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

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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. suppliers and independents was £30 per customer

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The volume weighted average price of power varying the level of credit to volume, but there is imbalance on 1 March was around £320/MWh for a no validation of a new supplier’s overall financial single rate meter household. The dark blue bars in capability. Figure 4 illustrate the total cost of supply, including We have previously argued that there is a case for non-wholesale costs, at different levels of resource adequacy statements to be given by imbalance. In this example a supplier with 20% suppliers at entry. This could cover anticipated electricity imbalance (at £320/MWh) would have sources of working capital and approaches to been loss making in this period, with costs trading. These could be supplemented by on- exceeding revenue. And at the low tariff rate, even going reporting process of KPIs linked to working 5% imbalance would create losses if tariffs are set capital performance and profitability once a certain at the low-end. scale of customers is reached. In gas, we estimate that in a worst-case scenario, The idea of “whole-business” resource where a gas supplier had been fully exposed to assessments is not new. The Australian Energy the gas system buy-price on unhedged volumes, it Regulator oversees a scheme where entrants must would have been paying 500p/th. gain authorisation by demonstrating they can Altitude sickness financially support the business until it is profitable, and this includes meeting credit requirements. These costs are not felt instantaneously. There is typically a lag between the incidence of high In Texas energy retailers must pass a tangible net market prices and cash-calls on suppliers as worth test to enter the market and maintain liabilities are largely payable around a month after shareholder funds at a specified level. There are delivery. This all points to the prospect of large restrictions on dividends if it diminishes the bills needing to be settled around Easter. financial strength of the company. Notably, customer deposits above a threshold per customer If a supplier is not hedging adequately, one buffer must be kept in Escrow or in a ring-fenced against sudden demands on cash is to take account, or 100% secured by a Letter of Credit. payment from customers in advance, rather than The levels of the tests are very high, and not monthly in arrears. This practice is typical, but not necessarily desirable in GB, but they are indicative exclusive, to recent supplier entrants. of the elements of a coherent, workable approach. The consumer of a failed supplier has protection Fixed ropes against this, but at a wider cost. Where a supplier fails the Supplier of Last Resort process allows for After the failure of GB energy Ofgem Chief a claim to be made to cover the cost of credit Executive Dermot Nolan said in February 2017 that balances, moving this to be recovered via a levy “we will review our approach to awarding supply on distributors. This socialises the costs, subject to licences, the financial requirements on suppliers, Ofgem approval on a case-by-case basis. and how we monitor supplier performance later this year”, but nothing has happened since. Without significant supplier failure, the costs are not material (less than £1 a customer for GB We do not wish failure on anyone in the market, Energy). But the principle of all consumers bearing quite the opposite. But given the obvious stresses costs for the working capital practices of a failed changes in the business sits uncomfortably. wholesale market are likely Belay to create for new In the GB energy markets, there is no entry business comprehensive assessment of the business or models in supply, financing strategy of a new entrant supplier. measures which Instead financial assurance is disparately reduce the demonstrated by posting credit under a range of prospects of schemes and codes. Consistency in approach is such events already lacking, and complexity is high. occurring can only be a good In networks corporate credit strength and good thing for a payment history is favoured over cash or letters of healthy, credit. In balancing and policy schemes under sustainable and Electricity Market Reform, cash and letters of credit trusted market. are the only option. Growth is accounted for by

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Dan Starman, Senior Consultant, [email protected]

Electricity bill subsidies to promote the forecasts levy costs to peak at £8.7bn in 2023-24 deployment of low-carbon technologies look set (in 2011-12 prices). This excludes any plant to to rise to over £12bn per annum in the middle of commission under the additional £557mn available the next decade, from around £7bn currently, for less established technologies and equates to according to Cornwall Insight research to be £10.2bn in 2017-18 money. published this week. While Cornwall Insight broadly agrees with this Last week we covered the energy-lite Spring assessment (see Figure 1), there are likely to be Statement, which was published alongside a significant additional costs in further years, reduced forecast of environmental levies from the particularly for Hinkley Point C and offshore wind OBR. The OBR’s basket of green levies confusingly signing contracts in the next CfD auction. Hinkley includes the Capacity Market, which is intentionally alone is expected to add in excess of £1bn per technology agnostic and supports coal and gas- annum to the annual costs of low-carbon levies. fired generation, and the Warm Homes Discount, a The government’s decision to publish a forecast of rebate and broader support to those in or at risk of costs to 2024-25 fails to show the longer-term fuel poverty. These are alongside charges one profile, where Cornwall Insight’s modelling might expect to be classed as low-carbon levies – suggests the potential for costs in excess of £12bn the Renewable Obligation (RO), Contracts-for- per annum in 2026-27 (in 2017-18 prices?). This Difference (CfDs) and Feed-in Tariffs (FiTs) – that forecast is subject to sensitivities and assumptions, fall within the current Levy Control Framework of which the largest is the CfD’s sensitivity to the (LCF) spending envelope. wholesale price against which subsidy is provided. The government’s last full forecast of LCF- For example, a reduction of £5/MWh in the constrained costs was issued in the Control for reference price for intermittent technologies would Low Carbon Levies, published alongside the have the impact of increasing annual CfD support Autumn Budget 2017. It set out that until the total for a 900MW offshore wind farm by at least burden of existing low-carbon costs falls in real £13.5mn. terms, there will be no further low-carbon costs This is before the impact of escalating real CfD added to the electricity bill. This new control levy costs, should BEIS have under-estimated the extends to 2025 and rules out any further spend impact on wholesale power prices that could occur except for the £557mn already committed for less from price cannibalisation driven by concentrated established technologies under the CfD or when wind generation. aggregate levies are forecast to fall or reduce energy bills in the round. The presence and level of the control, alongside the forecast trajectory of aggregate subsidy costs, Following a forecast over-spend of around £1bn suggests no further subsidy available for the per annum under the existing LCF control, BEIS remainder of the next decade. Figure 1: Forecast low-carbon subsidies (2017-18 money) Read the linked Insight Paper for more information on how low-carbon costs are forecast to change, and the likely impact of the control on the future deployment of renewables. We will cover the issue of wholesale price cannibalisation in greater depth in a further insight paper in coming weeks. What our analysis demonstrates unambiguously is that political concern over rising energy bills is set to be a long-term concern, regardless of price caps being implemented. LCF Insight Paper HM Treasury - Control for Low Carbon Levies

Source: BEIS, the OBR, and Cornwall Insight analysis

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James Cunningham, Writer, [email protected]

On 16 March BEIS opened a consultation on the they could be best put into practice. It is also setting of standards for smart appliances to working with industry to identify and, if necessary, facilitate the growth of demand-side response. develop technical standards for smart appliances. The consultation follows up the publication of the Figure 1: Smart device benefit cycle government’s and Ofgem’s joint Smart System and Flexibility Plan in July 2017, which identified the role that smart homes and business could play in the provision of demand-side response (DSR) services. BEIS added that smart appliances are key to enabling consumers to provide these services. For the purposes of the consultation, BEIS said it was using the term “smart appliance” to mean any that is connected and able to modulate its electricity consumption in response to signals, such as price. To maximise the benefits of DSR, BEIS said it was first focusing on the appliances that offer the greatest opportunity for DSR - those which Source: BEIS consume high levels of electricity and are most The government has put forward four potential suited to being used flexibly. The government said methods for the setting of standards. It explained it currently considered these to include cold and that its preferred option was the transition from wet appliances, heating, ventilation, air voluntary to mandatory standards for smart conditioning and battery storage. appliances in the 2020s, with a review of the While there are a number of benefits from smart implementation of mandatory standards for all appliances, the consultation document identified relevant appliances to be smart from then on. that there are currently a number of barriers to This option, BEIS said, would result in a net benefit their deployment. There are also potential risks of between £73mn and £119mn, with a best that need to be addressed – particularly relating to estimate of £112mn. The department added that data protection and cyber-security. this transitional approach would raise awareness The government said it was “keen to ensure that and trust among consumers, which would in turn consumer protection provisions are robust”, enable a significant uptake in smart appliances adding that it has set out proposals to mandate whilst also minimising familiarisation and transition standards for smart appliances. BEIS plans to work costs. with industry to develop and set these standards The review of the implementation of mandatory and, when parliamentary time allows, to apply for standards would also act as a signal for industry to powers to mandate these standards for certain promote smart products, whilst also allowing time smart appliances: for cost-reductions to come into effect, consumer • Those which are communications-enabled and behaviour change to occur and smart tariffs/ able to modulate their electricity consumption aggregation services to develop. in response to signals, and The government added that this was a “low • Those which offer the greatest opportunity for regrets” option, as it allows government to adapt DSR. the strategy as new information comes to light. The government said that it will make a decision It is only through the setting of such standards on whether to extend these standards to apply to that domestic consumers will be able to all appliances “in due course”. In the first instance, meaningfully contribute to flexibility, so this it is seeking stakeholder views on the principles on workstream is very necessary. which it should base these standards and on how BEIS

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Tom Crisp, Editor, [email protected]

The department launched a consultation on 19 a move to implement regulations that phase-out March, outlining the scope of the government’s new installations of high-carbon fossil fuel heating. commitment to phase-out the installation of high- The timing and nature of any regulations that carbon fossil fuel heating in new and existing phase-out such installations of high-carbon fossil buildings off the gas grid during the 2020s, and fuel heating systems. seeking views on options on how to achieve this. If the market is able to drive progress, then The call for evidence forms part of BEIS’s ongoing regulation may be “light touch”, to ensure work to deliver the Clean Growth Strategy. standards are maintained and capture late movers. The government highlighted that it was imperative The consultation highlighted that a wide range of that the heating transition process be driven housing stock is off the gas grid, with around 1.1mn though collaboration with industry. It is seen as oil-heated households in GB and 62,000 non- “essential” for installers, suppliers and domestic buildings heated with oil or LPG. These manufacturers in the coal and oil sectors to show are particularly concentrated in rural areas such as leadership. central Wales, the South West and northern Scotland (see Figure 1). The department identified BEIS is also keen to gain a better understanding of that phasing out high-carbon fossil fuel heating will the costs and effectiveness of hybrid systems in be a challenge, but that it is also an opportunity for off-gas grid properties. The department has been new jobs, new skills, and investment in innovation. carrying out analysis of the off-grid housing stock using current available evidence and data from the Moreover, options pursued to decarbonise English Household Survey and the devolved buildings off the gas grid may pave the way for equivalents. future decarbonisation of the wider building stock. The analysis aims to understand the approximate The government stated that it is unclear which proportion of homes in off-gas grid areas that are combinations of technology, and at what scale, will suitable for heat pumps, and in which heat pumps work best in decarbonising heat. BEIS are can provide sufficient levels of comfort. In some therefore carrying out work to consolidate and circumstances the installation of a heat pump improve the evidence base on different would need to happen alongside improvements to approaches, with a view to publishing a report on the building fabric, but not in every case. BEIS this work in summer 2018. The aim is to design and intends to publish the outcomes of this analysis “in implement a clear framework that will follow on due course.” from the Figure 1: Non-gas map Renewable There is also a role identified for network Heat companies, distribution network operators and gas Incentive distributions networks (DNOs and GDNs), in the (RHI), once it delivery of clean heating systems. It is seen as closes to sensible to involve DNOs in the transition as this is new likely to involve electric heating, and deployment applicants. of electric heating is likely to have associated The RHI is network costs. currently Responses are invited by 11 June. funded to 2021. While the off-gas grid issue here is important, As well as it is more revealing that BEIS sees results in stimulating this sphere as acting as a potential pathway to the broader heat decarbonisation. The focus on installation of novel approaches will probably bring into low-carbon clearer focus the need for supporting heating, the regulatory structures. call for evidence BEIS Source: BEIS also signals

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Tom Crisp, Editor, [email protected]

Energy and Clean Growth Minister Claire Perry A Delegated Legislation Committee debated the gave evidence to the House of Lords EU Energy Draft Electricity Supplier Payments (Amendment) and Environment Sub-Committee on 21 March, Regulations 2018 on 19 March. The draft focusing on what steps the government is taking to regulations would amend existing regulations in ensure that Brexit does not undermine the UK’s order to secure sufficient funding for the Low climate ambitions. More on this next issue. Carbon Contracts Company (LCCC) and the Electricity Settlements Company (ESC) to enable The Public Accounts Committee held an evidence the continued smooth operation of the Capacity session on 21 March on the Renewable Heat Market and the Contracts for Difference scheme. Incentive in Great Britain, hearing from witnesses Shadow Energy Minister Alan Whitehead including BEIS Permanent Secretary Alex Chisholm highlighted the rise in costs for the LCCC and ESC and Ofgem Chief Executive Dermot Nolan (again, from £1,374,000 in 2015 to £6,241,000 in 2017. more next time). Perry responded that there has been a At Report Stage in the House of Lords on 20 “phenomenal increase in what we are actually March, the government was defeated on several asking the company to do. In 2016-17, we asked it amendments to the Nuclear Safeguards Bill. Lib to, essentially, look at 0.6GW of capacity. That will Dem, Labour and crossbench peers joined forces increase to 55GW during the course of this year, to add provisions that would ensure that the UK with the number of providers going up from 46 to would not withdraw from the European nuclear 447.” The Statutory Instrument was approved and agreement, Euratom, until a replacement deal is in moves to the Lords. place. They also require the government to provide regular updates to Parliament on installing In a Written Answer on solar power, published on these replacement arrangements. Ex-Labour 19 March, Energy and Clean Growth Minister Claire cabinet minister Lord Hutton, Chair of the Nuclear Perry confirmed that BEIS is “considering options Industry Association, said remaining in Euratom for small-scale low-carbon generation beyond should be kept alive as a "back-up" option in case 2019” and a consultation on the Feed-in Tariff other arrangements cannot be negotiated in time. scheme will be published “in due course.” However, BEIS Minister Lord Henley said the UK's The House of Commons Library published a exit from Euratom was a "done deal" since the briefing on 19 March on the Fifth Carbon Budget. triggering of the formal two-year proceedings for This week on 27 March the Business, Energy and exiting the EU in March 2017 had also started the Industrial Strategy Committee will hold a further process of leaving Euratom. The Bill as amended evidence session as part of its inquiry into Electric moves to Third Reading on 27 March. Vehicles, hearing from representatives from In a debate on Welsh Affairs in the Commons on 19 Ofgem, National grid and the Energy Networks March, Welsh Secretary Alun Cairns was asked Association Low Carbon Technologies Working when the government would make a decision on Group. support for the Swansea Tidal Lagoon. Cairns Links underlined above. responded: “The price of renewable energy has plummeted over that period and the numbers from the tidal lagoon company have also changed, so perhaps the delay will prove to bring better value Our latest Chart of the Week for money for the taxpayer.” PAR for the course? is available The Northern Ireland (Regional Rates and Energy) to download here. Bill was passed through the Commons on 21 March as emergency legislation. The Bill amends the Last week’s blogs included New Renewable Heat Incentive Scheme Regulations survey shows TPIs at risk of (Northern Ireland) 2012 ensuring that the present being left behind on technology. cost controls, and the legal basis for payments, can continue for the 2018-19 financial year.

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Energy and Clean Growth Minister Claire Perry has confirmed that a formal review of the Capacity Market will be conducted in 2018. Speaking at an industry event on 20 March, Perry said it was right to assess the policy after its first five years of operation – as the Energy Act 2013 requires the government to do. The minister suggested the review would look at “key questions”, including: • the penalties regime • contract lengths • alignment with the ambitions set out in the government's Industrial Strategy • whether or not to open up the auction process to new technologies such as renewables, and • how the system could better work in tandem with battery storage and demand balancing services. A BEIS spokesperson cited in various media reports added it was "only right that we should be considering the function" of the Capacity Market. “The whole point of the Dieter Helm review was to stimulate discussion among the sector. It's been very effective in doing so and we're interested in all the ideas that are out there on how the market can evolve,” the BEIS spokesperson explained. Perry indicated the review may report back in 2019. No link

The UK government is confident that it has sufficient flexibility in gas supplies despite the looming closure of the nation’s largest gas storage site – the Centrica-operated Rough facility. Speaking at the BEIS Gas Security of Supply workshop in London on 16 March, officials from the department stated that, while gas storage had an important role to play, such assets should be provided by the market rather than by recipients of state support. The workshop came less than a month after the cold weather front caused by the “Beast from The East”, which resulted in warnings of gas supply shortages and a price spike that took the prompt gas market to its highest level in a decade. Attended by approximately 100 delegates, the workshop saw BEIS and Ofgem challenged on the closure of Rough and a range of other issues relating to the flow of gas to the UK market. The cold spell seen at the start of March was the first significant test of the UK market since Centrica announced that it would be closing Rough. The facility previously represented approximately 70% of the nation’s gas storage capacity. A representative from BEIS stated that there were “tried and tested emergency plans in place” for gas supplies, and that market signals had ensured that deliveries flowed to the UK on 1 March and the days thereafter. “Short-term price spikes are necessary to drive a significant (market) response,” they continued, concluding that the nation’s gas system, “is well-placed to be secure and robust over the next two decades.” The prospect of government backing for storage – something rejected in 2013 for Centrica’s planned Baird offshore site – was rejected on the grounds that such backing was inefficient and risked having adverse consequences on other forms of investment. However, BEIS officials stressed that the situation remained the subject of ongoing monitoring. No link

SSE CEO Alistair Phillips-Davies has warned that an energy price cap represents a “significant market intervention” and could undermine the progress made in the energy sector, discouraging investments to the detriment of customers. Discussing the government’s cap on 14 March, Phillips-Davies argued in a blog that, if an absolute price cap is to be introduced, then it is critical that steps are taken to “mitigate the potential impact on the competitive market”. As part of this, he said that suppliers should be given the ability to appeal the level of the price cap

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to the Competition and Markets Authority (CMA). Phillips-Davies assured this was not a strategy to delay implementation; it was about protecting customers from unintended consequences. The SSE CEO also called for greater clarity around the conditions under which a price cap would be removed – particularly if there is a genuine desire to encourage and preserve competition. He explained that this would allow suppliers to consider how to target their efforts to improve outcomes for customers during the interim period. Phillips-Davies said: “This is a significant moment for the future of the energy supply market in Britain. Getting the right answer to these questions is critical; firstly, to help minimise the serious potential for unintended consequences on the competitive market, secondly, to ensure customers derive the maximum benefit from the government’s transformative initiatives and supplier innovation and, thirdly, to ensure suppliers can continue to operate sustainably and that the GB energy supply sector remains attractive for investors.” SSE

Research by the Green Alliance has warned that Britain is “falling behind” on the global transition towards electric vehicles (EVs). The How the UK can Lead the Electric Vehicle Revolution report, published on 19 March, said that, while government policy has helped to almost double the overall EV stock in the UK on a yearly basis since 2012, in 2017 Germany still overtook the UK on EV sales for the first time. The think tank therefore recommended that if the government wants to secure the UK’s position as a world leader in the low-emission and electric vehicle industry, its upcoming “Road to Zero” strategy offers a “prime opportunity to shift gear.” The Green Alliance explained that a strong UK market will be critical in growing EV manufacturing and, to support this, it recommended that the government should bring forward its ban on the sale of new fossil- fuelled vehicles from the current 2040 deadline to 2030. However, it added that “targets alone will not be enough”. To address this, it proposed that fleet vehicles, which account for over half of new vehicle sales in the UK, should be seen as a “top priority”. Tax incentives, emissions standards, production targets and new charging infrastructure were all noted as being necessary to support large private EV fleets. As well as suggesting how EV uptake could be increased, the report highlighted benefits that this would bring. It explained that EVs are already cheaper than conventional vehicles, on a whole life basis, and are expected to reach upfront cost-parity in 2022, but that a more rapid adoption would see costs fall more quickly. It was also highlighted that bringing forward the ban on petrol and diesel vehicles to 2030 would reduce the current gap in meeting the UK’s carbon budgets by between 60%-85%. Finally, the think tank noted that the UK currently has a £5bn trade deficit in conventional vehicles. It argued that “going slow on EVs” would only prolong this deficit, but that getting ahead on EVs offered the prospect of the UK becoming a net vehicle exporter. Green Alliance

The Scottish government announced on 16 March that its Climate Challenge Fund (CCF) has now provided over £100mn in funding and has helped to support more than 1,000 projects over the past decade. The announcement came after First Minister Nicola Sturgeon revealed the latest grants under the scheme, which totalled £15.3mn. These latest projects took the total funding awarded through the CCF to £101mn across 1,097 sites. The government also revealed that 110 recipients will receive funding through the CCF between 2018 and 2020. The funding will be provided to projects tackling a range of issues, including fuel poverty. Sturgeon said: “The Climate Challenge Fund enables communities to take ownership and action at a grassroots level, with projects that deliver tangible community and social benefits while helping address climate change.” Scottish government

Energy Spectrum 611 | 26/03/2018 | page 10

Emma Bill, Regulatory Analyst, [email protected]

On 12 March, Ofgem issued its first in a series of costs associated with meeting environmental and working papers on the high-level design of the social obligations. In terms of establishing government’s default tariff cap. Four approaches operating costs, Ofgem acknowledges that to do are under consideration on how to set the level this efficiently would require benchmarking across of the cap, including a new approach using a suppliers. Finally, it would also expect this bottom-up cost assessment. approach to incorporate an allowance for network costs, other direct costs which could include those The Domestic Gas and Electricity (Tariff Cap) Bill, from the DCC and Xoserve, and an allowance for a currently progressing through Parliament, will return on capital. impose a requirement on Ofgem to design and implement a price cap for domestic customers on The regulator identified three possible approaches a Standard Variable Tariff or other default tariff. to updating the level of the default tariff cap that it will consider (Figure 1). The assumption behind When setting the cap, Ofgem must have regard to: option a) is that rivalry in the competitive market • Incentives for suppliers to improve efficiency segment would ensure that movements in tariffs over time reflect trends in costs where these are • Effective competition for domestic supply efficiently controlled. In using historic cost contracts information from different groups of companies, • Maintaining customer incentives to switch, and option b) could provide an accurate guide to observed trends in costs. • Financeability of supplier activities. Figure 1: Options for updating the allowance for efficient costs Ofgem set out its intention to maintain the number of caps applied to existing safeguard tariffs. This means there will be different caps for gas, standard electricity and Economy 7 electricity across all 14 price control regions to reflect the varying cost of serving of different groups of customers. The regulator is also considering payment method differentials, including where customers have smart meters. Source: Ofgem According to the paper, four options are under consideration for estimating an efficient level of However, Ofgem noted that, assuming this costs to set the initial level of the government’s approach will result in a lower level of the cap default tariff cap: being set in future periods, suppliers may be less likely to reduce those costs that are within their • A “basket of market tariffs” approach control if they know that this will result in a lower level of the cap being set in future periods. • The existing safeguard tariff benchmark The type of approach referred to as option c) is • An updated competitive reference price, and used under the existing safeguard tariffs, which are • A bottom-up cost assessment. updated with reference to an index of wholesale prices, forecasts of policy costs, and inflation. Ofgem will consider responses to its December Under option c), supplier incentives affecting consultation in relation to the former two options. market behaviour are expected to be unaffected. Alternatively, a bottom-up approach requires Ofgem invites views by 26 March. defined categories of costs to be included in the level of the cap. If this approach were to be used This is an important consultation on a key to set the level of the cap, Ofgem said it would design issue. But why the rush? A two-week expect the allowance for wholesale costs to be set response window is insufficient. using a similar method to that of the existing safeguard tariffs and updated every six months. In Ofgem addition, it would allow suppliers to pass through

Energy Spectrum 611 | 26/03/2018 | page 11

Ofgem held a workshop on the future of the supply market arrangements in London on 15 March, where it highlighted the considerable advances in technology and data over the past 20 years. In light of the pace of this change, the key question it sought to address was whether the current energy market structure was fit for purpose in future, and what this would mean for consumer outcomes. The event was attended by a wide range of industry participants, with the focus on generating thoughts on how the market works for both today’s consumer and the future consumer. Key discussion points of the day included a high-level overview of industry responses to the regulator’s call for evidence, which it issued towards the end of last year. Key barriers identified included: • the complexity and volume of codes • the complexity of the licence • the challenges of access to data, • lack of transparency for costs and risks, and • and the unclear definition of future generation and supply. A number of alternative strawmen models were shared to encourage discussion and to suggest that it would be possible to completely erase the current model and start again. The potential benefits for what could be achieved through an alternative included: • making the market work better for engaged consumers • the importance of vulnerable and disengaged customers also securing a good deal • making it easy for consumers to become engaged • allowing new entrants and business models to be able to compete without disadvantages, and • making it easier for transactions which support optimisation. In terms of next steps, Ofgem suggested that it would be looking at around five to 10 years before implementation. This would tie in with the smart meter roll-out, the end of price controls, and the end of the price cap. It is expected that the regulator will set out its envisaged way forward in late spring/ early summer. No link

Elexon issued a consultation on 20 March on a proposal raised by the BSC Panel to establish a “regulatory sandbox” for the Balancing and Settlement Code. The modification, P362, would enable BSC Parties to be derogated against BSC obligations in order to trial pre-competitive and innovative products and services. It comes after Ofgem launched its Innovation Link in December 2016, which included a process for trialling new initiatives through derogations to regulations, but which did not extend to the BSC. The Panel when it discussed the proposal on 9 November 2017 considered that the absence of this facility in the BSC is hindering the development and trialling of innovations. The panel said market participants that have not acceded to the BSC arrangements want the ability to test new ways of working to establish whether it is economically viable and efficient for them to become a full part of the BSC framework. Elexon has already been approached by companies interested in electric vehicle charging solutions, peer to peer trading platforms and local community energy schemes to discuss how their projects interact with and could be accommodated by the BSC. Under the proposal, Elexon would receive applications via Ofgem, and the Panel would then make a recommendation on whether to approve or reject the derogation. Ofgem would make a decision and, if approved, synchronise derogations across any impacted codes and licences. Non-BSC Parties would need to accede to the BSC and complete relevant market entry processes to secure derogations. Responses are requested by 12 April and the workgroup is due to report back to the Panel in May. Elexon

Energy Spectrum 611 | 26/03/2018 | page 12

Following its December consultation, the regulator decided on 21 March to revise most targets for supply interruptions under the RIIO-GD1 price control, which particularly included the rejection of an argument by Cadent that it faced particular difficulties forecasting interruptions for Multiple Occupancy Buildings (MOBs) following the Grenfell Tower fire. Ofgem had been concerned that the gas distribution networks’ (GDNs’) reliability targets on loss of supply omitted certain types of interruptions or contained other errors, and were therefore likely to be unachievable. It therefore conducted a consultation as part of its RIIO mid-period review on amendments to the targets to ensure they are realistic and challenging. Cadent raised a particular concern that when operating in London it faced difficulties due to the higher numbers of listed buildings and conservation areas, as well as the need to obtain permissions from multiple building owners. This made it harder to forecast unplanned interruptions for MOBs, and it was also facing uncertainties following the Grenfell disaster. However, Ofgem noted that SGN had not cited similar issues for its operations in South London and took the view that consumers in MOBs should be treated like any others. Cadent proposed updated targets for unplanned interruptions based on 2017-18 data, and Ofgem accepted these for the East of England region, and the number of disruptions in North London. However, it rejected the proposal to increase North London’s disruption duration target as not being sufficiently challenging. All targets for SGN, Cadent and Northern gas networks have been amended up or down so they are now more realistic. Ofgem said that most were more challenging than company performance to date, and those that were not were still more challenging than those that applied during the 2007-13 price control. No changes were proposed for Wales & West Utilities as it is on track to achieve its original targets, and Ofgem was satisfied that these were suitably challenging. Ofgem

Ofgem, together with Irish regulator the Commission for Regulation of Utilities, has requested amendments to the Irish-UK transmission system operators’ (TSOs’) proposal for the common capacity calculation methodology. This is a methodology required under the capacity allocation and congestion management network code, which sets out the calculation of cross-zonal capacity allocation and congestion management in the day- ahead and intra-day markets to maximise the cross-zonal capacity allocation on interconnectors. Issuing the joint formal opinion and covering letters on 16 and 20 March respectively, the regulators said that the methodology is insufficiently described and that it does not provide a satisfactory level of clarity and precision on its different steps. It said there were elements of the methodology that allow too much discretion to TSOs in defining the input, definition or parameters in a number of key areas. These include the justification for initiating a calculation of the day-ahead calculation process, the process for TSOs to apply operational adjustments and the definition of external constraints. National Grid, Moyle Interconnector and the Eirgrid Interconnector Designated Activity are required to make the necessary changes and clarifications and to resubmit the proposal within two months. Ofgem CRU

Congratulations to Sarah Cox, winner of the Eco Hero award at the Norwich and Norfolk eco-awards, sponsored by Pixie Energy. Find out more about the awards here.

Energy Spectrum 611 | 26/03/2018 | page 13

Dan Starman, Senior Consultant, [email protected]

National Grid published triad data for the winter Figure 1: Weekly maximum transmission system demand 2017-18 season on 22 March. It marks the first 51 time since Triads were measured on a GB basis in 2005 that all three triad peaks have fallen 50 below the 50GW mark. 49 National Grid’s data revealed the greatest triad 48 peak occurred on 11 December at 48.6GW (5- 47 5:30pm), followed by 47.1GW on 26 February (6- 6:30pm) and 47.1GW on 5 February (5:30-6pm). 46

The average (47.6GW) is the lowest seen since demand GW 45 1994 (45.2GW). 44 Two of the periods fall under the previous record 43 minimum triad demand figure for this century of 47.6GW on 25 November 2015. The results also 42 mark the first time that two triad dates have fallen

in February. The 26 February peak also marks only

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08/01/2018 26/02/2018 settlement period 37 (6-6.30pm), the first being on Week commencing 05/02/2018 15 February 2016. This year’s latest triad date is TSD (I014) NGET forecast TSD also the latest triad on record, falling only 2 days ND (I014) Triad 1 before the end of the triad season at the end of Triad 2 Triad 3 February. This was likely due to the beginnings of the so-called “Beast from the East” polar vortex, Source: National Grid, Winter Outlook Report driving temperatures down below seasonal norms. Subsequently demand users of the electricity All three triads occurred on a Monday – the first network seek to reduce or eliminate consumption time this has happened in the history of the during these periods to minimise transmission scheme. This firmly places Monday as the most charge exposure. National Grid expects peak likely day of the week to have a triad – four of the customer demand management to be circa 2GW. past five years’ half-hours of peak system demand The methodology has come under fire in recent have all occurred on a Monday. years due to its limited duration and concentration National Grid published its Winter Outlook Report of cost over three half-hours. Proponents would on 12 October 2017, revealing its view of security argue that it is the driver of the largest demand- of supply for electricity and gas for winter 2017-18. side response in the market. However, this is also It forecast peak transmission system demand of starting to drive peak demand outside of 50.7GW and a peak national demand (excluding November – February as firms using triad 1GW of baseload interconnector exports and avoidance are not incentivised to do so outside 600MW of station demand) of 49.1GW. It also this period. For the first time last winter we saw forecast peak transmission system demand, based what would have been a triad peak in March. As on seasonal normal weather, to occur between 11 Figure 1 shows, this would have occurred this year and 18 December 2017. This was incredibly with a peak of 48.3GW on 1 March and three prescient given peak triad demand fell on 11 further peaks of over 47.1GW by 6 March, December just 500MW lower than forecast. according to National Grid I014 National Demand data. The triad methodology, which has been in place since 1990 for charging transmission costs onto This winter highlights the increasingly half-hourly settled customers, applies a £/kW tariff unpredictable triad periods, and greater peak to users’ demand over the three peak half hours of demand response from users. The effects of system demand. These must occur November to this response halting on 1 March is also February and be separated by a minimum of ten evident. clear days. Triad demand data Winter Outlook Report

Energy Spectrum 611 | 26/03/2018 | page 14

Rowan Hazell, Regulatory Analyst, [email protected]

With BEIS’s consultation on the third phase of A range of other proposals were put forward by the Energy Company Obligation (ECO) due to be Jones, which she expected to be included in the published shortly, we are starting to build a consultation. She said that she believed the picture of what might be in store for the future of consultation would set out plans for the scheme to the scheme, which is due to start in October. have a 100% focus on fuel poverty, and that there would be no Carbon Emissions Reduction Speaking at the House of Commons discussion on Obligation (CERO). Jones noted that the solid wall energy efficiency and the Clean Growth Strategy minimum requirement would be expected to fall held on 8 March, Minister for Energy and Clean from 21,000 to 17,000 to reflect this. Growth Claire Perry said that the consultation will consider how to pivot ECO to focus on fuel She also said that BEIS is planning to increase the poverty, while also making it a conduit for more number of ECO eligible customers to 6.5mn, up innovation. Perry has previously stated that the from current levels of 4.5mn, and that benefits will consultation will include proposals to move the still be the route to eligibility but BEIS will look to scheme to a 100% focus on vulnerable and low extend the range used. income households. Also suggested was plans to deliver a minimum Perry said that the next phase of ECO should be number of first time central heating installations, targeted at the people who need it most, noting the raising of the cap on the number of gas boilers that local authorities know who these customers that can be installed annually under the scheme are. This backs up speculation seen elsewhere from 25,000 to 30,000-35,000, and that there that the consultation will consider an increase to could be the potential to have boilers replaced the proportion of measures that can be delivered outside of the cap If an insulation measure is also through Flexible Eligibility, which currently allows installed. Jones also said that she suspects that 10% of Home Heating Cost Reduction Obligation there will be no funding for oil boilers. (HHCRO) funding to be delivered through local Further suggestions for inclusion in the authorities. Supplier uptake for the mechanism is consultation put forward by Jones included an shown in Figure 1. obligation to deliver 15% of measures in rural Figure 1: Supplier uptake of Flexible Eligibility areas, the continuation of measures delivery to social housing premises with an Energy Performance Certificate with an energy efficiency rating of E, F, or G, and the potential introduction of smaller suppliers in the obligation. We understand that several government departments were involved given the wider vulnerability agenda. It’s likely the new scheme will Source: Ofgem commence with an initial six-month obligation period, before returning to the usual 12-month blocks. This means the threshold test at 31 Widening the Flexible Eligibility mechanism was December will still apply with the obligation period suggested by Ofgem in its response to BEIS’s commencing the following April. The threshold consultation on building a market for energy level at which suppliers are mandated to efficiency. Rachel Jones, the chair of the West participate in the scheme is also an important Midlands Association of Local Energy Officers decision. (ALEO) also identified the mechanism at the NEA’s West Midland’s Fuel Poverty Forum on 26 We will be holding a work-shop on ECO and BEIS’s February. She said that she suspects that the plans on 3 May. See our website here for details. ECO3 consultation will include a proposal to While there is much speculation, it appears extend the amount of HHCRO measures that can that not even BEIS have certainty on the plans. be delivered through Flexible Eligibility to increase from 10% to 25%. Jones also said that she expects We will reserve judgement until the final the mechanism to remain voluntary for suppliers. proposals are published. Parliament

Energy Spectrum 611 | 26/03/2018 | page 15

Tom Goswell, Senior Analyst, [email protected]

E.ON published its 2017 annual report on 13 E.ON’s renewables business grew in 2017, with March, reporting steady financial results as the fully consolidated capacity up 13% to 4.7GW. company embarks on its “largest growth Output was higher due to favourable wind initiative in more than ten years” after striking an conditions, particularly in the UK, Sweden, asset deal with RWE. Germany and Poland. Power sales rose 9% to 14.9TWh, with a knock-on effect on the financials – E.ON CEO Johannes Teyssen heralded a revenue grew in this segment by 18% to €1.6bn, “successful financial year”, with earnings at the and adjusted EBIT rose by 6% to €454mn. upper end of forecasts (adjusted earnings before interest and taxes, EBIT, was down 1% on 2016 at Figure 1: Results summary €3.1bn), and debt reduction exceeding expectations. 2017 2016 Change Teyssen claimed the extensive asset swap deal UK customer 6.8 7.0 -0.2 struck with RWE was “one of the most creative accounts (mn) transactions in the history of German industry”, and UK power sales that it will make E.ON more attractive to 34.8 37.4 -2.6 shareholders. (TWh) UK gas sales The update struck an optimistic tone, with the 42.5 48.4 -5.9 company’s share price tracking 39% above the (TWh) baseline for the previous year. This compared to Renewables 14.9 13.7 1.2 10% growth for European utilities and 9% growth power sales (TWh) for the broader European stock market. Fully consolidated Analysts at Bernstein and Bank of America Merrill renewable 4.72 4.18 0.54 Lynch, while focusing on the RWE deal, welcomed capacity (GW) the “strong” set of results. Moving forwards, E.ON will focus on its three core The company said it was impacted during the year businesses – Energy Networks, Renewable and by customer losses, especially focused around the Customer Solutions. In the third of these, the UK and Germany, but had seen customer number company wants to become the “partner of choice” growth across all regions since mid-2017. across the municipal, public, private and residential Over the year, UK customer numbers fell from sectors. It would achieve this through customer 7.0mn to 6.8mn, whilst power and gas sales were service and digitisation, but also through new down 11% and 13% respectively in residential and products and services in energy efficiency, SME supply. The lower gas sales were partly distributed generation and storage, and weather-driven, but mostly caused by lower sustainable transport. Indeed, E.ON’s solar and customer numbers. In industry and commerce storage business in Germany grew by over 200% (I&C), this effect was more muted, with power sales in 2017. down 3% and gas sales down 10%. While the group results for E.ON were positive On a financial basis, revenue in the UK Customer and well-received by analysts, the UK results Solutions segment fell 10% to €7.2bn, blamed on were less promising as customer losses the impact of regulatory interventions, declining continued across the residential and business customer numbers, unfavourable weather and supply units. Understandably, much of the currency conversion effects. attention in the GB market on E.ON presently Adjusted EBIT fell 32% to €250mn as a result of focuses on the RWE tie-up (including its stake the above, in combination with higher policy in Innogy), and what effect this could have on obligation costs. The company said the outlook for the proposed merger between SSE and 2018 was lower in UK Customer Solutions, npower. “primarily because of the intervention of the CMA and restructuring expenditures”. E.ON

Energy Spectrum 611 | 26/03/2018 | page 16

Charlotte Farmer, Analyst, [email protected]

The latest monthly Cornwall Insight Index of generation and supply perfectly, which is unlikely Domestic Energy Supply Costs was published to be the case. last week, revealing an easing in cost pressures For some of the smaller suppliers purchasing over on suppliers. short time-frames, the week ending 2 March would Updated every month, the index tracks have represented a difficult period. Averaged over wholesale, network and policy costs faced by the week day-ahead baseload power rose 19.5% suppliers of electricity and of gas, baselined to a week on week, while day-ahead gas rose 37%. The value of 1,000 points in January 2012. within day prices spiked even more significantly (covered in-depth in this week’s Energy Both the electricity- and gas-related indices Perspective on p.2). decreased in February, principally due to easing wholesale prices. The electricity index fell by 45 In addition to decreasing wholesale costs, the points to 1,400 and the gas index fell by the same electricity index also fell as a result of lower amount to 993 points. network costs. Lower balancing charges and residual imbalance charges resulted in a four-point The index uses month-ahead wholesale prices, fall in the electricity index. and as such does not show the record price spikes seen at the end of February on the day-ahead and With the arrival of spring and longer daylight hours, intra-day markets as the period of extreme cold we would expect to see a stable or falling supplier weather arrived in the UK. cost outlook next month on the wholesale side. The indices will also begin to incorporate the third- As the index began looking at a new month-ahead party costs for the new charging year, where policy contract, the prices were lower with the prospect costs are likely to have a bullish influence on the of spring around the corner, with milder index. A new regime of network charges looks temperatures and increased output from solar likely to have a mixed influence on the index, with generation assets expected. This was the principal electricity transmission charges falling for demand downward force on the electricity index and was users in 2018-19. the exclusive driver on the gas side. While the index shows that supplier costs fell in We update the index of domestic supply costs February for both electricity and gas, this is an during the third week of each month. For more assumed cost scenario, and the experience will details, please contact c.farmer@cornwall- have varied considerably for suppliers depending insight.com or 01603 959880. For on their purchasing and hedging strategies. It also accompanying charts and figures, visit our assumes a supplier has balanced contracted website. Figure 1: Trends in components of Cornwall Insight index of domestic supply costs: standard user 1,700

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Energy Spectrum 611 | 26/03/2018 | page 17

The offshore wind industry has committed to work with the government on a transformative Sector Deal, which by 2030 could deliver substantial additional jobs and investment. RenewableUK pointed out that the sector deal, coupled with the government’s Clean Growth Strategy, means the industry would more than double its capacity from 13GW deployed or contracted currently, to 30GW by 2030. This would deliver: • £48bn of investment in UK infrastructure • a five-fold increase in export value, to £2.6bn a year • 27,000 skilled jobs across the UK (up from 11,000 today) mainly in coastal areas, and • a £2.4bn/ year reduction in total electricity system costs, reducing costs to consumers. The sector’s engagement with the government on the deal will be led by The Baroness Brown of Cambridge, who is currently the UK’s Low Carbon Business Ambassador and Vice-Chair of the Committee on Climate Change. Benj Sykes, Co-Chair of the Offshore Wind Industry Council, commented: “Our proposals show how the innovative offshore wind industry can drive economic growth throughout the UK, attracting billions in investment, driving growth in coastal communities which need new opportunities, whilst generating affordable and clean energy.” Renewable UK

Trade association Oil and Gas UK published its Business Outlook 2018 report on 20 March, which outlined key performance indicators in the sector and assessed future prospects. The report highlighted that 2017-18 has been an important period for both oil and gas markets, with both reaching new highs. The report charted commodities movements over the last year. Brent oil showed relative stability and increased confidence in 2017. The last quarter of 2017 saw the Brent spot price rise nearly $20/bbl from the start of the year to over $70/bbl in January 2018, the first time it has reached this level in three years. This high was driven by high compliance with OPEC production quotas and the gradual draw-down of oil inventories impacting the supply side. The world’s largest economies also exceeded expectations for real GDP growth, causing demand for oil to grow by 1.6mn-bl/day. The National Balancing Point (NBP) gas market saw a 30% rise in the average day-ahead price in 2017, compared to 2016, reaching 45p/th. European gas contracts are still tied to oil prices, resulting in a mirrored boost in gains in the second half of 2017. Prices further exceeded expectations in December to reach almost 60p/th for day-ahead prices, caused by reduced UK gas storage capabilities and unexpected outages across Europe, including Austria’s Baumgarten gas hub and the closure of the Forties Pipeline System. Within-day prices peaked at a 12-year high in February 2018 at 300p/th due to the colder than average temperatures leading to unexpected supply disruptions across the UK. Looking forwards, the report predicted that production from the UK Continental Shelf (UKCS) will increase by 5% in 2018. Production is expected to increase from 598mn barrels of oil equivalent (mboe) to between 620 and 640mboe. Oil and Gas UK explained that a combination of improvements in production efficiency and new fields coming online are seeing production increase following 14 consecutive years of decline. Between 12 and 16 oil and gas developments could be granted approval this year – unlocking investment of around £5bn. Oil and Gas UK

One of the largest planned stand-alone battery-based electricity storage facilities in the UK has received planning consent in Swindon. Public Power Solutions (PPS) – wholly-owned by Swindon Borough Council – intends to develop the 50MW battery on the former Mannington Depot, currently a brownfield site. The battery will benefit from low grid connection costs, with connection via the nearby substation at Toothill. The storage site will provide balancing services to National Grid to help accommodate the growing

Energy Spectrum 611 | 26/03/2018 | page 18

proportion of renewable generation across the UK. The company said it will make a significant contribution to the future flexibility of the UK’s energy system and help reduce costs for consumers. Swindon Borough Council’s Cabinet Member for Sustainability, Councillor Toby Elliott, commented: “The fact [that] this will be one of the largest battery storage schemes in the UK speaks volumes for our ambition in Swindon. It also shows our willingness to look for innovative ways in which to utilise our assets, generating an income for the Council to protect vital services.” PPS

On 15 March, Statoil announced it will be rebranding to Equinor to reflect a change in strategy in favour of low-carbon investments. The new name will be proposed to shareholders in a resolution to the company’s Annual General Meeting on 15 May. In a statement, the Norwegian government, as majority shareholder in the company confirmed its support for the proposal and will vote in favour of the resolution. Statoil’s strategy sets clear principles for the development of a distinct, diverse and competitive portfolio, and being one of the world’s most carbon- efficient producers of oil and gas the company plans to develop its low-carbon portfolio further. The company announced its aim to invest 15-20% of total capex in new energy solutions by 2030, to build a material industrial position within profitable renewable energy. Chair of the Statoil Board, Jon Erik Reinhardsen, commented: “The world is changing, and so is Statoil. The biggest transition our modern-day energy systems have ever seen is underway, and we aim to be at the forefront of this development. The name Equinor reflects ongoing changes and supports the always safe, high value and low-carbon strategy we outlined last year”. Reidar Gjærum, Senior Vice President for Corporate Communication in Statoil, added: “Once formally approved on 15 May, we will start the roll-out of the new name and brand. Equinor is a name that is forward- looking, and it creates a strong platform for engagement and dialogue with a broad set of stakeholders”. Statoil

Energy Spectrum 611 | 26/03/2018 | page 19

On 6 March, Cornwall Insight co-hosted an event current model of selling units of energy with limited with international law firm Gowling WLG where potential for value added services. Instead, these we looked back at recent developments and markets are shifting towards providing consumers potential future changes in the GB electricity with required services, and towards opportunities market. for intermediaries to sell services to network operators to manage systems. The event coincided with the launch of our joint White Paper – Electricity Markets in Transition. Reed acknowledged that there had been some technological improvements in the supply markets, This paper discusses how technology is shaping but significant change would only be possible transition in the electricity sector across different once smart meters and accompanying changes to elements of the value chain. It focuses separately settlement processes were in place. on the generation, network, and retail sectors. One of the key barriers to more novel supply These links, set out in the 1990s, are becoming arrangements is the ‘supplier hub’ arrangement less distinct as technology and new practices that places the licensed entity at the core of the begin to dissolve the once hard and fast barriers market. As the role of the supplier has ballooned between them. since market opening, any innovator looking to Generating uncertainty trial a technology and/ or alternative retail approach (e.g. domestic storage, local markets, Policy has successfully led to investment in largely peer-to-peer trading) has to either become a low-carbon generation capacity, much of it supplier or find a willing supplier to partner with. installed at the distribution network level. More generation capacity is required over the coming Reed suggested that the regulatory options to years as larger thermal plants close. address retail market (perceived or actual) failings are nearly exhausted. Initiatives to provide At the event, Cornwall Insight CEO Gareth Miller consumers with more information, restrictions on showed the scale of change on the system and our number of tariffs, and now price caps begs the view on thermal plant retirements, new build question whether tinkering with the retail model interconnector capacity and the requirement for should give way to a root and branch review of the greater flexibility to manage the system. regulatory architecture. Ofgem’s call for evidence Miller added that in an environment of limited new on the future of supply arrangements is a welcome subsidy and the splintering of revenues across workstream and a step in the right direction. different activities (wholesale, balancing services Driving change and embedded benefits where available) developers are actively exploring the viability of Project Director of Electric Vehicles National Grid alternative deployment models. Graeme Cooper set out his thoughts on how EVs are disrupting not just the car industry and digital These include co-location of generation and services but also the electricity sector. The move storage, “hybrid” models that combine generation, to EVs is undermining the automotive industry’s IP storage and demand within a micro-grid, and as principal components (e.g. engines and Virtual Power Plant arrangements. However, the gearboxes) are replaced by third-party batteries. latter is not possible within current market arrangements except for limited innovation Cooper spoke from personal experience on how projects with some derogations. this change is happening now and on how EV owners often become more engaged in electricity The changing market landscape has made consumption and services, such as considering bankability of new projects that look to stack home generation and time of use tariffs. revenues difficult, but as funders become more familiar with diverse revenue schemes they can We thank Derek Goodban and his colleagues at successfully harness the opportunity they offer. Gowlings WLG for the opportunity to jointly author this paper and speak at the event. Future of supply If you wish to read more about our views on the Cornwall Insight Head of Research Ed Reed future of the electricity market, the full report is discussed how supply markets may be on the cusp available here. of fundamental change, moving away from the

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On 12 March E.ON and RWE announced a mega Innogy in December. The share price performance (and highly complex) asset swap. This deal suggests that at least initially investors believe that continues the wide-spread restructuring of this solves more problems for RWE than for E.ON. European utility sector that has been under way for As mentioned above, this deal is the culmination of several years now. So why have E.ON and RWE several years of retrenchment and restructuring by announced this deal and what does it tell us about the two German utilities. In the 2000s RWE and the future of the sector? E.ON were flush with surplus capital generated by The major elements are as follows: their near duopoly in their home market and both companies utilised this to go on a huge spending E.ON will acquire RWE’s 76.8% stake in Innogy • spree. RWE and E.ON both eagerly embraced the at €40/ share (including the value of Innogy’s then fashionable notion of the pan-European 2017 and 2018 dividend) conglomerate utility company. The belief was that • RWE will acquire a 16.7% equity stake in E.ON a small number of utility companies would come to via a capital increase. In return RWE will dominate the market by spreading their operations acquire all of Innogy’s and most of E.ON’s across geographies and technologies. It was renewable assets plus E.ON’s minority stakes believed that regulatory and political risk would be in two nuclear power plants and its gas storage lowered by operating in multiple jurisdictions, and assets, and that technological risk would also be reduced by involvement in all aspects of energy delivery. • RWE will pay E.ON €1.5bn in cash. However, the financial crash and subsequent For both E.ON and RWE, this deal will (hopefully) events exposed the conglomerate utility business complete the restructuring began several years model to be seriously flawed. First, to deliver the ago and included the 2016 de-mergers when both model RWE and E.ON took on excess gearing, companies split themselves in two with RWE which was exposed as soon as prices and demand creating Innogy and E.ON spinning off Uniper. fell in the aftermath of the financial crises. Second, Clearly, however, that earlier restructuring did not international diversity did little to protect against go far enough. political and regulatory risk in Germany. Third, the This new deal is designed to give greater focus utility business is an inherently local business and and specialisation to their business going forward. it has been proven time and again that they are very difficult to manage across borders. Should the deal go through, E.ON will emerge with two business units, Networks and Customer So, the emphasis is now for utility companies to Solutions. It will have power and gas networks de-clutter their strategies and become more across seven countries with a combined focussed. Most companies have moved away from Regulatory Asset Base (RAB) of around €37bn. The the conglomerate model in favour of focussing on Customer Solutions unit will have around 50mn just one or two of the four key market segments – customer accounts across 13 countries including networks, economically regulated generation the UK. (mainly renewables), market exposed generation (thermal and nuclear), and customers. RWE on the other hand will emerge from this deal focused on conventional and renewable power So will the new strategies and corporate structures generation, and what they term security of supply work for E.ON and RWE in the long term? Of services such as gas storage. RWE claims that it course only time will tell. But it had been clear for will become Europe’s third largest owner of some time that the previous restructuring had not renewable assets and that 60% of its generation gone far enough and further moves were required. portfolio will be low-carbon. Ultimately what matters is the quality of the management teams and their ability to allocate The proposed deal has been well received by the and use capital successfully. Both companies now market in the case of RWE, whose share price is up have clear strategies and, assuming the deal 9% since the announcement. E.ON’s shares also completes, the right mix of assets to deliver those rose initially although they have now fallen back to strategies. So failure from here is likely to be down their pre-announcement levels. This partly reflects to management alone. the fact that ahead of the deal’s announcement RWE’s shares had been weak, not helped by the Equity analyst Peter Atherton is a Cornwall profits warning and CEO departure announced by Insight Associate.

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Near-term gas contracts experienced mixed movements last week. Week-on-week day-ahead gas dropped 20.0% to 53.6p/th, amid forecasts that temperatures will increase to levels around the seasonal norm. The price declines also reflect a pick-up in LNG deliveries scheduled for Britain this month.

All seasonal gas contracts experienced gains, rising 1.1% on average, following oil prices upwards. Summer 18 gas climbed 1.0% to 45.4p/th and the winter 18 contract lifted 0.6% to 52.8p/th.

Near-term baseload power contracts were mixed last week. Day-ahead power dropped 18.4% to £51.8/MWh, down from £63.5/MWh the previous week. The contract was pushed lower by a significant drop in the day-ahead gas price and forecasts of higher wind generation week-on-week. Most seasonal baseload power prices increased last week, climbing 1.5% on average. Summer 18 power gained 1.9% to £46.3/MWh and the winter 18 contract jumped 2.0% to £51.9/MWh.

Brent crude oil prices climbed 4.3% to average $67.8/bl, rising to a six-week high of $69.3/bl on 22 March. US EIA data showing that US crude inventories fell by 2.6mn barrels in the week ending 16 March, as well as news that OPEC and non-OPEC members achieved 138% compliance with agreed output cuts in February, helped push prices higher. API 2 coal prices slipped 2.0% to average $74.6/t. Coal prices weakened amid decreased demand from the Asian/Pacific market and a weakening euro against the dollar. EU ETS carbon prices gained 6.4% to average €11.9/t last week. On 22 March, prices reached €12.8/t, their highest level since September 2011. Carbon prices jumped due to a range of reasons, including Minister of State for Energy and Clean Growth, Claire Perry confirming the UK wishes to stay in the EU ETS scheme until at least 2020.

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