BEIS Consults on Potential Actions in the 2020S to Phase out the Use of High-Carbon Fossil Fuel Heating in Buildings ENERGY PERSPECTIVE 02 Located Off the Gas Grid

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BEIS Consults on Potential Actions in the 2020S to Phase out the Use of High-Carbon Fossil Fuel Heating in Buildings ENERGY PERSPECTIVE 02 Located Off the Gas Grid Tom Crisp Editor 01603 604421 [email protected] Monday 19/03 – BEIS consults on potential actions in the 2020s to phase out the use of high-carbon fossil fuel heating in buildings ENERGY PERSPECTIVE 02 located off the gas grid. Media reports indicate BEIS has rejected calls for an inquiry into the UK’s gas storage capacity following recent price Cliff-hanger: supplier new entry in volatile markets – Gareth spikes. Oil and Gas UK predicts that production from the UK Miller Continental Shelf will increase by 5% in 2018. POLICY 05 Tuesday 20/03 – Energy and Clean Growth Minister Claire Perry confirms the government will be undertaking a formal review of the Low-carbon levies to breach £12bn per annum in 2026 Capacity Market this year. The Offshore Wind Industry Council details BEIS consults on standards for the industry’s vision for 2030, including 30GW of new capacity and smart appliances £48bn of investment in UK infrastructure. The government loses two BEIS considers novel options to votes in the House of Lords over its plans for successor arrangements decarbonise off-grid heat Parliamentary update – Week 12 for Euratom post-Brexit. The former CEO of E.ON UK Tony Cocker is 2018 appointed as the new Chairman of the Energy Innovation Centre. REGULATION 11 Wednesday 21/03 – Appearing before a Lords select committee, Claire Perry indicates the UK will look to remain in the EU Emissions Ofgem considers default tariff cap options Trading System, at least until the end of the current phase in 2020. Ofgem’s annual report on the Renewables Obligation shows it issued INDUSTRY STRUCTURE 14 86.2mn ROCs in 2016-17 – lower than the total UK supplier obligation Triad demand falls to record of 100.7mn ROCs. National Grid’s Gas Future Operability Planning lows report finds that under its Consumer Power scenario there may be Industry awaits consultation on regional operability challenges in some areas in the period up to 2027. the future of ECO NatWest surpasses its sustainable energy funding target, announcing E.ON delivers positive 2017 results that it has provided £3.5bn of lending to UK renewable energy and Retail supplier costs fall as energy efficiency projects over the past three years. spring approaches Thursday 22/03 – National Grid confirms that that 2017-18 was the NUTWOOD 20 first time that all three triad peaks were below 50GW since the turn of Electricity markets in transition:– the century. Ofgem confirms that 38 of the 112 proposed changes to Cornwall Insight and Gowling the Capacity Market Rules will be taken forward. The International Swap shop: the RWE/E.ON deal Energy Agency finds that global energy demand grew by 2.1% in 2017. – Peter Atherton Friday 23/03 – Claire Perry indicates BEIS will hold another auction MARKETS 22 that brings forward onshore wind and solar. Defra launches £260mn of clean air funding, including monies for electric vehicle charging infrastructure. The Ministry of Housing, Communities and Local Government confirms that Sajid Javid has blocked the development of the Druridge Bay coal mine in Northumberland. Because of the Easter Break, the next edition of Energy Spectrum – ES612 – will issue on Monday 9 April Energy Spectrum 611 | 26/03/2018 | page 1 The volatility in wholesale the market, prices peaked to over 350p/th, the energy prices in the last highest price since 1999. month has led to a focus Short-term weather change is not the only factor on what this means for driving volatility, and more can be expected. In physical security of supply. power, we have declining levels of predictable, But, given wholesale and baseload plant and rising levels of variable low- retail market linkages, in carbon plant. Cash-out prices will sharpen further this Energy Perspective in November 2018 under P305. Whilst baseload we set out how recent prices are likely to remain unexciting, intra-day and Gareth Miller price events, and CEO seasonal volatility will be prevalent. Our wholesale 01603 604400 increased volatility power model clearly indicates much greater half- g.miller@cornwall- generally, could be hourly standard deviation, as shown at Figure 2. insight.com impacting new entrant domestic suppliers. Their model of customer Figure 2: Historic and forecast power volatility acquisition through cheap fixed prices, accompanied by low levels of trading for risk management, makes such suppliers particularly vulnerable to unexpected cost spikes. We argue that the recent events are a reminder to the regulator to resurrect earlier thinking on financial assurance tests for new entrant suppliers to guarantee market integrity and consumer trust. Death-zone Supplier failures have been infrequent, but since the end of the 1990s there have been several notable exits, with GB Energy and Future Energy the most recent. Most of these can be linked to Source: Cornwall Insight sudden rises in wholesale prices (see Figure 1). In gas, the closure of Rough storage will make us Figure 1: Correlation of supplier failure to day-ahead more liable to price swings to balance supply and wholesale prices demand, with increasing reliance necessary on imported supplies via pipelines and LNG. Network costs are also becoming more unpredictable. For example, analysis supporting the CMP287 change proposal shows that in 2017- 18 changes in TNUoS forecasting methods to account for embedded generation led to monthly forecast variation of ±20% in some zones for Non- Half Hourly demand tariffs. Naturally, this impacts directly on supplier tariff setting. Policy costs have in-built uncertainties too. The CfD levy will vary based on actual wholesale prices and generation loads. But there are risks around all of the main items of policy costs, and available Source: Cornwall Insight evidence suggests these are very challenging to Such conditions were evident during the cold predict for even the smaller suppliers who actively weather of the last month. Electricity within-day seek to price in these costs. wholesale prices rapidly climbed to in excess of £300/MWh over the evening peak on March 1. Overhang Imbalance prices reached £990/MWh. In the gas This greater price volatility is unfolding against a market, where the within-day Over the Counter radically changed retail supply landscape. There Market (OCM) is used predominantly to balance are now 72 active domestic suppliers. Rates of Energy Spectrum 611 | 26/03/2018 | page 2 f new entry have blossomed during a period of in normal market conditions. They also noted a benign wholesale power prices (see Figure 3). lack of forward “shaped” products in the peak Figure 3: New entry volumes and wholesale power prices demand period “blocks”. (£/MWh) In 2014 Ofgem introduced various measures under Secure and Promote (S&P), its flagship project to address wholesale electricity market liquidity. This obligated the Big Six, Drax and Engie to make available products to support greater liquidity in the wholesale power markets. According to data published by Ofgem in July 2017, S&P has marginally increased volumes of trades, and smaller suppliers have gained better access to longer-dated products. But, granular peak products (for “shape”) are still illiquid. Options for hedging still broadly fall between either trading through financial institutions or Source: Cornwall Insight consolidators in exchange for a fee or charges There is a striking proportion of the supply market over their business. This may deter new entrants less than two years old, and yet to truly establish from doing so. themselves. Our January 2018 domestic supplier In the gas market, the cost chain includes the market share survey shows that 52 suppliers shippers, some of which provide wholesale trading account for under 6% market share. services for suppliers for hedging and avoiding Hand-hold imbalance price. However, it is usual for a degree of premium to be added on the pass through of Many of new domestic suppliers have acquired an these costs. off-the-shelf pre-accredited licensed company that helps shorten entry timescales and reduce costs. Free-fall They have looked to grow scale by cutting margins Being unhedged through periods of market and offering the cheapest fixed tariffs. volatility can have unpalatable consequences. Our tariff research reveals that, in the last year, Figure 4: Electricity supplier costs of imbalance three out of the eight new dual fuel domestic suppliers led with fixed deals only, a further two £60,000 with fixed deals much lower than their parallel variable tariff, and only two have led with only £50,000 variable tariffs. LOW MEDIUM HIGH £40,000 Neither type of tariff is particularly responsive to sudden market changes, but variable tariffs do at £30,000 least offer a limited time-period of exposure to loss making given the 30 days-notice period to £20,000 customers before they are changed. Traverse £10,000 Passing through increases in costs after the fact in £0 tariffs is reactive. Hedging energy purchases is the 5% imbalance 20% imbalance 50% imbalance 100% imbalance best route to avoiding margin risk, at least for Source: Cornwall Insight wholesale energy costs, which on a dual-fuel basis An illustration of the financial impact is given in still account for c45% of the bill. However, new Figure 4. This is for an electricity supplier with entrant suppliers have not traditionally hedged 10,000 accounts. The horizontal lines are levels of long-term partly through choice, related to costs, daily revenue collected at different tariff levels - and partly through market access. 13.7p/kWh (low), 16p/kWh (medium) or 18.3p/kWh In their submissions during the CMA investigation (high), assuming average consumption for the day of the energy markets, First Utility highlighted a was 14kWh. These rates are from our tariff cost differential for trading between the larger database.
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