Tom Crisp Editor 01603 604421 t.crisp@cornwall-insight.com

ENERGY PERSPECTIVE 02 Monday 12/02 – National Grid issues its first annual forward plan for Crossed wires: interconnectors the electricity system operator. Ofgem delivers its outline business and the Capacity Market –Tom case for faster switching. The regulator also announces plans to trial Edwards an innovative approach to collective switching in the coming weeks POLICY 05 where participants will have to provide less information. BEIS allocates £30mn of funding to unlock the balancing potential of electric vehicles BEIS Committee finds broken through research into vehicle to grid technologies. Energy UK energy market, supports SVT cap launches its Commission for Customers in Vulnerable Circumstances. CCC sceptical tech innovation Tuesday 13/02 – The Business, Energy and Industrial Strategy can deliver climate goals Transport overtakes energy Committee backs the government’s approach of implementing a price supply as UK’s largest emitter cap for customers on standard variable tariffs. Citizens Advice reacts Ofgem gives Helm Review by expressing reservations over the inclusion of a sunset clause in the mixed write up price cap bill tied to an arbitrary date. National Grid, in its role as EMR REGULATION 12 Delivery Body, publishes the final results of the T-1 2018-19 Capacity Market Auction, with an additional 15MW of battery projects securing Ofgem confirms faster switching features agreements. Ofgem to trial opt-in collective switch for disengaged Wednesday 14/02 – The OECD says governments should make better customers use of energy taxation to address climate change. The Renewables CMA decision on transmission Consulting Group warns of a growing threat from cyber-attacks in the rebate appeal imminent sector. A Lloyd's study finds respondents believe wind power will INDUSTRY STRUCTURE 17 reach grid parity in the UK by 2024.

Power Responsive outlines Thursday 15/02 – Energy UK switching figures show 400,000 increased activity in flexibility customers switched during January 2018 – a 14% increase on the services same period last year. The London Assembly warns the capital must National Grid charts path to independent electricity SO begin to limit the amount and type of waste that is sent to energy from waste facilities. Only a minority of UNC Panel members vote in favour NUTWOOD 21 of implementing any of the three modifications that seek to introduce Beyond the sunset – Rich Hall, an enduring solution to the problems caused by the volatility of

Citizens Advice unidentified gas. Statoil announces that its Hywind Scotland floating offshore windfarm has “performed better than expected” during its MARKETS 22 first three full months in production, with a ~60% capacity factor. Friday 16/02 – Ofgem announces that it has launched an investigation into supplier Iresa’s customer service processes. EDF’s 2017 results show the UK contribution to group sales was €579mn lower than in 2016, mainly explained by lower realised prices for nuclear power. The first Annual Monitoring Report from the National Infrastructure Commission welcomes the progress made in transforming the UK’s energy networks towards a smart future.

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This year’s capacity representing 4% of capacity procured. All of them auctions have now have commissioning dates earlier than 2021-22, concluded. The price of and two of them – NEMO and IFA2 – are £8.40/kW was, by some supported by the so-called Cap and Floor regime. margin, the lowest It is likely that they have targeted this auction clearing price in a T-4 delivery year to accommodate possible auction. There are construction delay creating the risk of Capacity myriad ramifications, but Market penalties. Figure 1 shows the cumulative a key development in role of interconnectors in T-4 auctions. the auction relates to Figure 1: De-rated interconnector capacity in T-4 Tom Edwards 2.16GW of new auctions Senior Consultant interconnectors taking 01603 604411 this low price. t.edwards@cornwall- 5 insight.com As we approach a five- 4 2.16 year review of Electricity Market Reform (EMR), we 3 argue in this Energy Perspective that there is a 2 pressing need to reconsider the interaction 2.4 between the Cap and Floor regime for 1 1.86 2.34

interconnectors and the capacity auctions, 0 rated rated capacity (GW) especially the approach to de-rating - 2015 T-4 2016-T-4 2018 T-4 interconnectors. Without change, the price signal De T-4 auction to other capacity could remain depressed, dangerously so if current assumptions about Existing interconnectors New build interconnectors interconnector deployment prove correct. Two-phase Circuit breaker The introduction of interconnectors in the second We believe the low price accepted by new T-4 capacity auction in 2015 was a bridge to full interconnectors in the last T-4 auction will be cross-border capacity participation in the Capacity repeated in future auctions. A significant factor is Market. This was to satisfy State Aid requirements the interaction with underwriting investment under as the European Commission saw interconnector the Cap and Floor regulatory rules. This regime involvement as an interim measure, with the aim to was introduced by Ofgem, first specifically for the facilitate full cross-border participation by capacity 1GW (nameplate) NEMO interconnector in 2014, providers, consistent with State Aid guidelines. The and then latterly more widely through two January 2015 DECC consultation decision on qualification windows. allowing interconnector participation in that year’s The first of these windows opened in September second T-4 auction made explicit that the 2014 and initial project assessments were made in participation of interconnectors would only last 2015, awarding Cap and Floor status to 5.7GW of until a common EU approach was adopted. nameplate capacity across five interconnectors. In the T-4 auction in 2015, interconnectors, as The second of these opened in 2016 and has just remains the case today, competed for one-year resulted in awards in principle to support 4.2GW agreements, having been de-rated individually four across three interconnectors. Ofgem is yet to years ahead, on the recommendation of National confirm whether a third window will take place. Grid. Their de-rating reflected the expected The Cap and Floor stimulates investment through contribution across the interconnectors at times of reducing reliance on traditional “merchant” system stress. Under this method, interconnector revenues. It enables new GB interconnectors to de-rating should erode with new planned use the regulated revenue stabilisation mechanism interconnection to a specific market. for 50% of the project (the GB side of the The performance of new interconnectors in T-4 interconnector). Where interconnectors cannot auctions has until the most recent auction been earn enough from trading to cover the regulator’s poor. However, in this year’s T-4 auction, Eleclink, view of appropriate returns to debt providers, IFA2 and NEMO all secured agreements. This is revenues are topped up to the floor from demand 2.16GW of de-rated new interconnection, transmission charges. Where revenues exceed the

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regulator’s view of suitable equity return for an Generally, in the context of the volume of asset of this type, the over-recovery is returned to interconnector capacity being brought forward and consumers through lower transmission charges. the wider impacts on the GB generation Support under the Cap and Floor is provided for community, these seem like big bets to make. 25 years from the connection date. Ofgem’s view of the world assumes proper coordination across the Internal Energy Market In this model, the Capacity Market revenues (IEM), which is nascent and anyway is not contribute towards revenue accounted for in the guaranteed for GB post-Brexit. In addition, a 25- reconciliation. Their impact will differ year modelled view is always at risk of being interconnector to interconnector. For example, the incorrect, and assumptions about policy and modelling for Neuconnect, Northconnect and market structure underpinning expected price Gridlink for Window Two of the Cap and Floor, dynamics between markets are certain to be published in Ofgem’s Initial Project Assessment overtaken by events. consultation in June 2017, shows that capacity revenues are more relevant to Northconnect and It is also relevant that interconnectors have also Gridlink to achieve the floor than they are for been granted beneficial treatment in industry Neuconnect – particularly before 2030. charging. The European single electricity market stipulates that interconnectors are part of the But, as the ability of NEMO and IFA2 to accept transmission network. As a result, GB ECM-26 in £8.40/kW shows, due to the presence of a floor, 2010 removed interconnector exposure to the Capacity Market revenues are certainly not as transmission charges. Additionally in 2013 CMP216 fundamental to the investment decision for and P285 removed interconnector exposure to interconnectors as they are to a comparable balancing charges. Interconnector users no longer transmission-connected new build generator. face transmission loss charges after they were Crucially, if such a generator were in receipt of removed in 2012 by P278. Recently, the BSC panel support under other policy schemes (such as the discussed P361, an urgent modification request to CfD regime or the RO), they would be excluded remove BSC charges from interconnectors. from the capacity auctions. These competitive advantages are relevant as the Re-cabling levels of interconnector capacity are anticipated to The two Cap and Floor windows to date have not grow dramatically in the next five to ten years. had an explicit aggregate capacity limitation. Figure 2 shows the profile of interconnector Instead, they have set constraints primarily by capacity assuming an average 50% de-rating commissioning date. Each interconnector has been factor (but noting that the average de-rating of assessed through a modelled estimate of interconnectors in the last T-4 auction was 65%). contribution to socio-economic welfare across 25 The graph shows the de-rated estimate as a years. The assessment approach has raised percentage of capacity procured in the last T-4 questions about whether it properly considers the auction as a means for showing relativity to typical impact on other generators, the Capacity Market auction dynamics. and system flexibility. Assuming 50% de-rating, the total amount of In responses to Ofgem’s Initial Project Assessment interconnector de-rated capacity in the auctions for decision for the last three Cap and Floor the 2022-23 delivery year could be 8.7GW. 5.2GW interconnectors, the observation was made that - if of this is currently accounted for by Cap and Floor interconnectors can compete for and displace projects, and 2GW by existing interconnectors. domestic GB plant in system services - this will Total de-rated interconnection volume grows likely force closure of current GB service providers considerably to 16.3GW (at 50% de-rating) at some and displace new build assets. This could as yet unspecified stage in the 2020s, if all adversely impact security of supply in the absence interconnectors in the pipeline are built out. of revenues from other resources. Interconnector Admittedly, at this stage, the extent to which the flows might also be reliant on production by Cap and Floor proportion of this grows is unclear. marginal carbon plant in other markets. There are, of course, Brexit-related uncertainties. For example, the French energy regulator will not But overall Ofgem agreed with modelling approve support for new interconnectors to GB conducted by Pöyry. It argued that the diversity of until the future relationship with the EU is clarified generation sources offered by interconnectors is – this particularly impacts Gridlink. But almost all beneficial to system security. It also said that net other interconnectors in the pipeline are not to imports are more likely to comprise an emissions France, and Ofgem has stated confidence in the benefit through importing surplus renewables.

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Academic and market studies, whilst supportive of Figure 2: De-rated interconnector growth recognition of interconnector contribution, 20.00 40.0% recognise that certain interconnector flows at 15.00 30.0% times of system stress relies heavily on greater 10.00 20.0% harmonisation and coordination between 5.00 10.0% operators and policy-makers. Whilst ACER are 0.00 0.0%

2018 2019 2020 2021 2022 2022+ driving progress on this, this is still a work in rated rated (at 50%)

- progress, and the extent of GB involvement in Delivery year in which they commission European regulatory development and coordination remains uncertain after Brexit.

De-rated undertermined to 50% GWs GWs de De-rated cap and floor to 50% There is also a question of time. The effect of market dynamics, and regulatory and policy De-rated merchant to 50% changes on generators at the other end of an Total as % of 2021/22 T-4 auction interconnector, four years out from a delivery year, is more risky than de-rating other generators. fundamental benefits to both Europe and GB winning through. Current dilemmas Even with these uncertainties, interconnectors Under the current rule book interconnectors enjoy represent a growing share of competing capacity unique cost and revenue advantages over both with the propensity to take up some of the slack existing and new generation sources. They are emerging from coal closure, and gas and nuclear prospectively treated as network assets under the retirement from 2023 onwards. Our analysis sees regulatory regime and under the BSC enjoying the peak level of these retirements at ~30GW (de- cost subsidies, but as merchant generation assets rated as per the capacity auctions) in the early under the Capacity Market. This is anomalous 2030s, but between 15-20GW by the mid-2020s. today, distorting the market, but it also reduces possibilities for new generators in GB in the Conductors capacity auctions. Excluding interconnectors from bidding into There are some technical questions that need capacity auctions is not feasible while the UK addressing anyway. For instance, how should the remains part of the EU. Even if this were feasible, it security standard used for the Capacity Market be would not change the competitive impact. Instead flexed to accommodate Cap and Floor assets? it would simply mean reducing the procurement Should the approach to de-rating be revised now, target modelling for a given delivery year based on and how should it be applied in a post-Brexit accounting for capacity outside of the auction. world? How interconnectors are de-rated has always been As for how interconnectors should be governed in controversial and is raising some important a future where the UK is not part of the IEM, that’s questions. The de-rating is a generic assessment a whole different ball-game. But it’s one we also of the capacity of the interconnector to carry the need to start thinking about quickly. volumes produced by generation in the interconnected market, and the propensity for But we should not defer consideration of the those to flow into GB at times of system stress. For current treatment of interconnectors under the the 2014 T-4 auction, before interconnectors were Capacity Market until the wider questions and the allowed to compete, they had Brexit process runs its course. been modelled to “float” (net The anomalies need to be zero contribution to system addressed ahead of the next T-4 security) in setting the auction, especially given the procurement target. active build out of new interconnectors already taking This assumption was criticised place. by the EMR Panel of Technical Experts that year as being too Thinking these matters through conservative. But equally, it rationally now should also mean may be that the reaction in the the wider negotiations on the form of current de-rating goes treatment of interconnectors too far the other way. going forward can only be less complex.

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Tom Crisp, Editor, [email protected]

The Business, Energy and Industrial Strategy However, the report found that setting a definition Committee delivered its report on the of “the conditions for effective competition” before government's Draft Energy Price Cap Bill on 13 setting the cap could create incentives for February. It argued that systemic overcharging suppliers to “game the system or treat the cap as a by the largest suppliers of standard variable tariff box-checking exercise” rather than going above (SVT) to customers warrants the introduction of and beyond their obligations. The committee said an absolute energy price cap. it is right that the decision to keep or remove the cap is left to the Secretary of State, based on The committee found that the energy market has Ofgem’s assessment. now become two-tiered, with 12mn customers on SVTs paying up to £300/ year more compared to The committee was also sceptical of the role smart those on fixed deals (see Figure 1). In the meters could play in delivering these conditions. committee’s view, this is compounded by the fact The report concludes that it would be unwise to that too many energy suppliers rely on a business rely solely on the smart meter roll-out once the cap model where they target cheap acquisition deals is lifted to maintain effective competition in the at engaged customers who switch, whilst making market given “slim evidence” that smart meters will substantial profits from “sticky” customers on have any substantial impact on switching rates. expensive variable tariffs who do not or rarely On Ofgem’s governance of the sector, the switch. committee found the regulator had been “too slow Figure 1: Retail price comparison by company and tariff type and reluctant” to use its powers to protect the interests of customers, especially vulnerable customers. Ofgem took “repeated nudging and too much time” to start actively protecting some customers from over-charging. The committee urged Ofgem to be more proactive in future in meeting its statutory duties towards consumers. The committee also dismissed the argument put forward by suppliers for the need for a right to appeal the bill through the CMA. The report stated such rights would be used by suppliers to “delay the implementation of a cap that is not the result of

a discretionary Ofgem decision but stems directly Source: Parliament from a government intervention.” To resolve this market failure, the committee On the cap, Committee Chair Rachel Reeves backed the government’s plan for a broad energy commented: “The government must act urgently to price cap to provide protection for SVT customers ensure it is in place to protect customers next based on an absolute cap rather than a relative winter.” cap. This is because evidence put forward by the Centre for Competition Policy suggested that a This is an uncompromising report, delivering a relative cap risks substantially increasing prices for highly critical assessment of the sector. There many consumers as the large suppliers would be remain key questions as to what constitutes likely to raise their fixed deals by significantly more effective competition or what the world where than they reduce their SVT prices. the consumer detriment is eradicated looks The committee also supported the government’s like, but these matters are rightly left to view that the price cap should only be a temporary Ofgem. measure. Removing the sunset clause would make We think the criticism of Ofgem is misplaced removing the cap too challenging and would put given the advanced stage of work on the the government unduly in charge of setting energy expanded safeguard tariff and also other steps prices for the foreseeable future. The committee favoured a return to “unbridled competition” once in train to address disengagement. the customer detriment is removed. Parliament

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Tom Crisp, Editor, [email protected]

Committee on Climate Change (CCC) Chairman storage standing as a warning as to technology’s Lord Deben and Chief Executive Adrian Gault limitations. He commented: “If you do not do more gave evidence on 7 February as part of the to establish markets so that enterprise can be Business, Energy and Industrial Strategy released, then you will not get those new Committee’s Clean Growth Strategy (CGS) technologies […] You cannot run the future on, inquiry. ‘Something will turn up’”. The session opened with Stephen Kerr CCC Chief Executive Adrian Gault added that with (Conservative, Stirling) asking why the government the start of the fourth carbon budget only five produced a strategy that “openly fails to meet their years away and the start of the fifth carbon budget own carbon targets”. Lord Deben responded that only 10 years away, to think new technology is there should be a recognition that the CGS going to make a substantial difference “would be represents a “fundamental change” in the way the stretching it”. government has been looking at decarbonisation, On priority areas, Lord Deben suggested it was with the CGS presented as part of the Industrial unreasonable that the UK should accept a lower Strategy and as a central part of how government standard of buildings than Germany and operates. He added that currently government is at Scandinavia. UK houses being built today will “stage one” of getting other departments beyond ultimately need retrofitting with energy efficiency BEIS and Defra engaged in delivering the CGS. measures, he pointed out. Gault added that the On the CCC’s assessment of the policy gap in cost of retrofitting was more expensive per achieving later carbon budgets (see Figure 1), Lord property than addressing new build. Deben said the CCC counted the measures The session then turned to the accounting proposed differently to government. He said: flexibilities within the carbon budgets allowing roll- “What we have done is to take the real promises over of outperformance. Lord Deben told MPs he that can be properly measured, and then we have found it unacceptable that outperformance be taken the aspirations that are strong enough to be carried forward – he said he would not advise that able to try to put some sort of measurement on […] budgets be changed, to reflect this because it was I do not want to put a figure on it, but it is certainly, "contrary to at least the spirit" of the Climate it seems to me, a significant gap. That gap must be Change Act. filled, and I want to see something that shows that it can be filled, even in circumstances where some Committee Chair Rachel Reeves (Labour, Leeds of the propositions take longer to come in.” West) asked if the UK could be a world leader on carbon capture and storage, and queried what Figure 1: Emission savings from new policies, compared other countries were doing. Lord Deben said there to the policy gap (2030) were other countries such as Canada where lots was being done, but not to the point where the UK could adopt those policies. He felt that the UK had not recognised that it could build on expertise and resources in relation to this. On low-cost renewable generation, Lord Deben stated that onshore wind did need to play a wider role and that it was a mistake to make it harder to Source: CCC build onshore windfarms. However, he also argued that solar energy largely produced energy in the Kerr then questioned whether in the CCC’s view UK when it was not wanted and that the grid the government’s stance was reasonable in needed to be balanced. expecting gaps in the plan to be filled with advances in technology. Lord Deben responded The CCC’s dominating view came across – the that he was ambivalent, with the rapid falls in the Clean Growth Strategy is a laudable statement cost of offshore wind a positive example of the of ambition, but not as yet a sufficient route- potential of technological innovation, while the map to deliver the carbon budgets. failure to create a market for carbon capture and Parliament

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James Cunningham, Writer, [email protected]

BEIS statistics show that in 2016 transport 1990, with the final three deep mines all closing in became the largest emitting sector in the UK, 2015. As a result, emissions from coal mining and overtaking energy in total greenhouse gas handling have fallen by 21.3MtCO2e since 1990, to emissions (GHGs). just 0.5MtCO2e in 2016. The 2016 UK Greenhouse Gas Emissions, Final Figure 1: Changes in emissions by sector Figures report, published on 6 February, found that during that year the UK’s emissions of the basket of seven greenhouse gases covered by the Kyoto Protocol were estimated to be 467.9mn tonnes carbon dioxide equivalent (MtCO2e). This was a 5% decrease on the 2015 figure of 492.4MtCO2e. This fall was primarily driven by reductions in the energy supply and business sectors. Energy supply accounted for 25% of the UK’s GHGs in 2016, with carbon dioxide being the most prominent of the sector’s emissions (95%). The main source of emissions from the sector was from the use of natural gas and coal for electricity Source: BEIS generation. The report also examined the UK’s performance Between 1990 and 2016 the sector reduced its against its emission reduction targets and emissions by 57%. This decrease was primarily the confirmed that the UK is on track to meet the result of changes in the fuel mix for electricity second carbon budget. This was despite the net generation and more efficient technologies. The carbon account (EU Emissions Trading Scheme report explained that since 1990 there has been a (ETS) allowances + non-traded emissions + decline in the use of coal for power generation in credits/debits from other trading schemes) favour of gas. This has seen coal-fired generation increasing by 0.6% on 2015. BEIS attributed this fall by 86% between 1990 and 2016. Over the fluctuation to an increase in the UK’s share of same time period final electricity consumption allowances under the EU ETS. increased by 9%, although it peaked in 2005 and In other sectors, there was a decrease of 5.4% in has subsequently decreased. Electricity generation 2016 (4.6 MtCO2e) in the business sector, driven in 2016 was 3% lower than in 1990 having also by reduction in emissions from fuel used in the iron peaked in the early 2000s. and steel sector due to the closure of one of the BEIS found that between 2015 and 2016 the use of UK’s three integrated steelworks in September coal for electricity generation fell by 62%. This was 2015. mainly due to the conversion of a unit at Drax from The transport supply sector contributed 26% of coal to biomass and other plant closures. GHG emissions, for the first time more than energy However, emission reductions from less coal supply and now the largest sectoral emitter. Since generation were partially offset by a 39% increase a peak in 2007 emissions have shown a small in the use of gas for electricity generation. declining trend in every year until 2014, at which These factors led to a total 16.8% reduction in point this trend reversed to show small increases emissions from the energy supply sector between in every year. 2015 and 2016. Overall, in 2016, the total The progress made in reducing emissions in emissions from power stations (81.6MtCO2e) accounted for 17% of all UK GHGs. the energy sector is remarkable and also set to continue. But, in order to meet its climate BEIS noted that the other main factor in the long- targets, the UK must now focus on term decline in emissions has been reduced coal decarbonising other sectors. mining. It explained that the production of deep- mined coal in particular has declined steadily since BEIS

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Emma Bill, Regulatory Analyst, [email protected]

Ofgem has cautioned that action to reduce the On network costs, the regulator highlighted how cost of electricity alone may not be enough to these had fallen by around 17% in real terms since minimise the overall cost of energy. The privatisation. Simultaneously, there had been regulator’s warning, on 6 February, came in its significant improvements to network services. published response to the BEIS call for evidence Returns for networks under the RIIO-1 price control on the findings of Helm’s Cost of Energy have been higher than expected, but this is Independent Review. primarily due to reduced costs and greater incentive payments for innovation and other Dieter Helm’s review was published in October improvements. Ofgem said it has been clear that 2017 (see ES584 p.2). It focused largely on the cost RIIO-2 will be tougher for investors, with lower of electricity, prompting Ofgem to warn that issues overall returns. It will achieve this by driving further around heat and transport had been neglected use of competition in networks, which its and that the electrification of these is unlikely to experience suggests reduces costs. provide a “silver bullet” even though it should be an important part of the solution. Figure 1: Average household bill (£/household, 2016 prices) Ofgem said that the increasing importance of interactions between electricity, heat and transport meant that a well-designed, integrated energy system will be the most efficient approach and deliver the most benefits for consumers. While there are several different routes to achieve decarbonisation of heat, the regulator said that many questions remain over the cost, who would pay, safety, and consumer acceptance. It added that, given the importance of public support for key options, it recommends consideration of the Ofgem also said that the current supply market is appropriate regulatory framework for heat. not working satisfactorily for consumers. Despite The regulator particularly highlighted how the reduction in consumption due to energy efficiency boundaries between the traditional parts of the measures, household energy bills remain high (see sector (generation, networks, supply and Figure 1). To remedy this, Ofgem sees the potential consumers) are blurring. As a result, although for a very different retail market to emerge, with Ofgem follows the traditional system structure in the old rules needing an overhaul to speed up its response, it notes that crossover is becoming processes and increase flexibility to future change. increasingly important and that the government, In addition, consumers will likely use electricity the regulator and industry all have important roles differently, such as through the increasing number to play in delivering the future energy system. of electric vehicles, prompting Ofgem to raise the Specifically on electricity generation, Ofgem stated possibility of moving away from the traditional it expects further technological progress will mean p/kWh charging structure, and the traditional the costs of new low-carbon electricity will supplier hub principle. continue to fall. This outcome is set to be achieved This 7-page response provides a useful by creating a level playing field ensuring synthesis of ongoing regulatory programmes renewables and technologies including demand that should help put downward pressure on side response and storage can compete. energy costs. The recognition of heat and However, in time, structures established under transport as part of an integrated solution is Electricity Market Reform may become less important. Ofgem also highlights three of its appropriate, with flexibility becoming more key workstreams – engagement trials, important than capacity. This has led Ofgem to innovation funding and regulatory sandbox – recommend further, more specific consultation on that are part of the delivery of the future options for the future structure of the wholesale market. energy system. Ofgem

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Parliament is in recess and returns on 20 February. The next Parliamentary update will be in ES607.

Energy and Clean Growth Minister Claire Perry has welcomed the decision by the European Commission to not raise any objections to the government’s proposals allowing remote island wind projects to compete in the next Contract for Difference (CfD) auction round. The proposals would allow remote island wind projects to compete in the next CfD auction round in 2019 as a less established technology. Over 750MW of wind projects that hold planning consent on the Western Isles, Orkney and Shetland could be eligible under the proposals. BEIS is currently consulting on amendments to the CfD scheme, including on a proposed definition for remote island wind and on how island communities would benefit from wind projects (ES599 p.5). Responses to this consultation are welcomed until 9 March. No link

BEIS Permanent Secretary Alex Chisholm will be questioned this week by the Business, Energy and Industrial Strategy Committee on the work of the department. The hearing will be held on 21 February and questions are expected to range across the department’s responsibilities, including plans for an SVT energy price cap, the Clean Growth Strategy and the Industrial Strategy. Also on the same day, Energy and Clean Growth Minister Claire Perry will appear before the Environmental Audit Committee as part of its inquiry into Green Finance. Meanwhile, Foreign Secretary Boris Johnson has suggested that following Brexit the UK may be able to reduce VAT on a number of products, including domestic fuel. Johnson made the comments during a speech on 14 February, in which he set out a potential path for the UK after it leaves the EU. More broadly, he added: “no one should think that Brexit is some economic panacea, any more than it is right to treat it as an economic pandemic. On the contrary, the success of Brexit will depend on what we make of it.” Parliament – BEIS Committee Parliament – EAC

Labour Leader Jeremy Corbyn argued that re-nationalisation of the energy sector would place tackling climate change at the “heart of our energy system” during a speech on 10 February. Corbyn was speaking at the Alternative Models of Ownership Conference, where he highlighted the potential benefits a re-nationalised energy system could bring. The Labour Leader outlined a vision of a future, green energy system that is “decentralised, flexible and diverse with new sources of energy, large and small”. However, transforming into that grid would require investment and planning on a scale that was not currently happening. Corbyn argued that nationalisation would bring benefits such as cheaper energy, an end to fuel poverty, cleaner energy and the creation of jobs in the renewable energy and green technology sectors. On climate change, Corbyn said the challenge it poses will “require us to radically shift the way we organise our economy”. He added: “Necessary action to help avert climate catastrophe requires us to be at least as radical.” The Labour Leader criticised the government for licensing fracking, declaring a moratorium on renewable levies, subsidising fossil fuels, hesitating on tidal, holding back onshore wind and making a U-turn on all new homes being zero carbon. Re-nationalisation would ensure commitments could be made to renewable generation from tidal to onshore wind, according to Corbyn.

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Corbyn also conceded that not everyone had the resources to produce their own energy, so a publicly- owned grid would act as “the great leveller, distributing energy from where it is plentiful to where it is scarce and guaranteeing that everyone has access to clean, affordable energy all of the time.” Labour

BEIS announced on 12 February that it was consulting on potential data sharing regulations for Ofgem’s safeguard tariff. The government said that it was looking for views on adding the safeguard tariff for vulnerable customers to the list of fuel poverty measures for which public authorities are able to share data with gas and electricity suppliers for the purposes of tackling fuel poverty. Currently, Part 5 of the Digital Economy Act 2017 allows data sharing between specified public authorities and energy suppliers in order to alleviate fuel poverty. However, this must be for use under one of the fuel poverty measures listed in the Act. Currently this list is limited to the Warm Home Discount and the Energy Company Obligation schemes. Submissions are welcomed until 26 February. BEIS

Making a ministerial visit to Teesside on 8 February, Energy and Clean Growth Minister Claire Perry reaffirmed the government’s commitment to clean growth and spoke on plans for the region. The government has previously made a firm commitment to regeneration and clean energy production in the Teesside area. It is targeting 25,000 new jobs and over £1bn of investment over the course of a 10-year period, with the region considered to have the potential to exploit opportunities from future growth industries, including carbon capture usage and storage (CCUS), district heating and the hydrogen economy. Perry said she had seen the “exciting opportunities” during her visit and was looking forward to seeing how the proposals will be developed. During her visit Perry met with Tees Valley Mayor Ben Houchen, who said that the concentration of industry along the coastline meant that the region was perfectly placed as the “go-to location for green energy proposals” such as CCUS. Houchen was later quoted in the regional paper, the Gazette, as saying that over the coming weeks an announcement of a “multi-billion pound energy project of national significance on the South Tees site” is expected. BEIS

A new All-Party Parliamentary Group (APPG) on Electric and Automated Vehicles has been established to raise awareness of the technologies among MPs. The group, announced on 12 February, will be chaired by former Welsh Secretary Dame Cheryl Gillan MP and focus on areas such as the roll-out of EV charging infrastructure and opportunities for new high-value manufacturing. The groups vice-chairs include former coalition Transport Minister Baroness Kramer (Lib Dem), Andrew Selous MP (Con), Anna McMorrin MP (Lab), a member of the Environmental Audit Committee. Other members of the group include former energy secretary Sir Ed Davey MP (Lib Dem), Mark Pawsey MP (Con) a member of the Business, Energy, and Industrial Strategy Committee, and Nigel Evans MP (Con), a member of the International Trade Committee. Commenting on the creation of the group, Gillan said: “It is imperative that parliamentarians are aware of the rapid pace of change in the electric and automated vehicle sectors and that post-Brexit the UK is well positioned to benefit from these new technologies. […] We can’t let this major industrial shift pass us by while everybody is focused on EU negotiations. We will aim to keep MPs and Lords informed and help drive the agenda forwards.” REA Parliament

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The Crown Estate has issued an update on potential new offshore leasing to the Offshore Wind Industry Council. On 8 February, it published a copy of its presentation in which it set out its views on the leasing model, as well as a process of engagement with the sector. It will hold information days with interested market participants and workshops with statutory stakeholders over the course of summer 2018, followed by wider stakeholder engagement. Feedback from this engagement process will then form part of The Crown Estate’s consideration in determining both the case for, and approach to, new offshore wind leasing. The new process could then commence in late 2018 or early 2019, if confirmed. As a result of the potential for new offshore wind leasing, The Crown Estate also announced that it will no longer be accepting applications for offshore windfarm extensions after 31 May 2018. It explained that this will help to “pave the way for a single and comprehensive route for awarding new seabed rights and avoid potentially having two processes running concurrently”. The Crown Estate

The Anaerobic Digestion and Bioresources Association (ADBA) has welcomed proposed reforms to the Renewable Heat Incentive (RHI) scheme, which it says will provide a “vital boost” to GB green gas production. The Renewable Heat Incentive Scheme Regulations 2018 implements the re-focusing of the RHI including tariff and eligibility changes, and introducing tariff guarantees and assignment of rights. Additionally, the long term budget management and affordability mechanism are introduced in the second part of the reform package. In a statement on 8 February the ADBA explained that the proposed changes to the scheme would restore tariffs for heat generation to levels that would stimulate deployment and provide tariff guarantees, which would give long-term certainty to investors and generators of renewable heat. Charlotte Morton, CEO of the ADBA, said: "The introduction of higher tariff rates and tariff guarantees will give a vital boost to green gas production in the UK, which is currently heating over 300,000 homes and displacing almost 800,000 tonnes of CO2, the equivalent to taking almost a million cars off our roads.” ADBA

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Steven Britton, Senior Regulatory Analyst, [email protected]

The regulator has decided to proceed with protected. This is to provide time to consider any reform package 2a (RP2a) for the switching changes that could lead to erroneous transfers programme in its Outline Business Case and The CSS also received significant attention in the Blueprint phase decision document, published document, with Ofgem detailing how its position on 12 February. This is a milestone in the had developed. It concluded that analysis of UK switching programme and has clarified several Link and the MPRS indicated there were no significant issues. technical barriers to either being used as the basis Ofgem’s switching programme aims to deliver for the CSS. faster and more reliable switching to all customers The document noted too that Ofgem will work with by the end of 2020. Following a design process Xoserve to ensure any governance constraints for that began in 2013, it held numerous consultations it to operate the CSS are addressed effectively. In last year to seek views on the four potential reform its role as the gas industry’s central data service packages it was proposing. Consultations were provider, Xoserve is limited in the provision of also held on several specific issues, such as the services to third parties. formation of a Retail Energy Code (REC) and the procurement of a Central Switching Service (CSS). Additionally, Ofgem has concluded that the CSS should include an annulment feature that losing RP2a is its preferred reform package, which suppliers can use to prevent erroneous switches. received support from the industry and was found The feature would also invite losing suppliers to by Ofgem’s impact assessment to have the largest make an objection even when the Change of and most robust net present value (NPV) to Occupancy indicator has been set. However, to consumers. RP2a would see a single CSS created avoid misuse, there will be a strong performance to replace the separate switching functionality assurance regime for its use. currently provided by the Meter Point Registration Service (MPRS) (electricity) and UK Link (gas), and Consumers who cancel their contracts during the incorporates a one-day objections window for cooling-off period will be given three choices. They domestic switches. Losing suppliers would have could return to their previous supplier on until 5pm the next working day to object to a equivalent terms that they would have been on switch event, with the transfer occurring by had they not moved, move to a new supplier, or midnight that day. For non-domestic switches, the stay with their current supplier. Ofgem has also window would include an additional 24 hours. decided that the option of imposing standstill periods should be built into the CSS, and one will RP1 (minimal reform) was seen as not meeting initially be set at go-live, probably for five days. Ofgem’s objectives, while RP2 and RP3 included a The regulator will look to reduce this to zero more complex and costly automatic objections unless there is evidence of market harm through service that was not considered to offer much debt-hopping. benefit to consumers over RP2a. The Full Business Case is the next major milestone Ofgem has decided that it will not initially oblige in the programme, scheduled for publication Q2 suppliers to deliver next-day switching. Instead, it 2019. Ofgem will be consulting early in the summer will set a requirement to switch a customer within on the scope of the REC, transitional five working days of a request (except when the arrangements, and extending the DCC’s licence to customer has specified a later date) in the oversee the design, build and test of the CSS. expectation that competitive pressure will push suppliers to next-day switching. However, if this Ofgem has done a good job of providing does not prove the case, it will consider tightening visibility on its thinking on the switching the obligation. programme, so the selection of RP2a is no Additionally, there will be a transition period at surprise. This document also provides much- implementation (expected to last three months) needed clarity on issues like objections, during which suppliers will only be allowed to standstill periods, and mandated switching perform next-day switches if they meet certain timescales. criteria to show that the customer will be Ofgem

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Rowan Hazell, Regulatory Analyst, [email protected]

Ofgem announced on 12 February that it would Following negotiation of the new tariff, the work with one of the Big Six and a consumer consumer partner will calculate the savings that partner to deliver an “active choice” collective each customer could make and notify the switching trial for around 50,000 disengaged customer of this. Letters will have different customers. branding from either Ofgem and the consumer partner, the incumbent supplier and the consumer This is the latest trial in response to findings from partner, or just the consumer partner. An active the Competition and Markets Authority (CMA) choice will then be required for the switch to take energy market investigation that there is an place, and a simple process to do this through the adverse effect on competition stemming from a consumer partners website or call centre will be lack of consumer engagement in the retail energy provided. Customers will also be provided with market. access to search wider results to allow them to The CMA ordered suppliers to provide details of compare tariffs across the market. Ofgem said this their customers who had been on default tariffs for would allow customers to make a fully informed three or more years to Ofgem for the purpose of decision. A further letter reminding customers of creating a disengaged customer database. Ofgem the opportunity to switch will also be sent. would then monitor this and disclose data to rival The regulator said that it was appointing a third- suppliers for the purpose of prompting customers party consumer partner to negotiate the collective to engage in the energy market. Various switch so that the disengaged customers would be approaches to how the data could be used have provided with extra “hand holding” and been tested, including the creation of the Check reassurance. It said that the trial would test what Your Energy Deal switching service, and letters uplift in switching would be seen when it is showing cheaper offers with branding from both delivered by an “on your side” party. suppliers and Ofgem. In its invitation to tender published late December, For the active choice collective switch trial, Ofgem Ofgem said that it was looking to appoint a has selected one of the six largest suppliers as its consumer-facing organisation with experience of partner supplier. 50,000 of the supplier’s running successful collective switches. The customers who have been on a standard variable organisation should be able to provide evidence of tariff for at least three years will be given the the ability to negotiate a highly price competitive -- opportunity to participate in the switch. A summary ideally market leading -- new and exclusive of the process is shown in Figure 1. collective switch tariff. The partner was set to be Figure 1: Summary of trial process appointed on 8 February, and the tariff negotiation Incumbent supplier sends letter to announce collective switch. and the issuing of the savings projection letters are Customers given the option to opt out set to be completed in March. The consumer partner will be able to collect Incumbent supplier sends relevant customer data to consumer partner commission from each switch, including other switches made through its website. Ofgem said the Consumer partner negotiates tariff and notifies customers amount to be collected would be in line with general market practice for switching services. Customers choose whether to switch or not. Switch made Depending on the outcomes of the trial, Ofgem through consumer partner website or call centre said that it could potentially roll-out simplified A letter announcing the collective switch will be collective switches to more customers. sent from the incumbent supplier. The customers The disengaged database was originally will have the chance to opt-out of having their intended to go live in April. What we are savings calculated. The relevant customer data will seeing instead is a pro-active move to then be sent by the supplier to an Ofgem- crystallise switching among sticky customers, appointed consumer partner for the purposes of negotiating the tariff. In its invitation to tender for and it’s a world first as far as we are aware. the trial, Ofgem said that it expected 5% of Watch this space! customers would opt-out or become ineligible. Ofgem - trial Ofgem - mytenders

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Josephine Lord, Regulatory Consultant, [email protected]

The Competition and Markets Authority (CMA) is adopted a “narrow” construction of the preparing to issue its decision on a CUSC exclusions in the Regulation in its decision on proposal that would reallocate £119.5mn of CMP244. Here, Ofgem had rejected a proposal transmission network use of system (TNUoS) to set final TNUoS tariffs 200 days before the charges for 2015-16 from suppliers to generators. start of the tariff year, and CMP261 was raised by SSE in March 2016 and • That Ofgem erred in law in that its decision seeks to ensure that the TNUoS paid by infringes the general EU law principles of legal generators in 2015-16 complies with the limit set certainty, proportionality, non-discrimination out under EU Regulation 838/2010, which requires and/or the right to effective legal protection of average annual generator charges to be between EU law rights. €0-2.5MWh. The appellants have asked that alternative SSE argued that the limit was breached because WACM1, which would see a rebate for generators the forecasts made by National Grid of the £/€ in 2019-20, is implemented. exchange rate and the output of generators was On 13 December, the CMA appointed John Wotton wrong. This meant that generators had paid too (Chair), Anne Fletcher and Jon Stern to determine much TNUoS, and SSE argued there should be a the appeal, and permission to appeal was granted rebate from suppliers with whom the TNUoS costs on 19 December. are shared. Subsequently, on 8 January, National Grid made In November, Ofgem rejected the proposal, against the recommendation of the Connection an application to become a party to the appeal. It was able to do this as a body that would have and Use of System Code (CUSC) Panel, thus failing been entitled to apply in its own right. to approve any of the original or two alternative proposals setting out alternative mechanisms and On 18 January, 10 days later, the CMA extended timings for the rebate to be made. It considered the normal period of 30 working days for a that the Regulation had not been breached under determination by 10 days, meaning the deadline its interpretation. Even so, because Ofgem ruled for a decision is now 26 February (see Figure 1). against any of the Panel recommendations, this made the decision open to appeal to the CMA. Figure 1: Revised case timetable SSE, together with EDF Energy, then appealed on 6 December. There were four grounds for the appeal, being either errors of law or errors of fact: • That Ofgem erred in law in its construction of the Regulation for several reasons, including failing to take a view that recognised the Regulation’s purpose is to achieve a degree of harmonisation in the EU generation market to facilitate efficient use of the transmission Source: CMA system across Europe. As such, Ofgem adopted a broad approach to permissible This is the first appeal of an electricity code exclusions from transmission charges, when it modification to the CMA (following one on should have adopted a narrow one reform of the gas offtake arrangements in • That Ofgem erred in fact in treating generation- 2007). The appeal challenges Ofgem on the only spurs and local circuits/substations as if substance of its decision, and the outcome they were connection assets, rather than as could have significant implications for transmission assets for the benefit of the generator and supplier costs. transmission system as a whole CMA National Grid – CMP261 • That the regulator destroyed the legal validity of its decision because it had previously

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Reactions to the Cheaper Market Offers Letter issued as part of Ofgem’s large-scale trial held last summer were predominantly positive, Ofgem announced on 12 February. The trial involved 138,000 customers who had been on a Standard Variable Tariff for over a year, and was designed to test the effectiveness of the letter to encourage engagement in the energy market. Two-thirds of the participants received a single standalone letter detailing three cheaper tariffs from across the market that the customer could switch to, with branding on the letters split between Ofgem and the customer’s supplier. Qualitative interviews were held with 91 customers who received letters to gain a deeper insight into their reactions. Customers largely saw the letter as helpful, informative and honest, as well as providing a nudge to explore other options. However, some participants felt confused. Problematic areas included a lack of context over why the letter had been sent, and scepticism over supplier motives. Ofgem said that, if the letters were sent to customers again, providing clearer detail around why they were sent would possibly encourage greater switching activity, and that more education and transparency on the switching process could also be provided. The regulator also noted that the sender did not have a major impact on the credibility of the letter, although Ofgem endorsement did provide reassurance. Ofgem

An open letter setting out the work to identify where amendments may be required to licences and industry codes following the UK’s exit of the European Union (EU) was published by Ofgem on 8 February. The regulator had not identified any provisions which may prove to be legally inoperable on the exit date, but considered that several areas may require modification. The regulator said that its intention was to ensure that both licences and industry codes are fit for purpose following the implementation of the EU Withdrawal Bill, which will set out, among other things, the conversion of EU energy law into domestic law. There is uncertainty over the specific changes that will be required as they will be subject to the negotiations between the UK and EU, the passage of the Withdrawal Bill, and any subsequent changes to retained EU legislation. As a result, Ofgem said modification could only take place once the final arrangements take full effect in UK law. Views are sought on Ofgem’s initial analysis, and the regulator is particularly interested in whether there are any significant gaps in the work so far. Responses are requested until 9 March.

Ofgem

Ofgem issued minutes on 26 January of the Gas and Electricity Markets Authority (GEMA) meetings that were held on 12 October and 16 November. At its October meeting, the Authority endorsed the outline plans for the forward work programme for 2018-19 and agreed to include a longer time horizon to reflect the nature of the work being undertaken. It endorsed the communications team’s proposal on priorities and called for a bolder approach, including ensuring the performance of regulated companies and their value for money are clearly scrutinised. In respect of the proposed approach for the electricity distribution mid-period review, the Authority agreed to consult on a range of options in November. At its November meeting, the Authority approved the Forward Work Programme 2018-19. It was updated on proposals to amend and improve the regulatory and incentive framework for the electricity system operator (ESO) and agreed, subject to consultation, to approve proposed arrangements including the maximum pot size of £20-30mn for the 2018-19 incentive scheme. On the Hinkley-Seabank transmission link for the Hinkley Point C nuclear power station under construction, the Authority agreed a minded-to decision that the competition proxy solution was the best way of achieving efficiency and fairness. It also reversed a previous minded-to decision on a distribution link from Shetland to

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the mainland in the light of an EU level change relating to the Industrial Emissions Directive that means the Lerwick power station can remain open. The Authority also discussed an overview of the key decisions that will be made for the RIIO2 price control period over the next few years and discussed options to tackle the key challenges. Ofgem

The two task forces considering options for electricity network access and forward-looking aspects of network charges issued a paper on Monday 12 February on initial options for change. The paper is to inform Ofgem’s assessment of issues identified with the current network access and charging arrangements and outputs from the task force will ultimately feed into Ofgem’s consultation in summer 2018 on initial proposals for reform. The access task force has considered options to define more explicitly the arrangements for use access to the electricity system while the forward-looking charges task force has considered those elements of charges that provide a signal to users on how their system usage affects network costs. Two further workshops are schedule in coming weeks – 28 February in London as part of the Charging Futures Forum and 6 March in Glasgow for those who are not attending the Charging Futures Forum. We will cover a fuller piece in Energy Spectrum shortly explaining the progress of the work stream to date. National Grid

National Grid issued a consultation on 8 February on proposed changes to the Applicable Balancing Services Volume Data (ABSVD) methodology that would implement imbalance adjustments for non-Balancing Mechanism (BM) balancing service providers. Implementation would mean that any energy provision is removed from the relevant associated supplier’s account when the balancing service is provided. The consultation follows several workshops in autumn last year and an informal consultation. National Grid has said that one reason for the proposed change is the requirements of Article 49 of the European Guideline on energy balancing, requiring it to ensure that imbalance is correctly attributed when balancing services are delivered. In parallel, on 9 February Elexon issued the report phase consultation for P354 Use of ABSVD for non-BM Balancing Services at the Metered (MAPN) Level following the BSC Panel’s initial decision to recommend the alternative proposal for implementation. The proposal, raised by ENGIE, enables National Grid to provide the ABSVD covering non-BM balancing services for allocation to the appropriate supplier BM Unit. The alternative proposal does not require customer consent for suppliers to receive ABSVD data for their Metering System IDs. This is an enabling modification as part of a solution to address the issue that currently for balancing services such as STOR, non-BM providers can take account of a second income stream, imbalance revenue, when constructing tenders for services. For BM providers the BM energy is removed from their Energy Account as part of the BSC process so they do not benefit or suffer from additional imbalance due to accurately delivered BM actions. Responses are requested by 8 March and 23 February respectively. National Grid Elexon Our latest Chart of the Week explores the inexorable rise of Third Party Charges. Last week’s blogs included PPA market interviews: Five key trends in the renewables market and Self-reporting reduces supply licence enforcement action.

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James Cunningham, Writer, [email protected]

On 8 February the fourth annual report on Of all Balancing Services (provided between April demand-side flexibility (DSF) was published by 2016 and March 2017) by DSF, the vast majority National Grid’s Power Responsive initiative. was for Short Term Operating Reserve (STOR). Power Responsive suggested that this could be The report used the term DSF to encompass five the result of it being an established service categories of flexible response: offering flexibility over the winter with less • Demand side response (DSR) challenging technical requirements. • DSR by onsite generation Figure 1: Balancing Services tendered and accepted (April 2016- March 2017) • DSR by onsite energy storage • Distributed generation for export, and • Distributed energy storage for export. Feedback suggested that the opportunities of DSF are now more widely recognised, with a broad understanding found amongst Industrial and Commercial (I&C) customers. However, overall it was found that the DSF market remained complex to many potential participants, due to a number of Source: Power Responsive different routes to market and uncertainties around payback times. The level of DSF providers participating in Fast Reserve remained low, which Power Responsive The report noted that I&C customers continued to said was due to participants choosing instead to highlight the need for simple, reliable revenue provide frequency response services, as well as to streams in order to invest in DSF. It added that the entry threshold for the monthly tenders being there was still a gap between end-users’ needs 50MW. and the current state of demand side markets. However, it added that new markets and services Between April 2016 and March 2017 685MW of are emerging with a focus on offering simplicity Firm Frequency response (FFR) was accepted by and transparency to providers. National Grid, with tendered volumes far outstripping the volume accepted. Power Power Responsive also highlighted the need for Responsive suggested that this was due to clear guidance on the complexities involved in increased recent interest in battery storage. It was revenue stacking. As a result, it suggested that also noted that in January 2017 the entry threshold continued collaboration across transmission and for participating in FFR was reduced from 10MW to distribution networks will be necessary to offer a 1MW to increase accessibility for smaller “coherent proposition” for providers of flexibility. It participants. This resulted in a significant increase added that third parties such as aggregators will in the number of monthly tenders received. have a “key role” in enabling I&C customers to provide flexibility services. The report also assessed which sectors were participating in demand-side flexibility. It found that DSF was found to be increasingly mainstream, over half (54%) of participants were in the Industrial particularly as a result of greater storage and Manufacturing sector. The Commercial and participation in contracted markets and the Retail and Public Sectors both accounted for 17% realisation of the benefits of co-locating storage of participants, with the remaining 12% being with other sources of DSF. Due to increased classified as “Other” (e.g. Water Treatment). participation in certain services, such as Firm Frequency Response (FFR), the liquidity of markets It is clear from this latest review that the is increasing, which in turn drives competition and current DSF market has barriers that hinder delivers value for end consumers. Therefore, the entry, but also that these are known by report argued, it is important for service providers National Grid and concerted efforts are being to consider how to access multiple revenue made to address them streams and routes to market. Power Responsive

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Josephine Lord, Regulatory Consultant, [email protected]

On 12 February National Grid issued its first recent months the market for system services annual Forward Plan, setting out its priorities for procured by National Grid has diminished in the the electricity system operator (ESO) and what it face of surging interest from providers. The will deliver for stakeholders in 2018-19. Forward Plan states that action is being taken after stakeholders told National Grid they found how the Plans for the legally separate company to be set TSO procures flexibility to be “too complicated” up within the National Grid group were announced and “hard to offer services to the ESO”. In the next at the start of 2017, with the new entity seeking to two years this will be addressed with procurement play an active role across the energy system to “through efficient and transparent markets”. shape developing markets. As part of the move to an independent ESO, in its December consultation The plan also details the ESO’s four roles and key Ofgem said a key objective for its future actions (see Figure 1). framework is to make the ESO more clearly Figure 1: Four roles and key actions accountable to its customers and wider stakeholders and it wants the ESO to place them at the centre of its decision making. The Forward Plan will form part of this more evaluative incentive approach, as compared to the discrete mechanistic financial incentives currently employed. It will help define at the start of the year some of the information that will be used for the end-of-year evaluation. The plan is driven by principles for the ESO, including to: • Support market participants to make informed decisions by providing user-friendly, comprehensive and accurate information • Drive overall efficiency and transparency in balancing, taking into account impacts of ESO actions across time horizons • Ensure the rules and processes for procuring balancing services maximise competition where possible and are simple, fair and transparent • Promote competition in the wholesale and capacity markets Source: National Grid • Coordinate across system boundaries to deliver efficient network planning and The consultation closes on 5 March with a final development version of the plan due to be published in March. • Coordinate effectively to ensure efficient whole The new framework is a significant system operation and optimal use of development from the existing arrangements resources, and and one that has the potential to ensure that the ESO function adapts efficiently as the • Facilitate timely, efficient and competitive network investments. system changes. But, by the same token, it will also require more active input from industry One of the key shifts involves working with participants and involvement in the detail of industry to make “fundamental changes” to how it the proposals. communicates with customers around flexibility. In National Grid

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The latest statistics from Energy UK have revealed that there were 397,775 electricity switches in January. While this was a 14% increase on the same month in 2017, the data, published on Thursday 15 February, revealed that January also saw the third month-on-month decrease in switches, although the decline has started to level out. Of all switches, a quarter (25%) were gains for small and mid-tier supplier. Overall, 36% of switches were from larger to small and mid-tier suppliers; 11% were from small and mid-tier to larger suppliers; 32% were between larger suppliers; and 21% were between small and mid-tier suppliers. It was also found that confidence in switching was high, with nine in 10 customers, reportedly happy with the process. Lawrence Slade, CEO of Energy UK, said: “It’s great to see 2018 picking up where 2017 left off. There’s real momentum behind switching as more and more customers find they can save money on their energy bills by taking advantage of the competition and choice that is out there.” Energy UK

Energy UK announced on 12 February that it had launched the Commission for Customers in Vulnerable Circumstances, which will explore how standards of care and support could be improved. The commission will consider different aspects of vulnerability, including mental health, disability, and financial vulnerability, and consider how the actions of the energy industry impact vulnerable customers. The commission will be independently chaired and will be made up of commissioners from across the business, charity and consumer advice sectors. It will now publish a call for evidence and hold a series of hearings with stakeholders representing consumer groups, the elderly and people with disabilities, experts on financial vulnerability, and mental health charities. The commission plans to report on its findings by the end of 2018. It will include recommendations for industry, government and other stakeholders. Energy UK is also planning to draw on the Commission’s work to separately develop a new Vulnerability Charter. The Charter follows the setting up of a vulnerability group, and Energy UK’s previous work on vulnerability and mental health with the Money Advice Trust. Chair of the commission, Lord Whitty, commented: “Vulnerability of all kinds presents a range of challenges for the energy industry, and I’m pleased to have the opportunity to take on the role of Chair of the new Commission to explore how energy suppliers, and wider sectors both public and private, can best serve, support and protect customers in vulnerable circumstances.” Energy UK

National Grid announced on 7 February that it had completed the £1bn London Power Tunnels project, designed to create an “electricity superhighway” to better manage the capital’s future electricity needs. As part of the project, National Grid has built a total of 10 new underground transmission circuits that will initially carry a fifth (20%) of London’s power needs. It explained that the city’s power consumption is rising quicker than in other parts of the UK, and that additional cabling can be added to the circuits to respond to future increases. It added that the project was delivered on time and on budget, describing it as “the most significant addition to London’s electricity system since the 1960s.” Business and Energy Secretary Greg Clark said: “The £1bn London Power Tunnels is exactly the type of investment and innovative infrastructure project that the government wants to encourage through our modern Industrial Strategy. This important infrastructure will help increase productivity by cutting the number of road works needed for maintenance, as well as powering London with the safe and reliable electricity supplies it needs for the future.” National Grid

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Ecotricity released an update of its full accounts made up to 30 April 2017 on 6 February. The release showed that overall meter growth slowed, with both domestic and business at 8.8%, compared to 12.4% the previous financial year. The supplier attributed the deceleration to an increase in new entrants and higher levels of switching. The Ecotricity group saw a loss of £19.1mn in 2017, down from a profit of £3.8mn in 2016, but this includes non-energy assets such as Forest Green Rovers. The supply business performance was a loss of £8.1mn, compared with a profit of £2.2mn in 2016. Performance was affected by lower gas demand, low wind output increasing the need to trade, and increased network and policy costs that were not passed on at the end of 2016. The group also recorded a write down of £11mn due to historical over-estimation of unbilled gas. Looking forwards, the update said Ecotricity’s directors believe the weather and grid conditions that contributed to a reduction in profit are unlikely to occur again and said the write down from historical over- estimation is anticipated to be a one-time event. Companies House

Statistics from WindEurope have revealed 3.1GW of new net grid-connected offshore wind capacity was installed during 2017, twice as much as 2016 and 13% higher than the previous record in 2015. The figures, published on 6 February, found that the added capacity throughout 2017 brought Europe’s total capacity to 15.8GW. This represents an increase of 25% in just one year, with total installed offshore wind capacity expected to grow to 25GW by 2020. The majority of this year’s increase was heavily concentrated in the UK and Germany, accounting for 1.7GW and 1.3GW respectively. The average size of the new turbines grew to 5.9MW in 2017, a 23% increase on 2016, while the average size of the new offshore wind farms was 493MW, a 34% increase on 2016. These size increases improve the turbines’ total efficiency and output. Offshore wind investments in Europe reached €7.5bn in Final Investment Decisions (FIDs) for a total capacity of 2.5GW in UK and Germany in 2017, allowing the construction and efficiency improvements associated with these projects. The report predicted offshore wind investments would top €9bn by the end of 2018. CEO of WindEurope Giles Dickson said: “Investing in offshore wind today costs no more than in conventional power generation. It just shows Europe’s ready to embrace a much higher renewable target for 2030 - 35% is easily achievable.” Wind Europe

The European Investment Bank (EIB) has approved a €6.5bn energy, SME, transport and urban investment package of new financing for 36 projects. This investment, announced on 6 February, included support for a $2bn initiative to strengthen the use of green bonds, the construction of a new waste to energy plant in Dundee and a €970mn investment to improve services, provision of social housing, sustainable infrastructure and reduce energy use in cities across Europe. The package also included support for the €1.5bn of financing for the Trans-Adriatic Pipeline that will cross Northern Greece, Albania and the Adriatic Sea before reaching Southern Italy to connect to the Italian natural gas network. The project is part of the Southern Gas Corridor initiative and has been identified as a “strategically important component” of the EU’s energy policy. President of the EIB, Werner Hoyer, said: “New financing approved today demonstrates the EIB’s firm commitment to improving education, energy, transport, housing and water needs and ensuring that businesses can expand. This includes both new initiatives to transform the global green bond market and [to] improve daily life in western, central and southern Africa.” EIB

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Last week, the draft Domestic Gas and Electricity and the litigative nature of the industry, would be (Tariff Cap) Bill passed a crucial milestone, as the likely to ensure a robust decision-making process. BEIS Select Committee reported on its pre- But that discipline and logic is lost in 2023. The legislative scrutiny. The findings generated draft bill requires that, if it had not already been headlines with spiky criticism of the industry scrapped in the preceding annual reviews, the complacency that has failed consumers and led us price cap should be lifted that year – regardless of down a pathway to the re-introduction of retail whether effective competition is present in the price caps. market, and without any formal review to consider In truth the report was largely short on surprises. It whether it is. highlighted the cross-party consensus that action And there is no attempt to draw a link between is urgently needed to protect consumers from that date and any relevant external event. What is being ripped off. Where changes to the draft bill the significance of 2023? There doesn’t appear to were suggested, these sought to finesse the policy be any. There are no relevant parallel industry rather than radically change it. initiatives or reforms running to that deadline. The government will be relieved. It has previously There is no reason to believe that year will said that it would seek to pass the bill before the revolutionise consumer experience of the energy summer recess in order for a price cap to be in market any more than any other year. place for the coming winter; a daunting timetable. Nobody hopes that the price cap will still be It will hope that the clean-ish bill of health from the needed by 2023. We hope conditions allow it to committee will ease its speedy passage through be removed sooner, and it would have been better parliament. still if large suppliers had solved the issues of rip- In large part this is good news for consumers. off default tariff pricing years ago. But it would be Citizens Advice supports the draft bill and think it is prudent to plan for the possibility that some a sensible and necessary package that should customers may still need protection after 2023. stop customers on default tariffs – most of us – The decision on whether to keep or kill the price from being ripped off. We also think it is right for cap should only be driven by an evidence-based the government to move quickly on this so that review of whether it is still needed or not – and not consumers are protected before next winter. by an arbitrary choice of calendar date. But while it is a good bill, it isn’t perfect. We hope Rich Hall is Chief Energy Economist at Citizens the understandable drive to push it through Advice, with responsibility for wider work on Parliament quickly doesn’t impede the energy competition, including price protection consideration of some of the issues that remain. for vulnerable customers. Prior to joining the One key area that needs further attention is how to consumer watchdog, Rich worked for Ofgem, the ensure vulnerable consumers continue to be Financial Services Authority, Elexon and Ernst & protected beyond the lifetime of the legislation, Young LLP. which is currently 2023 thanks to the sunset clause built into the draft bill. If you’re not familiar with the term, a sunset clause is a provision that explicitly provides for a rule or protection to cease having effect when a particular milestone is met or passed. In this case, the draft bill explicitly provides that price protection should fall away sometime between 2020 and 2023. Between 2020 and 2022 first Ofgem, and then the Secretary of State, would carry out an annual assessment of whether the cap was still needed. The latter could then choose to scrap or retain it. Importantly, this would mean the decision to keep or scrap the price cap would be based on evidence. In addition, the high profile of the policy,

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Most near-term gas contracts experienced gains last week. The only exception was the day-ahead contract which slipped 0.4% to 50.2p/th. Prices decreased throughout the week amid rising temperatures and lower gas demand for both power generation and residential heating. The month-ahead (March) contract rose 2.7% to 50.9p/th. Summer 18 gas lifted 1.9% to 42.2p/th and the winter 18 contract gained 0.8% to 49.8p/th.

All near-term baseload power contracts increased last week. Day-ahead baseload power rose 2.5% to £49.2/MWh, with lower wind generation forecast at the end of the week. The day-ahead contract was relatively stable last week with just a £0.90/MWh difference between the highest and lowest price. The month-ahead (March) contract climbed 2.3% to £49.4/MWh. Summer 18 power gained 1.5% to £43.1/MWh and the winter 18 contract lifted 1.2% to £48.8/MWh.

Brent crude oil prices lost 4.1% to average $63.6/bl throughout the week. On Wednesday, prices fell to a nine-week low of $62.4/bl. Continued concerns over rising US oil output, with the US rig count at a three-year high, pushed prices lower. Additionally, many US oil refineries are shut for seasonal maintenance reducing demand for the commodity. API 2 coal prices continued to fall last week, dropping 1.4% to average $78.9/t. However, prices did experience a week-on-week gain, reaching $80.5/t on Friday, up from $77.0/t the previous Friday. Coal prices moved lower early in the week, pressured by lower Asian demand. However prices rose in the second half of the week as lower German renewables output led to higher coal-fired output. EU ETS carbon prices gained 7.4% to average €9.6/t last week. Prices hit a six-year high of €9.8/t on Wednesday, amid heavy buying from speculators with expectations of increased demand from emitters preparing for 2017 compliance.

Energy Spectrum 606 | 19/02/2018 | page 22