Week in Energy

Monday 17/07 – Energy Minister Alan Whitehead warns time is running out to make up on ‘lost ground’ in key areas where progress towards meeting climate targets is already failing, criticising the delay in publishing the Clean Growth Plan. The National Cyber Security Centre (NCSC) – part of the UK’s intelligence agency GCHQ – reportedly issues a warning of hackers targeting the UK energy sector.

Tuesday 18/07 – The government’s latest Major Projects Portfolio Data reveals the whole life cost estimates for the Hinkley Point C nuclear power station project have increased from £14bn in 2015 to £50bn. During a debate in the House of Lords, government whip Viscount Younger of Leckie reiterates the government’s determination to ensure energy security.

Wednesday 19/07 – BEIS confirms its decision to exempt energy-intensive industries from the costs of the Renewables Obligation, pushing up energy bills for other business energy users. The department also reiterates its commitment to a low-cost, reliable, clean energy system in its Annual Report and Accounts for 2016-17, saying UK emissions were 38% lower in 2015 than 1990, while GDP growth has continued. Ofgem publishes the timetable for a proposed mid-period review of the price control for electricity distribution networks, starting the process in autumn 2017.

Thursday 20/07 – Defra finds the UK’s carbon footprint fell by 1% between 2013 and 2014, with it 20% lower than the 2007 peak. Leading businesses and investors write to Prime Minister Theresa May, urging the UK government to increase ambition to tackle climate change and demonstrate leadership towards a zero-carbon economy. Economic modelling, released by SSE, finds the impact of the £2.6bn investment in the Beatrice Offshore Windfarm is expected to add £1.13bn to UK GDP and support more than 18,100 years of full-time employment in the UK.

Friday 21/07 – A new report published by the Sustainable Gas Institute at Imperial College London assesses options for greener gas grids, suggesting decarbonisation standards will be needed if decarbonised gas networks are pursued.

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Policy 1 | Heavy industry renewables cost exemption to raise other bills

The government has decided to exempt energy intensive industries (EII) from the indirect costs of the Renewables Obligation (RO) scheme, lowering energy costs for some of the country’s biggest energy users, but increasing costs for other bill payers.

Exempt industries defined as EIIs include many major manufacturers and the steel industry. EIIs had previously received compensation for these costs, however the shift from compensation to exemption shifts the costs from taxpayers to energy bills. Specifically, the government estimated that the exemption would lift non-exempt business electricity bills by around 0.2% - 0.6% over 2017-18 to 2027-28. Without the exemption, costs are estimated to be around £17.40/MWh (2016 prices) on average. If the exemption is included, this rises to around £18.20/MWh. For a non-exempt large sized energy user this translates into a projected average contribution to bills over 2017-18 to 2027-28 of £1,700,000.

BEIS explained these extra costs for non-exempt energy users had to be balanced against the benefits to EIIs. These benefits include increased certainty, compared with a compensation scheme, and real-time support provided to EIIs by being exempt from RO costs. The increased certainty will enable maintained competitiveness in two ways. The first is the real-time support, allowing EIIs to free up working capital which can be deployed elsewhere. Meanwhile, an EII will be able to raise or service debt at lesser cost while maintaining their target debt service coverage ratios. The government suggested it could have wider beneficial impacts on output, investment and employment decisions. It also could reduce the risks of investment and carbon leakage.

While recognising businesses that do not benefit from the exemption will bear additional costs, BEIS explained it considered the benefits justified proceeding. It explained it had focused the exemption on businesses for whom electricity is a significant part of their gross value added and operate in sectors that are considered “at risk” of losing out to international competition. The government assured it is still looking to “bear down” on broader business energy costs. It is considering what more it can do in the business energy area, referencing ongoing work on the Industrial Strategy and Clean Growth Plan.

The exemption is set to be implemented in England and Wales, as well as Scotland – although it has devolved responsibility for the RO. The government said it will be brought in through changes to the supplier liability mechanism under the RO scheme.

The exemption is still subject to Parliamentary approval, though State Aid approval has now been secured. The government said it intends to bring the RO exemption in from 1 January 2018, though this may be delayed if parliamentary approval is not secured in time.

BEIS added that it will set out its decision on implementing exemption for EIIs from the indirect costs of the small scale renewable feed-in tariff scheme in “due course”.

Gareth Redmond-King, Head of Climate and Energy Policy at WWF-UK, argued this “disappointing decision” would mean other bill payers would end up paying more and reward firms that are contributing more than most to global warming.

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Policy 2 | Next energy network price control to maximise energy user benefits

Energy regulator Ofgem has warned energy network companies to prepare themselves for a “tougher” round of price controls from 2021.

The new price controls will be adaptable to ensure a wide range of energy futures are considered, as Britain’s energy system evolves at an “unprecedented pace”. Ofgem said its new controls would be capable of attracting global investment, while ensuring consumers get value for money.

The regulator said it had seen “clear evidence” the cost of investment required in networks was “significant lower” and the new, RIIO-2 price control would reflect this. It would also fall in line with other utility regulators.

Jonathan Brearley, Senior Partner, Networks at Ofgem explained: “Our stable regulatory regime appeals to investors. We believe current market evidence suggests that they may be willing to accept lower returns for regulated assets. Setting tougher controls will ensure that Britain’s energy networks deliver even better value for customers.”

By 2020, Ofgem said its price controls would have enabled around £80bn of investment in electricity transmission and distribution infrastructure since privatisation. It added that they would have also reduced network costs by 17% over the same period.

The new framework will make use of the lessons learned from RIIO-1, Ofgem said. For example, if companies are able to deliver outputs set for them for less money during RIIO-1, this will be taken into account when setting allowances for the next framework.

This would ensure energy users see 100% of the benefit in the next price control period. Ofgem assured this was a normal part of the way in which incentives encourage companies to be efficient. It explained the benefits of this efficiency are passed on to consumers “partly” within the current price control period, with this “fully” the case in the next price control period.

It explained network companies will be encouraged to further understand the services consumers both want and need at the start and throughout the price control. They will be tasked with anticipating and adjusting to changing demands. These include continuing to deliver a reliable, safe and secure network system that supports the transition to a low-carbon future.

As well as this, Ofgem said network companies should use flexible, non-traditional options where appropriate. Furthermore, greater coordination across traditional network boundaries will be required. Ofgem said companies will have to adapt and “play their part” in meeting the challenges presented by the changing energy system.

Ofgem is seeking views on its initial plans until 4 September. Plans to consult on the framework structure will follow in 2018.

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Policy 3 | Media reports head of energy costs review selected

Oxford University economist, Professor Dieter Helm, has reportedly been selected by BEIS as the preferred choice to carry out the government’s promised review into the cost of energy in the UK.

The review will be looking at the future of UK energy generation and changing demand profiles, and evaluating how best to keep energy costs down for consumers whilst still meeting emission reduction targets and ensuring the security of supply.

The report in the Guardian of Helm’s selection have sparked controversy, predominantly because of his scepticism over the role that renewables should play in the UK energy mix. Greenpeace UK Head of Energy, Hannah Martin commented: “Dieter has a well-known preference for gas and has historically failed to grasp the full potential of renewables.”

Helm has previously criticised the cost of wind and solar farms, arguing that renewable investment would be better spent in research and development on new technology rather than in increasing existing renewable capacity, which he feels cannot be implemented at a large enough scale to achieve climate targets.

The review committee will reportedly also include Steve Holliday, former CEO of National Grid until 2016, and Richard Nourse of Greencoat Capital.

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Policy 4 | Defra decides on emissions controls for small generators

The Department for Environment, Food and Rural Affairs (Defra) has confirmed its decision for implementing the Medium Combustion Plant Directive (MCPD), as well as further emissions controls on generators.

The MCPD, brings in emission controls for combustion plants in the 1-50MWth range to help to deliver a cost-effective improvement in air quality. An increasing number of businesses have opted in recent years to install onsite generation of this size, while small generators have also been successful in the capacity market energy security auctions.

Originating from the EU, the MCPD must be transposed into UK law by 19 December 2017, with controls to apply to new plants from December 2018. Dependent on size, existing plants will have to comply with requirements from 2024 or 2029 – with full implementations set to be achieved in 2030.

Defra said generators with Capacity Arrangements from 2014 and 2015 Capacity Market auctions are to be included in transitional arrangements (Tranche A), as proposed in the consultation. They will be joined by generators under 1MW with Capacity Arrangements from the 2016 auction. Tranche A generators are tasked with complying with standard permit conditions only when their agreement comes to an end.

Meanwhile, generators with 5-50MW generators with nitrogen oxide emissions over 500mg/Nm3 operating for over 50 hours/ year will have emission controls implemented from 1 October 2019.

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Industry 1 | Royal Academy of Engineers find biofuel potential from business waste

The latest report from the Royal Academy of Engineers (RAEng) has stated that more needs to be done to accelerate the uptake of biofuels in the UK transport sector.

The report, Sustainability of Liquid Biofuels, was published Friday, 14 July. It was commissioned by the government and evaluates the respective pros and cons of biofuels. It found that they have the potential to play a significant role in meeting the UK’s commitments to climate change targets.

The report stated that biofuels will be especially important in aviation, shipping and heavy goods vehicles where there are currently few viable alternatives to fossil fuels. Whilst biofuels have been widely adopted in other countries, such as Brazil and the USA, the report noted that uptake globally has been limited due to concerns over deforestation, land degradation and negative impacts on biodiversity.

To make the biofuel sector in the UK a viable proposition, the report found that a mixture of incentivisation and regulation will be required to ensure that the benefits from reduced greenhouse gas emissions are not achieved at the expense of other environmental sustainability criteria.

The global biofuel market is heavily based on first generation crop-based biofuels, such as bioethanol from sugar cane. The RAEng report supports the use of crop-based biofuels in appropriate locations which do not cause environmental damage, but it recommends setting a cap on the supply of crop-based biofuels to mitigate the risks from changing land-use. In preference, it suggests incentivising the development of new second generation biofuels from business waste, such as cooking oil, as well as agricultural, forest and sawmill residues.

In line with the EU target of incorporating 10% biofuel into road transport by 2020, suppliers are already blending biofuels into petrol and diesel up to a level of 4.75%. The RAEng report found that the level of biofuels required under the Renewable Transport Fuel Obligation should be increased further to reduce the carbon emissions from road transport and meet climate change mitigation targets.

The report identified several risks involved in expanding the biofuel sector, including the traceability of fuel sources and fraudulent fuel practises. To ensure that genuine residues are used, and not diverted from other more environmentally sustainable applications, it will be essential to create a framework for the clear and consistent categorisation of wastes and residues. In the longer term, RAEng suggest that more work needs to be done on land-use planning and evaluating the impact of biofuels via life-cycle assessments, rather than simply their carbon emissions, to ensure that the full benefits of biofuel use can be realised.

The Chair of the RAEng’s working group on biofuels, Adisa Azapagic, said: “Second generation biofuels offer real prospects for the UK to make progress in reducing emissions from transport, particularly in sectors like aviation where liquid fuels are really the only option for the foreseeable future.”

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Industry 2 | Concerns raised over impact of attempted energy industry hacking

Recent cyber-attacks on energy infrastructure across the globe have brought the energy community’s attention to the need for improved cyber-security.

The US sent out an alert in June to say that hackers were persistently stealing network log-in and password information to access energy company networks. It raised fears of the “BlackEnergy” malware attack experienced by Ukraine in 2016, when hackers were able to cause widespread blackouts by taking remote control of plant systems.

More recently, cyber-attacks targeted senior engineers at the Electricity Supply Board (ESB) in Ireland this week, with emails containing malicious software. In addition to usual phishing emails, spear phishing emails contain personal information of the recipient so that they appear to be genuine communications. While there were no energy security implications caused by the attack, concerns remain over what information was accessed.

Following the attacks, the National Cyber Security Centre (NCSC), part of the UK’s intelligence agency GCHQ, has reportedly issued a warning of hackers targeting the UK energy sector. The Guardian said a leaked memo from NCSC, which has not been confirmed by the organisation, stated that they had identified: “connections from multiple UK IP addresses to infrastructure associated with advanced state-sponsored hostile threat actors, who are known to target the energy and manufacturing sectors.”

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Industry 3 | Oxford initiative seeks to boost the number of new low-carbon businesses

Oxford social enterprise, Low Carbon Hub – which develops community-owned renewable energy projects – has been awarded £1.6mn in EU funding to boost low-carbon economic activity across Oxfordshire.

The EU funding will be matched by the initiative’s existing investment partners, bringing the total fund for its OxFutures scheme to £3.2mn.

Low Carbon Hub estimates that the low-carbon businesses contribute 7% of the county’s revenue, and hopes that the new funding will facilitate the creation of new low-carbon businesses to increase this figure. The OxFutures scheme will support new and existing SMEs as they incorporate new products and energy efficiency measures. It also hopes to facilitate knowledge sharing and networking between local authorities, businesses and community groups to further enhance the collaboration in community projects.

The initiative’s partnership with Oxford University will see the production of a case study on the role SMEs can play in integrating modern renewable energy technologies into local, regional and national grids, with the intention that this could inform future schemes across the country.

The Low Carbon Hub hopes that the OxFutures scheme, along with its other projects, will result in improved air quality, a reduction in energy bills and carbon emissions, and a boost to the local economy.

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