Tom Crisp Editor 01603 604421 [email protected]

Monday 17/09 – A motion is passed at the Liberal Democrat conference for the government to improve housing standards and ENERGY PERSPECTIVE 02 reduce fuel poverty. Ofgem affirms its position that its work on market- wide settlement reform should not include centralisation of supplier Steady as she goes: the rise of agent functions, and that it is considering whether aggregated data corporate PPAs – Ben Hall should be provided into central settlement systems at all. POLICY 05 RenewableUK celebrates the UK surpassing 20GW of wind generation capacity. Summit brings welcome progress on UK’s EV transition Tuesday 18/09 – Chinese nuclear energy company CNG says that Adam Smith Institute warns of negative consequences of price “political sensitivities” could lead to it giving up the chance to operate caps its planned Bradwell power station in Essex. OVO Energy announces Royal Society and RAE detail that it has taken control of German energy provider 4hundred. A 50% how UK can hit net zero carbon stake in the Hornsea 1 offshore windfarm is sold by Ørsted to Global REGULATION 10 Infrastructure Partners for £4.46bn. Media reports indicate Birmingham City Council could drop plans to establish its own energy supply Balancing charges up for review company. Five-year review of transmission charges suggests 20% increase Wednesday 19/09 –Energy and Clean Growth Minister Claire Perry in revenues Ofgem takes forward gives Hydraulic Fracturing Consent to shale gas operator Cuadrilla for competition in transmission its second well at its Preston New Road site in Lancashire. The infrastructure Treasury awards £36mn to a consortium led by Swansea University to Ofgem: supplier agents should develop building materials that generate energy. Green Star Energy not be centralised pays over £675,000 in compensation after mis-selling and annual INDUSTRY STRUCTURE 16 statement failures. Retail tariff strategies diversify Thursday 20/09 – BEIS data shows that non-domestic Renewable amid rising prices Heat Incentive deployment during the month was “much lower than UKERC warns current gas security metric insufficient the average” for the prior 12 months. Official figures also show the number of Energy Company Obligation measures installed in July was NUTWOOD 20 11% lower than in June. Ofgem issues its statutory consultation on Lessons from time of use legacy domestic customer communications, including a continued move away tariffs must be learnt – Rajni from prescriptive based rules to narrow principles. Policy Exchange Nair, Citizen’s Advice recommends reforms to encourage the uptake of the hydrogen Red alert: SSE’s latest profit warning – Peter Atherton economy. Gore Street acquires two battery storage projects from Origami Energy, taking its portfolio to 29MW across four projects. MARKETS 22 Friday 21/09 – Martin Cave is confirmed as Chair of Ofgem. Citizens Advice releases research comparing historic time of use tariffs and the implications for the move to the smarter energy system. Oil prices fall to below $70/ barrel amid reports OPEC is considering boosting coordinated output levels ahead of US sanctions against Tehran.

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We have written recently subsidies, has the ability to provide two key (ES623) on the potential features for the developer: a long-term route to for a floor price Contract market with wholesale price certainty and a buyer for Difference (CfD) to with a strong credit rating. The combination of provide a route to these can help to provide comfort to financiers. market for new build Cross currents onshore renewables. An alternative, and already The interest in CPPAs from developers is Ben Hall Associate Director active option to provide significant, especially for onshore wind and solar 01603 604405 some wholesale price PV, now excluded from the CfD auctions at least b.hall@cornwall- stability is through a for the time being. Many developers are viewing insight.com direct power purchase these contracts as the only route to market for agreement (PPA) with a creditworthy end user. It is subsidy-free renewables. The enticement of a sometimes known as a corporate PPA (CPPA) or long-term, potentially fixed price contract with a “long-term sleeve”. financially strong counterparty could also lead to lower cost of capital. The CPPA has been gaining traction recently as developers explore creative solutions to reducing The buyers tend to be Fortune 500, blue-chip firms subsidies. A recent example is provided by with large electricity usage. They range from banks EnergieKontor’s subsidy-free onshore wind to tech companies, supermarket chains and large developments in Scotland (Withernwick 2) and manufacturing processes. In the UK, those with England (Pines Burn), over which it is in advanced active CPPAs include BT, HSBC, M&S and Mars negotiation with a major international company as (see Figure 1). We estimate over 400MW of a potential partner. renewables capacity is now under CPPAs, representing a small (<2% of the total PPA market) This week’s Energy Perspective focuses on some but growing segment. This compares with the US, of the recent activity in this area, including the which had 2.8GW of CPPAs in 2017, according to a drivers from the end user and developer, and recent report by Baker McKenzie. trends in contract structuring and price setting. Figure 1: Examples of UK CPPAs Gulf stream The traditional route to market to sell power for Developer Technology Capacity Buyer developers is through a PPA with a licensed EDF Onshore wind 72MW BT electricity supplier. For a project built using project finance, these contracts are typically 10-15 years Baywa Solar PV 15MW McDonalds and may contain a floor price. However, they do not tend to provide long-term price stability as the BSR Solar PV 61MW HSBC output will be paid against a market reference Pennant Onshore wind 23MW BT price (e.g. hourly day-ahead N2EX), and therefore Walters the price achieved can vary hour-by-hour of Shanks/ generation. Increasingly, suppliers are willing to AD 4MW M&S offer fixed prices for periods within the PPAs, but Future Biogas this is usually for no more than three to five years. Eneco Onshore wind 60MW Mars The floor price does bring some comfort, but they Source: Cornwall Insight are often in the range of £10-20/MWh and The motivations for these end users are well- therefore unlikely to provide full confidence of aligned with developers. Large corporates are revenue stability. This merchant route therefore increasingly interested in these due to corporate does not suit many developers, especially in the social responsibility, which can range from absence of subsidies. company-specific policies for renewables and Whilst not a new route to market – with the first emissions targets, to pressure from investors/ contracts in the UK signed over a decade ago – shareholders and even from the supply chain in the CPPA is increasingly prominent as developers which they operate. There are now 144 major attempt to bring new projects to market without companies, many of which have a UK foot-print, subsidy. At a high-level, a CPPA, in the absence of committed to going “100% renewable” through the

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RE100 – a global initiative set up by the Climate registering the meter, dealing with settlement and Group and the Carbon Disclosure Project. managing the differences in generation and consumption. It will also include the transfer of The other key drivers for buyers are locking in Renewable Guarantee of Origins for the end user/ predictable wholesale power prices and ensuring supplier to use in the Fuel Mix Disclosure process. security of supply over the long term. To date this has been difficult to arrange through agreements Rigging with the off-taker/ supplier sector. Once a structure has been agreed, much of the From the corporate’s perspective, it will help bring focus between the developer and buyer will be on through new renewable developments without the key terms of the contract. Length of agreement having to make an upfront capital investment. It and pricing are the main focuses. also provides greater cost certainty, especially For project financing of a new asset, an absolute following high levels of volatility in a market where minimum of 10 years will be required, though this is energy suppliers have, unsurprisingly, been more likely to be 15+ years from most lenders. This reluctant to provide extended tenor contracts. is a big ask for the buyer, but we are aware of Top sails time-spans of up to 25 years in some discussions. For existing projects, the contract length may be Various structures and terms are evolving. in the much shorter as there may be less requirement for UK; these have focused on a tri-party deal where long-term stability if some of the debt has been there is a PPA between the corporate and repaid. Given that the supplier PPA market developer, a PPA between the corporate and the currently offers up to three to five years of price supplier and sleeving agreements between all fixing, we would expect some interest in this space three parties. The contracts will include the for five to 10-year sleeving deals. headline wholesale price terms agreed between the corporate and the developer. The sleeving There are various pricing options, but the principal agreement will include the costs for managing objective is a fixed price contract beyond the liquid shape (or profile) and volume variations between wholesale trading horizon between the developer output and consumption. and consumer. An alternative which has proven popular in other Prices can be set: jurisdictions, such as the US where there are tax for an initial period at a constant level, then breaks for CPPAs, is the synthetic or indirect PPA. • reviewed after a defined period (e.g. 7 years) There is an increasing willingness to explore the synthetic option given its benefits over the direct • for periods beyond the initial fix then set in PPA, which is more established in the UK. further periods of the same duration or then The design of the indirect PPA model aims to annually, linked to an index such as Consumer simplify the contractual arrangements and Price Index (CPI) or Retail Price Index (RPI) management of price and volume risk. Under this • at a fixed rate (in £/MWh) from the start of the structure, there is no PPA between the corporate contract and then inflated each year using CPI and the generator; this is replaced by a price or RPI for the whole duration of the contract guarantee agreement. Therefore, the contract structure is: a PPA between the developer and • at a fixed rate and then adjusted annually for a supplier, supply contract between the corporate fixed inflator (e.g. 2.5%), and and supplier and the price guarantee between the • using a value share model with a floor price developer and corporate. The price guarantee and an agreement on how the value above the agreement mirrors the terms in the PPA and supply floor is shared. contracts with the utility, allowing the utility to manage the calculation and settlement processes. The method for how the initial price is set will also vary by counterparties. A publicly-available option Another feature of the indirect PPA is the ability to is to use the current forward curve for baseload allow for more than one corporate buyer for the and peak prices. The forward curve provides renewables output. Earlier this year, for instance, pricing for the period to winter 2020. To this, Vattenfall proposed 10 to15-year contracts for adjustments will be made for the intermittency of output of its 165MW South Kyle wind farm in the generation, expected profile and generation- packages of 1MW to multiple buyers. weighted pricing assessments, and where relevant Under both direct and indirect arrangements, the embedded benefits. licensed electricity supplier retains a central role of

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A paper, Wholesale Power Price Cannibalisation, written by Cornwall Insight earlier this year assessed possible captured wholesale power prices for different renewables technologies (see Figure 2). A further option is to use the BEIS long- term price curve or one from other forecasters. Figure 2: Modelled capture prices for wind and solar power (2018 money)

2020s and beyond. They clearly provide a good market-led option, but they are also complex, costly and involve multiple contracts.

For a corporate entity, agreeing a long-term Source: Cornwall Insight procurement deal for their energy is not part of its Various factors will influence the agreed price core business. Agreement of key terms such as between the buyer and producer. In general, solar how to fix the price will likely result in differing can be expected to achieve a slightly higher price views from both parties, and there is obviously than wind because of its greater predictability, and some risk in fixing the price based on the forward biomass/ anaerobic digestion could achieve a curve or forecasts of future prices. higher rate still due to its baseload running profile. Above all, the main issue is market readiness and Longer-term (e.g. 20-25 year) contracts may result demand. There are numerous developers of in lower agreed fixed prices than 10-15 years due various renewables technologies but a relatively to the additional certainty from the longer duration. small, although growing, stock of buyers. In addition, the higher the credit rating of the buyer the (potentially) lower the agreed price as this We conclude that CPPAs are unlikely to pull could also result in capital costs for the developer. forward significant new build capacity on their own. Consequently, we believe the CfD floor price Manifest option should also be considered by the Much has been made of CPPAs being the answer government as it looks to bring forward significant to bringing through new renewables into the further quantities of low-carbon generation in a subsidy-free world.

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Tom Lawson, [email protected]

The UK’s first Zero Emission Vehicle (EV) Summit Carbon Vehicle Partnership (LowCVP) would was held in Birmingham from 11-12 September. facilitate this. The LowCVP which was established Here we round up some of the key in 2003, as a public-private partnership working to announcements from the event and industry accelerate a sustainable shift to lower carbon reaction. vehicles and fuels and create opportunities for UK business, with around 200 organisations engaged. The summit aimed to build on the government’s Road to Zero Strategy, published in July, which set The taskforce will bring together the energy and out plans to meet a target for all new cars and vans automotive industries to address the challenges to be “effectively” zero emission by 2040 – and for and opportunities that increased uptake is every car and van to be zero emission by 2050. expected to bring. LowCVP said that it would work to “ensure that costs and emissions are as low as At the event, Prime Minister Theresa May possible, and opportunities for vehicles to provide announced £106mn of government funding for grid services are capitalised upon.” projects developing innovative battery, vehicle and refuelling technologies. She also said that £500mn Ahead of the summit, groups of businesses, NGOs of new investment would come from the private and policymakers called for action from the sector. May referred to her “ambitious mission” for government to speed up the transition to zero- the UK to become a world leader in low-emission emissions transport. These included some specific technology and said: “these measures will drive policy recommendations, such as bringing the the design, use, uptake and infrastructure 2040 target forward, introducing EV sales targets necessary for cleaner, greener vehicles.” and greater clarity around Brexit (ES634). Specific projects covered by the funds included: Although these issues were not directly addressed by the Prime Minister, industry stakeholders £200mn from the EV Network for 200 fast- • generally welcomed May’s speech and the funding charging stations throughout the UK commitments made. Energy UK said: “It’s good • the UK’s largest, independent, vehicle battery that the Prime Minister has listened to our calls for manufacturing plant in Coventry, by Hyperbat greater ambition and recognises the enormous Limited to open in early 2019 opportunities offered by EVs”, while the Confederation of British Industry said new • up to £50mn from Zhuzhou CRRC Times investments were "a welcome sign that the UK can Electric for a new UK R&D Innovation Centre lead the transition to a zero-emission future". The for EVs, rail, and renewables Committee on Climate Change (CCC) said it • a further £50mn from Aston Martin for its new “demonstrates a strong industry consensus”. centre for electrification in Wales, and Amid the praise however, there were still calls to • £1mn from Lloyds Banking Group for EV leases do more. The CCC argued that the 2040 new sales for its customers to incentivise EV uptake. target should be brought forward five years to ensure the UK meets its climate goals, and Energy May also said that the UK could not achieve the UK said the aspiration to be a world-leader in low- transition alone, and an agreement, called the emissions vehicles was “even more reason for the Birmingham declaration, was unveiled at the government to show greater ambition with its summit. Signed by 11 governments, it declared a targets for the rollout”. The National Infrastructure commitment to co-operate on building smart Commission focused on charging provision and, infrastructure networks, supporting zero-emission despite welcoming the 200 fast charging stations R&D and promoting a sustainable, circular commitment, said that further steps were needed economy to drive down supply chain emissions. to create a “truly national charging network”. However, no specific targets were included. The pledges made at the summit were broadly To help co-ordinate the wide range of initiatives welcomed by the energy industry and mark a and manage the expected growth in EVs, the further step forward building on the Road to government is set to establish a new Electric Vehicle Energy Taskforce. The day before the Zero Strategy. summit began it was announced that the Low Number 10

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Tom Crisp, [email protected]

Think tank the Adam Smith Institute published a level discounts and none benefitting from high- report on 16 September, exploring the dangers of level discounts. By contrast, in deregulated government energy market intervention and Victoria just 11% of customers stay on high cost proposing measures to encourage competition. standing offers, with 45% accessing high-level discounts, and pricing often set at marginal cost. The report – Capping Competition – opened by exploring the dynamics of the current retail market, The parallels were then drawn between historic particularly the current price differential between intervention in the UK market and reduced fixed and standard variable tariffs (SVTs) (see switching and competition. The introduction of the Figure 1). It argued that high levels of price non-discrimination clause in 2008 coincided with discrimination are “frequently observed” in highly switching falling from 20% in 2008 to 10% in 2013. competitive markets. The examples given included An end to doorstep selling after high fines were coffee chains and airlines, where high fixed costs imposed on SSE, EDF Energy and British Gas also mean that uniform prices set at any level (and, led to lower switching rates and reduced levels of notably, if they are set equal to marginal costs) will engagement with hard to reach groups. Finally, not permit companies to recoup invested outlay. introduction of the four-tariff rule had a “deterring Where these markets differ to energy is that effect on innovation”. energy is a homogenised product (with the Three potential remedies to the UK retail market exception of green tariffs). However, the increasing were then assessed: relative price caps, improved move to a smart energy system and time of use information and opt-out switch auctions. tariffs will create a heterogeneous service. Relative price caps were recognised as minimising The Competition and Market Authority’s figure of the risk that an absolute cap set too low will deter £1.4bn in consumer detriment from being on higher investors. However, it would likely increase variable tariffs was also criticised, with the Adam supplier profit margins and reduce overall Smith Institute saying it depended on “multiple competition, giving an incentive for the Big Six to contested assumptions”, including using OVO raise the price of fixed tariffs and then lower their Energy and First Utility as baselines, when at the variable price. time, they priced to expand rapidly. Improved information was recognised as being Figure 1: Retail price comparison by company and tariff type: domestic (GB) 2016-18 effective in boosting switching rates, with evidence from Ofgem trials of a letter of cheaper offerings based on consumption seen as particularly effective. It was recommended that Ofgem consider renaming SVTs “out of Contract Tariffs”. Finally, the Stephen Littlechild proposal of an auction of 10% of the disengaged Big Six customer base was backed. As suppliers would compete directly for disengaged customers, it is to be expected that prices for the new tariffs would be closer to competitive fixed tariffs than existing standard variable tariffs. Littlechild calculates this Source: Ofgem would make 4mn new customers available for new The report then drew on international comparisons suppliers. Unlike price caps, this measure would to argue that curbs on differential pricing lead to “stimulate competition and allow new suppliers to reduced switching rates. It highlighted research prove their ability to offer lower prices and better from two retail electricity markets in Australia – service.” South-east Queensland, which has a regulated This is a traditional defence against price caps, price cap, and fully deregulated Victoria. Customer flagging the potential for consumer detriment. behaviour is “significantly different” in Queensland and Victoria. In Southeast Queensland 46% of We have said it many times, but we strongly customers stayed on the default, more expensive prefer the auction approach to price caps. standing offer with 22% benefitting from medium- Adam Smith Institute

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Nick Palmer, [email protected]

A joint report by the Royal Academy of A challenge for both BECCS and DACCS, the Engineering and The Royal Society has outlined report outlined, is that CCS technology is currently the greenhouse gas removal (GGR) actions the “largely at the demonstration stage”. However, the UK must undertake to achieve net-zero carbon potential for storage is very high once the emissions by 2050. technology is established and in place. According to the report, CCS’ potential storage capacity in Greenhouse Gas Removal was published on 12 globally is estimated to be 900 GtCO2. The UK is September and detailed the various methods estimated to have access to 20 GtCO2 offshore, across different industries that the UK can use to primarily in former North Sea wells. remove greenhouse gas from the atmosphere. Another recommended action was to use carbon The report said that, in order for the UK to achieve pricing to help make GGR viable. The price of net-zero by 2050, it should use GGR to remove carbon is likely to play an “enormous role” in and store CO2, as well as reduce the CO2 emitted deciding how feasible GGR technology can be, the by all sectors. report said. At current pricing levels, there is little Eight key recommendations were made by the incentive to remove carbon from the atmosphere. report, one of which was to construct carbon However, with carbon prices predicted to reach capture and storage (CCS) infrastructure such as $100 (£76) per tonne of carbon, the incentive to deep underground storage areas. Two of the GGR use GGR methods will increase significantly. methods detailed by the report require CCS. Implementing a “global suite” of GGR methods was Bioenergy with carbon capture and storage also proposed. Methods outlined in the report (BECCS) is the practice of burning biomass, such included biochar, which involves incorporating as crops and waste, for energy, capturing carbon partially-burned biomass into soil to improve emissions and then storing them. Carbon captured fertility; forestation; ocean fertilisation – the from the emissions from power stations or other removal of CO2 from the ocean; and soil carbon sources is transported to storage areas to stop it sequestration – increasing soil carbon content entering the atmosphere. One method injects it through altering agricultural practices. into deep geological formations to be stored Additionally, the report recommended incentivising permanently (see Figure 1). early stage deployment of GGR to allow more time The second method incorporating CCS is direct air to assess its impact, as well as establishing global capture and carbon storage (DACCS). DACCS uses standards for monitoring GGR effectiveness. It was chemical bonding to capture carbon from the air. A also highlighted that GGR cannot be relied on to separating agent is used and the carbon is then prevent global warming alone – it needs to be regenerated with heat, water or both before being combined with global efforts to reduce emissions. released as a high-purity stream, which is easier to Professor Nilay Shah, Director of the Centre for inject underground. Process Systems Engineering at Imperial College Figure 1: How BECCS works London and member of the report working group, commented: “delivery of these technologies at the necessary scale will present many challenges. Overcoming these will require a concerted effort from engineers, scientists and governments worldwide. For the goal to remain in our sights action must be taken now.” This report is an interesting contribution from two respected bodies. It outlines how the UK is well-placed to play a leading role in the next stage of combatting carbon emissions. Royal Academy of Engineering Source: The Royal Society and Royal Academy of Engineering

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Parliament is in recess and will return on 9 October.

On 14 September BEIS announced that 10 new nations, states and cities have joined the Powering Past Coal Alliance (PPCA). This alliance, which was established in the UK and Canada in 2017, is a commitment between signatories to the phasing out of coal power by 2030 in favour of cleaner energy sources. New signatories include Wales, the Balearic Islands in Spain, the Australian Capital Territory government and the US states of New York, Minnesota and Connecticut. In total, over 25 nations, 17 states, provincial and city governments, and 28 corporations have joined the alliance since it was established. The declaration of the PPCA said: “To meet the Paris Agreement, analysis shows that coal phase-out is needed no later than by 2030 in the OECD and EU28, and no later than by 2050 in the rest of the world.” BEIS

A group of MPs, academics and green campaigners have called for a green infrastructure spending boost. In the Green New Deal report released on 10 September – an update to the report released in the wake of the 2008 banking crash – the group advocated a range of ambitious new policies. These included: making the UK’s 30mn buildings “super-energy efficient”, accelerating the drive to renewable energy, and addressing the housing crisis by building affordable, highly insulated new homes, predominantly on brown field site. The upfront cost of this infrastructure programme is likely to eventually run into more than £50bn/ year. The group This could be met by traditional government borrowing at present low interest rate, plus the use of “Green Quantitative Easing” to help rebuild local economies. Parliamentary backers include Vince Cable (Liberal Democrat Leader, Twickenham), David Drew (Labour, Stround), Angus MacNeil (SNP, Na h-Eileanan an Iar) and Caroline Lucas (Green, Brighton Pavillion). Green New Deal

Chancellor Philip Hammond announced on 19 September that a consortium led by Swansea University will receive £36mn from the Industrial Strategy Challenge Fund to support the development of new building materials and coatings which generate electricity from light and heat. The green technology uses light and heat to generate energy. The materials could replace conventional walls, roofs and windows, generating electricity, which is then stored and released by a smart operating system. Excess electricity could also be sold back to the grid. The announcement supports the government’s mission to at least halve the energy use of new buildings by 2030. Hammond said the funding will support “exciting green technology that could cut energy bills, reduce carbon emissions and create better homes and workspaces”. HM Treasury

Almost £0.5mn of BEIS funding has been awarded to Flexitricity, a demand-side response (DSR) specialist, for its Quickturn project. It aims to reduce the costs associated with establishing a DSR despatch system to make it cheaper for SMEs to take advantage of balancing services through access to National Grid’s electricity balancing market. This will allow SMEs to earn revenue from helping National Grid to balance the power system in times of high demand. Flexitricity claimed that Quickturn will reduce costs for SMEs by improving the speed and reliability of communications. Additionally, it said larger businesses with multiple smaller sites can also take advantage of Quickturn. The project is to use flexible energy assets such as cold storage, heat pumps and air conditioning

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and introduce them to the balancing market. The developer partnered with the University of Edinburgh’s Institute for Digital Communications, which will contribute expertise in emerging technology. Flexitricity’s Dr Alastair Martin said that participation in the balancing market was previously not possible for smaller businesses due to the costs involved. He added: “The ongoing drive towards a more decentralised, renewables-based energy system means that small businesses […] will have a vital role to play in the long- term management of our energy system. We’re proud to be able to deliver the tools that enable businesses to take control of their energy usage and earn much needed additional revenue.” Flexitricity

A motion was passed at the Liberal Democrat conference on 17 September calling for the government to improve housing standards. The party called for a commitment of at least 50,000 new social homes for rent to be built every year over the next decade. The motion included calls for better environmental standards for housing to reduce both fuel poverty and greenhouse gas emissions. The call relates to the Liberal Democrats own long-standing view that 300,000 homes should be built each year over the next decade. The party’s Housing Spokesperson Wera Hobhouse MP said: “Radical action must be taken to ensure people have the right to live in an affordable and secure home.” In the Leader’s Speech on 18 September, Vince Cable said that the demands of climate change required “boldness”. He said: “Take the tidal lagoon in South Wales. The Tory government has killed it; we would resurrect it.” The party also took the first step in developing a new climate and energy policy, with the launch of its Climate Change and the Low-Carbon Economy paper. Prepared by a policy working group, the initial consultation outlines the party’s 2017 manifesto pledges and seeks views on how these policies need to be evolved to ensure net zero emissions can be achieved, and how these policies can be promoted to gain electoral support. Views are invited by 26 October, with the aim of submitting a full policy paper to Autumn Conference in 2019. Liberal Democrats

A national taskforce was launched by the Scottish government on 13 September to advise on how the country can maximise the opportunities of decarbonisation in terms of fair work and tackling inequalities. The Just Transition Commission is a commitment under the Programme for Government (ES634) and forms part of Scotland’s plans to achieve a carbon-neutral economy. In May the government announced that it would be “one of the first countries to achieve a 100% reduction in carbon emissions”. The country’s Climate Change Bill sets out a target of a 90% emissions reduction on 1990 levels by 2050, with an aim to achieve a 100% reduction “as soon as possible”. The principles of a just transition include planning for, and investing in, a transition to environmentally and socially sustainable jobs, sectors and economies, actively considering employment issues when developing climate policies, and designing and delivering low-carbon infrastructure with the aim of creating “decent, high value” work. Scotland’s Environment Secretary Roseanna Cunningham said: “Our transition to a carbon-neutral economy is already well underway. With Scottish emissions almost halving since 1990, and 49,000 jobs already supported in our low carbon sector, I want to ensure we benefit fully from leading the global transition to low- carbon.” Scottish government Our latest Chart of the Week explores how one in four domestic customer accounts are now held outside the six largest suppliers. Last week’s Cornwall Insight blogs included a summary of our Chairman Volker Becker’s keynote speech at the 2018 BIEE annual conference.

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Tom Edwards, [email protected]

Engie raised modification CMP307 on 20 Figure 1: BSUoS cost components September, which proposes a significant change to the BSUoS charging arrangements. But other stakeholders are also seeking change. More clarity is now available on the future of the Balancing Services Use of System (BSUoS) embedded benefit after Engie raised a modification proposal on 20 September, following a meeting of the Transmission Charging Source: National Grid Methodology Forum (TCMF) on 12 September. offset by a reduction in the wholesale power price, At the TCMF, National Grid (ESO) noted the current as generators would no longer seek to recover the BSUoS charging structure “might not be fully BSUoS charge through the wholesale market. aligned with government policy objectives, the The Engie proposal, CMP307, aims to move to a costs and benefits imposed on the system from the gross charging basis on suppliers and charge use of new technologies, together with export exemptible embedded generators. It argues appropriate temporal and geographic attribution”. the current system leads to deficiencies, including There was also a need for increased transparency unfair apportionment of costs, inefficient dispatch in the process which converted costs (see Figure 1) due a £5/MWh difference between marginal costs into charges. To address these issues the ESO has of transmission and distribution-connected proposed to hold a series of workshops in early generators and distorted investment decisions. October, similar in structure and process to the Engie estimates there would be a £230mn benefit established BSC Issues Group mechanism. Following this, a modification would be raised in to consumers by reducing the value collected from consumers and increasing the charging base, as October to address the issues identified. well as reducing wholesale power prices. It At the same meeting EDF presented a draft proposes a 12-month assessment, with a target change proposal, which would remove the BSUoS implementation date of April 2021. It will also be levy from generators and place 100% of the charge seeking to raise concurrent BC modification to on suppliers. It argued this would have a positive deal with metering and Residual Cashflow effect on the GB market by reducing a Reallocation Cashflow (the “beer-fund”). discriminatory cost to GB generators not faced by If approved, this modification would have a EU generators, equivalent to roughly £600mn in 2017. It also noted there would not be a notable significant cashflow implication for embedded generators. For 2019-20 National Grid is estimating increase in payments to embedded generators, as BSUoS will average £2.30/MW; therefore this any increase in the benefit received would be modification would remove £2.30/MWh from the BSUoS context embedded benefit and add a £2.30/MWh charge to embedded generators, increasing the marginal BSUoS is charged by National Grid to recover the cost of the generator by £4.60/MWh. costs incurred as System Operator in balancing the system. In 2017 the total cost was £1,243.9mn. This is the latest in the long-saga of the reform of embedded benefits, and it is likely to be All transmission services costs (as they were called another contentious area of change. then) were recovered from suppliers under the Pool, but with implementation of NETA in 2001 this This change should also have an impact on was changed to BSUoS and the costs charged exit prices in the Capacity Market, by removing equally from generation and demand. this benefit and adding a charge. Prices CMP201 was raised by National Grid in December cleared in the auction should therefore 2011 but rejected by Ofgem in October 2014. This increase. But this will be scant consolation to proposed the transfer of all BSUoS costs on embedded generators with existing CM suppliers, who recovered the costs through contracts. demand charges. National Grid TCMF

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Josephine Lord, [email protected]

National Grid Electricity System Operator issued Figure 1: Forecast embedded export tariff its forecast of transmission network use of system (TNUoS) charges from 2019-20 to 2023- 24 on 14 September. The forecast is based on the charging methodology as set out in the CUSC on 1 April and does not take account of any changes that may be introduced under Ofgem’s reviews of forward- looking charges, its Significant Code Review on residual charges, or of any CUSC modification proposals currently under consideration.

As the period covered runs into the RIIO-T2 price Source: National Grid control from 2021-22 onwards, National Grid has made assumptions about this, including its allowed no longer as strong. The charge paid out through revenue. Total allowed revenue to be recovered the tariff is forecast to reduce from £111mn in 2019- including offshore transmission owners is forecast 20 to £18mn in 2020-21 and then stay flat, at to be £2,879mn in 2019-20, rising by £717mn to between £19.3mn and £20.5mn after that. £3,596mn in 2023-24. Generation tariffs have been set to recover a Demand tariffs are forecast to increase each year reducing amount of revenue over the period, in over the five-year period due to a declining line with the CUSC methodology for complying charging base for half-hourly (HH) and non-HH with the €0-2.5MWh European limit on annual (NHH) tariffs and an increasing proportion of total average generation charges required under revenue being recovered through demand tariffs, Regulation 838/2010. This is due both to the due to the cap on generation tariffs. decreasing forecast of transmission-connected generation output and an increase in the National Grid forecasts that system gross peak will generation charging base, rising from 71.9GW in fall from 51.3GW in 2020-21 to 50.1GW in 2022-23. 2019-20 to 75.2GW in 2023-24. The average Within that, HH demand will rise until 2021-22 to generation tariff falls from £5.61/kW in 2019-20 to 19.04GW before falling to 18.91GW in 2023-24, £4.32/kW in 2023-24, while the generation while NHH demand will fall over the period from residual charge moves more negative, moving 25.51GW to 22.97GW. from -£3.61/kW to -£10.58/kW. In 2019-20 the average gross HH demand tariff is National Grid has conducted analysis on the tariffs £50.75/kW rising to £65.27/kW in 2023-24, while to give a view on the effect of various sensitivities, the average NHH demand tariff increases from including changing the plant mix and changes to 6.56p/kWh to 8.79p/kWh. During that period the demand volumes. It has also set out the impacts of demand residual increases from £51.70/kW to continuing the small generator discount for 132kV £66.79/kW. connected generation in Scotland, which is due to The embedded export tariff paid to embedded end in March 2019, although there is a current generation reduces significantly in the first two CUSC proposal seeking to extend it. forecast years as the phased residual is reduced The next forecast of 2019-20 tariffs will be issued from £14.65 in 2019-20 to zero in subsequent in November, followed by final tariffs in January years. From 2021-22 onwards the tariff is expected 2019. to be zero in Zones 1-5 due to the negative locational tariff not being sufficiently offset by the Despite uncertainties arising from the Ofgem Avoided GSP Infrastructure Credit, which is charging reviews and the RIIO2 price control, forecast to rise by RPI (see Figure 1). the forecasts are useful broad-brush guides to National Grid forecasts that the volume of the key drivers for change and their likely scale generation receiving the tariff will peak in 2019-20 over the next few years. at 7.7GW and then gradually decline to 6.6GW by National Grid 2023-24 as the economic signal for triad benefit is

Energy Spectrum 635 | 24/09/2018 | page 11

Josephine Lord, [email protected]

The regulator has issued an update and forward capital applied. An annual operating cost plan on its work to extend competition in allowance will apply during the operational period. onshore electricity transmission. Ofgem intend to add this annual allowance to the annual recovery of the construction capital cost As part of the update on 14 September, Ofgem value across the full 25-year revenue term. issued an impact assessment for consultation on the two models it has developed to implement Ofgem’s impact assessment concluded that both transmission competition. They are the Special models can deliver financial savings for customers Purpose Vehicle (SPV) model and the Competition compared to delivery through the current and Proxy Model (CPM), which is being applied to the future price controls. They are the CPM 10.9-12.1% Hinkley-Seabank project. It also separately issued and the SPV 4.1-10% in its middle scenario, by a consultation on the commercial and regulatory reflecting efficient market-based costs for framework for the SPV model and an update on financing the projects. The regulator said that, if the CPM model. implemented efficiently, the SPV model has the potential to unlock additional savings for Ofgem confirmed in January that it intends to consumers by also driving additional savings in consider the two models for all future Strategic capital and operational expenditure, at between Wider Works (SWW) projects — large projects 13.0-18.7%. Ofgem also identified hard-to-monetise where funding was not awarded through the price benefits, including the impact of competitive control settlement — that are subject to a needs pressures on the supply chain and further case assessment during RIIO-T1. This is when a benchmarking for RIIO2. project meets the criteria for competition: it is new, separable and of value greater than £100mn. The regulator has set out its current workplan for both models and the indicative timetable for the Under the SPV model the incumbent transmission SWW projects it is currently considering or expects owner (TO) would run a competition for the to over the next year (see Figure 1). construction, financing and operation of the project, which would determine an annual revenue Responses to both the consultations are requested stream for it. This would reflect the capital and by 26 October. operational costs, and the weighted average cost of capital that would be paid to the SPV by the TO Figure 1: Workplan for transmission competition and then recovered by it through transmission network use charges. The SPV would deliver the project under a delivery agreement with the TO, expected to be for an operational period of 25 years, although it could be shorter or longer. The SPV model is an example of a “late” model competition, in that it applies to a project that is well-developed and is close to receiving, or has received, planning consents. The consultation addresses the next level of detail in the model design, including the delivery agreement, the licensing arrangements and the procurement framework. Ofgem also intends to continue to Source: Ofgem develop earlier models of competition where an appointed party undertakes elements of early The fracturing of transmission owners’ design and consenting as part of its work on the monopoly in the provision of transmission RIIO2 price control framework. infrastructure projects has been a while Under the CPM model, the full construction debt is coming. It could deliver meaningful savings for raised upfront and then drawn down during consumers and represents a significant construction. Allowed expenditure and the cost of regulatory initiative. capital at the end of construction are recovered by Ofgem update SVP consultation CPM update the TO over 25 years, with an operational costs of

Energy Spectrum 635 | 24/09/2018 | page 12

Rowan Hazell, [email protected]

The regulator set out its view on 17 September systems. This would see the data aggregation role that settlement reform should not lead to the removed or altered from its current form. It was centralisation of supplier agent functions. It also noted that having data in a disaggregated form said that there may be a case for future models, could allow more flexibility for implementing future which would not require aggregated data to be changes, and that it could be a way of future submitted into settlement systems. proofing the target operating model (TOM). Supplier agents are appointed by electricity Ofgem said that this could help the TOM support suppliers to undertake certain functions in relation or facilitate a transition to potential future supply to settlement. For metered supplies, agents models. The inclusion of data aggregation in the comprise of meter operators, data collectors, and TOM was viewed as being a detailed choice that data aggregators. The regulator issued a working should be considered by the Design Working paper in March considering the potential benefits Group (DWG). Even if it is decided that aggregators and disadvantages of centralising the agent are needed with current technology, Ofgem asked functions (see ES613), in which it did not have a the DWG to think ahead and consider how things preferred option. might change once technology has improved. It suggested that roles should not be kept simply Ofgem is now seeking views in the form of a because they already exist. consultation on its position that work to centralise agent functions should not be progressed, as it Changes to data collection process were not has not seen compelling reasons why a central envisaged. The regulator said that it does not agent would deliver significant consumer benefits. expect to see any reforms to how data is currently It did note that the position is in relation to the collected through smart metering, and as a work on settlement reform only, and that impacts consequence it has not proposed centralising data on supplier agents arising from wider changes like collection for advanced meters. It noted that this supplier hub reforms shouldn’t be ruled out. would be particularly complicated to implement, as supplier agents are responsible for organising Ofgem said that introducing a monopoly provider communications with advanced meters, whereas would conflict with its regulatory stances on the DCC provides smart meter communication. competition and innovation. It also said that, Some stakeholders have suggested that it could although there may be some economies of scale be worth centralising manual meter readings, but available from the appointment of a central agent, Ofgem said that it was the responsibility of these are likely to be small and that supplier suppliers to establish efficient commercial agents may be able to deliver cost reductions over arrangements in this area. time. It also noted that a central agent would not likely be able to deliver material improvements in The regulator previously set out that it would only data quality or settlement performance. entertain the idea of meter operation being centralised if the centralisation of data collection If agent functions were centralised, the provision of and data aggregation had merit in principle. As value-added services offered by supplier agents such, reforms to the arrangements for meter could in principle continue to be provided operation will not be considered. It said that the separately, but Ofgem said that there is at least a potential for any economies of scale would be potential risk of disruption to these services. A limited due to meter operation requiring site visits. central agent was also not viewed as being required to provide access for third parties to Responses are requested until 12 November. The provide value added services. Ofgem also said regulator intends to issue its decision on whether that introducing a central agent could be difficult to to proceed with the proposals over the winter. reverse, and that the proposed position is the best way to provide flexibility over any changes arising Keeping the supplier agent market open to from work on future supply market arrangements. competition aligns with Ofgem’s principles and allows for flexibility as the industry considers The regulator also set out that there may well be a alternatives to the supplier hub model. case for future models where data is not aggregated for submission into central settlement Ofgem

Energy Spectrum 635 | 24/09/2018 | page 13

Ofgem has closed its compliance “engagement” with Green Star Energy in relation to mis-selling and failures to issue annual statements, with the supplier agreeing to pay out £679,283 in compensation and redress. Having become aware in February 2018 that Green Star Energy was using a third-party intermediary (TPI) to acquire customers, the regulator sought to establish compliance with Standard Licence Condition (SLC) 25, which states that all suppliers are responsible for the activities of third parties acting as their representatives and must not mislead or otherwise use inappropriate tactics to sell to customers. In its decision, published on 19 September, Ofgem explained that the breach involved a Green Star Energy advert on switching site Utility Discount, which directed customers to a bespoke page displaying only Green Star Energy tariffs, yet the TPI failed to make this clear to customers. During discussions with the regulator, Green Star Energy self-reported that it also failed to issue annual statements to some of its customers between August 2014 and November 2017. Ofgem said that this was due to a failure in the supplier’s billing systems, leading to no annual statements being generated when Green Star Energy had been trading for 12 months and was required to start sending these to customers. This was in breach of SLC31A, which requires suppliers to provide customers with an annual statement at least once a year. Green Star Energy took remedial action in which it identified all 8,815 customers acquired through Utility Discount, and it is in the process of paying them compensation of £41 each in recognition of the fact that they could have switched to a cheaper tariff, for a total of £361,415. Additionally, customers will be allowed to switch away without facing exit fees, and the supplier paid £151,376 in redress. Having failed to provide annual statements to some of its customers, Green Star Energy has since made system changes to issue annual statements and a further redress payment of £166,492. Ofgem

The regulator has issued a request for suppliers, distribution network operators and meter asset providers in the electricity sector to work with industry groups to improve data quality ahead of the move to new switching arrangements. In its letter dated 11 September, Ofgem emphasised the widespread implications that poor quality data had for switching, urging industry participants to support the work of the Faster Switching Expert Group (FSEG). The FSEG is charged with ensuring that data is ready for migration into the Central Switching Service (CCS) during the Switching Programme’s Design, Build and Test phase. However, the regulator noted that significant improvements are needed to the data held within industry systems so that the requirements of the new CSS can be met. Parties were encouraged to engage with groups such as the FESG and the Issue Resolution Expert Group to ensure industry data is appropriately cleaned and ready for migration. As a minimum, Ofgem said that this engagement should take the form of delivering appropriate resources to ensure that stakeholders are able to execute the FSEG’s proposals. The regulator will continue to develop the Retail Energy Code, which will enable the new switching arrangements currently expected to go live in early 2021. Ofgem

UK Power Reserve raised a BSC modification on 11 September, P371 that aims to include the price of non- Balancing Mechanism (BM) fast reserve, non-tendered fast reserve and spin gen into the calculation of the imbalance price. The proposer argues that these balancing services should be included to ensure that the imbalance price is correctly calculated, that there is fair and harmonised treatment of all services, greater transparency, and that National Grid is complying with its obligations with respect to Balancing Service Adjustment Data (BSAD). It considers that National Grid should already be providing information to Elexon on fast reserve balancing

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actions and that there is no defect in the BSC but rather that National Grid is not compliant with its licence obligations, specifically the BSAD methodology. The solution proposed would include non-BM fast reserve and non-tendered fast reserve into the calculation of the imbalance price and extend the application of the Reserve Scarcity Price (RSP) calculation methodology to fast reserve. The RSP was introduced by P305 and includes the addition of non-BM Short Term Operating Reserve (STOR) utilisation costs into cash-out. However, UK Power Reserve argues that non- tendered fast reserve actions represent most of the costs paid by the system operator for reserve products and therefore should also be in the imbalance price. On 13 September the BSC Panel sent the proposal to a workgroup to report in March. Elexon

The European regulators’ organisation issued a consultation on Wednesday 19 September on draft guidance on bundled products, which aims to protect consumers who buy bundled products within or across economic sectors. The guide is been developed as part of the framework of the Partnership for the Enforcement of European Rights collaboration of regulators from different sectors. CEER’s consultation sets out ten recommendations for companies including the need for simplicity, clear liability principles, transparency, billing and information on contract conditions, as well as five recommendations for national regulatory authorities. These include that sectoral regulatory codes and rules should include provisions for bundled offers and that, where the bundle includes an essential service such as energy, consumers must be protected from disconnections or risks associated with the other elements of a bundled contract. Responses are requested by 14 November. CEER

Energy Spectrum 635 | 24/09/2018 | page 15

Oliver Archer, [email protected]

Wholesale costs continue to drive up tariff prices domestic supply companies are responding to and squeeze supply margins in the domestic pressured margins by diversifying into other areas, market. Against this backdrop, larger suppliers expanding their offerings to include energy and are offering customers security through long- technology services alongside traditional supply. In term fixes and new flat rate tariffs. Meanwhile, recent weeks the majority of this activity has challengers look to create margin elsewhere, focused around electric vehicles, with Octopus particularly in the electric vehicle space. Energy opening its Powerloop vehicle-to-grid (V2G) bundle for pre-registration and Tonik Energy Last month, Ofgem preceded a series of acquiring a renewables contractor to facilitate its prepayment price rises with its announcement that storage offer and charge point roll-out. the safeguard tariff level would increase due to rising wholesale costs. The price increases have Figure 2: Wholesale and average tariff increases continued in September, with five suppliers announcing substantial increases to their credit Year-on- tariffs so far this month, all of which cited the Aug 17 Aug 18 year effects of rising wholesale costs (see Figure 1). change Figure 1: Price increases announced in September Average year ahead £328/year £439/year £111 wholesale New Supplier Tariff Old price Increase price Average tariff in the £1,011/year £1,071/year £60 Bulb Vari-Fair £923 £1,025 11.1% market Economy Switch £811 £1122 38% Residual £683/year £632/year -£51 Energy Saver

Outfox the More established brands, meanwhile, have been Zapp! £859 £923 7.4% Market taking advantage of their comparatively substantial capital reserves to offer longer fixes and flat rates Ovo Simpler £1,090 £1,225 12.4% in a market environment that looks increasingly Energy Energy prone to large price rises. Both E.ON UK and British Gas have launched flat rate tariffs in recent 100% Pure Planet £872 £921 5.6% Green weeks, with their respective Secure Bill and Unlimited deals allowing customers to pay fixed The September edition of our Domestic Tariff monthly bills regardless of usage. First Utility has Report looks in detail at the effect wholesale prices also focused on providing security for customers in are having on tariffs, and it also explores supplier September, promoting its three-year fix through strategies in response to these pressures. The cashback sites and also launching a lengthy five- report shows that in August our measure of the year fix. wholesale cost for typical dual fuel tariffs rose Wholesale costs and high levels of above £450/ year for the first time since April 2014 competition in the market are exerting to £468/ year at the end of the month – a 34% considerable pressure on margins. increase year-on-year. In contrast, the average tariff increased just 6% year-on-year, with Technology innovations like V2G and smart- competitive market dynamics limiting the pass- storage are creating additional revenue through of wholesale rises. streams for suppliers through opening up the potential to provide flexibility services. While media responses to the recent run of price announcements have focused on the impact on As shown in our monthly Domestic Tariff customers, our analysis emphasises the pressure Report, suppliers are responding with a on margins suppliers are encountering from the diversity of strategies to try to maintain margin rising commodity market. Compared to the same and stand out from the crowd. Contact Oliver time last year, the average residual for non-energy Archer at [email protected]. costs and margin fell by £51 in August. A range of

Energy Spectrum 635 | 24/09/2018 | page 16

Tom Crisp, [email protected]

The UK Energy Research Centre (UKERC) issued • stress testing, which measures system a briefing paper on 14 September, proposing a resilience against currently foreseen threats, new approach to gas security that is needed to such as the 2014 gas security tests, and both address the less dramatic challenges that face UK gas security, as well as the chance of • modelling, which combines shock analysis with managing an event that deviates beyond what is an element of forecasting or scenario planning. currently expected, a so-called “black swan”. Considering all the above methods, UKERC The briefing, A New Approach to Assessing UK advocates a dashboard of combined indicators as Gas Security, is based on two key propositions: the best way forward, especially if it is expressed in a way that allows objective comparisons • gas security matters, as the fuel meets 40% of between indicators. The “Beast for the East” event GB primary energy demand, and illustrates the wide range of domestic and international factors at play. For a new approach to • the current measure is “far too narrow” to offer be effective it must consider and assess what a comprehensive assessment of UK gas constitutes security at each stage of the supply security, particularly in a post-Brexit context. chain and find an indicator that appropriately The UK currently uses the EU’s N-1 measure. This reflects this across upstream, midstream and calculates whether or not a country can meet its 1- downstream (see Figure 1). in-20 peak demand minus its largest piece of import infrastructure. This measure was designed Figure 1: Illustrative gas security dashboard following the first Russia-Ukraine crisis and is intended to prevent supply disruptions such as this from posing a risk to European gas security. The paper ventured that, because it had to be agreed by all 28-member states, N-1 is “relatively easy” for many to meet and therefore lacks rigour. In addition, discussions at the Gas Security Forum suggest that N-1 focuses only on infrastructure capacity and not supply, it fails to take account of the time-lag for gas delivery, it does not measure diversity or spare capacity, it ignores the impact of multiple asset failures, and it does not consider the costs associated with ensuring greater security. When defining gas security, there are two main approaches considered by UKERC; “breadth” and

“depth”. Breadth looks at the energy trilemma, while depth looks at supply chain issues and Source: UKERC where specific threats may emerge. It states that UKERC concluded that BEIS’s current confidence the best way to judge the suitability of a new in gas security – based on an excess of supply approach is to use the government’s own infrastructure – gives at best a partial view and the definition of energy security from the 2012 energy combination of an aging infrastructure, and security review “ensuring that consumers have growing import dependence are likely to access to the energy services they need […] at “increasingly challenge the resilience and flexibility prices that avoid excessive volatility”. of the UK’s gas supply chain”. Current measures of energy security can be In an under-scrutinised area of the market, this grouped into four categories: is a valuable contribution to thinking in the • single indicator, such as N-1 context of a supply outlook that looks set to • combined indicators, such as in DECC’s 2012 grow more challenging. energy security strategy UKERC

Energy Spectrum 635 | 24/09/2018 | page 17

A 50% stake in the Hornsea 1 offshore windfarm has been sold by Ørsted, the Danish energy firm announced on 18 September. Global Infrastructure Partners (GIP) bought the share in the 1,218MW project off the coast of Yorkshire for around £4.46bn – to be paid between 2018 and 2020. Under construction since January, the 174-turbine development will become the world’s largest offshore windfarm when commissioned, which is currently estimated to be in 2020. Under the agreement, Ørsted will construct the development under a full-scope EPC contract, provide long-term operations and maintenance services from its Grimsby base and provide a route to market for the power generated. Analysts at RBC Capital reported in The Telegraph said that the “bumper price” was “probably around 33% above market expectations” and could provide a huge dividend boost for Ørsted shareholders. The article also highlighted previous warnings from the National Audit Office, which said that the energy company could reap “excessive” profits as a result of the government 15-year contract for difference, which agreed to pay Ørsted £140/MWh. Subsequent policy changes mean that the price for the mostly recently agreed offshore wind projects was less than £60 MWh. Ørsted’s Ole Kjems Sørensen said: “This is our third partnership with GIP, and we are delighted to have one of the world’s largest infrastructure funds as a partner.” He also described the deal as “a landmark transaction which will create substantial value for our shareholders and reduce single asset exposure”. Ørsted

Birmingham City Council could drop plans to establish its own energy supply company, according to the Birmingham Mail on 20 September. The newspaper said that, in a recent Cabinet meeting, councillors were concerned due to the level of risk involved in creating such a firm and the time similar companies have taken to turn a profit. Setting up the company had been a pre-election pledge of the council’s Labour administration in an effort to tackle “the evils of fuel poverty and rip-off tariffs”. According to the article, Grant Thornton had been critical of Birmingham City Council’s management of subsidiaries in an external audit in July. Council Leader Ian Ward said the council was looking into the examples of Bristol and Nottingham, whose council-owned energy companies made “multi-million pound losses” in the first few years, before coming to a final decision. No link

Distribution network operator (DNO) Northern Powergrid has announced that it is entering into partnership with systems provider Piclo to assess the viability of a national flexibility procurement platform. The partnership will work to identify flexible assets across the country. This, the company said in its announcement on 12 September, will be a less expensive alternative to longer-term reinforcement. It is part of Northern Powergrid’s transition from DNO to distribution system operator (DSO). Northern Powergrid said that an important part of this flexible approach is to explain the value and advantages of it to customers and the partnership with Piclo is essential to achieving this. Flexibility services could be provided to customers within the North East, Yorkshire and north Lincolnshire areas. Northern Powergrid’s new Commercial Development Manager, Andrew McKenna, said: “We have a lot of multi-site businesses on our patch and we still have a significant number of heavy industry players who we expect will be able to provide flexibility services. Over the course of the next few months we plan to ramp up meaningful engagement with potential flexibility providers and publish details of where we would like to procure future services on the Picloflex platform.” Northern Powergrid

Energy Spectrum 635 | 24/09/2018 | page 18

A new 20MW battery storage facility has opened in West Lothian. The Broxburn Energy Storage facility was built and managed by energy storage provider RES. It is designed to charge when the grid has excess capacity, exporting when demand hits its peak. As well as being the largest battery storage facility in Scotland, it is also the fastest, allowing for a response to demand in milliseconds. Scotland’s Minister for Trade, Investment and Innovation Ivan McKee welcomed the facility’s opening and said it would help Scotland achieve its decarbonisation targets. RES Managing Director Rachel Ruffle said: “Energy storage can play a large role in supporting the transition to a secure, low-carbon, low-cost energy system. The use of energy storage will allow for a greater penetration of renewables and can avoid costly grid upgrades – leading to cost benefits for all consumers.” RES

The Federation of Small Businesses (FSB) published a report on 11 September proposing that introducing “open banking” style measures to the energy market would allow customers to make more informed decisions about their energy service. The report Open Energy: Using Data to Create a Smarter, Cheaper and Fairer Energy Market, proposes that tariffs are standardised in machine-readable formats to allow for automated comparisons of energy tariffs, and that smart meter data is made available through an Application Programming Interface (API) to approved third parties. It would also allow energy customers to delegate contract switching powers to third party intermediaries. The report said that these reforms would encourage switching and could create innovative opportunities for data use, such as demand-management services that could help renewables integration. FSB National Chairman Mike Cherry said that Open Energy has the potential to transform the market as it “would help small businesses to be more energy efficient and empower them to make energy choices that are cleaner, greener and more sustainable.” FSB

Energy technology platform provider Origami Energy announced on Thursday 20 September that it will “intelligently connect” 19MW of battery assets to the energy market after signing a deal with Gore Street Energy (GSE) Storage Fund. Origami Energy will connect and control a 9MW behind the meter project in London and a 10MW front of the meter project in Essex. The company has also sold the rights to build and operate the battery projects to GSE. Origami Energy said that its technology would “provide real-time monitoring, control and operation of the batteries enabling access to multiple revenue streams for each asset, including the provision of grid services to help keep the electricity system in balance”. Origami Energy

A report, published by Innovate UK, has detailed how the UK economy could benefit from embracing low- and zero-emission vehicles. The Low and Zero Emission Vehicles Impact Review 2018 claimed that the profitability of low- and zero-emission vehicles could reach £1.9bn over the next decade, as well as creating 6,000 jobs over the same period and 11,000 jobs over 15 years. Innovate UK carried out a survey in 2018 of 56 organisations involved in low- and zero-emissions vehicles projects detailed in the report. It found that for every £1 invested in low and zero emission projects, between £6.70 and £8.40 will be gained in the next five to 10 years. Since 2007 Innovate UK has supported 303 low-emission vehicle innovation projects with £321mn of grant funding. Innovate UK

Energy Spectrum 635 | 24/09/2018 | page 19

Time of Use (ToU) tariffs are back on the energy People can’t meaningfully make savings without policy agenda, driven by the installation of smart knowing when their energy is the cheapest. meters across Great Britain. But they’re not new – More work needs to be done to help consumers we’ve had legacy ToU tariffs like economy 7, benefit from complex tariffs. Whether that’s economy 10 and dynamic teleswitching for through re-designing offers based on how decades. consumers behave or what they want, processes The experience of legacy ToU tariffs holds that prompt behavioural change or by giving important lessons for the energy industry: information regularly at relevant consumer touch something we at Citizens Advice think should be points and in mediums that work. considered right now in preparation for the ToU If left unchallenged, other problems with ToU tariffs of tomorrow. tariffs will persist Firstly, ToU tariffs are not going to work for Legacy ToU customers face additional barriers to everyone. switching. Some of these barriers will be Last year, we commissioned some research into addressed by the move to smart meters but others the experience of legacy ToU tariffs. It found fewer could continue. than 50% of customers were trying to use their For example, people may still struggle to use price electrical appliances during off-peak times. The comparison sites reliably, especially where they research also identified particular characteristics of are trying to estimate how much a ToU tariff might people who are less willing or able to shift their cost them over a year. demand, including people who had high incomes, households with children or households with more It’s going to be harder for consumers to make the people. right decisions when tariffs could change day to day. And very few people have the time to unravel In previous work carried out six years ago, Citizens such complex information. This means suppliers or Advice found that automation can help people third parties need to translate it in a simple and take advantage of ToU tariffs. But this research intuitive way. It won’t be easy but, if ToU tariffs are reveals reasons why, despite automation, people to become widespread, trialling multiple methods might still struggle to benefit. Almost two fifths will be necessary to avoid the market failing (39%) of respondents said they did not use customers. appliances at off-peak times because of practical reasons like safety or noise. We’d encourage the energy industry to use customer insights when developing their methods, The introduction of smart appliances will make it including asking, involving or collaborating with easier for people to benefit from a ToU tariff, but customers especially at the development and we can’t assume people will always use them testing stages. optimally - especially if there are practical barriers. Tariff designs need to reflect how people behave Today, we see government ready to step in when as well as what the system needs. energy markets don’t work. The new opportunities smart meters present offer industry a chance to Even motivated consumers will struggle without innovate and protect consumers early on. better support In the meantime, we’ll be writing to energy The research found that, while people understand suppliers asking them how they plan to meet they pay a different price at off-peak times, often Ofgem’s supplier-customer communication people could not say when those times were. Even principles, specifically for legacy ToU customers. those who said they knew were sometimes making We will also begin to gather best practice from assumptions, rather than knowing for sure. those suppliers offering smart ToU tariffs right now. Around half think they have received information Rajni Nair is Senior Policy Researcher in the about their off-peak tariff times, but after probing energy team at Citizens Advice. few can recall any detail of when and how this information was received. There’s an assumption it The research paper False Economy is available to must have happened rather than certainty. About download here. one in three say they haven’t received or ever asked for this information.

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On 14 September SSE surprised the market by expects a significant loss in EPM, together with a making a profit warning for its current 2018-19 significant fall in power generation, only being financial year. In fact, this was SSE’s second profit partially off-set by better results from gas warning in a little over eight weeks and the share production. price has reacted as would be expected by falling However, the impact of gas prices, which appears nearly 9% on the day. Worryingly for SSE, the to have caught out the Wholesale division so shares have continued to fall in subsequent badly, can also be seen it its Retail division. SSE is trading and fell as low as 1080p – a 12% fall since now expecting Retail to only break even in H1 the profits warning and an eight-year low for the compared to an operating profit of £70.3mn last shares. year, with energy supply actually loss making. In its first profit warning on 19 July SSE had Looking at the full year, SSE expects the reported that a mixture of weak wind conditions, Wholesale division to be hit by a £300mn loss in high gas prices, and the warm weather had hit Q1 EPM and for Energy supply’s operating profit to be operating profit by around £80mn against “significantly” lower than previous expectations management expectations. At the time SSE’s share partly due to the price cap being introduced. price shrugged off this warning as it appeared that most of the pressure was weather-related which The latest profits warning has significantly dented might be reversed later in the year – note that the SSE’s credibility amongst investors. SSE’s whole sharp fall in the SSE share price in late July was strategy in recent years has been to de-risk the due to the shares going ex-dividend. business by reducing its exposure to market prices whilst concentrating on subsidised renewables But the second profit warning announced last and regulated networks. It is therefore both ironic week showed that far from reversing, SSE’s poor and shocking that SSE should be so caught out by Q1 performance continued through to September. a move in the gas price and by warm/ low wind SSE also confirmed that this is unlikely to be weather conditions. recovered during the winter months. The trading statement covers the first five months of the The expected £300mn loss in the EPM business trading year (so the period ending 31 August) and unit is particularly alarming. This unit is meant to states that market conditions had negatively manage the energy price risk faced by SSE’s impacted operating profit by some £190mn various businesses. SSE attributed a £47mn compared to company expectations. operating profit to EPM last year so is now expecting a ~£350mn negative swing in EPM this SSE attributed just under half of the £190mn year! Something has clearly gone very wrong shortfall to higher gas prices and the remainder to within EPM. This unit is meant to manage and the weather. It now expects its total H1 (i.e. the six hedge risk, together with optimising SSE’s physical months to the end of September) operating profit portfolio of assets and trading positions. What it is to be “around half that delivered in H1 2017-18” not meant to do is take a big one away bet on the Given that last year’s H1 operating profit was gas price or the weather – which is precisely what £586mn, SSE is in effect expecting a negative it appears to have done. impact in H1 of ~£293m. The only good news for investors is that SSE has This suggests that the rate of impact of the re-iterated its dividend policy and in particular its adverse conditions has been accelerating. The first intention to pay 97.5p in 2018-19. This gives a profit warning covered the three-month period 1 stonking 8.8% dividend yield at the current share April to 30 June and amounted to £80mn. The price. So, if you believe SSE’s management that second covers just July and August and amounts their current woes are merely the result of an to an additional £110mn. And SSE’s guidance for unfortunate set of circumstances with the weather September in effect adds another £100mn to the and gas prices going against them, then the total hit. company’s dividend yield should prove highly The hit has been taken mainly in SSE’s Wholesale attractive. If you don’t, then the yield is merely a Division which covers power generation, gas sign that SSE’s dividend is unsustainable. production and Energy Portfolio Management Cornwall Insight Associate Peter Atherton is a (EPM). For the half year SSE now expects this well-known equity analyst having headed utility division to report an operating loss compared to a research at several eminent City institutions. £160mn profit in the same period last year. SSE

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All gas contracts rebounded after the previous week’s decline. Day-ahead gas gained 6.3% to 76.0p/th from the previous week, as forecasts of significantly lower temperatures towards the end of the week lifted prices as high as 76.3p/th on 20 September. October 18 gas jumped 6.2% to end the week at 75.0p/th and November 18 gas rose to 79.1p/th. Temperatures are forecast to remain above seasonal normal levels in the coming months, but gas prices have continued to find support from commodity markets and European prices. All seasonal gas contracts rose week-on-week, up 4.0% on average. Both winter 18 and summer 19 gas contracts increased 4.2% to 79.8p/th and 63.7pth respectively.

All power contracts also rose last week. Day-ahead power increased 5.2% to £70.0/MWh. Prices started the week down at £64.0/MWh amid forecasts of higher wind output. Despite prices falling to a one-month low of £61.0/MWh on 18 September, prices recovered towards the end of the week as wind generation was forecast to subside into this coming week. October 18 and November 18 power rose, gaining 4.3% and 3.1% to £70.1/MWh and £73.6/MWh respectively Week-on-week, seasonal contracts were up 2.1% on average. Winter 18 power ended the week at £73.7/MWh (up 3.2% from the previous week).

The weekly average Brent crude oil price rose for the fifth consecutive week, gaining 1.2% to average $79.1/bl. Prices have been supported by the upcoming US sanctions on Iran. The market has also been looking at the OPEC and non-OPEC coalition meeting in Algiers on 22-23 September, which aimed to discuss how the group will mitigate the losses from Iran. The meeting ended on Sunday with no formal recommendation for any additional supply boost. API 2 coal rose 0.9% to average $96.7/t. Demand has grown in Europe following the recent record highs in wholesale gas prices across the continent. Average EU ETS carbon prices fell for the first time in 13 weeks, dropping 8.7% to €21.2/t, down from €23.2/t the previous week.

Energy Spectrum 635 | 24/09/2018 | page 22