SSE Business Energy Report 16.10.17

Week in Energy

Monday 09/10 – Senior civil servants involved in agreeing the deal for the Hinkley Point C nuclear project tell the Public Accounts Committee it still remains critical to energy security. The Low Carbon Contracts Company confirms the signing of Contracts for Difference contracts, with only one developer failing to sign their agreement.

Tuesday 10/10 – First Minister Nicola Sturgeon uses her speech at the SNP Conference to hail the strong progress made in deploying renewables. The UK remains in the top 10 most attractive countries for renewables in the latest Renewable Energy Country Attractiveness Index from EY.

Wednesday 11/10 – The government announces it will provide up to £557mn for less established low-carbon technologies through Contracts for Difference auctions, with the next auction planned for Spring 2019. It is also confirmed that for the first time wind projects on the Scottish islands will be able to compete alongside less established renewables. The government’s £9.2mn Industrial Energy Efficiency Accelerator opens for applications.

Thursday 12/10 – The government publishes its long-awaited Clean Growth Strategy, which sets out how it intends to decarbonise all sectors of the UK economy through the 2020s. National Grid issues its Winter Outlook, showing a significant rise in the electricity capacity margin and a comfortable gas supply situation. The government also publishes a diverse range of different documents and consultations, including a strategic assessment on gas security of supply.

Friday 13/10 – In its Interim National Infrastructure Assessment, the National Infrastructure Commission issues a warning about the current state of capacity shortages, including how over 60% of current UK power stations will need to be replaced to hit carbon goals.

Policy 1 | Clean Growth Strategy targets business energy efficiency

The government’s long-awaited Clean Growth Strategy was published on 12 October, outlining how the government plans to decarbonise all sectors of the UK economy through the 2020s.

A key part of the strategy sets out how to unlock business energy efficiency, stating that overall business and industry currently account for around 25% of the UK’s emissions and are also major users of electricity accounting for 50% of electricity use. The government said there was now a much greater understating of the potential for cost-effective energy efficiency in the commercial and industrial sector, with its analysis forecasting that up to £6bn could be saved by 2030 through investment in cost-effective energy efficiency technologies.

Therefore, the government set out its ambition to enable business and industry to improve energy efficiency by at least 20% by 2030. To facilitate this, the government intends to put in place a simpler, more ambitious and long-term policy and regulatory framework. As part of this, it will look to understand how to encourage greater investment in energy efficiency measures and technologies. This will include an Industrial Energy Efficiency Scheme which would help large companies to install measures to cut their energy use.

In the case of energy intensive industries, the strategy said that these would require steps beyond energy efficiency. The government pledged to develop a framework to support the decarbonisation of heavy industry during this Parliament. It said that out to 2030, industry will have to make progress in switching from fossil fuel use to low carbon fuels in line with broader government priorities on delivering clean air and clean electricity. The strategy said a substantial increase in switching will be needed beyond 2030 and could be coupled with deployment of carbon capture usage and storage (CCUS). To this end, it set out that up to £100mn would be invested CCUS. It said by working in partnership with industry, via a new CCUS Council, it would put the government on a path to meet its ambition of having the option of deploying CCUS at scale in the UK, maximising its industrial opportunity

Other pledges made were to phase out the installation of high carbon forms of fossil fuel heating in new and existing businesses off the gas grid during the 2020s; to publish joint industrial decarbonisation and energy efficiency action plans with seven of the most energy intensive sectors; and to explore how voluntary building standards can support improvements in the energy efficiency performance of business buildings. Meanwhile, the strategy also pledged to reduce costs for households and businesses through the smart systems plan, helping consumers to use energy more flexibly and unlocking savings of up to £40bn.

Other pledges made included the reiterated commitment to phase out the use of unabated coal generation by 2025; to improve the route to market for renewable technologies such as offshore wind with up to £557mn for further Contracts for Difference auctions – the next set for spring 2019 – and to work with industry as an “ambitious” sector deal for offshore wind is developed, potentially resulting in over 10GW of new capacity. Policy makers will also target a total carbon price in the power sector to give businesses “greater clarity” on the total price they pay for each tonne of emissions. The strategy added that further details on carbon prices for the 2020s will come in the Autumn 2017 Budget.

Policy 2 | Government “unlikely” to use Hinkley model in future

The financing model used for Hinkley Point C is unlikely to be used for future projects, according to government officials.

Hinkley Point C, when constructed, will be the first new nuclear power station built in the UK since Sizewell B was commissioned in 1995. Nuclear currently provides approximately 20% of the current electricity supply, however, many stations are ageing and are due to be decommissioned in the 2020s.

Over recent weeks, the future of nuclear has been discussed both at the Conservative Party Conference and by MPs during a Public Accounts Committee (PAC) inquiry into Hinkley Point C. The costs involved with Hinkley have often drawn criticism. The top-up payments for the project are estimated to hit £30bn over the 35 years of the government contract, which will be passed on to energy bills. Meanwhile, the Contract for Difference (CfD) pricing structure agreed between the government and the project developers means the latter receives a guaranteed price of £92.50/MWh (in 2012 money) for the first 35 years of production. In comparison, offshore wind achieved a strike price of £57.50 in the most recent government auction for renewables subsidies. However, civil servants at the PAC hearing said any attempt at renegotiation to drive costs down would have likely ended the deal altogether – with the project developers already experiencing diminished project returns on investment (8.2-8.5%) and increased costs.

The PAC also heard that the 3.2GW generating capacity offered by Hinkley would be key in ensuring a secure supply of electricity as well as reducing emissions. Stephen Lovegrove, former Permanent Secretary at the Department of Energy and Climate Change (DECC) said that even if the deal could have been renegotiated with lower costs, the substantial delay this would have caused would have placed UK decarbonisation targets at risk. Lovegrove said this would have been as old nuclear would have been going off line in 2025, with new nuclear not yet ready to replace it. Alex Chisholm, Permanent Secretary at the BEIS department claimed the comparisons made to offshore wind were unfair. Chisholm also explained it was key to have a reliable source of base-load energy that was not from wind. It was also said that at the time of the deal’s conception, it was felt having some nuclear in the energy mix would ultimately lead to lower overall costs on the energy system going up to 2050 and beyond.

Energy Minister Richard Harrington, speaking at a fringe event at the Conservative Party Conference, similarly said that nuclear “absolutely” had a role to play in the future energy mix. However, Harrington admitted the Hinkley financing model was “unlikely” to be used again, with the government set to rethink how it supports new nuclear. The model sees the private sector finance the entire construction phase of the project, though critics have said the government should be the main financier behind such projects.

Policy 3 | Defra confirms emissions restrictions for medium plants

The Department for Environment, Food and Rural Affairs (Defra) has issued a clarification after a number of enquiries relating to restrictions under the Medium Combustion Plant Directive (MCPD).

The MCPD brings in emission controls for combustion plants in the 1-50MWth range, aiming to deliver a cost-effective improvement in air quality. In July, Defra confirmed generators with Capacity Arrangements from 2014 and 2015 Capacity Market auctions will be included in transitional arrangements (Tranche A). Tranche A generators have to comply with standard permit conditions only when their agreement comes to an end.

The clarification said that Tranche A generators will stop being classed as Tranche A and move to Tranche B, if they were to enter into a new capacity market agreement or balancing services agreement after 31 October 2017 – and that agreement remains active until after 31 December 2018.

The implication is that any generator that signs up to the upcoming T-1 and T-4 capacity market auctions will lose their transitional arrangement status, making them a Tranche B generator. Tranche B generators are subject to stricter obligations and do not benefit from transitional arrangements.

Defra said without this provision, Tranche A generators would have a competitive advantage over Tranche B generators when bidding for new agreements.

Policy 3 | Government industrial energy efficiency scheme open for applications

The government’s £9.2mn Industrial Energy Efficiency Accelerator (IEEA) is now open for applications.

The IEEA supports industrial companies that are aiming to implement new energy efficiency technologies into their organisations to boost their competitiveness and improve their operational efficiency. It is an initiative specifically designed to tackle the financial and implementation barriers that can hamper large-scale technology demonstrations. It will provide a combination of co-funding and expert implementation guidance and is managed by The Carbon Trust.

Co-funding of between £150,000 and £750,000 is available for successful applicants to support large-scale, onsite demonstrations of pre-commercial efficiency technologies on UK industrial sites. Industrial companies and technology innovators need to jointly apply before the end of September 2018.

Projects will run between a year and 18 months and, upon their conclusion, a dissemination phase will be undertaken. This will look to help share the experiences as well as the learnings that have been gained throughout each of the pilot demonstrations.

The Scottish government has announced that it will not support the development of unconventional oil and gas in Scotland, effectively imposing a ban on fracking.

Minister for Business, Innovation and Energy Paul Wheelhouse announced on Tuesday, 3 October that a consultation on unconventional oil and gas received 60,000 responses, of which 99% were opposed to fracking. The government said that those opposed to fracking had: emphasised the potential for significant, long-lasting negative impacts on communities, health, environment, and climate; expressed scepticism about the ability of regulation to mitigate negative impacts; and were unconvinced about the value of any economic benefit or the contribution of unconventional oil and gas to Scotland’s energy mix.

A parliamentary vote on the ban will take place in the near future, followed by a Strategic Environmental Assessment.

Wheelhouse said: “Having taken account of the interests of the environment, our economy, public health and the overwhelming majority of public opinion, the decision I am announcing today means fracking cannot and will not take place in Scotland.” He added: ““It is clear that people across Scotland remain firmly opposed to fracking – this government has listened and taken decisive action.”

Policy 4 | Scottish minister says energy policy is constrained by devolved powers

Speaking at the SNP party conference, the Business, Innovation and Energy Minister Paul Wheelhouse said that the Scottish government had a number of ideas on how to manage the energy market, but that they were restrained by their limited devolved powers.

Speaking at a fringe event on Sunday, 8 October Wheelhouse said that while the Scottish government did not have all the powers it would want in relation to the energy industry, it still made sense for the government to review its approach to energy regardless. Wheelhouse argued that the electricity supply had to be decarbonised, saying steps were needed to ensure infrastructure was in place to transport energy around the country.

He added that the government’s overall aim was for 50% of Scotland’s energy demand to come from renewable sources by 2030. At a separate fringe event Wheelhouse also said that in the future energy policy will need to adapt to include advances in technology, such as the uptake of electric vehicles and renewables.

Also at the conference First Minister Nicola Sturgeon reminded the attendees that Scotland had achieved its target of ensuring 50% of its electricity consumption is be met by renewable sources by 2020 had been surpassed early, with renewables meeting 54% of electricity demand last year.

Industry 1 | Ofgem sets out plans to regulate energy storage

The regulator has launched a consultation on changes to the electricity generation licence so that it accommodates storage sites as generation assets.

In an announcement on Monday, 2 October, Ofgem said that the modified licence would provide regulatory certainty for both new and existing storage sites, encourage the deployment of battery technology on the grid and ensure a level playing field so that storage is able to compete fairly with other sources of flexibility.

The proposed changes will also appropriately address issues that storage facilities face in relation to final consumption levies. Currently some storage developments could be subjected to double charging of final consumption levies at the time of both importing and exporting electricity to the grid.

Ofgem is also consulting on changes to the electricity and gas regulations on the licence applications forms to make sure that it has all, but only the necessary information to assess applicant’s eligibility for a licence. It has also added specific questions for electricity storage providers in the electricity licence application paperwork.

In a separate consultation Ofgem has proposed to introduce a new condition into the electricity distribution licence to prevent distribution network operators from operating storage assets.

In its announcement of the consultation Ofgem said that storage had a number of benefits, including helping to integrate renewable generation, reducing the costs of operating the system, and helping to avoid or defer costs associated with reinforcing networks. However, it added that the playing field will need to be levelled to allow storage to compete in relevant markets.

In areas where competitive activities are carried out by monopoly network operators, there is potential for competition to be distorted, new market entrants to be put off and for the incentives for network operators to efficiently invest in their networks to be affected.

Ofgem noted that in the case of DNOs owning and operating their own storage assets, distortions or foreclosures could have additional impacts on both the adoption of storage and other forms of flexibility by third party providers – such as DSR or other sources of flexible generation. The regulator added that this could have a knock-on effect on other markets, such as aggregation.

The consultation also highlighted the potential benefits of storage to network operators, namely a valuable source of flexibility. It was therefore seen as important that networks have the appropriate regulatory framework to make efficient and effective use of the flexibility available to the market, while maintaining a position of neutrality.

Both consultations are open until 27 November.

Industry 2 | Reducing emissions can boost manufacturing competitiveness: report

Manufacturing is a substantial source of carbon emissions, according to a new report, accounting for 60% of emissions from the industry sector – which amounts to 33% of all UK emissions.

Published on Monday, 9 October, the report, Lean and Clean, Building Manufacturing Excellence in the UK found that the best manufacturers are improving energy efficiency by 50% over 10 years, though the rest had only managed a 10-15% improvement. The report said the gap will not be closed by businesses on its own, with faulty signals on current and future costs, as well as a lack of strategic insight on resource issues, meaning opportunities were not being realised. It explained that cutting emissions through reducing energy use or increasing resource efficiency can support manufacturing competitiveness. This is as it can lower costs and extract more value per resource input used. It added that by supporting the transition to low-carbon manufacturing, it also avoids offshoring manufacturing employment and emissions to countries with more carbon intensive production methods.

The report called for a government supported manufacturing upgrade programme and to embed incentives for resource efficiency in the industrial strategy. Such a programme would help to spread best practice and stimulate investment and innovation, the report explained.

Industry 3 | Energy UK calls for government certainty to allow investment

Research by Energy UK has made a number of recommendations to the government to alleviate key concerns of investors. The issues were identified through a number of interviews and a round table discussion.

The first concern identified related to recent policy changes and the lack of transparency in their implementation. It was also found that the limited number of frameworks beyond 2020 means that the development of power projects is becoming increasingly risky for projects due for a Final Investment Decision after 2020. To address this Energy UK argued that clarity on the replacement mechanism for the Levy Control Framework is urgently needed. This, it argued, should include a commitment to future Contract for Difference auctions so that developers and investors have the confidence to invest beyond the current pipeline. The next concern noted was that for companies whose revenues are focused around owning generation assets, it is harder to source financing when they rely solely on a merchant model.

Concerns were raised by interviewees from the retail sector that the level of competition in supply markets has made it an increasingly hard area of the market to operate in. In response Energy UK called on the government to deliver an annual energy statement, which sets out forthcoming energy policies and their costs and benefits to both domestic and non-domestic customers. It was argued that this would help to rebuild the trust between government, industry and customers, as well as set out a clear vision for investors.

SSE Business Energy

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Week in Energy