Tom Crisp Editor 01603 604421 [email protected]

Monday 25/09 – At the Labour Party Conference Shadow Chancellor John McDonnell confirms that a Labour government would bring ENERGY PERSPECTIVE 02 utilities, including energy, back into public control. The Energy Networks Association launches the first consultation on its Electricity Help the aged (and fuel poor) – the next social policy obligations Network Innovation Strategy. National Grid data reveals that in the – Robert Buckley three months to 22 September almost 52% of UK electricity generation was from low-carbon sources POLICY 05 Tuesday 26/09 – Anesco opens its 10MW Clayhill solar farm, with a Labour Conference focuses on renationalisation 6MW energy storage facility – the first subsidy-free solar farm in the Energy UK sets out industry UK. Following a year-long in-depth study, the CMA announces that it is priorities for Helm review setting clear rules for all online price comparison tools. BEIS Policy Exchange sets out roadmap to boost business announces that the government is providing £5mn of funding to energy efficiency support new exploration in the North Sea. Finnish power utility Fortum IPPR calls for simplification of officially launches a takeover bid for Uniper. energy bills Wednesday 27/09 – Research by Frontier Economics recommends REGULATION 12 comprehensive Buildings Energy Infrastructure Programme to achieve National Grid presents ideas on significant energy savings in UK homes. National Energy Action says future ESO incentives the report shows it is possible to tackle decarbonisation and fuel poverty simultaneously, provided efforts to improve domestic energy INDUSTRY STRUCTURE 15 efficiency are dramatically enhanced. The Renewable Energy Imperial finds solar and storage Association calls on the government to develop a charging could be cost-competitive by infrastructure strategy. 2030 Academic warns UK oil and gas Thursday 28/09 – BEIS statistics show coal’s share of generation fell reserves may expire in a decade from 5.9% in Q2 2016 to a record low of 2.1% in Q2 2017. The Welsh NUTWOOD 18 government sets a target of generating 70% of its electricity consumption from renewable sources by 2030. The EU Commission MCPD: the music stops but the dance continues – Gareth Miller approves a €222mn investment package to support the transition to a more sustainable and low-carbon future. Vattenfall’s £365mn Pen y MARKETS 20 Cymoedd windfarm, located between Neath and Aberdare, officially opens. Friday 29/09 – A letter calling on Prime Minister Theresa May to implement her election pledge to bring in a price cap on standard variable tariffs to domestic customers is published, having been signed by 192 MPs. In response, SSE says it believes in competition not caps, and any intervention should be simple to administer, time- limited, and maintain the principles of a competitive energy market. Media reports suggest RBC Capital is leading the sale of flexgen provider UK Power Reserve.

Funding energy over 2mn eligible customers, at a cost of around efficiency and other £320mn per year. benefits for Beyond ECO2t the government has confirmed that vulnerable a supplier obligation will run until 2021-22 at least. consumers through As for the WHD, it has said it will also extend this to domestic energy bills 2012-22, maintaining current levels of expenditure has been an in real terms. Both schemes were introduced by important part of government, but are administered by Ofgem. Robert Buckley policy for more than Director 20 years now. The A Little soul 01603 604404 first energy efficiency [email protected] With a cost of around £1bn to be recovered schemes annually, the issue of supplier coverage of the administered through suppliers were put in place schemes remains an important one. Reflecting this, in 1994, before full competition came to the energy there has long been a carve-out for small market. They have become progressively more suppliers, reflecting their lack of scale and (usually) important in terms of both their scale and their unrepresentative customer bases. impact on the market-place. ECO has now to be paid by suppliers with more As current schemes approach maturity, active than 250,000 domestic “accounts” (technically a thought is being given by officials to their dual fuel household counts as two accounts, so replacement and consultations are promised early this is 125,000 customers), and selling more than in 2018. In this, the first of two Energy 0.4TWh of electricity and 2.0TWh of gas. The perspective’s, we consider the existing support liability date (the point at which suppliers notify baseline. A key question is which suppliers should their qualifying customers via Ofgem to BEIS) is 31 be subject to the obligations without loading December, with ECO compliance taking effect disproportionate compliance costs onto them, from the following 1 April. For WHD the dates are thereby harming competition. the same with just the account numbers threshold Everybody’s problem of 250,000 applying. Presently there are two important schemes. The energy efficiency scheme threshold was increased from 50,000 customers at the start of The Energy Company Obligation (ECO) is directed ECO (itself a successor to various previous at improving energy efficiency. Starting in 2013, the schemes, such as EEC and CERT, that had the second iteration of the scheme was introduced in same threshold). Once a supplier pushes through 2015, but was recently extended by 18 months to the threshold, it has to catch up with the obligation end September 2018 (ECO2t) as a transition period through a “taper” mechanism. Under this there is a to a new obligation. The new obligation, we are two for-one obligation for each new customer it told, will have even greater focus on fuel poverty. takes on, until it reaches the full obligation at At present BEIS estimates that households 500,000 accounts. receiving ECO improvements from suppliers will save up to £300 on their heating bill per year. It Figure 1: Indicative costs of energy policy schemes expected that by the end of March 2017 some 2011-12 to 2017-18 1.9mn homes would be impacted with installation 100 of over 2.1mn qualifying measures. The annual cost 80 is presently to the order of £600mn or 60 £30/customer (see Figure 1). 40 20 The Warm Homes Discount (WHD) has since April 0 2011 formalised previous voluntary arrangements where suppliers offered savings on bills to nominal) vulnerable consumers. The current regulations took the scheme into a sixth year, which will close CERT/ECO Warm homes discount

at end March 2018. Its focus is a £140 discount to Cost/dual fuel household ( £

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The existence of the threshold and then the taper At the time of ECO design, there were eight has a very important influence on supplier growth competitors to the Big Six in the domestic market strategies. Many newer entrants approaching the serving 165,000 energy accounts (or 0.3% of the threshold put a brake on growth at least market). With hindsight its design at the turn of the temporarily. But once over it, there is an incentive current decade was pretty much concurrent with to dash for customer acquisition. In a market the high water mark of the integrated increasingly dominated by fixed price offers (which generator/supplier “Big Six” business model. restrict the ability to recover new costs), the judgements over pricing have had to be fine. Figure 2: Energy accounts served by SaMS 2012-2017 Different class 10,000

Back in 2011, DECC stated that the scheme costs 8,000 weighed more heavily on small suppliers unable to spread the fixed costs of compliance across a 6,000 large customer base, and therefore they could not 4,000

exploit economies of scale. Indeed, on the raising Accounts (k) of the threshold for ECO, officials stated the move 2,000 would increase competition, “which would bring down prices and encourage innovation, benefitting 0 energy consumers”. For the WHD, it was also asserted by officials that SaMS accounts outside ECO SaMS accounts with ECO the costs of compliance would be significantly higher for smaller suppliers. In particular, the Big The period since ECO was implemented has of Six had been involved in pilots to identify and course seem a proliferation of new suppliers into market the scheme to eligible customers, and they the domestic energy supply market. Since 2011 the generally enjoyed better access. share of the domestic energy accounts held by the Nevertheless, the issue of what might be small and medium energy suppliers (SaMS) has considered proportionate costs of these support surged to nearly a fifth. Our 31 July market share schemes has long been debated among suppliers. assessments put 8.7mn domestic energy accounts This debate came to a head in late 2013 after the outside the six largest suppliers. Indeed there are costs arising from tougher targets for ECO were over 50 suppliers now competing with the Big Six, blamed by the large suppliers as a contributor to and we assess nine of these as having crossed the 1 the standard variable tariff increases they levied threshold at end December 2016. Those SaMS that autumn. At the time some suppliers alleged that have an ECO now serve just over 6.0mn that the obligations cost upwards of £100/customer domestic energy accounts (see Figure 2). But the costs of ECO were slashed in 2014-15 as a But many smaller suppliers are still not subject to result of reduced obligation levels, and targets the obligation. Indeed some 30% of the customers were extended by two years to March 2017 to of the SaMS – or 5% of the total domestic market – allow more time to deliver required carbon are supplied by companies who are not subject to savings, in so doing lowering costs by 40% or so. the obligations. At face value from official statements, the cost of Something changed the two schemes ECO and WHD have been closer to £30-40/customer. The ECO was established at least in part to stimulate a market in home energy efficiency So the costs of compliance are still significant, but installation. Indeed, mobilising six scale players all much less distorting than in the recent past. with extensive reach to targeted types of customer Misshapes was an important element in the considering the ECO design, with its three component elements In considering the way forward, officials will be (CERO, CSCO, and HHCRO). To broaden the taking account of a rapidly changing retail market. market into a market where the larger suppliers had established relationships with mass market

1 They were First Utility, Utility Warehouse, Ovo Energy, Energy and Economy Energy. Greenstar may well have Utilita, Extra Energy, Co-operative Energy, Spark, Flow become the tenth.

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solution providers, a unique auction mechanism was also put in place by DECC for ECO. This allowed bids to be placed for units of carbon saving in the various subsectors. But activity on the ECO auctions collapsed after the Autumn 2013 scheme extension. No trades have been recorded through the auctions since February 2017, and there has been a success rate of less than 1% of offers accepted in the 66 auctions that have taken place since start 2015 (137 out of 23,747 lots offered over this period). In practical terms this paucity of trading means that smaller obligated suppliers still struggle to access customers and services to comply with ECO. At the same time, on the basis that the few trades that have been undertaken recently through the cost and therefore competitive disadvantage? auctions, we estimate compliance can be secured Would there be wider competitive effects in the through this method for about £15 per dual fuel market from the scaling back of the threshold? household. Presumably larger suppliers are able to The answer to these questions would still seem to secure delivery for lower than this, or they would be “no” (the lack of scale is a real cost issue) and otherwise be using the platform. And probably “yes” (there is a competitive detriment) because of this, newly obligated suppliers simply respectively. In a truly competitive market such buy in solutions from the established suppliers distortions are clearly very undesirable. rather than provide them themselves. Countdown If the obligation threshold is to be changed, it needs to be accompanied by other changes that Any decision to change the thresholds needs to be level the playing field, especially given the poor taken bearing in mind competitive and cost effects. showing of the auctions. For ECO at least, the cost advantage for those not subject to them is clearly much less than it was. The fear But with over 2mn accounts served by suppliers As we recently reported (ES586) speakers at who do not have social obligations, it is hard to National Energy Action (NEA)’s 2017 conference justify maintenance of the current thresholds. earlier last month questioned the level of the At the same time the ECO auctions don’t work in thresholds. NEA’s Jenny Saunders argued that the their current form, and we believe wider supplier thresholds should be reduced back down to coverage would need to be accompanied by some 50,000 customers. Lawrence Slade, CEO of form of buy-out mechanism. Indeed recycling buy- Energy UK, also suggested there was a need to out fees set at a slight premium to weighted review which suppliers should offer help to auction clearing prices to accredited third parties, vulnerable customers, while E.ON UK suggested such as local authorities, to install measures feels that 20% more assistance could be delivered if the to us to be a very fertile avenue to explore further. ECO obligation extended to all suppliers. Community involvement in energy markets is now But at least two challenges exist for policymakers. accepted, and technology is enabling new ways to The first comes back to the economies of scale meet challenges in the market, including for issue and whether that extra spend would be energy efficiency and vulnerable consumers. So deployed efficiently. Also do small suppliers have connecting smaller suppliers funding with LAs in the skills and buying power to ensure they secure this way would appear to have merit. good value for the consumer who eventually picks The funding of social policy obligations is just up the cost? one aspect of fairness in energy markets that we The second challenge flows from this, which is to will be considering in the coming weeks as we meet the same level of obligation as their peers build up to our annual conference on retail would smaller players be placed at a systematic energy markets on 22 November.

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Tom Crisp, Editor, [email protected]

Labour’s Party Conference was held in Brighton implement its manifesto commitment to bring the from 24-27 September. While a wide range of National Grid back into public ownership. energy issues were under discussion, the party’s The subject of E.ON’s commitment to move commitment to renationalise the sector was the towards ending the use of Standard Variable dominant theme. Tariffs drew scrutiny at an Energy UK fringe on 26 In his Leader’s Speech on 27 September, Jeremy September. Shadow Energy and Climate Change Corbyn highlighted the water sector as an example Minister Alan Whitehead discussed the recent of an industry where “profits are handed out in announcement, saying the small print indicated dividends to shareholders while the infrastructure STVs would be ended on the basis of customers crumbles the companies pay little or nothing in getting a smart meter and then being on a series tax”. To address this, he committed to “take back of rolling fixed term tariffs. He felt the our utilities into public ownership to put them at announcement was “by no means the end of the the service of our people and our economy and STV, by no means an overall solution to the prices stop the public being ripped off.” Corbyn also issue and by no means a device that protected committed to creating a £250bn National vulnerable customers” but acknowledged it as a Transformation Fund, “building the homes people first step. need and the new transport, energy and digital Turning to the domestic price cap, Whitehead said infrastructure our country needs.” there was now a stand-off between Ofgem and the Detail on the renationalisation plans was also government over who should be responsible for given by Shadow Chancellor John McDonnell on implementing a price cap. Shadow Minister for 25 September. He said that building an economy Consumer Protections Gill Furniss echoed this. She for the many “also means bringing ownership and added putting the onus on consumers to switch control of the utilities and key services into the was morally questionable and harmed vulnerable hands of people who use and work in them. Rail, people, who lacked the understanding or digital water, energy, Royal Mail- we’re taking them skills to find a new deal. back.”. Whitehead also called last week for local council In an interview on the Today programme the same companies to be able to take control of the energy day, McDonnell said that a Labour government system. At another fringe meeting organised by might not pay shareholders the full market value EON, he set out further details of the manifesto for companies they want to take back into public commitment to set up council-owned utilities. He ownership, if the companies are seen as having said: “We want to see cities in control of a whole exploited customers since privatisation. range of activities: generation, transmission and supply. The vision is cities and communities Shadow Business, Energy and Industrial Strategy running their own energy generation as far as Secretary Rebecca Long-Bailey started in her possible in local areas.” speech on 26 September that there needed to be “radical action” on climate change. To achieve this, Former Shadow Business Secretary Clive Lewis she said a Labour government would ensure that also argued last week that Labour needed to do 60% of energy comes from low-carbon or more to get involved in the renewable energy renewable sources by 2030, specifically sector. At an event organised by the Labour supporting projects like the Swansea tidal lagoon Energy Forum on the 26th, he stated that the party and Moorside nuclear plant. should encourage unions and activism in the renewable industries as good for business. But he Speaking at a Centrica fringe event the same day, accused trade unions involved in the nuclear Long-Bailey added that she hoped the party could industry of becoming “a voice for big business”. “do a lot more” and go beyond the 60% target. She noted: “The government is rolling back on At least for the Labour Party, interventionism is most of its climate change commitments and they the new normal. What is noticeable here, haven’t even produced their clean growth plan. though, is that manifesto promises are being We need to act and fast.” At the same event, she turned into a more coherent policy framework. also said the party was exploring how to Labour

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James Cunningham, Writer, [email protected]

Lawrence Slade, Chief Executive of Energy UK, Energy UK also called on the government to has written to Dieter Helm to set out the 10 key provide a clear policy in relation to the UK’s energy priorities for the energy industry that should be efficiency and smart low-carbon home needs. It considered as part of the cost of energy review. argued that the current energy efficiency policy framework is overly reliant on funding through In the letter dated 15 September, Slade said that supplier obligations, such as the Energy Company the industry is currently working to lower costs for Obligation. This has led to an expectation that customers within a highly competitive energy energy efficiency should be provided free of market, whilst ensuring that the UK meets its charge, undermining its value to the public. climate change obligations. This, he said, is set against a backdrop of the need to invest billions of Energy UK said the government should help kick- pounds by 2030 to ensure continued access to a start a sustainable energy efficiency market via secure, decarbonised energy supply. Energy UK targeted incentives to encourage demand, therefore set out the key priorities for the energy supported by regulation that sets a clear trajectory industry, which it believes will help to achieve of government’s expectation. Linked to this the these goals. government should revisit provisions around the zero carbon homes initiative. The first of these was to review the cost associated with decarbonisation. Energy UK said it is The next recommendation was to develop a important to recognise that decarbonising the delivery plan for investment post-2020 in low- economy is a vital activity and to realise that the carbon electricity generation. This should be UK has already made significant strides to framed around a UK strategy for delivering the decarbonise its generation mix. It added that there Fifth Carbon Budget and should ensure that the needs to be structures in place that support lowest cost large-scale renewables have a route to investment in new and existing technology, that market. Energy UK said it would seriously question under current government policy will be levied the findings of the cost of energy review if it did onto customer bills. Energy UK said there needs to not acknowledge that exempting the cheapest be better communication around who will pay technologies from participating will inevitably these costs, and how, when and why they should. increase costs to consumers. In a similar vein, the letter recommended that the Other recommendations covered: setting out the government work with industry to address the government’s position on the future of carbon “urgent need” for a strategy to decarbonise both pricing; ensuring security of supply to protect the heat and transport sectors. It said that, given investment in the UK economy; recognising the the urgency of carbon reduction requirements, the benefits that the energy sector can provide to the government should concentrate on formulating a wider economy; and, reviewing the future of coordinated plan to encourage the uptake of low- carbon capture and storage. carbon technologies in the 2020s and enhance Slade said: “We believe the review provides an efforts to decarbonise heat and transport. opportunity to consider each aspect of the energy The letter also called for the establishment of “fit bill and how these are apportioned across gas and for purpose controls” to support the cost of electricity, whilst promoting a strong focus on decarbonisation. To improve visibility in relation to energy efficiency as a key approach to delivering the government’s decarbonisation commitments, cost savings.” and to provide long-term certainty to low-carbon investments, Energy UK said that these controls This 4-page letter makes a number of salient needed to be linked to the UK’s carbon budgets points, but highlights just how multi-facetted through the governments Clean Growth Plan. It the challenge facing the review is. It also recommended that indicative procurement reprises some of the recent thinking from the volumes should be set out four years in advance of Climate Change Committee that shows bills auctions. It also called for BEIS to report all policy today are less than 2008 as a result of energy costs on a net and gross basis in order to provide efficiency policies. greater transparency of the costs and benefits these policies have on consumer bills. Energy UK

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Tom Crisp, Editor, [email protected]

Research by Policy Exchange has concluded that party certification to enable lenders to reduce their reductions in carbon emissions, saved energy transactional costs even further. costs and improved productivity are all The think tank’s second major recommendation achievable with a new approach to investment in was that the existing Energy Saving Opportunity non-domestic energy efficiency. Scheme (ESOS) be extended to cover public Released on 25 September, Clean Growth: How to sector institutions where the energy saving Boost Business Energy Productivity highlighted potential is significant and cost effective, such as in how there is still significant potential to improve health, defence and education. Reporting on energy efficiency in businesses. progress should also be made mandatory. To improve the scheme, Policy Exchange advocates The government’s latest Business Energy an increase in transparency to understand how Efficiency Survey (BEES) highlighted the potential well it is working. Administrators of the scheme for businesses to reduce overall energy demand should begin collating and publicising key metrics by a further 39%. One third of this identified saving such as what proportion of recommendations are relates to measures that have a payback period of acted upon. Moreover, as ESOS is based on EU three years or less. Measures were identified with law, it should be transposed into UK law before a less than three-year payback, which would result Brexit. in bill savings of £1.3bn per year in total (see Figure 1). This opportunity, Policy Exchange said, forms a Thirdly, the research suggested that in the UK as natural synergy between energy efficiency and the much as half of commercial properties are rented emerging industrial strategy. from commercial landlords. Therefore, government intervention should focus on landlords rather than Figure 1: Scale of the opportunity tenants, and use a combination of tighter regulations and fiscal incentives, including linking business rates to energy efficiency. It recommends that policy makers could increase the minimum Energy Performance Certificate rating for private rented properties to D by 2023. Finally, evidence suggests Climate Change

Agreements (CCAs) have been a weak driver of Source: Policy Exchange businesses’ energy efficiency, and adverse effects of the Climate Change Levy (CCL) on economic The barriers to realisation of these savings were performance are unsubstantiated across most broken down into four main areas: lack of sectors. Therefore, the discount on the CCL that information; the limitations of project economics; businesses gain under CCAs should be made access to capital; and, split incentives, e.g. landlord more rigorous and linked to sector deals as part of and tenant. To address these challenges, the the industrial strategy. report made several recommendations. This is a timely and over-due focus on an area Central to its proposals was that the government of policy that receives less focus than it used should establish an Energy Efficiency Delivery Unit (EEDU), able to bridge the gap between viable to. As well illustrated by Policy Exchange, the projects and available capital. The unit should be potential benefits from more focussed action based on the template of the Heat Network on business energy efficiency are substantial Delivery Unit; offering expertise, certification and and are there for the taking if barriers are finance for project development to both public and broken down. The solutions proposed appear private institutions. Finance should be offered for sensible. development costs up to a maximum of 50%. Policy Exchange Expertise within the EEDU could also provide third

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Cory Varney, Writer, [email protected]

Think tank IPPR has argued that switching levels Figure 1: Summary of recommendations remain low in the domestic energy market as many customers continue to face obstacles to engagement. The report, Keep It Simple, published on 21 September, identified three main barriers. These were: how people can access information; difficulties in accessing and understanding the information available; and, barriers to action, where a lack of confidence in making a switch or a lack of support in managing energy usage is seen. For the energy market to address wider issues of Source: IPPR competitiveness, IPPR said that tackling these to find cheaper deals. However, for the sake of barriers will prove essential. simplicity and greater engagement of the It proposed that more radical measures may be unengaged majority of consumers, it felt this required than those so far been deployed, approach was justified. suggesting that, with the energy bill the first point The report also backed the creation of an of consumer engagement, that would be where independent body to utilise smart meter data. This “significant work” needs to be done. Focus group would be a not-for-profit, arm’s length government research carried out by IPPR, as well as studies by body that could possibly be an extension of Ofgem, have revealed many consumers still find Ofgem. It said that this body could use data on the their energy bill too confusing and difficult to cost of energy to deliver personalised advice to engage with. Furthermore, when comparing UK consumers, which it could identify as being the consumer experiences of other bills, IPPR said that most in need. Moreover, it said that an it had been found many others are felt to be independent body could provide energy suppliers simpler and more accessible than energy bills. with data on consumer energy use. This could then IPPR called for a “significant simplification” of allow them to offer personal incentives to energy bills as a solution, stating this would consumers to reduce energy usage at certain improve consumer engagement. Figure 1 times – while the baseline tariff would be the same summarises the recommendations. IPPR said that, for all consumers. to get users to consume information on bills in a Alternatively, IPPR said that with consumer consent way that will make them act, the design and data could be passed on to Third Party information on the bill must change. This would Intermediaries (TPIs), who could then manage involve making them jargon free and focused on price saving activities on consumers’ behalf. key information. This is something that can be done in the short term. IPPR added that this should It further recommended supporting the growth of also be matched by support to help customers use “pro-sumers”. It said initiatives that promote the information to act through occasional and domestic renewables could help to engage timely text alerts detailing better deals. consumers by enabling them to reduce, or net-out, their bills. It said it would recommend including net Looking to the medium term, IPPR said that the energy metering within the smart meter roll-out in smart meter roll-out provides an opportunity to go this context. further. This could involve legislating for a single tariff per supplier to allow energy companies to While we agree it is important to better compete directly with each other on price, while understand how consumers engage and make also reducing the information on a breadth of decisions, restricting choice is retrograde. But alternatives consumers have to take on board we agree that, in a world of smart meters, the about what supplier to use, and when deciding role of brokers will become much more whether or not to switch. IPPR acknowledged that important in the domestic market. this recommendation could stifle the opportunity to offer innovative pricing to consumers who manage IPPR

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The Business, Energy and Industrial Strategy Committee has continued the process of resuming its scrutiny function, having had its membership established. On 20 September, the committee launched an inquiry on the implications of leaving the EU for British business. It will take a sectoral approach, aiming to establish how the interests of different sectors should best be pursued both in the negotiating process and post-Brexit, and will examine a range of issues relating to market access, non-tariff barriers, regulation, skills, R&D, trade opportunities and transitional arrangements. The committee will initially look at the civil nuclear sector, with views invited by 4 October. The Committee has already received written evidence on Euratom as part of its Leaving the EU: Negotiation Priorities for Energy and Climate Change Policy, but invites stakeholders to submit further views in response to the extended terms of reference. Committee Chair Rachel Reeves commented: “The extent of challenges will vary from sector to sector, but the same issues will need to be addressed. In taking a sector by sector approach, we want to inform public debate about the potential impact of Brexit and ensure that the Government is promoting the country's economic interests across the board as negotiations proceed." On 21 September, the committee launched a further inquiry into electric vehicles (EVs), the challenges they represent for the energy infrastructure and the actions needed to support the development of this market. This inquiry will build on the written evidence received for the former BEIS Committee's inquiry Electric Vehicles: Developing the Market, which was interrupted by the General Election. This new inquiry builds on the previous inquiry and “brings an added focus to the challenges electric vehicles create for the electricity grid and energy infrastructure”. The committee invited further written submissions on the following by 3 November: • How will increased uptake of electric vehicles, to meet the Government's 2040 target to end the sale of new diesel and petrol cars, affect the electricity grid? What action is needed to manage impacts, and to make the most of opportunities afforded by vehicle-to-grid technologies? • How do charging infrastructure requirements differ for alternative types of vehicle, journey, and user (including fleets)? • How should new infrastructure for electric vehicles and associated grid reinforcements be funded? Again Rachel Reeves commented: “We also want to investigate concerns that there is a 'postcode lottery' in charging infrastructure with considerable variation in the availability of charge points across the country, which must inevitably discourage people from buying electric cars.” Parliament – Brexit Parliament – EVs

The government announced on 21 September that businesses can apply for funding to support the development of technologies that will enable a range of vehicles to become zero emission. Innovate UK and the Office for Low Emission Vehicles (OLEV) are providing up to £20mn to invest in new vehicle technologies through the 14th competition under their integrated delivery plan. The funding comprises £15mn from OLEV and £5mn from the Faraday Challenge. Up to £18mn has been set aside for research and development projects that develop technologies to support the transition, and a further £2mn is set aside for smaller feasibility studies. The government added that this will be the first time that a portion of the money is being set aside to support research into technologies for medium and heavy goods vehicles. Simon Edmonds, Director of Manufacturing and Materials at Innovate UK, said: “We welcome this significant further investment in zero emission research and development funding, in particular its focus on freight and commercial vehicles as this is a major opportunity for UK companies to drive forward innovations.” Innovate UK

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A letter calling on Prime Minister Theresa May to implement her election pledge to bring in a price cap on standard variable tariffs (SVTs) has been signed by 192 MPs, including more than 70 Conservatives. The Guardian reported on 29 September that the letter had been coordinated by Conservative MP John Penrose, Labour’s Caroline Flint and the SNP’s Patricia Gibson. The letter pointed out that action on energy bills was promised in three party manifestos. It added: “We hope you will work with us and Ofgem to stop this Big Six stitch-up, and pledge to help the millions of households who Ofgem seem set to ignore”. Penrose, who has been a staunch advocate for the implementation of an extended price cap said: “If Ofgem won’t challenge the Big Six and stand up for consumers, the government should replace it and implement the energy price cap itself”. He added: “This was a manifesto pledge in the Conservative, Labour and SNP election campaigns, and the breadth and depth of cross-party signatures on this letter shows huge support for the government to get this through parliament.” No link

Following an in-depth study, the CMA announced on 26 September that it is setting clear rules for all online price comparison tools. The year-long investigation found that such sites do offer a range of benefits, including helping people shop around by making it easier to compare prices and forcing businesses to improve their offerings. However, the CMA has also laid down instructions for all sites on issues such as communicating how they plan to use people’s personal data. All sites should be clear about how they make money; how many deals they’re displaying and how they are ordering the results. Specifically for the energy sector, where low levels of engagement and switching have meant that consumers have not fully benefited from cheaper and/or better services, the CMA found that comparison tools could be a way of increasing competition. It also recommended that BEIS look to bring intermediaries into the regulators’ scope. Andrea Coscelli, CEO of the CMA, said: “Our study has found that most people in the UK have used a comparison site at least once so it is vital that everyone gets the benefits they deserve. The good news is that more than 90% of the people we surveyed were very or fairly satisfied with the sites they used. But we have also found that improvements are needed to help people get even better deals. We have set ground rules for how sites should behave, as well as being clear on how regulators can ensure people have a better experience online.” CMA

The Public Accounts Committee (PAC) will hear evidence for its inquiry on Hinkley Point C on 9 October. The hearing follows a report by the National Audit Office in June, which concluded that it would be impossible to know for decades whether building the power station will represent good value for money. The report also raised concerns about the Contract-for-Difference pricing structure agreed between the government and the sites developer NNB Generation, of which EDF is the majority shareholder. Other concerns include the financial health of EDF, and the inherent risks of using new technology for the reactor. The PAC is expected to ask officials about the decision-making process behind the Hinkley Point C contract, how risks to the project can be managed in the future and whether the project demonstrates good value for money by providing secure and affordable energy to consumers, while contributing to the UK’s statutory decarbonisation target. The deadline for submitting written evidence for the inquiry is 3 October.

Parliament

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A group of energy companies has backed a plan by EU regulators to attach emissions limits to subsidies for providing back-up power capacity. Reuters reported that the proposal by the European Commission, which would set a cap of 550 grams of CO2 per kWh for new power stations, thereby ruling out less-efficient coal and gas-fired plants, has been fiercely contested by Poland and some other EU Member States. The proposal is part of a draft reform of Europe’s electricity market that calls for stricter rules on capacity mechanisms used in countries such as Britain and France to fund power generation that may not be cost- effective, or as clean as renewable energy, but which is still needed to guarantee supply during periods of peak demand. In an open letter to the EU’s environment ministers on Tuesday, the proposal was backed by 22 signatories from energy majors, renewable energy groups and utilities. The letter said: “Our electricity bills should not support the operation of the most polluting power plants, given that cleaner and more flexible options are available”. It added: “This would clearly contradict EU climate and energy policy objectives and would go against the best interest of European consumers.” No link

Trade association the Energy and Utilities Alliance (EUA) has submitted recommendations for the forthcoming Autumn Budget, identifying solutions to enable the government to address multiple challenges within the energy sector. In a statement issued on 21 September, the EUA said there are three main areas that will facilitate carbon reductions in line with the fifth carbon budget, address fuel poverty and ensure domestic and industrial energy efficiency is achieved. It recommends investment in infrastructure for natural gas buses and HGVs, tackling the issue of the 9mn lower efficiency boilers still operating to decarbonise heat and allocating funds to tackle endemic fuel poverty. The EUA said the government must address the increasing issue of vehicle pollutants. It challenges its “narrow focus” on electric vehicles, recognising that natural gas provides a viable alternative to diesel. It noted that natural gas vehicle usage can become more widespread by providing support to local authorities and investment in infrastructure. It recommends introducing varying tax bands based on technology or measurements of emissions to encourage the take-up of clean vehicles. The EUA added that the allocation of funds to connect more households to the gas grid, paying the winter fuel allowance in summer, so households can benefit from cheaper LPG prices and prioritising boiler replacement under ECO would all help to alleviate fuel poverty. Mike Foster, Chief Executive of the Energy and Utilities Alliance, said: ‘”So far, there has been a distinct lack of coherent environmental and energy strategy from this government and the Autumn Budget provides them with an opportunity to present a clear vision as to how we will meet the Fifth Carbon Budget and reduce fuel poverty in the UK.’ The Budget is set to be delivered on 22 November. EUA

Our latest Chart of the Week explores how sustained switching bodes well for the newly deregulated non-domestic water market. Last week’s blogs from Cornwall Insight included Tomorrow's world? The smart home in 2020 and Latest frequency tender results exacerbate battery challenges.

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Josephine Lord, Regulatory Consultant, [email protected]

The Electricity System Operator (ESO) has issued incentive ideas also promote a trial approach by a paper setting out its thinking for the regulatory encouraging new ways of working; for example and incentive framework for 2018-21. across the transmission and distribution systems, and in code management. From 1 April 2018 until the start of the next RIIO transmission price control in 2021, the ESO will be The ESO presented a series of work packages subject to a new incentive framework when the (see Figure 1) linked to Ofgem’s proposed ESO current interim incentives expire. Legal and roles and principles. It said the packages are not operational separation of the ESO from the other necessarily designed to be taken forward at the parts of National Grid’s businesses is due to take same time but form the foundation for work to effect from next April. In the light of these consider which subset of proposals could form a developments National Grid has set out its views coherent package of financial incentives. on the ESO’s role and the part that financial Its proposals include some traditional areas for incentives can play in its regulation. system operator incentives but also some novel National Grid said the regulatory regime should ideas. In respect of balancing services cost control, focus the ESO to take actions in areas where most the ESO proposed that there could either be a consumer value is at stake. It has identified ESO simple, target-based incentive, conceptually similar activity that, potentially associated with incentives, to the current scheme, but with a simpler could support this outcome and formed these into methodology for the target; or a hybrid approach packages of work. In its view, there would be where a target approach would be supplemented benefits to consumers in putting in place a regime by a more “evaluative approach” allowing for an that combines a small number of discrete, ex-post assessment of performance. The ESO mechanistic incentives that drive a sharp focus in proposed incentives on creating market diversity high-value areas with wider, more evaluate for balancing services in existing and new markets measures that could capture the totality of the that would be target-based, using for example, ESO’s role. It considers this would be in keeping market concentration benchmarks. It also with the regulatory practice for comparable suggested that it could have a role in representing organisations in other countries and sectors. British interests in European negotiations with respect to balancing services, with a potential ex- Further, as Ofgem indicated in its recent working post reward based on the delivery of defined paper on the ESO, National Grid considers the benefits from a specific negotiation outcome. 2018-21 period could be used to try new, innovative regulatory approaches that could National Grid said it will also publish an initial draft potentially form part of a more enduring regulatory of a forward plan this year as input to this work that scheme after 2021. National Grid said some of its will show how its core roles plus incentivised activities can deliver against the principles that Figure 1 - ESO work packages Ofgem set out for the ESO’s role. Responses are requested by 16 October. Alongside the paper National Grid has published its response to Ofgem’s working paper on the ESO issued in July. Ofgem will consult on the proposed ESO incentive framework later this year. This exercise has generated a range of interesting ideas that will stimulate thinking, although it is still at a high level. The ESO paper is a good contribution to the debate.

National Grid Source: National Grid

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The UNC Panel recommended approval of a UNC proposal, UNC593V, on 18 September, which is designed to meet the Competition and Markets Authority (CMA) requirement that Price Comparison Websites and Third Party Intermediaries should have access to certain data for domestic consumers seeking to switch supplier, to enable them to obtain or verify this data. A similar proposal has also been recommended by the iGT UNC Panel for Independent Gas Transporters. The CMA’s requirement followed the energy market investigation, and the proposal would allow PCWs and TPIs to check or obtain Meter Point Reference Numbers and other information provided by the consumer against the data held. Access to this data is expected to reduce the number of erroneous transfers and failed switches. After the original proposal was sent back to the workgroup by Ofgem to address a number of issues, the CMA issued a follow-up letter in June which clarified that, in terms of the working of the solution, the provision of an interim service and an Application Programme Interface solution would achieve compliance with its Order. The modification was subsequently amended to reflect these solutions. The proposals are now with Ofgem for determination. Joint Office

National Grid Gas (NGG) will be allowed to substitute unsold exit capacity to the National Transmission System (NTS) exit point at Sutton Bridge Power Station from 1 October 2018. In Ofgem’s decision not to veto National Grid’s proposal for exit capacity substitution at Sutton Bridge, published on 20 September, it notes that the substitution will allow NGG to meet the 5.167GWh/day Planning and Advanced Reservation of Capacity Agreement (PARCA) at the power station, which it received in March. Substituting unsold capacity between NTS points allows demand for additional capacity to be met, without the need to invest in network upgrades. This lowers the network costs for end consumers. Over 4.7mn kWh/day of unsold capacity will be donated from the exit point at Spalding Power Station at Wragg Marsh, with around 600,000 kWh/day of unsold capacity to be donated from the distribution network exit point at Sutton Bridge. The total exchange rate for capacity substituted was 1.0388:1. NGG also intends to release non-obligated exit capacity at Sutton Bridge Power Station between 1 October 2017 and 30 September 2018. This is at the discretion of NGG and therefore does not require approval from Ofgem. Ofgem

Following its approval by the Agency’s Administrative Board, ACER issued its 2018 Programming Document on 25 September, which includes the 2018 work programme and covers the period 2018-20. It does not anticipate that the additional tasks and responsibilities envisaged in the European Commission’s Clean Energy for all Europeans legislative proposals will come into force before the end of this period. It therefore expects to focus its attention on four strategic areas. The first is the completion of the Internal Energy Market through the full implementation of the adopted Guidelines and Network Codes, and the adoption and implementation of binding subsidiary instruments. The second is to seek to address the “infrastructure challenge”, particularly through the TEN-E Regulation, through assessing the cost-benefit methodologies of the ENTSOs and the consistent application of the criteria for identifying Projects of Common Interest. ACER’s third focus is on the implementation and operation of REMIT, the Regulation which seeks improved integrity and transparency in wholesale energy markets. The Agency noted that it has repeatedly raised concerns about the level of funding for staff for this specialist activity, having been denied the 19 additional posts requested in the 2017 budget. In a new classification of its tasks by priority, ACER said those defined as

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“critical” are mostly related to the effective monitoring of the wholesale energy markets and the implementation and monitoring of Guidelines and Network Codes. The final area of focus relates to longer-term regulatory challenges, particularly as identified in the conclusions paper Energy Regulation: A Bridge to 2025 issued in September 2014, which covered a wide range of issues in the gas and electricity sector. ACER said the Commission’s legislative proposals address many of these challenges and that once the new legislation is enacted the Agency is expected to play an enhanced role. ACER

The regulator approved changes proposed by National Grid to the gas Transmission Planning Code (TPC) on 25 September, following National Grid’s two-yearly review and consultation on the document. National Grid is required to maintain, implement and comply with the TPC, which covers all the key aspects relating to the planning and development of the NTS that could have a material impact on customers, sets out a methodology to determine the physical capability of the NTS, and includes detailed supply and demand planning assumptions. The main change proposed by National Grid was a modification of planning analysis for within-day flow variations. This included: supply profiling at each NTS Entry Point to better identify supply-driven line-pack depletion; improved assumptions for CCGT demand variation which are more in line with actual operational; and linking distribution network operator pressures to Local Distribution Zones. Other changes include text describing the assessment methodologies for uncertainty in planning and operation, and removal or substitution of text describing the processes to calculate flow margins and pressure coverage. Ofgem considered the proposed changes better achieve the licence requirements for the TPC. It noted concerns raised by the one consultation respondent that profiling could be positive contribution to linepack and not only a source of depletion, but agreed with National Grid that it was not necessary to amend the TPC to address this comment as National Grid takes the repletion and depletion effects of supply profiling into account when assessing system operations. Ofgem

Ofgem gave notice on 26 September that it had issued directions to suppliers involved in the Cheaper Market Offer Letter (CMOL) trial to provide specified data to a third party. The trial is testing measures to increase consumer engagement by providing prompts to those who have not recently switched tariff. Following its energy markets investigation, the Competition and Markets Authority recommended that Ofgem should establish a programme to identify, test and implement measures to provide domestic customers with additional or different information, and to develop and test proposals on a priority list of measures, including changes to the information provided to customers on the availability of cheaper tariffs in the market. In June the regulator issued a notice under Standard Condition 32A of the supplier licence to certain suppliers in order that they should participation in a randomised control trial on measures to prompt engagement. This followed a smaller scale trial at the beginning of 2017. In the latest direction, the involved suppliers are required to provide information to a third party to facilitate the assessment of feedback received during the trial, specifically for the purpose of conducting qualitative telephone interviews with subjects from the CMOL trial. The direction specifies that this data is to be provided in a specified format given in a schedule and by a certain date. Ofgem

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Ben Hardie, Analyst, [email protected]

Imperial College London (ICL) recently published is likely to remain a barrier to energy findings that suggest that residential generation independence for many millions of consumers for and storage could become profitable by 2030, many years to come. potentially leaving the utilities industry in chaos. Another consideration is that different types of ICL published the report Firm Power Parity: A customers have different energy needs and pay Framework for Understanding the Disruptive different prices. Information taken mostly from Threat of Solar + Storage on 4 September. The domestic household consumers, who tend to pay authors were Luke Bevan and Charles Donovan. the most for their energy, would not account for the more competitively priced commercial and In recent years, lowering costs have made energy industry rates. generated from locally installed solar photovoltaics (PV) and wind turbines more competitive This is further complicated by the fact energy is not compared to grid energy from traditional sources; statically priced, with many “time of use” tariff and as significant investment continue to pour into holders paying more at periods of peak demand. the renewables sector, questions have been raised To compensate for this, ICL used a “3x3 matrix” to about what this will mean for utility firms in the long consider the three types of customer (residential, run. commercial, and wholesale) and the three levels of In order to analyse this phenomenon, ICL has energy services (PV energy-only, PV energy created a new framework called “firm power levelised over a day, and PV energy levelized over parity’. Firm power parity is the hypothetical point a year). at which on site renewables can deliver the same Using a traffic light coding system, the report services at the same costs as conventional categorised how profitable solar PV under the electricity supplies. three groupings will become by 2030, with green Achieving parity in this way means being able to indicating profitability, yellow indicating near supply power 24 hours a day, 7 days a week, not profitability and red indicating a substantial gap to just when the standard intermittency of when “the profitability. It looked at six international case sun is shining and the wind is blowing”. The rapid studies, including one for London. growth of the storage battery market in recent The report also recognised that access to capital years, and falling prices, makes the integration of will also likely have a big effect on solar PV and batteries with distributed generation much more wind turbine uptake and so different scenarios feasible. were created, one assuming a high “cost of According to this framework, ICL says it is not capital” and one envisioning a low “cost of capital”. difficult to envisage that by 2030 millions of All scenarios show higher profitability from energy consumers could be generating and using their independence over connecting to the grid by own energy largely independently of the grid. This 2030 on today’s levels, with residential consumers could cause major disruption to traditional utilities returning ‘green’ profitability results in both high as suppliers would lose millions of customers, and low cost of capital scenarios by 2030. traditional large-scale generation would not be as Industry energy independence however is only needed, and even grid operators may have to indicated to become profitable in a low cost of scale back their operations. capital scenario, and even then it would only However, the report suggested there are a number become profitable by 2030. of reasons why this scenario may not fully unfold. Firstly, while consumers who already have PV Even in ICL’s high cost of capital scenario, the panels or wind turbines installed may find it scale of predicted disruption is significant and cheaper to go independent, this will not apply to suggests a considerable shake-up of the the majority of consumers who are still importing energy sector owing to high residential all of their energy from the grid. And, while the uptake. marginal costs of being energy independent are Imperial coming down, the fixed cost of coming off the grid

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Neil Mearns, Analyst, [email protected]

A University of Edinburgh academic has claimed Fracking in the UK is also problematic for a range that UK and Scottish oil and gas reserves could of other reasons, none more so that potential expire by 2027. Professor Roy Thompson says an fracking areas lie under densely population areas assessment of output estimates that only 11% of in the Scottish Central Belt. There are also oil and 9% of gas resources remains in the UK expected to be environmental risks, with induced Continental Shelf (UKCS). earthquakes resulting from the large volumes of flow-back and brine-laden waters produced with The study by Professor Roy Thompson of the the gas. Edinburgh University School of GeoSciences presents evidence of long-term downward trends Considering the projected resource shortfall and of oil and gas field size and lifespan. It also lack of opportunity for fracking, the University of discusses UK potential for fracking, which was Edinburgh has strongly urged the UK government found to be minimal. to reconsider its current oil and gas policies, which assume two-thirds of the UK’s energy will come The downward trend of oil production on the from oil and gas in 2035. UKCS is illustrated in Figure 1, with each coloured stripe representing a different oil field. Commenting on the findings, Thompson said: “The Figure 1: Offshore oil production for 261 UK fields UK urgently needs a bold energy transition plan, instead of trusting to dwindling fossil fuel reserves and possible fracking. We must act now and drive the necessary shift to a clean economy with integration between energy systems. There needs to be greater emphasis on renewables, energy storage and improved insulation and energy efficiencies.” UK oil and gas prospects, however, continue to be seen more positively by the Oil & Gas Authority, who claim up to 20bn barrels of resources may still be recoverable from the UKCS. In response to the study, Deirdre Michie, Chief Executive of Oil & Gas UK, said: “Nine new fields began production in 2016 and a further seven started producing in the first half of this year – most of which will still be producing in 2030. A further 12 are due on-stream by the end of next year.” Furthermore, Michie claims technological advances are presenting new opportunities and Source: The Edinburgh Geologist, Issue No 62 commercial viability. This could mean some large Recently discovered fields, with the exception of developments may be producing as far away as Buzzard in 2007, have typically generated less 2050. than 10mn barrels of oil over lifespans that end While this was widely reported as academic within 16 years. research, it is in actuality an 8-page discursive The outlook for fracking in Scotland is also article in the Edinburgh Geological Society estimated as meagre, due to the fact Scottish autumn review. It provides an interesting shales have modest organic carbon contents, perspective, but one that is firmly rooted in an shallow depths and unremarkable thermal history. anti-fossil fuel heritage. Thompson goes on to remark that Scottish shale “frackability” (the ease of fracking or fracturing) The University of Edinburgh barely corresponds to even the poorest US- producing regions.

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Reported in the FT on 19 September, China General Nuclear (CGN) has confirmed its bid for an equity stake in the proposed £15bn NuGen nuclear power station in Mooreside, Cumbria. The bid came as the UK government confirmed its plans for tougher screening of foreign investments in order to protect national security. There are currently three proposed nuclear plants in the UK, each expected to cost more than £10bn (Hinkley Point, Moorside and Wylfa in Anglesey), which will help energy security given the decision to phase-out Britain’s coal-fired power stations and the need to replace existing nuclear plants. If the bid is successful, this will give the CGN stakes in four British nuclear plants. CGN, alongside another Chinese state-backed company CNNC, already shares a one-third stake in the Hinkley Point C power station in Somerset. Originally NuGen was owned by a partnership between ENGIE and Toshiba, until Toshiba ran into financial difficulties, selling its stake in the company. A CGN spokesperson said the company had “accepted the invitation to bid for an equity stake in NuGen”. A Toshiba spokesperson added: “We would like to explore alternatives, including sales of the shares, while carefully monitoring the situation, in consultation with other stakeholders including the British government.” No link

Drax Group announced on 21 September that CEO Dorothy Thompson will be stepping down after 12 years in the post. Thompson will be replaced by current CFO Will Gardiner, effective from 1 January 2018. During her tenure, Thompson oversaw considerable change, as the generator moved away from its coal-fired roots. This has included Drax converting half of its coal-fired power plant units to biomass, as well as expansion into the retail energy market through its acquisition of Haven Power and latterly Opus Energy. Drax has also recently considered developments in gas-fired power and is currently seeking planning permission to build what would be amongst the largest battery storage facilities in the world at up to 200MW. Thompson said: “I retire knowing the group is in excellent shape: it has the right strategy, the right team and, in Will, the right leader”. Drax said the appointment of Gardiner came after a thorough selection process involving internal and external candidates. Chairman, Philip Cox, said: “We are delighted Will is to become Chief Executive. He has been a key architect of our new strategy and is a focused, innovative and engaging leader.” The Board will now commence a process to appoint a new Group Chief Financial Officer. Drax

DriveElectric, a vehicle leasing provider, announced on 20 September that its CrowdCharge platform will offer the first domestic vehicle to grid (V2G) service in GB. The system, developed in conjunction with the University of Reading, uses artificial intelligence and machine learning to optimise charging sessions for electric vehicle (EV) owners. CrowdCharge then connects and manages large numbers of EV batteries using V2G charges, effectively being aggregated as one large battery to support the grid. It is currently being used in the Electric Nation programme, testing EVs’ impact on the grid. DriveElectric is currently registering interested customers ahead of the platform’s debut in summer/autumn 2018. CrowdCharge is expected to cost from £8,000 to £9,500 and initially yield £300 – £800/ year for customers. Additionally, the new service will help to avoid the need for non-renewable sources of power to be used at times of peak energy demand. Mike Potter, Managing Director at DriveElectric, said: “It is the first time people can do this from their own home in the UK, and by enabling customers to sell energy back to the grid, becoming fully fledged and active participants in the UK energy market, we’re providing a financial incentive to choose the sustainable option.” DriveElectric

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In November 2016, Defra launched a consultation MWth plants that had come into operation before 1 on reducing emissions from “medium combustion” December 2016, had received capacity market generation. These are plants with a rated thermal agreements in the 2014 and 2015 auctions, or input of more than 1MWth and up to 50MWth. were subject to Feed-in tariff preliminary accreditation received before 1 December 2016. As it happens, this smaller plant classification Collectively these plants fell into a category embraces many of the conventional generation defined as “Tranche A” generators. Rather than developments that have come forward in Britain needing to comply with the ELVs at January 2019, over the past few years. Indeed nearly 2GW of 1-5MWth generators would have until 2030 to plant has earned contracts in the first two T-4 comply, and 5-50MWth to 2025 so long as in this Capacity Market auctions, and a sizeable portion of latter category they emit less than 500mg/Nm3 or this will be impacted by the Defra move. run less than 50 hours a year. But in a recent communication, Defra has startled While many operators baulked at the complexity of investors by changing its proposed approach to these arrangements, at least some pragmatic the phase in of new arrangements. consideration had been given to investor Song and dance concerns. Many generators and their investors took comfort from being caught in the web of the The November 2016 consultation proposed transitional arrangements, and they have measures which were broadly compatible with, subsequently made operational budgeting, and in some cases went further than, the European Capacity Market and balancing service Medium Combustion Plant Directive (MCPD). With participation decisions accordingly. the caveat of some plants being subject to transitional arrangements, the impact of the Musical chairs proposals was that effected generation would But the waters have just been muddied further. In need to be compliant with an emission limit value an emailed stakeholder clarification on the draft (ELV) of 190mg/Nm3 by 1 January 2019. The legislation issued early September, Defra has gone consultation concluded on 8 February 2017. beyond the original consultation proposals. The impact of implementing the consultation was It seems that now, if a Tranche A generator enters widely expected to increase costs of new diesel into a Capacity Market or balancing services reciprocating generator bids into the Capacity agreement after 31 October 2017, and that remains Market, where the first T-4 auctions had brought in force after the 31 December 2018, it will no forth several GWs of capacity. It was anticipated longer be subject to the transitional relief. As a that developers would need to factor in additional consequence, it will need to comply with the costs to install emissions mitigation equipment that emissions limits by January 2019 anyway. allowed for compliance with the specified limits. The rationale for this change presented by Defra is But the increased demand on the catalytic to ensure a “level playing field between older and reduction supply chain has tended to lower the newer plant”. But it is to do so in a way that almost costs of such equipment, and so the economic directly contravenes the underlying effect of the impact of the ELV perhaps has not been as drastic transitional arrangements in the first place. as may might have feared at the outset. This is a significant and damaging change. It is one Change partners that will have caught out many in the market, Crucially, to avoid a cliff edge for sunk investments particularly those outside the net of frequent Defra and to prevent contravening the legitimate stakeholder communications. expectation that owners may have had when Given the parallel threat of losing triad income, and entering Capacity Market auctions that predated perhaps with further embedded benefit reform not the consultation (essentially the 2014 and 2015 T-4 too far down the track, investor confidence in the auctions), the proposals included transitional smaller generator sector is already brittle. It is arrangements. likely diesel and biodiesel generators will simply Of most interest, because of their importance have to swallow higher emissions compliance within the market, were those which captured 1-50 costs.

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The alternative – starving themselves of certain will be earning less, but spending more, than balancing service and/or Capacity Market revenue expected. It is a further example of very poor – is simply not an option. timing and communication surrounding key government policy changes. Witness the Crucially Defra has made it clear that it is not unexpected capacity market battery de-rating seeking comments on this new provision and consultation, introduced by BEIS after the market envisages no further changes to the implementing assumed the rules for the upcoming auctions were draft statutory instrument pending discussion with settled, for another. the Welsh government. Is it any surprise that generators and developers Tango-d continue to talk up regulatory risk in the GB Of course, some developers could see this as the market, and the effect this is having on investor straw that breaks the camel’s back, and withdraw. confidence is now significant. At a time when But that depends on whether the cost of reneging Britain is positioning itself as a place to do on Capacity Market or commercial contract business, the disjoint with wider policy and commitments is higher or lower than the industrial strategy is baffling, and ministers appear cost/losses of emissions compliance. If adopted, accident prone. the change is also likely to have two further Supporting arm profound impacts. There is an obvious need for flexible generators of First in a world where all sub-100MW generators all varieties to closely track policy and regulation, face losing triad income, and because of these from its genesis to its implementation, and to new “clarifications”, more diesel and biodiesel assume nothing in the process. generators are incurring MCPD compliance costs, then bids and prices in tendered balancing Our regulatory services include our quarterly services should increase. There are a number of Flexibility Briefing Report, supported by alerts, and factors that are presently driving bidding patterns, our two generator forums (the Green Generators but this change once implemented combined with Group and the Flexibility Forum). They can help the other changes on the horizon for the triad you do this, notifying you and commenting on embedded benefit can only increase required developments as they occur to ensure you stay on generator revenues. top of the rapidly changing policy and regulatory world. Second, and in a similar vein, it will almost certainly also have an impact on exit bids in future Capacity Contact Tom Edwards for details at Market auctions, even if at this stage the [email protected] on 01603 604411. magnitude is uncertain. There were generators Gareth Miller is Cornwall Insight’s CEO. with reciprocating engines who did not win fifteen- year agreements in the 2014 and 2015 Capacity Market auctions, and who instead had planned to secure one-year agreements. They would have planned to ride further one-year agreements as a strategy over the longer term, perhaps also seeing T-1 auctions as a premium option. Previously they would have assumed not needing to recover costs of MCPD emissions compliance until a much later date as they had assumed they were Tranche A generators. Now they will be forced to recover costs of compliance much earlier. This effect should come through loud and clear in next January’s T-1 Capacity Market auction. Hop, skip, jump In short, the latest Defra intervention represents a further change that means this class of generator

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Last week, all near-term gas contracts increased. The day-ahead gas contract rose 0.5% to 44.6p/th with reduced Norwegian imports due to outages towards the end of the week. This was coupled with an increase in demand. The contract ended the week 25.6% higher than its level the same time last year (35.5p/th). All seasonal gas contracts experienced gains. Winter 17 gas climbed 2.0% to 49.8p/th, and the summer 18 contract rose 1.1% to 41.4p/th. On average, seasonal contracts increased 1.0%.

The majority of near-term baseload power contracts experienced increases last week. In contrast to this trend was the day-ahead contract, which lowered 7.5% to £40.3/MWh. Losses stemmed from high wind generation forecast for early this week and with news that over the weekend the IFA interconnector will be brought back to full capacity. All seasonal baseload power contracts followed their gas counterparts upwards last week. An uptick of 0.1% was experienced in winter 17 power, rising to £50.1/MWh, whilst the summer 18 power contract rose 0.8% to £42.1/MWh. On average, seasonal baseload contracts increased by 0.9%.

Brent crude oil prices gained 3.5% to average $57.9/bl. On Thursday, prices reached a near two- year high of $58.5/bl. Prices were supported by Turkish threats to cut oil imports from Iraq’s Kurdistan region following the Kurdistan independence referendum on Monday. API 2 coal prices fell 1.4% to average $81.8/t amid a drop in demand from south-east Asia. Prices were 4.0% above the value this time last month ($78.7/t) and 30.9% higher year-on-year ($62.5/t). EU ETS carbon prices rose 2.0% last week to average €7.0/t. This slight increase in prices was supported by bullish auction results. The outcome of the German election on Sunday also strengthened prices with the German Green Party likely to be a part of coalition negotiations.

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