress forecast system imbalance at a given trigger level. These objective triggers, which we were involved with designing, have underpinned the gas market since.

Energy Spectrum 608 | 06/03/2018 | page 4

f

Tom Crisp, Editor, [email protected]

The government introduced its Domestic Gas & where Ofgem is satisfied that the tariff supports Electricity (Tariff Cap) Bill enabling absolute price the production of renewable energy. caps on energy bills to the House of Commons Energy and Clean Growth Minister Claire Perry on 26 February. said: “We are working hard to deliver an energy The bill will put in place a requirement on Ofgem supply that is clean, affordable and innovative and to cap energy tariffs until at least 2020. It will mean an energy market that delivers the best possible an absolute cap can be set, covering the 11mn value and service for energy customers. This new households in England, Wales and Scotland who legislation is a big step forward toward that goal.” are currently on a standard variable or other Energy UK’s Lawrence Slade said: “With a record 1 default energy tariff and who are not protected by in 6 customers switching last year and over 60 existing “safeguard” price caps (see Figure 1). suppliers to choose from, the energy market is changing rapidly and has never offered so much Figure 1: Number of domestic customer accounts by supplier: choice. It’s vital the cap doesn’t halt the growth of standard variable, fixed and other tariffs (GB) competition.” Gillian Guy, Chief Executive of Citizens Advice, commented: “It’s essential that protections from overcharging remain in place for vulnerable energy customers after the cap is lifted. We look forward to working with the government to ensure that consumers in vulnerable situations are protected in the long term.” BEIS Committee Chair Rachel Reeves said: “The Bill has cross-party support, and both Conservative and Labour election manifestos included a Source: Parliament commitment to an energy price cap. Energy consumers have been overcharged for too long In setting the cap, Ofgem will also take into and the government now needs to quickly ensure account the need to set it at a level that enables this legislation is passed in time to protect suppliers to “compete effectively for supply customers next winter”. contracts”, as well as “the need to maintain incentives for customers to switch and the need to Second Reading will be held on 6 March. ensure that efficient suppliers are able to finance Alongside the bill, BEIS published a letter to the their supply activities”. It will be in place until 2020, Big Six. The letter outlined how there have been after which Ofgem will recommend whether it recent tentative steps by large suppliers to should be extended annually up to 2023. improve their treatment of loyal customers, but The draft bill was committed in October 2017 to these “do not go far enough.” It concluded: “We pre-legislative scrutiny by the Business, Energy hope you will work constructively together with and Industrial Strategy Committee. The government and parliamentarians to ensure the committee’s recommendations were accepted in Bill passes smoothly through Parliament and that full by the government. In line with the committee’s you will support Ofgem’s work to ensure the cap is recommendations, the government will ensure implemented in time for next winter.” Ofgem reviews the level the cap is reset every six The bill has strong cross-party support so it months. should see a swift passage through BEIS has also taken account of the Committee’s Parliament, but it will still be a race to meet the recommendation to add in safeguards for the objective of the new caps being in place by exemption of green tariffs from the cap. These the end of the year. ensure that where consumers make an active choice to opt for a green tariff it is only exempted Parliament BEIS

Energy Spectrum 608 | 06/03/2018 | page 5

Tom Crisp, Editor, [email protected]

On 26 February, BEIS published the The CMA remedies particularly emphasised how government’s response to the findings of the half-hourly settlement will by key to providing Competition and Markets Authority (CMA) stronger incentives for smarter tariffs. The energy market investigation, giving its support to government agrees, and backed the CMA’s the majority of the remedies. remedy of implementing half-hourly settlement. Ofgem published a consultation in 2016 on plans With regards to removing the requirement on price for moving to mandatory market-wide half-hourly comparison sites to provide a whole-of-market settlement including timing considerations, comparison, the government is on balance relevant regulatory interventions, and who should supportive but said that this risks reducing design and approve such interventions. The customer confidence. However, this is something regulator launched a Significant Code Review in that could be addressed by careful implementation 2017 to take the work forward and intend to reach and consumer testing. a decision on the approach to implementing The government disagreed that it should legislate market-wide half-hourly settlement by the second to change Ofgem’s statutory duties, which it half of 2019. New powers included in the Smart believes already give sufficient emphasis to Meters Bill would provide Ofgem with a more competition. BEIS also argued that Ofgem is able, efficient way of delivering these reforms. under its current powers, to comment on On the generation side, the CMA called for the government policy. The response added that government to undertake, and disclose the Ofgem has stated it will do so when appropriate. outcome of a “clear and thorough” impact The government also felt there was a risk of assessment before awarding any Contracts for excessive marketing from suppliers as a direct Difference outside the auction mechanism. The result of the disengaged customer database government supported the use of the competitive remedy. Even so, it supported the measure, process where possible, but it added that subject to careful implementation by Ofgem. decisions on specific implementation will continue The government also supported the remedy of to be taken in the circumstances at the time. On BEIS and Ofgem publishing detailed joint location-based pricing of variable transmission statements concerning proposed government losses, the government supported this, with final policy objectives that are likely to necessitate proposals were submitted on schedule to Ofgem parallel, or consequential, Ofgem interventions. It which it approved in March 2017 for noted, however, that action would be considered implementation within the CMA’s timescale. on a case-by-case basis. In terms of other remedies proposed, such as On the CMA’s remedy on code governance, and capping the price for all customers on prepayment specifically improvements to enable Ofgem to set meters, the government was in favour. Meanwhile strategic direction, modify code manager roles and the response noted that other remedies have powers to intervene in modification process as a already been implemented, including Ofgem last resort, the government declined to comment ensuring implementation of Project Nexus on whether legislation will be needed to give this covering infrastructural upgrade of the UK Link effect. The government agreed that code system managing national gas distribution, and governance arrangements require reform, and improving transparency on tariff prices for legislation will be “considered” when microbusiness customers. parliamentary time allows. Weighing in at all of eight pages, this response On the role of the system operator, it was has taken the government nearly two years to highlighted that the government and Ofgem deliver. It provides a useful summary of where announced a proposed restructuring of National the plethora of competition remedies have Grid’s system operator functions in January 2017. progressed to, but with responsibility for Ofgem has since confirmed that National Grid should proceed with plans to set up a new legally successful implementation largely laid at separate company to carry out its electricity Ofgem’s door. system operation function within National Grid plc, BEIS which will be in place by April 2019.

Energy Spectrum 608 | 06/03/2018 | page 6

Cory Varney, Writer, [email protected]

On 27 February, the Business, Energy and still works out £2.5k more expensive than the Industrial Strategy Committee held its first public equivalent Clio. He said the gap between EVs and evidence session in its inquiry into electric conventional vehicles was still too big to bridge, vehicles (EVs). It heard that costs, range anxiety, adding there was a case for increasing the level of a lack of models and concerns over availability of subsidy, depending on how fast government wants charging infrastructure were other important to move with uptake or for waiting for scale factors inhibiting the growth of the market. efficiencies to “kick in”. Mark Squires, Chairman of the National Franchised Georg Ell, Director for Western Europe at Tesla, Dealers Association, explained that a barrier facing outlined the overall goal of a transition to a market EVs was the way in which they depreciate faster that is self-sustaining and without subsidy. He than traditional vehicles. He cited the lack of suggested linking incremental changes in subsidy sufficient appetite and demand in the second-hand levels to uptake levels, meaning subsidy would market as a reason for this. lower as uptake rises, providing a clear line of sight to zero subsidy for government. Benfield Squires said: “The second-hand market is key added that meanwhile more investment should go because there are three times as many second- into bolstering the grid to ensure “rapid charge hand cars sold as new, and actually, if you don’t hubs can be built on arterial roads” where drivers get a second-hand market going, you won’t have a want them. new car market that’s going well either.” Vernon Coaker (Labour, Gedling) asked the Albert Owen (Labour, Ynys Môn) asked what witnesses what their one top ask would be to the actions are needed to support a second-hand Secretary of State in terms of regulation to try and market. Squires said very limited supply of vehicles accelerate EV uptake. Steve Gooding, Director of was a factor, owing to the EV market being in its the RAC Foundation, said it would be to ensure infancy, while general education was needed for government, when requiring the installation of both consumers and the market itself. charging units, requires local storage capacity as Andrew Benfield, Group Director of Transport at well. This would ensure models need less high- the Energy Saving Trust, said the range of vehicles power connection and can also play a role in on the market was another key barrier that they balancing demands on the grid. had been seeing. Benfield cited private hire as an Looking ahead 10 years, the witnesses were example who do a lot of work in cities “where the optimistic with regards to what the EV market will cleanest vehicles need to be”, but at the moment look like. Benfield suggested most passenger there was a very limited range of vehicles that suit vehicles will have a fully electric option, while both their needs – noting, for example, there was not a he and Squires felt price parity with traditional people carrier that was electric battery-powered as vehicles would be reached. Gooding suggested an example. familiarity will have increased, meaning individuals Squires also noted an enduring perception that will not have to think about these differences when access to charging is an issue. The Energy Saving owning an EV, while Ell stated this would all mean Trust has found the average driver is four miles the Committee on Climate Change’s target of 60% from a charging point in England, three miles away of all new vehicles being zero emissions by 2030 in Scotland, while the distance is 12 miles in Wales. would have been met. Benfield addressed it as being “something of a postcode lottery.” This session marked a useful start to what should be a very interesting inquiry, with the Attention then turned to the current government witnesses offering valuable technical insights initiatives to incentivise the uptake of EVs. Mark and sensible suggestions, as the committee Pawsey (Conservative, Rugby) spoke on levers sets about shaping its thinking on electric available to government and whether the current level of subsidy was doing enough. Squires had vehicles. previously noted that, despite the government’s Parliament £4.5k subsidy, Renault’s electric model, the Zoe,

Energy Spectrum 608 | 06/03/2018 | page 7

Tilly Pembroke, Analyst, [email protected]

The Green Alliance has warned that the future The Green Alliance urges the government to place success of the UK’s low-carbon sector is at risk the Paris Agreement at the heart of UK trade from the government’s post-Brexit trade negotiations as a selling point for world leading strategy. low-carbon goods and services. This would also allow other countries to decarbonize quickly and The report, Britain’s Trading Future: a post-Brexit cost-effectively. In addition, the UK should apply Export Strategy led by Clean Growth, highlighted environmental principles and sustainability the need to capitalise on the UK’s capabilities and assessments in future trade agreements to prevent expand its low-carbon exports. It considered the negative trade outcomes, it recommended. UK’s choice of aligning with the rules and standards set by either the EU or the US, and Furthermore, the report suggested concluded that failure to prioritise trade with the harmonising regulation with the EU where it is EU risks a significant setback to the UK’s low- critical for UK clean growth. With over half of the carbon sector. UK’s low-carbon trade being with the EU, it explained it makes sense to keep regulation The government’s Clean Growth Strategy and aligned, especially in areas like electricity to Industrial Strategy both signal a clear transition reduce the possibility of rising costs to homes and toward a low-carbon, high-tech and resource- businesses. But where complete harmonization is efficient world. Therefore, Green Alliance not necessary in areas such as renewable targets considered the UK should secure a trade strategy and smart energy innovation, the UK must agree with the EU that would take advantage of the UK’s on a framework for regulatory equivalence. This expertise in the low-carbon and renewable process will allow the EU to acknowledge the UK’s sectors, and that could improve access for British standards and regulatory framework, providing businesses to a market estimated to be worth flexibility in meeting shared objectives and thereby £17tn worldwide. facilitating trade. To ensure this alignment with the EU is maintained, In order to provide certainty for industry and the report laid out several recommendations. investors in UK decarbonisation in the short term Green Alliance suggested that, rather than offering during the Brexit process, Green Alliance to lower standards in exchange for trade deals recommended that the government ensure a with stronger partners such as the US or China, the stable transition period. During this transition, the UK should maintain a high UK standard and UK should fully participate in the internal energy associated business advantages, enabling it to market and its rule making bodies, remain in the continue to maximise trade in low carbon goods EU’s Emissions Trading System (EU ETS) and and services. This will allow the UK to keep the continue to access cheap finance for domestic government’s industrial strategy central to new energy infrastructure. trade policy, it stressed. Chaitanya Kumar, Senior Policy Adviser, said: “The Figure 1: Current UK trade in low carbon goods government’s current approach to trade risks undercutting its own Clean Growth Strategy, which aims to build a thriving low-carbon economy in the UK. Alignment to make low-carbon trade with the EU as simple as possible will be central to achieving that goal.” It is clear that what the low-carbon sector hopes for most of all is continuity with existing arrangements. But if this cannot be achieved then certainty as to what comes next will be essential. Green Alliance Source: Green Alliance

Energy Spectrum 608 | 06/03/2018 | page 8

Tom Crisp, Editor, [email protected]

The Business, Energy and Industrial Strategy reducing nitrogen dioxide concentrations sets out Committee opened its inquiry into Electric Vehicles action to tackle hotspots of air pollution. We will on 27 February, hearing from a range of shortly be launching our new zero-emissions representatives from the car industry (see p.6) transport paper, and the House can review that, too.” The Domestic Gas and Electricity (Tariff Cap) Bill was introduced to the Commons on 26 February. At Treasury Oral Questions on 27 February, Liberal Second Reading is scheduled for 6 March (see Democrat Leader Vince Cable asked why as the p.5). Swansea Tidal Lagoon had been approved as value for money by the Treasury it was being A Written Ministerial Statement was published blocked by BEIS. Chancellor Philip Hammond alongside the bill from Business and Energy responded only that the project is “under Secretary Greg Clark. Clark said the Bill will give consideration by the government. An the regulator the powers to protect those announcement will be made in due course.” consumers who are overpaying for energy, while ensuring that other initiatives such as switching, In a Written Answer, published on 1 March, Energy smart meter roll-out and consumer education and Clean Growth Minister Claire Perry said that, continue to contribute to a more competitive whilst there is in-year variability in comparisons market. between UK gas prices and other European states, UK wholesale prices are “generally consistent with The Public Accounts Committee (PAC) published the EU average.” on 28 February the conclusions of its inquiry into The Nuclear Decommissioning Authority (NDA) Perry added: “The UK benefits from a range of and specifically the Magnox Contract. It found the supply sources, including indigenous production, NDA “completely failed” in both the procurement imports from Norway and the Continent, storage and management of the contract to clean up the and liquefied natural gas imports, all of which Magnox nuclear reactor and research sites. This contribute to a diverse and liquid market. both disrupted an important component of vital However, it is a normal and necessary market nuclear decommissioning work and also cost the response for prices to rise in response to system taxpayer upwards of £122mn. tightness, driving a responsive and flexible supply response. The government will continue to monitor Sir Geoffrey Clifton-Brown MP, Committee Deputy our security of gas supply, including price Chair, commented: “An independent inquiry volatility.” examining the Magnox contract is under way and both the NDA and central government say they are A Written Answer, published on 28 February, also acting on its interim recommendations. Given the revealed BEIS estimates of average (standard) scale and implications of the failings set out in our electricity and gas bills (in 2010 prices). The Report, we are not prepared simply to take their provisional duel fuel domestic bill in 2017 was word for it. In the coming months we expect to be £1,116 (in 2010 money), down from £1,123 in 2016. shown concrete evidence of the progress being One Early Day Motion (EDM) of note was tabled made." last week: Transport Oral Questions were held in the • EDM 994 was tabled by Ed Davey (Lib Dem. Commons on 1 March. Vernon Coaker (Labour, Kingston and Surbiton) on 27 February. The Gedling) asked what steps the department is motion urges the government to enhance the taking to reduce transport emissions. Junior Transport Minister Jesse Norman responded: “We UK's corporate reporting regime by requiring financial institutions and companies to outline have very ambitious plans to reduce transport emissions, including by ending the sale of new how they will mitigate climate-related financial risk, and how their businesses are innovating conventional petrol and diesel cars and vans, and to promote a low-carbon economy. by ending the use of diesel-only trains by 2040. Clean Growth Strategy actions will reduce Links underlined above greenhouse gas emissions, and the UK plan for

Energy Spectrum 608 | 06/03/2018 | page 9

The Competition and Markets Authority (CMA) announced on 28 February that it had opened an investigation into the proposed merger between SSE’s retail business and npower to create a new domestic energy supply company. The companies are hoping to complete the deal, include obtaining regulatory clearances, by late 2018/ early 2019 In its announcement, the CMA said that it has been discussing the deal with both companies since it was announced in November 2017 (ES 594). It now believes that it has the necessary information to begin an investigation into whether the merger could significantly reduce competition in the UK domestic supply market. The CMA will investigate the merger on competition grounds under the Enterprise Act 2002, in line with its merger guidance, specifically whether the merger could significantly reduce competition into the supply of energy to domestic consumers. Comments are welcome until 14 March. The deadline for the initial decision is 26 April. This is phase 1 of a statutory process; the decision will determine whether the CMA considers it should proceed to a phase 2 investigation under the 2002 Act. SSE CEO Alistair Phillips-Davies commented: “The scale and pace of change in the GB energy market continues to be significant and requires us to evolve to stay relevant, competitive and sustainable. We remain confident that the creation of a new, combined, standalone retail business will best serve the needs of customers, employees and shareholders in the long term.” CMA SSE

Energy is an area where the UK will still want to cooperate closely with the EU, even after it leaves the bloc in March 2019, UK Prime Minister Theresa May said on 2 March. Delivered at Mansion House, the speech – the last is a series by senior ministers – set out the Prime Minister’s view of a future economic partnership with the European Union. May said: “On energy, we will want to secure broad energy cooperation with the EU,”. This includes “exploring options for the UK’s continued participation in the EU’s internal energy market” and “protecting the single electricity market across Ireland and Northern Ireland,” she said. May added: “We also believe it is of benefit to both sides for the UK to have a close association with Euratom,” the EU’s nuclear treaty.” Number 10

The latest statistics on measures installed under the Energy Company Obligation (ECO) Help to Heat scheme have shown a fall in installations in December. The data, published on 22 February, revealed that 14,491 measures were installed during the month compared to 18,618 in November, making it the first month-on-month decrease (-22%) in installations since the scheme was launched in April 2017. BEIS attributed this decrease to the fewer working days in December. Overall 132,303 measures have been installed under the scheme, of which 38% were for cavity wall insulation, 20% were for boiler upgrades, 18% were for loft insulation, 15% were for “other heating” and 9% were for solid wall insulation. So far, the average number of monthly installations under Help to Heat has been 50% lower than under ECO2, but BEIS noted that the estimated cost of the Eco Help to Heat Obligation is three quarters lower than ECO2. Under the overall ECO scheme, a total of 2,242,526 measures had been installed as of the end of December. Of these 35% were for cavity wall insulation, 24% were for loft insulation, 22% were for boiler upgrades, 10% were for “other heating” and 7% were for solid wall insulation. BEIS

Energy Spectrum 608 | 06/03/2018 | page 10

Shadow Business and Energy Secretary Rebecca Long-Bailey has described fuel poverty in the UK as a “national scandal”. Commenting on Fuel Poverty Awareness Day on 23 February, Long-Bailey explained that the issue of fuel poverty is not just one of high energy costs, highlighting that it also leads to poor health and therefore increased pressure on health services. She added that the government “must act urgently” to address the issue. She went on to explain what Labour would do, if elected, to tackle fuel poverty and “transform our broken energy market”. This included introducing an emergency price cap and insulating 4mn homes “as an infrastructure priority to help those who suffer in cold homes each winter.” Labour

A report by E3G and National Energy Action (NEA) has found that the UK had the sixth-highest long-term rate of excess winter deaths in Europe. The research, published on 23 February, also found that when taking account of cold weather outside winter months the UK ranked second worst. It was revealed that over the past five years there was an average of 32,000 excess winter deaths in the UK each year, of which 9,700 were due to people’s inability to heat their homes. In order to meet fuel poverty and carbon emission reduction targets, E3G and NEA have called on the Treasury to use public infrastructure capital to co-fund area-based energy efficiency schemes, aimed at improving the quality of UK housing in every part of the country. Pedro Guertler, co-author of the report from E3G, commented: “This epidemic is entirely preventable and E3G and NEA are calling on the UK Government to reinstate public capital investment in home energy efficiency to fix the cold homes crisis. As well as ending needless suffering and premature deaths, it would also address a wide range of national infrastructure priorities.” E3G

The European Council has approved the reform of the EU Emissions Trading System (ETS) for the period 2021-30. In a statement on 27 February, the Council said that the revised ETS directive was a “significant step” towards meeting the EU’s emissions targets. Under the reforms a number of elements were introduced, including: reducing the cap on the total volume of emissions by 2.2% per year; temporarily doubling the number of allowances that are placed in the market stability reserve until the end of 2023; and the introduction of a new mechanism in 2023 to limit the validity of allowances in the Market Stability Reserve above a certain level. The formal approval at the Council today is the final step in the legislative process. The new directive will enter into force on the 20th day following its publication in the official journal. European Council

Our latest Chart of the Week explores the potential of Local Energy Markets. Last week’s blogs included Pricing strategies in the SME market and Price cap progresses amidst rising pass-through costs.

Energy Spectrum 608 | 06/03/2018 | page 11

Josephine Lord, Regulatory Consultant, [email protected]

The Competition and Markets Authority (CMA) decision because it had previously adopted a has dismissed an appeal against an Ofgem “narrow” construction of the exclusions. This was decision on a CUSC change proposal to contained in its decision on an earlier proposal, reallocate £119.5mn of transmission network use CMP224, in which Ofgem rejected a modification of system (TNUoS) charges for 2015-16 from that sought to set final TNUoS tariffs 200 days suppliers to generators. before the start of the tariff year. The appeal, the first to be made on an electricity The CMA considered the two issues were: whether modification under the Energy Act 2004, was on Ofgem had indeed reached a concluded view, and Ofgem’s decision to reject CMP261. The CMA’s if so, if that precluded the regulator from reaching decision was issued on 26 February, with the full a different view on CMP261. Finding that Ofgem judgement following a day after. had specifically highlighted the uncertainty surrounding the Regulation’s interpretation, SSE had raised the proposal to ensure that the recognising there was a risk of legal challenge, the TNUoS paid by generators in 2015-16 complied CMA decided it had not reached a concluded view. with the limit set out under EU Regulation It also found that, even if it had come to an 838/2010, which requires average annual erroneous concluded view on the interpretation of generator charges to be between €0-2.5MWh. It the connection exclusion for CMP244, this did not argued that the limit had been breached and that preclude it from taking a different, legally correct there should therefore be a rebate from suppliers. view in its CMP261 decision. (For further recent background see ES606). A further ground for the appeal was that Ofgem’s There were four grounds to the appeal, which was decision infringed the general EU law principles of made by SSE and EDF Energy, and the CMA legal certainty, proportionality, non-discrimination rejected them all. The first related to the central and/or the right to effective legal protection of EU issue of whether offshore grid-only spurs (GOS) fall law rights. The CMA said this ground was within the scope of exclusions, when considering premised on the assumption that there had been a what costs should not be included when breach of the Regulation and an unlawful calculating the Regulation cap. There were two interpretation of the connection exclusion, as well interpretations of the Regulation: a narrow one, as whether Ofgem had made a definitive that included only those charges classed in the interpretation. Given its previous conclusions on CUSC as “connection charges”, and a broader one these areas, the CMA also dismissed this ground including connection charges and also “local for appeal. charges”, which includes GOS. It was agreed by all parties that if GOS fall into the exclusion, then the Responding to the decision, Ofgem Senior Partner cap would not have been exceeded in 2015-16. Andrew Wright said the decision was good news for customers and added: “It is disappointing that The CMA decided that GOS do fall within the SSE and EDF challenged our decision. The energy scope of exclusions. It concluded policy decisions market is under close scrutiny and companies about how the costs of these were recovered should be working hard to deliver a better deal for (usage rather than connection) did not affect the customers rather than seeking additional revenues nature of the assets. It did not agree with the that will add to customers' bills.” appellants that what distinguishes connection charges from usage charges under the CUSC is Apart from failing to secure a rebate, there are the same as what determines charges that fall likely to be further consequences for within the scope of the Regulation. It agreed with transmission charging that could see Ofgem that connecting equipment does not cease generators bear more of the costs, as the to be an asset required for connection following current charges are based on the incorrect the initial act of connection. It also found nothing in interpretation of the Regulation. A further the preparatory work for the Regulation that meant it had to be interpreted as argued by the CUSC modification may therefore be raised. appellants. However, Ofgem’s position and arguments have proved to be robust in this case. One of the grounds for appeal was that the regulator had destroyed the legal validity of its CMA National Grid – CMP261

Energy Spectrum 608 | 06/03/2018 | page 12

Rowan Hazell, Regulatory Analyst, [email protected]

Ofgem issued its final decision on the Data and Of this, £38.956mn is for costs relating to payroll, Communications Company (DCC) price control and Ofgem said it would welcome discussions with for the 2016-17 Regulatory Year (RY16-17) on 21 the DCC to develop clearer efficiency and February. Included in the decision was the headcount reduction plans. As to the CRS-related determination that £0.923mn of internal costs costs, Ofgem said that the DCC is not yet in a during RY16-17 were unacceptable, and that position to determine the forecast. The regulator allowed revenue will be reduced by £4.7mn due also viewed the external costs associated with to failures to meet DCC go-live implementation fundamental service providers as being economic milestones. and efficient. The DCC was penalised for failing to meet The regulator also approved the DCC’s application implementation milestones 9 and 10 during the to increase the External Contract Gain Share period between 1 April 2016 and 31 March 2017. (ECGS) values by a total of £3.261mn between These related to the delivery of the Releases 1.2 RY18-19 and RY20-21. The ECGS incentivises the and 1.3 of the DCC live services. As proposed in DCC to reduce costs by amending external service the initial consultation, the DCC will lose £4.702mn provider contracts. The reward has been allowed of its margin through the baseline margin as the DCC undertook a refinancing agreement for performance adjustment term. a fundamental service provider contract by introducing a competitive element. From RY18-19, the DCC will be subject to an operational performance regime, which will put the The DCC reported that it had over-recovered the DCC’s entire margin at risk if it fails to meet service charge by 122% in RY16-17, which was performance standards. BEIS is also planning above the 110% threshold. Any over-recovery may additional incentives relating to Release 2 and be charged a penalty interest rate of 3% plus the SMETS1 activities. Bank of England base rate if Ofgem is not satisfied with the justification. The DCC claimed that Due to increases in the complexity of the DCC additional funds were received due to a number of solution, shifts in timelines, and the volume of factors including an increase in actual meter resources required to deliver work, the DCC had numbers compared to the estimate, savings from applied for a £13.955mn increase to baseline refinancing costs, and savings arising from unmet margin between RY16-17 and RY20-21. The milestones. Ofgem accepted the reasons for over- regulator directed an adjustment of £6.769mn recovery, and it decided not to impose penalty between RY16-17 and RY18-19. Ofgem also interest. considered it appropriate that the DCC should have a 15% margin for the variation. In total, the decisions mean that the DCC’s allowed revenue over the entire licence period between The regulator decided that a small proportion of RY16-17 and RY25-26 was set at £2.404bn. internal costs incurred during RY16-17 were not economic or efficient. However, the total amount The regulator said that, having considered the of £0.923mn represented a decrease from the responses to its initial proposals, it was clear that £1.751mn proposed in the initial consultation on the many of the DCC’s customers were unhappy with price control that was issued last October. Of this, the level of transparency and influence they have £0.282mn was due to a lack of justification of costs over costs and performance. It said that it would for operational contractors. Another £0.524mn support requests for further engagement from the related to the contract cost for consultancy support DCC over any changes to its scope or activity. on the Systems Integration function was also deemed to be unacceptable. The remaining The DCC has rightly been penalised for £0.118mn was in relation to shared services missing deadlines, and there is a rising sense charges, which covered support services sourced of frustration with its performance. At the same from the DCC’s parent company Capita. time the costs of the roll-out are real and rising, and transparency will need to increase A total of £67.092mn in forecasts for internal costs to match expectations. and costs relating to the faster switching Centralised Registration Service (CRS) between Ofgem RY17-18 and RY20-21 have also been disallowed.

13

Ofgem has published a suite of documents which provide a high-level view of the new arrangements and the impacts on the systems and processes of the existing actors involved in the Switching Programme. In support of the enactment phase, it has issued an overview of the current “as is” end to end (E2E) switching arrangements, the processing time periods for key events (system transactions) for the Central Switching Service (CSS) and the supporting systems in the new switching arrangements. The characteristics of the CSS and other relevant services are detailed in the non-functional requirements, while the solution architecture considers changes to be made by market participants and Central Data Services (CDS). The Service Management Strategy considers three key options in relation to the execution of Service Management (SM) under the arrangements. Each option has been evaluated with respect to impacts on customers, market participants and delivery, costs and risks. One option involves each organisation operating SM independently, while another requires that SM processes are standardised and integrated for switching for all CDSs. Despite being the cheapest and least effort option to implement, the former option was seen as risking significant delays to delivering the faster and reliable switching, due to limited coordination between CDSs and issue resolution. The preferred solution achieves a balance between these options, whereby key SM processes are integrated, others are co-ordinated, and some operate independently. Here, SM processes would be individually assessed to identify whether a common approach (use of a single system), a co-ordinated approach (data or information shared with a central source) or no commonality is required. An example of the latter situation would be access management, where there is no benefit from directing access requests for UK Link or the Electricity Central Online Enquiry Service through the Switching Service Desk. However, the preferred option depends on manual rather than automated activity, thereby reducing the reliability. A subsequent SM Approach and Methodology document will follow. Ofgem

Over one in five customers are now supplied by small and medium-sized suppliers, leaving the six largest suppliers’ combined market share at a record low, Ofgem announced on 28 February as part of its periodic updating of its new retail market indicators. According to Ofgem, in December 2017, smaller and medium sized suppliers were supplying 21% of consumers for electricity and 22% for gas, whereas in 2013 their market share was 4.7% for electricity and 5% for gas. The six largest energy suppliers’ market share stood at 79% for electricity and 78% for gas in December 2017, down from 84% for both gas and electricity at the end of 2016. The regulator also highlighted that there had been 5.1mn electricity switches and 4.1mn gas switches in 2017; the highest number for almost a decade. Of these customers, more than a third switched from one of the six largest suppliers to rival companies. Additionally, Ofgem noted that many of these customers were switching for the first time. Still, it cautioned that, while more people are switching to get a better deal, those who have never switched or rarely do so are still being overcharged. It has estimated that 57% of non-prepayment meter consumers are on poor value standard variable tariffs, which can be as much as £300 more expensive than the cheapest deals on the market. The current figures support a continuing and sustained, long-term movement away from the six largest suppliers, increasingly under pressure to offer better deals or risk losing more customers. The regulator confirmed that, as of 28 January, the cheapest dual fuel deal on the market was £820 per year, with the average standard variable tariff on offer from one of the six largest suppliers at £1,135 per year. Ofgem said that updated market share figures for individual suppliers will be published in April. Ofgem

14

Centrica has proposed an National Transmission System (NTS) optional capacity charge that would remove the current NTS Optional Commodity Charge (OCC) entirely. The proposal was the third alternative uniform network code (UNC) modification proposal raised on changes to the OCC. The OCC exists to prevent inefficient bypass of the NTS, and in November National Grid raised a proposal to update the parameters within the tariff formula, as they had not been updated since 1998 when the tariff was first introduced. Two alternative proposals have since been raised that seek either to put a distance limit on use of the OCC or to increase the cost components annually in line with RPI. Centrica’s said its proposal for an optional capacity charge would be underpinned by a Capacity Weighted Distance approach to establishing capacity reserve prices at all system entry and exit points. The tariffs would therefore be derived with reference to the approach set out in the EU Tariff network code. In addition to the Optional Capacity Charges replacing relevant system reserve charges, non-transmission services commodity charges would not apply to relevant gas flows nor would transmission services revenue recovery (or top-up) charges be applied. The proposal will initially be considered by the UNC Panel on 15 March. Joint Office

Ofgem issued its decision on 27 February that the Nemo and Greater Gabbard Offshore Transmission Owners (OFTOs) will be certified under the ownership unbundling requirements of the EU’s Third Energy Package. Nemo applied for certification, and Greater Gabbard underwent a certification review following a change of its ultimate controller. The OFTOs were assessed for compliance using five tests, which ensure that they, their parent company, or their senior officers do not have a majority shareholding in a relevant producer or supplier. The regulator decided that each of the five tests had been met for both OFTOs. Ofgem

15

Jacob Briggs, Analyst, [email protected]

E.ON UK announced on 1 March that it is rise. Bulb also announced on 27 February that it removing the dual fuel discount and paperless will increase prices for customers by 2.8% as a billing discounts from a number of its tariffs, as result of sustained higher wholesale prices, which well as increasing the standing charge for will take effect for existing customer on 28 April. customers that pay quarterly via cash or cheque. According to Cornwall Insight analysis, This will result in an average increase for approximately 40 suppliers offer a discount for affected customers of £22 per year. customers opting for paperless billing, equivalent From 19 April, E.ON UK will no longer offer a duel to around 60% of suppliers in the market. fuel discount (currently £20 per year) or paperless Additionally, 14 suppliers offer a dual fuel discount. billing discount (currently £5 per fuel per year) to Figure 1: Non PPM customers of Big Six on SVTs and the customers on its standard variable tariff (SVT). differential with each supplier’s cheapest tariff E.ON UK will also increase the standing charge for customers that pay quarterly via cash or cheque by £10 per fuel per year to “reflect increased costs to serve” associated with this payment method. This will similarly take effect for SVT customers from 19 April. All of these changes will also affect every new fixed tariffs from E.ON UK with immediate effect. The average impact on SVT bills will be around £22 a year. However, Energyhelpline’s Mark Todd said that “Some customers are being hit for £50”, with the impact on customers’ bills will varying based on payment method, bill choice and fuel. The increases in customer bills come despite no changes to electricity or gas unit rates from the supplier. E.ON UK has the third highest proportion of non-prepayment customers on an SVT of the large suppliers (see Figure 1), with over 2mn Since Ofgem’s 7 February announcement that customers at September 2017. it was increasing the level of the safeguard tariff cap by around £57, there has been After these changes have been implemented, speculation around potential SVT price E.ON UK stated that customers will be able to save £45 per fuel per year against the standing charge if increases. they pay by fixed monthly Direct Debit. Around This announcement from E.ON UK is not a 72% of the supplier’s customers pay via fixed blanket SVT price increase. But it does have monthly Direct Debit through its online payment the effect of increasing customer bills for those platform. affected, which is why the media are reporting The supplier said it is removing its dual fuel and it as a “stealth hike”. online discounts to “make it simpler and easier for customers to understand our tariffs and compare The supplier said that it is doing this to move them with other suppliers in the market, the in line with the majority of the market and aid majority of whom do not offer these discounts”. customer comparisons. E.ON UK implemented these changes “in light of This move illustrates how sensitive any rising costs along with other factors in the market”. alteration of price is for suppliers, especially Separately, also on 1 March MoneySavingExpert against the backdrop of the default tariff price reported that iSupply is increasing the price of its cap Bill moving through Parliament. SVT by 7.5%. The supplier has around 120,000 No link customers, with approximately 9% affected by the

Energy Spectrum 608 | 06/03/2018 | page 16

Jacob Briggs, Analyst, [email protected]

Iberdrola has reported a 7.3% fall in net destination”. The supplier is targeting smart operating profit year-on-year as it set out its infrastructure and consumer technology outlook through to 2022 in its full year results for investments. 2017 published on 21 February. Its subsidiary Figure 1: Scottish Power EBITDA by division, £mn Scottish Power also saw retail customer numbers fall by 200,000 in 2016, alongside declines in net 900 operating profit for its Energy Networks and 800 Generation and Supply divisions. 700 In the full year to December 2017, Iberdrola 600 reported EBITDA (earnings before interest, taxes, 500 depreciation and amortisation) of €7.319bn, down 400 7.3% year-on-year. This decline was attributed to 300 the company’s poor performance in Spain, 200 stemming from low hydroelectric production. By

Net operatingNet profit (£mn) 100 division, Networks and Renewables saw EBITDA increases of 3.6% and 6.1% respectively, whilst 0 Generation and Retail EBITDA fell by 29% year-on- SP Renewables SP Energy Generation and Networks Supply year to €1.601bn. 2017 (£mn) 2016 (£mn) In the UK, Scottish Power also saw an annual increase in EBITDA for its Renewables business, Looking forward, Iberdrola outlined its outlook for rising 44.6% to £316.1mn (see Figure 1). This 2018-22, announcing plans to invest €32bn over increase was supported by a rise in production to the period. Almost 50% of this is set to be spent in 4,880GWh, powered by growth in wind (13%) and networks, with 37% going to renewables and 9% to hydroelectric production (19%). The company now generation and retail. has over 2GW of wind power capacity following its By region, Scottish Power plans to deliver around £650mn construction of eight onshore windfarms €6.1bn of investment in green and smart in Scotland. infrastructure, focussing on renewable energy In comparison to growth in Renewables, SP Energy capacity, enhanced grid networks and smart Networks saw a slight decline of 2.8% in EBITDA to technology for customers. At 31 December 2017, £776.6mn, but in-line with expectations. The Scottish Power had installed 738,000 smart meters division invested £617mn during 2017, across the and the supplier currently operates a partnership distribution and transmission networks. with connected home manufacturer Climote. As with parent company Iberdrola, Scottish Power Analysts at Merrill Lynch were down-beat saw a sharp decline in Generation and Supply regarding the results, highlighting concerns over EBITDA, which fell 49.3% to £121.9mn in 2017. Iberdrola's target of €600mn EBITDA growth from Closure of the Longannet coal-fired power station customer solutions and the return on expenditure was largely responsible for the fall in thermal of the company’s investments in renewables. generation and associated income, whilst reduced Scottish Power joins Centrica in highlighting gas volumes were attributed to warmer weather. the impacts of rising government policy costs Energy retail saw the sharper decline in net on its energy retail financial performance. operating profit, down 51.6% on 2016 at £98.5mn. Iberdrola stated that “low margins and high The UK remains a core investment destination expenses of government obligations” impacted its for Iberdrola, with the majority of this GB retail performance. The supplier had 5.1mn investment set for regulated markets, customers at year-end, down 200,000 on 2016. potentially offering some insulation against the Similarly, domestic power volume also fell, by 6.7%. further pressures on retail margins that are expected to come. Scottish Power Chairman Ignacio Galan said: “Despite recent political and regulatory Iberdrola uncertainty, the UK remains a core investment

Energy Spectrum 608 | 06/03/2018 | page 17

On 28 February Shell announced that it had completed the acquisition of Impello, the parent company of First Utility, having received all necessary approvals. The deal to acquire First Utility was first announced in December 2017. As part of the acquisition Shell has announced that its former Vice President of Downstream Strategy and Portfolio, Colin Crooks, has taken over as CEO of First Utility, effective immediately. Ian McCaig, First Utility’s Chief Executive, left the company in September and Mark Daeche, its co-founder, has been running the supplier in the intervening time. Crooks commented: “The rapidly-evolving retail energy market is a natural place for Shell to expand its business, building on the trusted relationships we’ve built with our millions of forecourt customers. We aim to grow our customer base by offering an attractive range of products and a real alternative to other companies in the sector.” Shell

Shell has found that the global demand for liquefied natural gas (LNG) increased by 29mn tonnes to 293mn tonnes in 2017. However, in its latest annual LNG Outlook, Shell warned that, based on current demand projections, there was a risk of potential supply shortages developing in the mid-2020s unless new LNG commitments are made soon. The report, published on 26 February, found that LNG has played an increasing role in the global energy system in recent decades, with the number of countries importing LNG quadrupling since 2000. Over the same time period the number of LNG exporting countries has doubled. It was also noted that there is a “mismatch” in requirements of buyers and suppliers and that this is increasing. Suppliers reportedly want long-term LNG sales to secure financing, while buyers are increasingly demanding shorter, smaller and more flexible contracts so that they can compete in their own downstream power and gas markets. Shell warned that this “mismatch” will need to be resolved to enable LNG project developers to make final investment decisions. These are needed to ensure that there is an adequate future supply. Maarten Wetselaar, Integrated Gas and New Energies Director at Shell, said: “We are still seeing significant demand from traditional importers in Asia and Europe, but we are also seeing LNG provide flexible, reliable and cleaner energy supply for other countries around the world.” Shell

Greencoat Solar announced on 22 February that they had acquired a 142MW portfolio of GB solar generation assets from Canadian Solar. The portfolio consists of 24 solar power sites across Britain. Most sites are expected to provide revenues from the Renewables Obligation, while seven are accredited to the FiT scheme. The sites are valued at approximately £191.2mn, and will generate roughly 142,000MWh of power annually. Investment Manager at Greencoat Capital, Lee Moscovitch, said: “Canadian Solar has developed a significant portfolio of high quality operating UK solar PV assets. We are delighted with the transaction. We continue to see great opportunities in the secondary market and demand for exposure from investors”. The acquisition now sees the company become one of the largest owners of solar assets in the UK, managing ~470MW of solar capacity across more than 60 locations. Greencoat Capital

Energy Spectrum 608 | 06/03/2018 | page 18

Oil production from non-OPEC countries is likely to grow faster than demand in 2018, according to the International Energy Agency’s (IEA) latest Oil Market Report. The report, which was published on 13 February, said the growth in production will be driven primarily by the US shale boom. In the three months to November US crude output also rose by over 800,000 barrels per day with current factors thought to be “perfect" for sustained growth in US oil output. At the start of the year the IEA forecast that US production would overtake nations such as Russia and Saudi Arabia to become the world’s largest producer by 2019. The findings from this month’s report only go to reaffirm such a projection. Speaking to CNBC, who?, the Head of the oil industry and markets division at the IEA said: “We are seeing United States production rising very, very dramatically before our very eyes and that’s likely to continue in 2018”. However, the report does add a caveat, highlighting the potential for dynamic changes in the current market. It cited the buoyancy in the global economy, which could deliver demand growth greater than previously forecast. Such a situation would keep prices at current high levels in spite of the bearish impact of rising US production. IEA

Octopus Energy launched its “Agile Octopus” tariff on 22 February, giving customers access to half-hourly energy prices that are tied to wholesale prices and updated on a daily basis. The tariff has a capped unit rate of 35p/kWh to limit the effect of price spikes, and a service which notifies customers when electricity prices become negative and encourages them to increase consumption at those times. Octopus Energy noted that unit prices dropped below 2p/kWh 31 times and below 0p/kWh 4 times over the last 12 months. The supplier said that the tariff is “perfect for electric vehicles, storage heaters, or anyone who can use most of their electricity outside of the 4pm-7pm peak”. The ability to match demand to the tariff’s dynamic prices is key to realising the benefits of this tariff. In order to support this, the tariff pricing data is available through Octopus Energy’s digital interface, allowing for the programming of any connected home devices. The supplier claimed that, over the last year, an average family would have saved £210 on the Agile tariff compared to the average large supplier SVT, and could save another £120 by shifting 75% of their electricity use to off-peak. Although this is not the first domestic tariff offering time-of-use reflective pricing (Tonik and Green Energy have such offers), it represents the first to offer dynamic pricing at this level of granularity. Octopus Energy

InterGen announced on 27 February that it had reached financial close on its planned 300MW extension project at its Spalding gas-fired power station. The Spalding Energy Expansion project will see the new Open Cycle Combined Turbine (OCGT) extension constructed on land adjacent to the existing power station. The existing 880MW combined cycle station began commercial operation in 2004. In its statement InterGen explained that the £100mn project has a 15-year capacity agreement from the 2016 Capacity market auction. It added that the extension is the first, and currently only, large-scale thermal power station to secure limited recourse financing based – which is being provided by Santander and Nord LB – on the basis of such an agreement. Construction of the project is expected to be completed in June 2019. Tim Menzie, CEO of InterGen, said: “I am very pleased that our project achieved financial closing. Spalding Energy Expansion will provide much needed peaking capacity to the grid for UK electricity consumers. As well, the project is close to existing gas and electrical infrastructure and will benefit from our UK platform, including the adjacent Spalding Power Station.” InterGen

Energy Spectrum 608 | 06/03/2018 | page 19

On 20 February, BP released its annual emissions will still rise – by a modest 10% assessment of global energy trends up to 2040, a compared to 55% over the last 25 years to around crucial period in meeting global greenhouse gas 37bn tCO2e a year in 2040. But this is still a far cry obligations under the Paris Agreement that poses from even the uppermost range set by UNEP of huge challenges. The report is for the most part 30bn tCO2e from all emission sources needed to upbeat, predicting a doubling of GDP by 2040 yet keep open the option of staying within 2°C of one accompanied by a dramatic shift towards “the global warming. A step change in decarbonisation most diversified fuel mix ever seen” and falling will be needed to bridge the gap, BP stresses, carbon intensity, driven primarily by growth of suggesting that tentative previous IEA findings of renewables and higher energy efficiency. an early stabilisation of energy emissions over three years to 2016 were optimistic. An almost four-fold growth in non-hydro renewable energy’s share of primary energy supply, from 7% Figure 1: Forecast shares of primary energy today to 25% by 2040, accounts for 40% of the predicted energy demand increase in its main continuity scenario, “Evolving Transition” (ET). There is also a changing of the guard, as China overtakes the US on renewable energy, with a 30% global share by 2040 compared to just 15% for the US. A large-scale switch from coal to lower carbon intensity gas is projected, with demand for coal flattening in China, its largest market, partially offset by strong growth in India and other Asian economies. Even so, downward pressures are set to cut coal’s share of primary energy to 21%, the Gas demand exceeds 1.6% annual growth between lowest level since the Industrial Revolution. 2016 and 2040, driven by industrialisation and higher power demand in emerging economies, In the power sector, as technology and economies and switching away from coal in both emerging of scale take hold faster than BP had previously and OECD economies. Demand is expected to expected, renewable generation, notably solar and reach 59 Bcf/d by 2040 in the power sector and wind, has been able to grow more quickly for less growth in industrial use of gas including use in the investment. Solar power alone is now forecast to non-combustion sectors such as chemicals (70 achieve growth 150% higher than anticipated in its Bcf/d), but this overall growth could fall to 1% or 2015 report, a major shift. less with more comprehensive climate policies, it Fly in the ointment finds. The fastest growth of gas use is in transport, where it accounts for 5% of demand by 2050. But against these positive trends, which have become more pronounced since last year’s Despite growing US dominance of oil and gas assessment, is set an increase in energy demand, output, most of this will be for domestic use, with fuelled primarily by rapid economic transformation exports from OPEC members dominating global in China, India and other Asian emerging markets. economies. The ET scenario predicts global Peak oil? energy demand will rise by more than a third (35%) by 2040, though it notes that at 1.3%/ year As in previous assessments, BP’s Energy Outlook compared to 2% over the last 20 years, this is a 2018 predicts that growth in its core business of significantly slower rate of growth, due to a gradual liquid fuels, dominated by oil, will continue decoupling of GDP from energy use. throughout most of the period at around 0.5% annually, though scaled back from previous Despite growth of non-fossil fuel use, this residual projections. It predicts that global demand for increase in primary energy demand will draw upon liquid fuels (oil, biofuels, and other liquid fuels) an energy mix where coal, oil, and gas still account increases by some 13mn bl/d, peaking at 110.3mn for a quarter of supply each by 2040. As a result, bl/d in 2035, and falling to 109mn bl/d by 2040.

Energy Spectrum 608 | 06/03/2018 | page 20

Growth will be driven by emerging economies, and 35% lower than in 2016, sharply reducing oil by transport accounting for 55% of demand, but demand, carbon intensity of GDP almost half this growth plateaus towards the end of the global levels, and non-fossil fuels providing around Outlook. 40% of energy demand compared to 25% globally. US oil growth is predicted to dominate initial Meanwhile, withdrawal of the US from the Paris growth, later to be overtaken by OPEC members Agreement, despite its voluntary design being after greater market share. The US and Qatar are developed in large part to overcome sensitivities also set to account for nearly half of LNG exports shown in America’s earlier rejection of the top- by 2040, with growth too in Australia, Russia and down Kyoto Protocol, will add further headwinds to Africa. the task of global decarbonisation. Even so, regional emissions trading schemes, state, city and But the oil demand stimulus from transport later business initiatives are continuing in the US. weakens once tighter fuel efficiency standards and alternatives such as electric vehicles and hydrogen A tale of two cities are factored in. After 2030, much of the residual Overall, the picture emerging is one where a major growth in oil demand of 7mn bl/d is for non- shift towards a low-carbon, energy efficient combustion uses such as petrochemical economy is rapidly gathering pace as renewable feedstocks where efficiency gains and substitution costs plummet, aided thus far by renewable become harder. support policies and carbon pricing, but progress A large part of global primary energy demand is patchy and still far from adequate to meet even growth – 70% – will come from electrifying the the minimal 2°C target of the Paris Agreement economy, ultimately enabling lower emissions, without greater intervention, let alone its 1.5°C particularly in the transport and heating markets. aspiration. Dependence on oil and gas will still The pace of decarbonisation of the power sector, account for 40% of primary energy in 2040. crucial to climate policies, has been even more The EU will remain in the lead, though eclipsed by pronounced than in primary energy, with China in absolute terms, while newly emerging renewables accounting for more than 50% of economies in Asia will remain dependent on high increased generation. Despite this, it still falls short levels of fossil fuel for much of the period and the of that needed for the full carbon dividend of positive influence of the US internationally will be electrification to be experienced in other sectors. largely absent for the foreseeable future. A matter of policy Even so, the BP report demonstrates what can be Yet varying policy assumptions are clearly done, and that the positive structural shifts already important; the ET scenario assumes mainstream starting to take place are forming the basis of a renewables become competitive without subsidy new low-carbon global energy framework that can in the 2020s, achieving a 25% share of power by be built on given stronger ambition. 2040, while a more aggressive “Renewables Push” Dr Paul Hatchwell is a long-standing writer and scenario with continuing subsidies enables a 40% consultant on climate and energy policies and share. Even so, system balancing issues limit the trends, and is a Cornwall Insight Associate. potential for carbon mitigation. The most aggressive scenario, and on current trends the least likely, is the “Even Faster Transition” which also includes high carbon pricing to drive coal to gas switching coupled with Carbon Capture Utilisation and Storage (CCUS). Current CCUS projects are largely limited to enhanced oil recovery, with low levels of investment as yet. China’s role in renewable generation dominates global growth of these technologies, as well as hydro, and 90% of new nuclear, albeit offset by closures in the EU. Together, these three sources are projected to meet 80% of China’s increased energy demand to 2040. But in relative terms, the EU will remain the low- carbon leader in 2040, with carbon emissions over

Energy Spectrum 608 | 06/03/2018 | page 21

Spot gas prices experienced extraordinary price spikes last week. Day-ahead gas rose 37.0% to 100.0p/th (Friday-on- Friday). On 1 March the contract hit its highest level in at least 10 years at 125.0p/th. following the announcement of a gas deficit warning by National Grid. The warning followed high demand levels amid cold weather, as well as supply outages at South Hook LNG terminal, Kollsnes gas processing plant and the BBL interconnector. An outage at the Rough gas storage site on 1 March added additional pressure. In contrast, most other contracts along the forward curve declined. The month-ahead (April) contract dropped 2.1% to 47.7p/th last week.

Spot power prices also experienced large price rises last week. The day-ahead baseload power contract was rose 19.5% to £76.5/MWh. On 1 March prices reached a one-and-a-half year high at £98.0/MWh. This was driven by a surge in gas prices, high levels of demand, and outages across numerous CCGT and nuclear plants. Most other contracts along the forward curve fell. The month-ahead (April) contract lost 2.0% to £46.8/MWh.

Brent crude oil prices grew 0.9% to average $65.8/bl throughout last week. Gains were capped by bearish fundamentals, with the EIA reporting on that US crude output reached an all-time high of 10.3mn barrels per day, with forecasts that this is set to increase. API 2 coal prices fell last week, down 0.8% to average $81.8/t. Prices weakened amid lower demand throughout the market, coupled by lower prices in Asia-Pacific markets. EU ETS carbon prices grew 2.3% to average €9.9/t last week. On 28 February, prices hit a fresh six- year high of €10.1/t. Support for prices stemmed from the European Council completing the final approval of EU ETS Phase 4 reforms. In addition, a strong Polish EUA auction mid-week boosted prices.

22