Tom Crisp Editor 01603 604421 [email protected]

Monday 03/09 – An alliance of energy businesses and groups raise concerns that failure to agree a comprehensive post-Brexit energy and ENERGY PERSPECTIVE 02 climate deal could see energy bills rise. The Energy Networks Association launches a Call for Ideas for the £90mn Network PAR for the course as Ofgem recommits to fully marginal cash- Innovation Competition. out – Lee Drummee Tuesday 04/09 – Scotland’s First Minister Nicola Sturgeon announces POLICY 05 that this year the Scottish government will invest £15mn to add an

BEIS looks to further reform CfD additional 1,500 electric vehicle charging points across the country. A framework £20mn pilot project to trial hydrogen supply in launched by BEIS. Spirit Energy sector sets out Brexit Energy confirms it will invest in oil exploration and appraisal west of demands Shetland for the first time early next year. Industry says sector deal crucial to the future of the oil and gas Wednesday 05/09 – BEIS confirms it will invest up to £44mn in its Parliamentary update – Week 35 Advanced Modular Reactor Feasibility and Development project. 2018 Appearing before a Commons committee, former BP boss Trevor REGULATION 10 Garlick warns that without a sector deal, the UK oil and gas industry could miss out compared to other countries. Media reports indicate Ofgem presents default tariff cap proposals has bought Affect Energy and its 22,000 customers Price cap announcement for an undisclosed “seven figure sum”. Analysis from Imperial College provokes mixed reaction London finds that increasing household flexibility could cut the cost of ENTSO-E invites views on Ten Year Network Development Plan decarbonising the energy system by £6.9bn/ year.

INDUSTRY STRUCTURE 16 Thursday 06/09 – Ofgem consults on the level and details of implementation of the government’s default tariff cap, which will Record year for onshore wind guarantee savings of at least £75 for disengaged customers. Labour but threat to investment criticises the announcement as a “smaller saving for fewer people” Global energy investment falls for third consecutive year than was originally promised in the 2017 general election by Prime Minister Theresa May. Research from Ofgem’s Consumer First Panel NUTWOOD 20 suggests that there was widespread support for the introduction of a Summer share price price cap for all Standard Variable Tariff customers. A National Audit performance – Peter Atherton Office report finds that utility providers are an increasing contributor to personal debt in the UK. Ørsted officially opens the Walney Extension, MARKETS 22 making it the world’s largest operational offshore windfarm. EY reveals that power and utility investment deals around the world reached a record half-year high of $180bn (£139bn) during H1 2018. Friday 07/09 –Nicola Sturgeon officially opens the European Offshore Wind Deployment Centre in Aberdeen Bay. National Grid submits its application to the Planning Inspectorate for a second connection for Wylfa Newydd nuclear power station. A group of 16 of the UK’s largest van fleet operators pledge an initial £40mn investment over the next two years to begin switching their diesel vans to electric models.

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November draws closer, Figure 1: Difference between daily average PAR 50 and PAR and with it the final step 1 system price in the implementation of Ofgem’s Electricity Balancing Significant Code Review (EBSCR) implemented through BSC modification P305 Lee Drummee in November 2015. This Analyst will see the electricity 01603 604427 imbalance (or “cash-out”) l.drummee@cornwall- insight.com rules altered for a second time to create sharper more volatile prices and increase the default costs for disconnections and reserve. The prospect of higher imbalance prices and the On 2 August the regulator published its review of potential for substantial spikes when the system is the EBSCR changes, which quantitatively assessed tight is intended to act as an incentive for parties to the impact on the market of the first wave of balance their contracted position. At the same time changes. We summarised this analysis previously this should reward parties that are able to respond (see ES630), but in this Energy Perspective we aim to market conditions and provide valuable to illuminate some of the expected impacts of flexibility to the system. However, the ability for further changes and explore issues Ofgem did not parties to accurately balance their position does touch on. somewhat depend on their capability to forecast Golf strong, go long generation and/ or demand accurately. The Single Imbalance Price (SIP) for each Figure 2: PAR 1 difference vs PAR 50 on 1 March 2018 settlement is calculated using a volume-weighted average of a defined volume of the most expensive actions that remain once all other tagging and flagging processes (removing system actions) have been taken. This is the Price Average Reference (PAR) volume, which currently stands at 50MWh (PAR 50). From 1 November 2018, the PAR volume will be reduced to 1MWh (PAR 1). Analysis of imbalance prices over the first half of 2018 shows that, under a PAR 1 scenario, prices would have been more volatile in a short market. On average, half-hourly imbalance prices were £2.40/MWh higher in periods when the system was short, but just £0.80/MWh lower during times of oversupply (see Figure 1).While the overall Grip it and rip it distribution of prices should remain broadly similar, As a last resort, the system operator can ask the move to PAR1 could see even more distribution network operators to reduce their occurrences of significant cash-out price spikes. voltage or disconnect customers to keep the The clearest example of the potential impact came system balanced. The actions involved in this during the Beast from the East, where on 2 March process are priced at an administratively set price 2018 imbalance prices would have averaged – since November 2015 this has been £15.10/MWh higher under the PAR 1 scenario. £3,000/MWh. This parameter is known as the Similarly, in one period on 1 March, the imbalance Value of Lost Load (VoLL). price would have been £277.80/MWh higher under From November 2018, the VoLL will increase to the same calculation method (Figure 2). £6,000/MWh. Similar to the reduction of the PAR volume, the move to a £6,000/MWh VoLL should

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strengthen the incentives for market participants to will be run with the latest variables on available avoid being short at times of scarcity. capacity, demand and wind forecasts. In its analysis of the first phase of the EBSCR, In March 2018 Elexon released a National Grid Ofgem found that market participants are more summary of a comparison of static and dynamic likely to go long (i.e. over contract) due to the LoLP between June 2017 and December 2017. increased risks associated with going short (i.e. They found the values of static and dynamic LoLP under contract). On average, the system as frequently differ across all timescales, although the represented by the Net Imbalance Volume (or difference in price at gate closure was marginal, “NIV”) is now on average 55MW longer than it was and at maximum resulted in a difference in RSP of pre-P305. This trend can be expected to continue £12.50/MWh. following the introduction of a £6,000/MWh VoLL. Elexon has also been releasing data for 2018, and our analysis shows that between December 2017 Negative prices and August 2018 the highest RSP would have Since November 2015, there has been 245 been £306/MWh, with an average non-zero LoLP occurrences of negative imbalance prices. value of 0.49% compared to 0.06% under the These had an average price of -£35.09/MWh static method. However, none of these higher with an absolute minimum of -£150.0/MWh. LoLPs would have factored into the final price as Under a PAR 1 scenario, there would have reserve actions, due to system flagging. been 284 occurrences with an average price However, we note that the LoLP at gate closure of -£40.39/MWh and an absolute minimum of - was less predictable. We expect that this, coupled £158.0/MWh. with a VoLL of £6,000/MWh, and the associated risk premium will push up wholesale power prices, Stuck in the bunker as parties look to offset exposure to more The Reserve Scarcity Price (RSP) function, which unpredictable prices. was also introduced in November 2015, uses the Swing into action activation of reserve as a price escalator to signal to the market the value of scarcity. The NIV is the sum of the Bids and Offers accepted in the Balancing Mechanism (BM) by the The RSP costs reserve actions at the highest of the system operator in each half-hour. It is used to Short-Term Operating Reserve (STOR) utilisation signal whether the system is short or long. It is also price or VoLL multiplied by the Loss of Load used to net off price ranked actions (termed “NIV Probability (LoLP). The LoLP is a measure of Tagging”). In 2013-14 Ofgem said it believed no system reliability, with a value between 0% and party would be able to sufficiently forecast the NIV 100%, and it represents a measure of scarcity in and the imbalance prices flowing from it, and available generation capacity for each settlement therefore trading out the position would remain the period. dominant strategy in the market. Ofgem in its review found there had been seven But being able to predict which actions will be periods when the STOR price had been replaced taken, and which will then be netted off can give a by the RSP. But five of these had been tagged out trader a powerful commercial advantage. This is of the price calculation (either through NIV-tagging because being in imbalance in the opposite or system flagging), and all of these periods direction to the system means the party is typically occurred in October 2016. cashed-out at a higher price than could otherwise The regulator noted the use of RSP was lower than be achieved in the wholesale market. originally anticipated, suggesting either the margin was higher than expected or the methodology was Price excursions above £200/MWh not as sensitive as was projected. Since November 2015, there has been 158 When implemented the P305 designers chose to occurrences of imbalance prices rising above use a simpler system of static LoLP where a LoLP £200.0/MWh. These had an average price of curve related to the margin was created in each £449.94/MWh with an absolute maximum of year, so parties could easily forecast what the £1,528.74/MWh. Under a PAR 1 scenario, there value of RSP would be if reserve actions were would have been 173 occurrences of such taken in the half-hour period. But from 1 November price spikes with an average price of 2018 the LoLP methodology will become £478.32/MWh and an absolute maximum of “dynamic”, which means every half-hour a model £1,990.0/MWh.

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Unlicensed generators have a significant Without EBSCR providing certainty to flexible advantage in this space, as they do not have to fix generators that cash-out prices would be sharper their output with contract notifications (at gate and more volatile, encouraging suppliers to go closure – they can intentionally spill into the long and raising wholesale prices, the clearing market when they forecast the imbalance price to price in CM auctions would have likely been be above their marginal cost. This is known as higher. The effect of the CM is one which should imbalance or “NIV chasing”). Independent market lower long-term baseload power prices, by analytics providers can supply this service as well providing greater levels of generation capacity as a number of offtakers. enjoying capacity payments. This then shifts the flexibility and volatility into the short-term market This practice means there are generators waiting through the EBSCR marginal cash-out price. to see which actions the system operator instructs under the BM and running in response to these How’s my driving? signals. This could potentially create a feedback The stated design objectives of the EBSCR were loop, where parties chase the system length and ensuring the right level of security of supply, the NIV continually flips, making the system more increasing the efficiency of electricity balancing difficult to balance, increasing balancing costs and and ensuring compliance with the EU target model. increasing the operational challenges facing the system operator. Ofgem’s review shows cash-out prices have fallen overall as participants have tended to go longer, It is difficult to measure how many generators are but this masks the half-hourly volatility of currently NIV chasing but looking at the existing imbalance prices. Party level imbalances have Capacity Market (CM) plant in the latest auction, changed overall, with smaller suppliers facing there is 1.3GW of reciprocating engine, CHP and lower average charges. And the GB cash-out OCGT capacity which could theoretically be arrangements are currently compliant with the EU participating in this market. We expect many more target model, although its likely more changes are to come forward, and as a consequence there required. So, the objectives at this stage would could be a risk of NIV chasing behaviour causing seem to have been largely successfully met, and the system to flip between being long and short proceeding to PAR1 is logical. much more frequently. Overall, we would agree with the assessment that Ofgem did not consider NIV chasing in its EBSCR the cash-out arrangements have improved, but we review, which is odd. The issue is evidently on the still have concerns about the volatility and system operator’s radar, and it seems to be one of predictability of variables such as the dynamic the reasons why it is now actively considering LoLP and the effects of significant levels of NIV wider BM access. chasing as a result of loss of other revenue How change to contract notification timescales is streams such as triad. interacting with these prices is not clear from the These need careful monitoring, which should EBSCR review, which is silent on P342. This include analysis of the market’s and SO’s response modification is the only significant modification to to BSC parties being able to notify contracts up to cash-out made since P305. Introduced in the beginning November 2017 this enabled contract notifications of the delivery to be made up to the start of the delivery period, period. A rather than at gate closure as previously. The marginal cost- change, in theory, allows BSC parties greater reflective opportunity to balance their position. price is only Tee it high, let it fly effective if parties can It is not possible to consider the success of the accurately EBSCR arrangements without also looking at its predict interactions with the CM. EBSCR has so far worked exposure and synergistically with the CM – it is hard to see how access the investment in ~8GW of new build de-rated products, capacity, including new battery storage and which can reciprocating engines, would be secured at offset the relatively low clearing prices without investors risks they being certain scarcity and flexibility were properly face. rewarded through peaky near-term prices.

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Tom Crisp, [email protected]

The department issued a response on 30 August Forecast Data from 30 September to 31 January, relating to matters arising from its December and to introduce a new requirement for developers 2017 consultation on changes to the Contracts to submit this data six months before their for Difference (CfD) scheme. It included a follow- expected start date. These changes (more at up consultation on specific changes. Figure 1) are intended to improve the accuracy of forecasting the costs of schemes. The response constitutes Part B of the response, with Part A having been published in June (see A policy decision has been taken on advanced ES621). The most significant elements of it relate to conversion technologies (ACTs), which will now be load factors and reference prices. required to meet a higher, 60% conversion efficiency of energy in the biogenic content of the BEIS intends to use higher load factor assumptions feedstock into energy in the biogenic content of for the next allocation round in March 2019. These the syngas/ synliquid. will be representative of the upper portion of the expected distribution of load factors for each The Part B response also highlights the benefits of technology rather than a central assumption. remote island wind (RIW), including enabling the However, it does not intend to use different load deployment of transmission infrastructure that factor assumptions for technology subsets in the could subsequently be used by other renewables, next allocation round, but it will reconsider this for such as tidal. It was noted that, while RIW future rounds. developers already offer community benefit packages, the government does not intend to The government also proposes to use different make this a mandatory part of the CfD process. reference price forecasts in the valuation formula While the inclusion of sub-5MW community RIW instead of one average price: a “baseload” and an projects was not explicitly ruled out, it was seen as “intermittent” reference price. These prices will be “challenging”. But overall only minor changes to based on estimates of the average wholesale the CfD contract have been proposed to prices that are expected to be captured by accommodate RIW. baseload and intermittent technologies. Different reference prices may be used for each technology Some elements of the plans have drawn criticism pot to account for the different eligible from trade bodies, including a plan to adopt the technologies and their typical generation patterns. new greenhouse gas threshold of 29kg CO2e/ MWh for new biomass combined heat and power BEIS also proposes new reporting requirements. It (CHP) under the CfD scheme. This is significantly proposes to amend the submission deadline for lower than the 180kg CO2e/MWh threshold that will apply from 2025-30 for existing biomass Figure 1: Amended reporting requirements generators under the Renewables Obligation. Commenting on this change, Benedict McAleenan, Head of Biomass UK, part of the Association, commented: “Developing sustainable, efficient renewable CHP plants will be much more difficult, despite the joined-up value they provide across heat and power sectors.” Other technical changes centre around drafting changes to ensure the CfD framework remains up to date post-Brexit. Views on the proposals are invited by 10 October. Many of these changes come as no surprise and they are generally sensible administrative measures. BEIS - Part B response REA Source: BEIS

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Tom Crisp, [email protected]

A letter co-ordinated by E3G and signed by an standards, while UK businesses need clarity that alliance of major energy groups and businesses the UK government will not lower standards in has called for strong and swift action from EU future (non-EU) trade deals that would allow and UK policy makers to deliver an enduring international competitors with lower standards to agreement on energy and climate change issues undercut them. to avert higher energy bills as a result of Brexit. Fourth, agreement should be reached on priorities Signatories included EDF, Energy UK, for delivering zero tariff and non-tariff barriers to RenewableUK, Unilever, the Energy Networks trade between the EU27 and UK in low-carbon Association and the Electricity Association of goods and services – particularly offshore wind, . energy storage and electric vehicles. The letter opened by emphasising the importance Fifth, agreement to diplomatic cooperation on of the Paris Agreement and continued co- energy and climate change. Joint UK-EU Energy operation between the UK and EU to achieve it. As and Climate Change Ministerial Councils should be such, the signatories call for within the Brexit formed to support coordinated diplomatic negotiations a comprehensive Climate and Energy engagement with major energy exporting Chapter that is prioritised in the future relationship countries, including Russia, emergency response negotiations. measures to manage supply interruptions and to discuss international climate change policy. Addressing climate change and energy together creates an area of “mutual benefits” where the Sixth, there should be a joint commitment to co- respective interests of the UK and the EU are investment in energy infrastructure to avoid an balanced, allowing for faster agreement. Such a investment hiatus and disruption to projects like balance of interests is only possible if the chapter the Offshore Grid, Horizon Europe and addresses issues such as cooperation on successor research and development emissions targets, clean energy Projects of programmes. Common Interest, climate and energy diplomacy Finally, the UK should continue to participate in the and carbon pricing, which it would “not be EU Emissions Trading System until at least the end possible” to address adequately in a more of phase IV in 2030. Particular concerns were conventional Free Trade Agreement, such as the raised that a hasty UK exit from the scheme could EU-Canada agreement. create a fresh surplus of allowances. Within such a chapter, the letter detailed seven Separate criticism also came of the government’s key recommendations. Brexit plans on 2 September, as environmental Firstly, that the UK and EU jointly commit to groups warned that the environmental regulator stretching their existing ambition levels and targets planned by Defra post-Brexit is being “deliberately towards meeting the Paris Agreement. weakened” and will be unable to hold the government to account over climate change. Secondly, the letter called for EU-UK consensus that there would be no tariffs on cross-border Shadow Brexit Minister Matthew Pennycook said: energy trading, and that co-operation on efficient “Our EU membership has been key to delivering market coupling would continue. Any imposition of and enforcing UK emission reductions. In choosing tariff or non-tariff barriers to the flows of energy to exclude climate change from the remit of their across interconnectors would increase the cost of environmental watchdog, ministers are deliberately the low-carbon transition and set back action on weakening the tools we have to hold them to climate change. In particular, the all-island Single account. The Brexit process cannot be used as a Electricity Market in Ireland would face “existential cover to water down the UK’s leadership on risk” if tariffs were imposed. climate change.” Third, it was recommended that the UK and EU27 The E3G coordinated initiative is well-argued both commit to maintain high environmental and timely. standards. EU27 businesses and investors need confidence that the UK will not seek to initiate a E3G race to the bottom with Europe on environmental

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Tom Lawson, [email protected]

On 5 September the Scottish Affairs Committee graph and that the sector deal addresses the “red held an oral evidence session with industry line” by opening up overseas export opportunities. stakeholders as part of its inquiry into the future The sector deal proposed co-investment from of the oil and gas industry. government, industry and academia for three new The committee launched its inquiry in April into the innovation hubs covering decommissioning, sector to consider the challenges Scotland’s oil underwater innovation and transformational and gas industry faces, and how they can be technologies. Garlick said the conclusion was addressed. Issues under scrutiny include: made after “they had consulted widely” in an effort maximising the economic return from Scotland’s oil to address “what was needed and not being done and gas reserves, what is being done to support elsewhere”. He added that an investment of the long-term future of the industry, how well £176mn could deliver up to £110bn of potential different stakeholders are working together and value between now and 2035 through “gaining how expertise, technology and infrastructure can market share in a growing export market in be used to secure the industry’s future as reserves subsea”. decline. Scottish Conservative MP Ross Thompson asked if In March an oil and gas sector deal was proposed proposals to maximise export potential, which are by the Oil and Gas Authority (OGA) to help deliver claimed to double the UK market share by 2035. the industry’s Vision 2035, which estimates an Garlick said that the hubs aimed to drive opportunity for up to £496bn in additional revenue innovation to make UK more competitive at a time to 2035 (see Figure 1). when “we see that the market is growing”. Gordon Figure 1: Projected growth in oil and gas sector, Vision 2035 also said that the hubs would help identify opportunities in the market and touched upon an intention for oil and gas to collaborate with other sectors involved in subsea development such as offshore wind, tidal and deep-sea mining. Garlick described the timing of the deal as “critical” in order to capitalise on current opportunities and that there was a danger of missing out. He called on the deal to be acted upon to sustain the UK’s “world leading position”, with 38% of the current market share, as countries including Norway and Brazil begin to act on similar plans.

Source: OGA Despite the urgency expressed over the timing in finalising the deal, when the SNP’s Pete Wishart Witness Trevor Garlick, Co-Vice-Chairman of the said the committee was expecting “some sort of Oil and Gas Technology Centre, highlighted recent announcement made around about now”, progress of government and private sector witnesses said its final plans were now being collaboration, including the founding of the OGA delayed until the end of the year to finalise the and establishment of the Oil and Gas Technology delivery model. Centre. The committee said it hoped to conclude its inquiry However, Garlick commented that these have report by November and have recommendations in “really focused on exploration and production.” He place by December. went on to say that to realise the full financial opportunities of Vision 2035, more focus was The industry appears clear on how its Vision needed on the supply chain and technological 2035 can be realised, but with details still to innovation. be finalised it could be several months before Neil Gordon, CEO of trade body Subsea UK, told any decisions are made. the committee that good progress was being Parliament made towards the “blue line” in the Vision 2035

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Parliament returned from Summer Recess on 4 September, and will sit until 13 September, before both houses rise for the party conference break. The Local Electricity Bill 2017-19 was introduced to the Commons on 6 September. A Private Member’s Bill tabled by Jeremy Lefroy (Conservative, Stafford) it aims to enable electricity generators to become local electricity suppliers. The Bill is being prepared for publication, with more details available soon. Second Reading is scheduled for 26 October. The Draft Electricity and Gas (Powers to Make Subordinate Legislation) (Amendment) (EU Exit) Regulations 2018 were laid in the Commons by Energy and Clean Growth Minister Claire Perry on 5 September. The Commons Scottish Affairs Select Committee held an evidence session on 5 September as part of its inquiry into the future of the oil and gas industry (see p.7). The Commons Welsh Affairs Select Committee held an evidence session on 4 September on the responsibilities of the Secretary of State for Wales. Subjects included the Swansea Bay Tidal Lagoon and the role of the minister in promoting renewable energy. The House of Commons Library published a briefing on 4 September on Energy Smart Meters. Links underlined above

The National Audit Office (NAO) delivered its report on Tackling Personal Debt on 6 September, finding people are increasingly reporting problems with debts to utilities providers. It highlighted how the proportion of problems reported to Citizens Advice related to utilities or rent increased from 21% to 26% between 2011-12 and 2017-18, with an estimated £1,065mn owed in arrears to energy suppliers. The report concluded that the Treasury cannot promote improvement in the management of excessive debt as effectively as possible across a wide network without fixing the “weak links”, in particular transparency around debt issues and levels across all sectors. Amyas Morse, the Head of the NAO, added: “The Treasury needs a better understanding of the scale of people’s debt problems and how it is impacting their lives and the taxpayer so it can effectively resolve the problem.” NAO

On 5 September BEIS announced that it is to invest up to £44mn in its Advanced Modular Reactor (AMR) Feasibility and Development (F&D) project. The department said that, unlike conventional nuclear reactors, AMRs do not use pressurised or boiling water for primary cooling, and they can generate lower cost electricity, increase flexibility in delivering power to the grid, and deliver enhanced functionality, such as the provision of heat output for domestic or industrial purposes, or facilitate the production of hydrogen. The funding project has two phases, with the first offering a share of up to £4mn to undertake a series of feasibility studies for AMR design and the second offering a share of up to £40mn for selected projects to undertake development activities. So far eight organisations have been awarded contracts for phase 1, including Westinghouse Electric Company UK, Moltex Energy Limited and Advanced Reactor Concepts LLC. Abstracts detailing each proposed project were published alongside the competition details. BEIS

Two surveys recently published detail the solar industry’s reaction to government plans on the closure of the Feed-in Tariff (FiT). The government is currently consulting on proposals to close the FiT scheme and end the export tariff, which would close the scheme in full to new applications after 31 March 2019.

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A survey by the Renewable Energy Association (REA) released on 3 September found that four in 10 (40%) of UK solar installers would consider leaving the industry and 78% would consider reducing staff levels if the government’s proposals go ahead. It covered 140 Renewable Energy Consumer Code (a subsidiary of REA) members. The REA said that retaining the export tariff “to fairly compensate projects for the energy they generate” could “soften the blow” to the industry of closing the FiT. Meanwhile, a survey by news site Solar Power Portal (SPP) on 30 August found that the majority of UK solar installers have said they would “face hardship” if the government goes ahead with its FiT closure plans. Nearly nine in 10 (88%) of those surveyed said that they disagreed with the government’s proposals on the FiT closure, while 73% said the closure of the export tariff with no replacement framework would have a negative impact on their day-to-day business activities. Further, 57% said it could result in them having to either downsize or close their business altogether. Findings from the SPP survey are being submitted as a response to the BEIS consultation, which closes on 13 September. REA

A £20mn Hydrogen Supply competition was opened by BEIS on 4 September, aiming to accelerate the development of low-carbon bulk hydrogen supply solutions. The competition is aimed at projects at a technology readiness level of 4 (laboratory testing) to 7 (pilot project), and targets projects which could reduce costs compared to Steam Methane Reformer with Carbon Capture and Storage or improve the capture rates at a comparable cost. BEIS said: “Low-carbon hydrogen could play an important role in decarbonising industry, power, heat and transport. However, for a market to grow, potential users need to be confident in supply of sufficient amounts of low-carbon hydrogen at a competitive price.” The deadline to register interest is 21 November, while the deadline to submit proposals is 5 December 2018. BEIS

On 3 September Scotland’s First Minister Nicola Sturgeon announced £16.7mn of additional funding for the country’s low-carbon transport plans. The declaration comes ahead of Sturgeon’s Programme for Government, which last year set out an aim of removing the need for new petrol or diesel cars or vans in Scotland by 2032 to reduce greenhouse gas (GHG) emissions. Sturgeon said the new funding will go towards increasing the number of green buses, improving access to electric charging points in homes, businesses and public spaces, and ensuring that people see electric vehicles as “an attractive, cost-effective alternative” to petrol and diesel vehicles. “Electrifying the road network and transforming the way we travel is vital to reducing our carbon emission, tackling climate change and improving air quality”, she added. The new fund comes on top of a continued Scottish government investment of £1bn per year in low-carbon and public transport. Scottish government

Our latest Chart of the Week – The policy gap – can it be met by subsidy free renewables? – Is available to download here. Last week’s Cornwall Insight blogs included The way forward – The latest on Unidentified Gas.

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Josephine Lord, [email protected]

The regulator has issued its proposals and a has calculated that 96% of SVT customers in 2017 statutory consultation on the tariff cap for would have paid less under the cap, reducing their standard variable tariffs (SVTs) and default tariffs bills by a collective £1.3bn. This will translate into to be introduced under the powers granted by around £1bn going forwards, as there are now the Domestic Gas and Electricity (Tariff Cap) Act. fewer customers on default tariffs than in 2017 and suppliers’ prices have not risen as quickly as The consultation on 6 September set out how wholesale prices during the period. Ofgem proposes to set the baseline level for the cap, its scope, how the cap will be updated and Customers already subject to the prepayment the potential impacts. It follows a series of working meter cap are exempt from the default tariff and papers and a consultation in May. customers currently on the Warm Home Discount safeguard tariff will be moved onto the direct debit The cap will be set using a “bottom up” cost default tariff cap to prevent a step change in their assessment, where for each component of the current prices. There is also an exemption for SVT customer’s bill, Ofgem will provide an allowance tariffs supporting renewable energy, if chosen by for efficient costs and a “normal” profit level of the customer. 1.9%, which is based on the Competition and Market Authority’s analysis from its energy market The cap will be updated every six months in April investigation. and October and announced two months before it comes into effect. Given the uncertainty around An allowance for operating costs will be based on the cost and pace of rolling out smart meters, analysis of 10 large and medium suppliers, using Ofgem intends to review these costs in time for the the lower quartile supplier, which is one of the third cap period, which will start in October 2019. largest six suppliers. Ofgem will deduct an The regulator will use its licence modification additional efficiency factor to sharpen the incentive powers if it finds there is a systematic error leading for suppliers to reduce inefficiency. The allowance to the cap being too high or too low. also includes a “headroom” to help suppliers manage additional costs of uncertainty, which will To align with the prepayment meter cap, the first be equivalent to £12 per dual fuel customer (see cap period will be shorter. Ofgem intends to issue Figure 1). its final decision and the initial cap values in November such that the default tariff cap can be in A cap higher by £83 will be set for SVT customers force for the start of 2019. paying by standard credit rather direct debit, which Ofgem said is slightly lower than the current Under the Act, the cap is temporary and will be market differential. removed in 2020 unless the government decides to amend it for a further 12 months, with a limit of The proposals mean a cap at around £1,136 for three extensions in total, meaning it will end no dual fuel customers paying by direct debit, and later than 2023. £1,219 for those paying by standard credit. Ofgem Alongside its consultations, Ofgem issued a report Figure 1: Direct debit default tariff cap baseline and 2019 comparator on a Consumer First Panel research on attitudes towards and behaviours under a potential price cap, whose insights helped form the development of the price cap and its design (see p.13). Ofgem has also set up a data disclosure room for more sensitive data. Responses are requested by 8 October. The proposals look initially less strict than feared by some suppliers. We will be considering the cap further in a forthcoming perspective piece. Source: Ofgem Ofgem- consultation Ofgem-Consumer First

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Tom Lawson, [email protected]

Following Ofgem’s proposed default tariff price Bernstein’s tone was similar stating “bang in line cap level (see p.11), announced on 6 September, with the prepayment cap , no favours for suppliers a wave of reaction came in from across politics with a 3% margin and £12 headroom. It added “in and industry. Here we round up some key our view the headroom allowance leaves no responses, with a wide range of opinions on the incentive for customers to switch”. policy and the cap level proposed. Analysts at Bernstein said Ofgem’s wholesale and Energy and Clean Growth Minister Claire Perry told policy costs were “slightly better” than the the MailOnline that the cap would “protect 11mn prepayment meter (PPM) cap by ~£27/ customer households from poor value deals this winter in but that it “seems to have balanced this by a lower addition to the 5mn vulnerable customers already head-room margin.” protected by the prepayment meter cap or Citizens Advice welcomed the cap and described safeguard tariff.” She added: “I've been absolutely it as “an important step in the right direction”. It clear with the Big Six – this government will put the expects those on standard variable tariffs to save interests of hard-working families and older money but said switching would still be more billpayers at the heart of the energy market.” effective. BEIS Committee Chair Rachel Reeves (Labour, (NEA) also welcomed the Leeds West) offered similar praise and said the cap new protections but said “people experiencing the was long overdue. She added: “The Big Six energy extremes of fuel poverty will need more help.” companies have been ripping off their customers for far too long and the price cap is a crucial step But Energy UK said that the cap would “pose a in helping to fix our broken energy market.” significant challenge” to many suppliers, and it was crucial that it “ensures we have an investible Labour’s Shadow Business and Energy Secretary energy sector where efficient and financially robust Rebecca Long Bailey was not impressed and said companies can trade” to benefits consumers. the cap was “a start”, but it was “a smaller saving for fewer people” than the 17mn households better Julian Jessop, Chief Economist at the Institute of off by up to £100/ year initially promised by Prime Economic Affairs also raised concerns. He said the Minister Theresa May. the government's proposed energy price cap is, “at best, a pointless gimmick, and, at worst, will Former Liberal Democrat Secretary of State for actually result in higher bills and lower levels of Energy Ed Davey agreed that the cap was service for many consumers […] unless the “underwhelming” and said it should be ensured government intervenes to set every single bill, that it “doesn’t lull people into a false sense of suppliers are likely to offset the costs by raising security” as capping prices wouldn’t necessarily prices that are not regulated.” mean they were “capped at a good rate”. SSE said it believed that “competition, not caps, Merrill Lynch said the cap level of £1,136 was best serves the long-term interests of customers”. slightly tougher than it expected, and it felt Ofgem However, it added: “Setting the cap at a level that had in some respects pursued “headlines vs logic”. protects the needs of current and future standard A lower "headroom" allowance is the principal tariff consumers preserves effective competition in difference, and it added that as a result of the the market and enables efficient suppliers to implied £12 headroom it expected switching rates finance their licensed activities is a challenging to “fall significantly”. task but also an essential objective.” Merrill Lynch added that consequential lower switching rates could be a “silver lining” for the The reactions were largely predictable, and incumbents. The caps will be painful but should brokers comments unsurprisingly focussed on cure a key overhang and bring some welcome the symmetry with the prepayment cap, 3% clarity, particularly for and SSE. margin and headroom assumptions. It concluded: “Ironically, the mechanical update of Parliament Labour Citizens Advice wholesale energy costs in February could largely Energy UK NEA SSE reverse the impact of the cap and confuse consumers.”

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Josephine Lord, [email protected]

The European electricity system operators’ The 2025, 2030 and 2040 TYNDP scenarios organisation issued its draft Ten Year Network provide a detailed picture of the electricity system Development Plan (TYNDP) for consultation on 3 situation in each European country. They show August. how much renewable capacity each country will need to integrate into its system, the market The plan, which includes four documents focusing integration barriers which persist and contribute to on different regions as well as technical papers on raising the cost of the electricity system for cost-benefit analyses of projects and Europeans, and how each country would manage developments in transmission technology, is its peak demand and ensure continuous access to produced by ENTSO-E every two years. It aims to electricity. set out a view of European transmission infrastructure development that will be required The regional insight report for the area including over the next 10 years, although it also considers GB and Ireland considers the scenarios as they scenarios out to 2040. impact on this area and notes the 13 Ireland–GB– Continental Europe projects in the North-South The latest iteration includes 166 proposed interconnector west corridor (see Figure 1). transmission projects consisting of 357 investments with 201 overhead lines, 67 subsea Figure 1: Promoted projects in NSI West corridor lines and 23 underground cables. There are 15 storage projects proposed including 12 hydro pumped and three compressed air storage facilities. The scenarios on which the developments are based have for the first time been developed jointly with ENTSOG. As well as setting out a view of the projects needed, the TYNDP forms a key role in identifying Projects of Common Interest that, following a favourable cost benefit analysis, can benefit from special treatment including access to European funding and accelerated planning and permit granting. In addition to scenarios for 2025, there are four scenarios for 2030 and 2040: Source: ENTSO-E • Sustainable Transition, where targets are These include interconnectors expected to connect over the next 12 years and the conceptual reached through national regulation, emissions northern seas offshore grid infrastructure, for trading schemes and subsidies, maximising which no commissioning date or scale is provided. use of existing infrastructure In terms of socio-economic welfare benefits, which • Distributed Generation, which puts prosumers form part of the cost benefit analyses conducted, the report concludes that projects between the at the centre with small-scale generation, Nordic and GB systems have high benefits, batteries and fuel switching although there are also high costs due to the long • Global Climate Action, which sees “full speed” distances involved. global decarbonisation and large-scale Responses are requested by 21 September. renewables development, and The TYNPD provides a wealth of analysis on • External Scenario, based on EUCO30, a core the European electricity system and its policy scenario produced by the European potential futures and is a key part of the Commission, including an energy efficiency process for gaining access to funding through target of 30%. the EU. ENTSO-E

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Research from Ofgem’s Consumer First Panel on the default tariff cap published on 6 September suggested that, among the 89 participants, there was widespread support for the introduction of a price cap for all Standard Variable Tariff (SVT) customers. The research, the first wave from year 10 of the panel, also showed a broad lack of awareness that current energy price caps existed and a need to communicate this more widely. When asked about how a higher or a lower cap would affect tariff prices, participants considered greater benefits to SVT customer where the price of capped SVTs would be materially lower than current ones. Less engaged participants also felt that the low cap would reduce complexity in the market. While feeling that there was “too much choice” in the market, panellists perceived no tangible differentiation between the products offered by suppliers. This meant panellists felt the only real thing to shop around for, and to determine their choice was the price. Price was viewed as measurable, tangible, and an easily recognisable point of difference between suppliers –as opposed to other qualities promoted. The panel also expressed a level of mistrust of smaller suppliers. Smaller suppliers were seen by some as owned by more well-known larger suppliers, less reliable in terms of and not always cheaper than established suppliers. More broadly, consensus was not reached on what constitutes vulnerability, and therefore on the categories of people that they thought should be supported. Ofgem

Ofgem issued a statutory consultation on 7 September on its proposed changes to the supplier of last resort (SoLR) licence conditions. The regulator plans to proceed with the proposals from its policy consultation in June, namely: • to enable SoLRs to recover costs of refunding former customers via the industry levy • to allow appropriate flexibility in the timings for the process for making a claim (up to five years), and • to allow costs to be recovered from all customers. It indicates it also intends to consult on its approach to licensing suppliers and market entry in “late summer”. The consultation closes on 8 October. We will cover this in-depth next issue. Ofgem

Ofgem has forecast a 5.4% rise in charges related to administration of the Renewables Obligation (RO) during 2018-19, which it attributes to an increased focus on assurance activity and redevelopment of the Renewables & CHP Register. A breakdown of costs is set out in a letter published by the regulator on 24 August. Over half of the £4,416,747 total figure includes spend on the RO Operations Team (£2,583,851). This is followed by an estimated spend of £724,927 on IT developments, a 26.8% increase compared to these costs during the previous 2017-18 scheme year. As part of this work, Ofgem noted ongoing efforts to update the fuel flow methodology within its CHP register, enabling it to deal with new and innovative fuel combinations proposed by generators. Spend on legal support rose by 40.6% to £208,917, with the regulator highlighting the need for this increased support as being due to novel application scenarios and complex applications driven by the closure of the scheme to new entrants. Recent legislative changes also require amendments to systems and processes, which the regulator expects will make scheme administration more robust and efficient. Ofgem will need to produce new guidance to account for the respective changes, as well as hosting workshops and webinars to ensure stakeholders remain informed.

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Recovery of these costs will take place via the RO buy-out fund in October 2018. Ofgem

National Grid Electricity Transmission’s (NGET’s) transmission licence will now be partially transferred to the new entity National Grid Electricity System Operator (NGESO) following Ofgem’s approval. The regulator described its decision, announced on 4 September, as a core element of the separation of the ESO functions from NGET’s licence, which will go live in April 2019. It also confirmed its decision to modify all electricity transmission licences in order to update and maintain the consistency of the electricity transmission licence, following the legal separation of the ESO. Ofgem

Elexon announced the results of the BSC Panel elections on 6 September. The current Industry Members’ term of office expires in September 2018. The term of newly elected Panel Members will start on 1 October 2018 and run until 30 September 2020. Successful candidates are: • Cornwall Insight’s Tom Edwards • Lisa Waters (Waters Wye) • Stuart Cotton (Drax) • Mark Bellman (), and • Mitch Donnelly (Centrica) Elexon

The regulator approved the original proposal for GC104 EU Connection Codes GB Implementation – Demand Connection Code on 4 September that will amend the Grid Code so that it is compliant with the EU demand connection network code (DCC). The modification makes a series of changes to existing code sections, including in respect of connection requirements and operational notification procedures for new transmission-connected demand facilities and distribution systems. It also introduces a new section for demand side response requirements for DCC compliance for new distribution-connected load. Ofgem considered that the modification will introduce a commonality and reduce complexity of arrangements, as is the aim of the network codes, improving the security and efficiency of the system and improving competition. Implementation was on 7 September. Ofgem

Millennium Wind Energy raised a CUSC proposal – CMP302 Extend the Small Generator Discount Until an Enduring Solution Acknowledging the Discrepancy Between England & Wales and Scotland is Implemented – on 23 August, which seeks to extend the current small generator discount for transmission network use of system (TNUoS) charges, available to generators with a capacity of under 100MW connected to the 132kV network in Scotland and offshore. The proposer has sought to extend the discount, which is due to expire on 31 March 2019, until an enduring solution is put in place that addresses the different treatment of these generators. The 2018-19 discount is worth £11.10/kW to these generators, and the £30.64mn that this represents is recovered from half hourly (HH) and non-HH demand users through an increment to demand TNUoS tariffs. The proposer argues that, while the current situation creates significant uncertainty for affected generators, which is also damaging to

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competition, continuing the discount until the enduring arrangements are put in place would mean one set of changes rather than two, causing less disruption. On 31 August the CUSC Panel recommended that the proposal should follow urgent procedures and be developed by the workgroup to an accelerated timetable, though Ofgem’s decision on this is awaited. The arrangements are proposed to be implemented in the CUSC 10 days after an Authority decision and to take effect from 1 April 2019. National Grid

ENTSO-E issued its fourth report on 14 August on the implementation of intraday and day-ahead market coupling, also including for the first time progress on the implementation of forward capacity allocation. It covers the period from August 2017. The report covers the go-live of continuous cross-zonal trading of XBID/SIDC in 14 European countries. The pan-European single intraday market coupling is governed by the intraday operational agreement, agreed by all Nominated Electricity Market Operators (NEMOs) and transmission system operators (TSOs) of the EU Member States plus Norway, but excluding Slovakian parties – in total 47 parties. In parallel, up to five local implementation projects are in preparation to go-live for single intraday market coupling in 2019. In respect of single day-ahead market coupling, ENSTO-E reported that all NEMOs and TSOs are progressing to finalise the day-ahead operational agreement which will cover two operational projects, namely the multi-regional coupling project in 20 countries and the 4M coupling project in four countries. It said both operations had no incidents of partial or full decoupling in 2017-18. In respect of the forward capacity allocation network code, the single allocation platform (SAP) cooperation agreement governs the allocation of long-term transmission rights on a pan-European level. The development and operation of the SAP will be carried out by the Joint Allocation Office and all TSOs are required to develop the cooperation agreement, which will cover the roles, tasks, responsibilities and liabilities of different parties. This platform is formed by 22 TSOs from 27 countries, performing the yearly and monthly explicit auctions in Europe. ENTSO-E

• In issue 8, published on 31 August, we focus on • Ofgem’s consultation on network access arrangements and forward-looking network charging, issued at the end of July the history of the e-POWER auctions and how they have evolved over time. The auction that took place over 10-11 July was the second largest auction to date • in future supply, we look at a review carried out for Ofgem on disintermediation models that could be applied to the GB system to aid the future of supply market arrangements and the regulator’s latest insight paper on electric vehicles, and • In international markets, The Australian Competition and Consumer Commission issued its final report of its electricity market inquiry, which set out 56 recommendations for reducing retail electricity prices and improving consumers’ ability to participate in the retail electricity market • we also look at direct customer access in California, and much, much more. In all 30 pages of content and insight on regulatory and market reform here and overseas. Email [email protected] for a free 3-month trial.

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Alex McGregor, [email protected]

RenewableUK released its Onshore Wind: Power in long-term skilled jobs when all the wind farms Communities report on 31 August, highlighting are operating. It is estimated that 60% of the jobs record deployment of onshore windfarms in the will be created in Scotland, 17% in Wales and 23% UK in 2017, but warning of a sharp drop in in England (where many HQs are located). It is investment if policy does not change. expected that 86% of the projects by capacity will be built in Scotland and 12% in Wales. Less than According to the report, a record 2.6GW of 2% will be built in England made up of small-scale onshore wind commenced generation in the UK in community projects. 2017 (see Figure 1). The majority of new installed capacity occurred outside of England, with Forecasts also show that the costs of new onshore 1,673MW in Scotland, 356MW in Wales and wind projects will drop beneath the government’s 247MW in Northern Ireland. forecast wholesale electricity price from 2023, delivering a net benefit of £1.6bn for GB electricity Accounting for 20% of the onshore wind fleet, the consumers. installed capacity in 2017 brings the total installed wind capacity generation to 12.1GW, enough to This news comes despite support levels for the power 7.3mn homes a year. accounting for 9% of technology at up to 74%, according to latest the UK’s fuel generation mix in 2017. The current government opinion polls, and the analysis by BVG installed capacity of onshore wind saves 13.4mn showing that onshore wind is the lowest cost tonnes of CO2 annually, according to the report. option for new power in the UK. Figure 1: Installed onshore wind capacity by year, including a map of regional installed capacity in 2017 Figure 2: Net payback to consumer from five CfD auctions

Source: BVG Associates RenewableUK Executive Director Emma Pinchbeck commented: “By excluding onshore wind from the Source: RenewableUK market, the government is putting at risk billions of The record installed capacity was driven by the pounds of new investment annually across the UK Renewables Obligation (RO) scheme deadline for and making it more expensive to meet its own accreditation, which led to investment of £7.7bn climate change targets.” across the lifetime of the projects installed in 2017. Commenting on the report, SSE’s Director of However, the report notes that, following the Generation Development Paul Cooley added: “A closure of the RO to onshore wind, other options supportive policy framework that addresses for subsidy are limited as the government’s market and planning challenges is vital to enable Contracts for Difference (CfD) scheme is currently onshore wind to continue delivering local and blocking onshore wind. national benefits”. The report draws on a report by BVG Associates, This persuasive report and supporting analysis which shows the benefits to the industry from was supported by ScottishPower Renewables, awarding 1GW of CfD contracts in each of five Vattenfall, innogy and Statkraft. auctions between 2019 and 2025. Around 18,000 RenewableUK skilled jobs would be supported during the peak years of construction, with 8,500 people employed

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Nick Palmer, [email protected]

Research issued in July by the International Key findings Energy Agency (IEA) has found that worldwide energy investment fell 2% in 2017 to $1.8tn • Energy investment is increasingly underpinned (£1.4tn). by governments - Across all power sector investments, more than 95% of investment is now A variety of factors are behind the fall in global based on regulation or contracts for remuneration energy investment, according to the IEA. The • Fewer investment decisions are being taken for power generation sector played a large role in the investment in thermal generation – in 2017 newly overall decline, with fewer increases to coal, hydro sanctioned coal power fell 18%, driven by a and nuclear capacity. slowdown in China, India and Southeast Asia. There was a reduction in spending on coal supply • Clean energy research and development (R&D is by 13% in 2017 to just under $80bn (£62.4bn). This on the rise – government low-carbon energy R&D was despite thermal prices more than doubling. spending in 2017 was estimated to have increased China has reduced its spending on coal power due by 13% in 2017 to a focus on low-carbon electricity and energy efficiency, with investment in new coal plants in the investment, with nearly 4GW being commissioned. country falling by 55% in 2017. However, onshore windfarm investment fell by 15% Liquefied natural gas (LNG) also experienced a during the same period, but with one-third of this decline in investment, with spending on LNG 15% drop coming as a result of decreasing liquefication expected to reduce to roughly $15bn technology costs. (£11.7bn) in 2018. New LNG projects have stalled Solar power saw record spending levels, of which due to a reduction in the price of LNG brought on 45% was in China, offering a demonstration of the by a surge in supply. Only three new LNG projects impact the nation can have on energy spending. have been approved since mid-2016. Set against this global downward trend, some Nuclear power saw a sharp decline. In 2017, sectors saw increases in investment, including investment in new nuclear power hit its lowest upstream oil and gas. Investment in upstream level in five years. However, global spending on activity increased by 4% to $450bn in 2017 and is lifetime extensions for existing plants increased in expected to rise by 5% to $472bn in 2018. 2017. The IEA said nuclear power is seeing its Energy efficiency is another area in which focus change from a primary power source to a investment has risen, though the rate in growth Figure 1: Global energy investment 2017 ($bn) and change from 2016 has slowed to 3%. In 2017, $236bn (£184bn) was spent on energy efficiency- across buildings, transport and industry in 2017. However, the distribution of the spend was uneven, and in the industrial sector the IEA estimated that spending reduced by 8% in 2017. This is a result of lower module prices and greater deployment in lower cost areas of the world. As we will report next week, in a separate study EY states that power and utility investment deals Source: IEA around the world reached a record half-year high transitional measure used for supporting low- of $180bn (£139bn) during H1 2018. carbon generation. The renewable energy sector also saw a fall in Once again there is a wealth of data and costs investment, declining by 7% to $300bn (£234bn) in this report. But the IEA’s overall conclusion (see Figure 1). However, it still accounted for two- is that investment is not sufficient to meet thirds of power generation spending in 2017. security and sustainability objectives, which should concern policy makers. Wind power investment experienced two differing trends. Offshore wind reached record levels of IEA

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Octopus Energy took over small supplier Affect Energy in an undisclosed “seven figure sum” deal, adding around 22,000 domestic customers to its current 350,000 total. After being finalised on 31 August, the transaction will see the 22,000 customers transition onto Octopus Energy’s Flexible Octopus variable tariff. Octopus Energy said it would “retain Affect Energy’s operations team to continue providing their excellent service”, with 17 of the supplier’s 20 staff transferring across to roles with Octopus Energy. Affect Energy has a score of 9.5/10 on consumer ratings site TrustPilot and Octopus Energy regularly highlights its own customer service credentials, and it holds the same rating on TrustPilot. On the deal, Affect Energy CEO and Founder John Szymik said " I am proud that we have built a business so beloved by customers. Octopus stood out among all energy retailers as the best company to take this to the next level, and I'm delighted at the opportunity this creates for our team and our customers". This is the latest in a series of deals from Octopus Energy over the summer, when it acquired 95,000 Iresa customers through the Supplier of Last Resort process and announced it would take on the M&S Energy white label partnership previously held by SSE. In all we estimate that these deals could boost its customer base from 250,000 to over 450,000. CEO and Founder of Octopus Energy Greg Jackson described the latest acquisition as: “another step in Octopus’s ambition to transform the energy market.” No link

Severn Trent announced on 30 August that it has acquired food waste renewable energy generator and composter Agrivert UK for £120mn. Agrivert was founded in 1994 and has specialised in renewable energy generation through the anaerobic digestion (AD) of food waste. The purchase will add Agrivert’s five food waste AD plants and five green and comingled waste composting sites to Severn Trent’s non-regulated Green Power Business arm. The new plants will complement Green Power’s two food waste AD plants in East Birmingham and West Birmingham, as well as one currently under construction in Derby. The purchase of Agrivert for £120mn will take Severn Trent’s total investment in renewable energy to £300mn by 2020. Agrivert Chief Executive Alexander Maddan commented: “Our familiarity with the Severn Trent Group gives us great confidence that the Agrivert UK business is being transferred into good hands, allowing Agrivert Limited to concentrate on the engineering and overseas markets.” Severn Trent Chief Executive Liv Garfield added: “Renewable energy is strategically important to Seven Trent and the UK as a whole as we work towards achieving our decarbonisation targets and delivering attractive shareholder returns. […] Agrivert UK strengthens our established presence in anaerobic digestion where we have been leaders in the water sector for many years.” Severn Trent

A joint venture between four electricity network companies to accommodate the increase in renewable power flowing onto local networks could save customers an estimated £40mn. Modelling by National Grid revealed that a current system of protection – known as Vector Shift – is “highly sensitive” to disturbances in the wider network and can cause some generators to stop exporting power unnecessarily. To avoid unnecessary curtailment, UK Power Networks, Scottish and Southern Electricity Networks, Western Power Distribution and National Grid collectively developed a new, more resilient mode of protection called “High Setting RoCof”. The project’s goal was to install the new mode of protection for up to

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800MW of distributed generation. The consortium reached the target and completed all the upgrade work at a total of 70 sites. Matt White, Lead Power System Development Engineer at UK Power Networks, said: “There was a real imperative to make the short-term move to a more resilient type of protection in time for this summer, and we have come together to achieve it.” UKPN

Danish energy company Ørsted officially opened the Walney Extension on 6 September, making it the world’s largest operational offshore windfarm. Located off the coast of Cumbria, the project consists of 87 turbines with a combined capacity of 659MW and therefore surpasses the 630MW . Walney Extension features 47 MHI 8MW wind turbines and a further 40 7MW wind turbines. The completion of Walney Extension brings Ørsted’s total capacity operating out of Barrow up to 1.5GW. The development is co-owned by Ørsted (50%) and Danish pension funds PKA (25%) and PFA (25%). Ørsted’s UK Managing Director Matthew Wright said: “The UK is the global leader in offshore wind and Walney Extension showcases the industry’s incredible success story”. He added that the project was completed on time and within budget. Ørsted

Windfarm developer Energiekontor is in “advanced negotiations” with a major international company to join in a partnership to create a long-term power purchase agreement for a new windfarm. The German developer is aiming for a “subsidy-free” development in 2019 for the 48MW windfarm in Pines Burn in the Scottish Borders. The will feature 12 turbines with tips between 130m and 150m in length. Energiekontor highlighted that wind speeds in the area at altitudes of 80 to 100m above ground level are comparable with those seen offshore. A spokesperson for Energiekontor said: “Like our Withernwick 2 wind farm, which is already under construction in England, the new wind farm in Scotland is to be realised without state subsidies.” The company was founded in 1999 and operates a number of renewable generation across Europe and the UK, with a total capacity of 86.3MW. No link

Spirit Energy – a joint venture which combines Centrica plc’s E&P business with Bayerngas Norge AS – is to invest in oil exploration and appraisal west of Shetland for the first time early next year. Announced by Centrica on 3 September, the deal will see Spirit Energy joining Hurricane Energy in work on 50% of its Greater Warwick Area. Spirit Energy will fund $180mn (£139mn) for drilling for three wells 100km in the seas west of Shetland, in an effort to further prove the potential of an area which holds an estimated 2bn barrels of oil equivalent. A single horizontal appraisal well will be drilled in Lincoln, with two horizontal exploration wells to be drilled on the adjacent Warwick prospect. If successful, the companies aim to progress towards full field development. Chris Cox, Chief Executive of Spirit Energy, said: “Appraising the Lincoln discovery and exploring for new reserves in Warwick offers a tremendous opportunity for Spirit to participate in the early phases of resource maturation in one of the last known world-class oil development opportunities in the UK”. Centrica

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With summer coming to an end, it is timely to look analysts to upgrade their outlook for the rest of back and see the utility stocks have fared over the 2018 and 2019. period and how investors are positioning EDF has been benefiting from strong nuclear themselves going into the winter months. output in as its maintenance issues recede. Market context It has also enjoyed strong hydro output following a wetter than normal winter. First however we should look at the market context. The FTSE 100 index made big gains in the But, perhaps most important has been the firming spring, rising over 800 points and over the of power prices across Europe on the back of a summer it has traded within a tight range, holding higher oil price and surging carbon prices. Given on to those earlier gains. But over the summer the scale of its nuclear operations, EDF is one of period (starting in June) it has given up a little bit of the most leveraged companies in Europe to moves ground falling from 7,680 to 7,505. in power prices. Indeed, the major European bourses in , In the UK the best performer has been Drax. Its France and Spain have also remained largely flat shares have risen 18% in the period. After hitting a over the summer period. low in February of 221p, Drax’s share price has now rallied all the way to 384p. The H1 corporate profit reporting season in Europe was reasonably good, but that may have reflected Investors shrugged off a somewhat weak H1 the strong economic growth in 2017. Furthermore finance performance from Drax focusing rather on economic data so far this year has tended to its medium-term outlook. Despite the strong rally in disappoint, leading to fears that profits may come recent months it is worth remembering that the under pressure in H2. With the European Central Drax share price is still less than half its all-time Bank also tapering its monetary support, high seen in May 2014. headwinds for some economies seem inevitable in Centrica’s headwinds the coming months. Perhaps the most troubled utility in Europe right Given this background equity markets have now is Centrica. Its shares had a lacklustre actually done quite well to hold onto the gains summer, briefly rallying to 165p before falling back seen earlier in the year. after a disappointing set of H1 results to 145p. In contrast to Europe the stock market in the US Centrica’s multiple challenges are well known and has continued to test all-time highs. The Dow at present investors are unconvinced that the Jones Industrial average is very close to its all-time company will overcome them. This can be seen high at 26,000 having risen over 8% this summer, most starkly in the dividend yield, now at an eye and the tech heavy Nasdaq index has been popping 8.4%. storming ahead. A strong earnings season, driven This level of dividend yield usually suggests one of in no small part by President Trump’s tax reforms, two things. Either investors have little faith in the has attracted investors into equities. growth potential of the business, and therefore Some market commentators believe that the US want their returns upfront as dividends (as market has reached its peak and the recent 3-4% opposed to capital growth via a rising share price), GDP growth seen in the US is merely a sugar rush or secondly that investors believe the dividend is caused by tax cuts. That may or may not prove to unsustainable and will be cut in the near future. Of be true, but for now the US economy and markets course, both of these reasons could apply at the are motoring along. same time. Front runners Flat times Looking at the utility sector the performance over Elsewhere both SSE and National Grid’s (NG) the summer has been mixed. The stand out shares have also had an uninspiring summer. performer over the period has been EDF, whose SSE’s share briefly hit 1,400p before falling back to share price has risen a whopping 26% over the 1,266p a loss of 6.5% over the summer. At 813p period. At end of July, EDF reported stronger than National Grid’s shares also finished the summer expected earnings for H1 2018 which in turn led

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below where they started albeit ahead of the 790p been resolved with Ofgem publishing the level of low seen in early August. the SVT price cap for the coming winter. At these levels SSE is yielding ~7% and NG is The share prices of the major suppliers ticked up yielding 5.5%. Both companies will be frustrated by 1-4% on the announcement as the level of the with their share price performance. Both face cap was generally seen as being at the higher end overhangs from regulators and political risk (RIIO of the possible range, and analysts have already reviews and Labour Party policy). factored in the financial impact. But both eased back over the course of the week remain a fair way In addition, SSE is working to complete its below where they were when May revealed plans complicated retail de-merger. As these overhangs for the cap last year. lift as we go into and through 2019 both stocks could be in line for a positive re-rating. Cornwall Insight Associate Peter Atherton is a well-known equity analyst having headed utility Finally, in Germany E.ON and RWE continued to research at several eminent City institutions. see positive share price gains. RWE’s shares advanced nearly 15% over the period whereas E.ON was up a more modest 6%. Both companies benefit from stronger power prices and the generally favourable reception given by investors to their asset swap deal announced earlier in the year. Capping it all In terms of the outlook for share prices in the coming months, as usual macro-economic news, movements in wholesale energy prices, and regulatory / political events will likely dominate. In the UK one element of regulatory uncertainty has

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Gas contracts rose across the board last week. Day-ahead gas surged 7.6% to 74.5p/th last week. Gas prices continued to rise as unplanned outages at St Fergus and Mobil terminals left the gas system undersupplied, with flows dropping by 14mcm/day. October 18 gas increased 8.4% to end the week at a fresh high of 74.1p/th. All seasonal gas contracts rose, up 6.9% on average. Higher prices were due to a range of market fundamentals, with EU ETS carbon and API 2 coal prices rising to fresh 10-year and five-year highs respectively, both of which have acted to increase gas demand for power generation. Winter 18 was up 8.4% to 79.3p/th, a fresh record high. Summer 19 rose 8.0% to 62.4p/th.

Day-ahead power rose 3.7% week-on-week to £69.5/MWh, a fresh five-month high amid rising gas and commodity prices. Support has also been found from a tighter market as planned maintenance restricts the French interconnector to 1.0GW capacity until 15 September. October 18 and November 18 power contracts rose throughout the week and reached record highs of £70.3/MWh and £74.8/MWh respectively. Seasonal prices climbed 3.4% on average last week, with all contracts hitting fresh highs. On 7 September, winter 18 power peaked at £73.9/MWh, the highest price of any season-ahead contract since September 2008. Summer 19 rose to £60.9/MWh.

The weekly average Brent crude oil price rose for the third consecutive week, gaining 3.5% to average $77.9/bl, up from $75.3/bl the previous week. Oil topped $79.0/bl on 4 September as oil platform evacuations began in the Gulf of Mexico ahead of tropical storm Gordon. API 2 coal rose 3.6% to average $94.2/t last week. API 2 coal rose to a fresh five-year high on 7 September of $96.0/t. EU ETS carbon prices rose for the eleventh consecutive week, increasing 3.0% to average €21.1/t, up from €20.5/t the previous week. EU ETS carbon hit a fresh 10-year high of €23.4/t on 7 September following the auction of 4.4mn EUAs in Germany at €22.5/t.

Energy Spectrum 633 | 10/09/2018 | page 22