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Weekly Industry Update – 13.08.18

Category : News


Week in Energy

Policy updates:

Industry updates:

Week in Energy

Monday 06/08 – The International Renewable Energy Agency outlines the innovation priorities needed to accelerate the global transition to a sustainable energy system.

Tuesday 07/08 – An expert finance working group appointed by the government concludes that developers of small modular reactors should be offered support on the same basis as offshore wind.

Wednesday 08/08 – BEIS launches its five-year review of the Capacity Market and the Emissions Performance Standard, finding that the schemes are working well and any changes are likely to be enhancing, rather than wholesale reform.

Thursday 09/08 – Ofgem looks to suspend the Market Making Obligation under the Secure and Promote licence condition. Supermarket chain Aldi commits to target net zero carbon status by 2019.

Friday 10/08 – The Treasury announces it is to assign an extra £780mn of funding to the UK’s Catapult Centres as it seeks to fast-track the R&D efforts required to support the government’s industrial and clean growth strategies. The third round of the Scottish government’s Decommissioning Challenge Fund is launched.

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Policy 1 | BEIS launches Capacity Market five-year review

The department launched its five-year review of the Capacity Market (CM) and the Emissions Performance Standard (EPS) on Wednesday, 8 August.

This review is intended to assess whether: the CM is still needed in future; the CM is meeting its objectives of ensuring security of supply, cost effectiveness, and avoiding unintended consequences; if these objectives remain appropriate; and if they can be achieved in the future in a way that imposes less regulation. The costs of the CM are levied on energy user bills.

The call for evidence states that the government’s current view is the CM is working “broadly as intended” and while it may find ways to enhance elements, it does not foresee the need for “fundamental reform at this point”. BEIS added the review offered a valuable opportunity to consider whether the CM needs to adapt in light of changes to the energy system as new technologies begin to compete effectively with traditional generation assets. The review will also seek to ensure that the CM is better able to support technologies such as Demand Side Response and enhance participation for aggregators and other smart system services.

Currently, the CM’s framework does not provide a route for some types of renewable capacity, specifically, solar and wind, to participate in the auctions. Most renewable technology is entirely supported by subsidies or benefits from low-carbon support schemes such as Contracts for Difference or the Renewables Obligation. However, the first round of subsidies is due to expire in 2027, meaning that the fleet of early renewable generators would be eligible to enter early CM auctions from 2023. The emergence of subsidy-free projects means these developers could also legitimately compete for contracts.

Ofgem also received three formal requests from industry to change the CM framework to allow renewables participation in future auctions. However, BEIS found several issues that must be corrected before the technology can realistically compete. BEIS noted the non-dispatchable nature of renewables would raise “unique challenges” for the CM that would require a review of current de-rating methodologies and how they would apply to renewables, in particular, with solar and wind. Legislative changes would also be required to allow for “hybrid projects” under one project application. However, this could provide advantages associated with security of supply.

Furthermore, a review of the penalties system would be needed. Originally the penalty regime was designed to reinforce existing market signals for the delivery of electricity during times of system stress. However, this synergistic effect does not materialise in the context of non-dispatchable renewables leading to concerns that the existing penalty regime for non-delivery of capacity when required may not be robust enough. BEIS suggested that the introduction of more robust penalties for non-dispatched technologies could incentivise more renewables developers to consider hybrid projects.

Following the call for evidence BEIS intend to consult “promptly” on the priority issues that emerge. Views are invited by Monday, 1 October.

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Policy 2 | Government considers learnings from Demand Side Response auction

The findings of an evaluation of the second auction of the Transitional Arrangements (TA) for Demand Side Response (DSR) in the Capacity Market (CM) were released by the government on Wednesday, 8 August.

The assessment was released alongside the CM five-year review, which is considering a more prominent role for DSR in the auctions. The TAs were a pilot scheme to encourage DSR to eventually bid into the main Capacity Market.

The TA scheme involved two auctions for specific types of capacity within the CM, the first for delivery of capacity in the 2016-17 delivery year, held in January 2016, and the second for delivery of capacity in 2017-18 was held in March 2017. While the first TA scheme was open to all types of DSR and small-scale distribution-connected generation between 2MW and 50MW, the second TA scheme was only open to turn-down DSR and has a minimum threshold of 500kW.

The latest evaluation specifically considers the second auction. This delivered a clearing price of £45/kW/year, with 312.17MW awarded agreements. Some 275.171 MW of the volume of Capacity Agreements awarded was for new capacity. The total cost of the auction was £14mn.

Aggregators contributed 82% of the capacity going forward to delivery in the second TA. Participating aggregators saw the second TA as an opportunity to build their business or build revenue for existing clients. Aggregators that chose not to participate regarded the TA as incompatible with their DSR portfolio or the timing of their business development.

Individual organisations that participated, whether directly or as aggregator clients, were able to offer turn-down DSR cost-effectively because they had sizeable sites suitable for turn-down DSR and did not face excessive upfront costs or excessive risks to their business. They tended to feel confident about delivering turn-down DSR because they were already doing “self-despatch” of turn-down DSR for Triad management.

Withdrawal of capacity before the auction contributed to low liquidity in the second TA, which led to a high clearing price. Pre-auction drop-out was caused by changes in the circumstances of specific aggregator clients and downwards revisions in the capacity that aggregators and direct participants thought they could realistically contract in the second TA.

There was little drop-out of capacity during the testing stage, after the auction. This was partly because of learning from the first TA and partly because the high price helped aggregators to attract clients.

The extent of the TA’s contribution to its objectives, relative to other external factors and trends, will be assessed further in the next phase of research. Phase 4 will also provide some insights into the value for money provided by the second TA, and the prospects for turn-down DSR in the future CM auctions.

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Policy 3 | Review backs support for small modular reactors

The Expert Finance Working Group (EFWG) on Small Reactors released its findings on Tuesday, 7 August assessing the prospect of raising private investment for small nuclear projects.

The independent panel, appointed by the government, said small-scale projects are a potentially more attractive option than nuclear megaprojects because they do not have the same high-risk issues such as budget overruns and delays.

The report issued seven recommendations to the government on how they can work with the nuclear and finance sectors to enable the small-scale advanced technologies market. The key recommendation of the report is that the UK government should help to de-risk the small nuclear reactor market to enable the private sector to develop and finance projects, to the benefit of supply chains and energy security.

The report said this should be done through the government issuing a clear policy and a market framework, as well as working with stakeholders to develop a common understanding of the risks associated with small nuclear projects. Removing perceptions of risks which have previously acted as barriers to investment will enable a level playing field with other low-carbon energy projects.

The EFWG concluded that if they attract the necessary private finance, the UK could develop first-of-a-kind small reactors projects with overnight costs (the cost of a construction project if no interest was incurred during construction) of less than £2.5bn by 2030. This is dependent on the recommendations of the report being followed and the projects attracting the needed private finance.

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Policy 4 | EU funding delivers new energy storage initiative

The Centre for Automotive and Power Systems Engineering (CAPSE) at the University of South Wales (USW) will soon launch a £3.5mn research project on low-carbon technologies and energy-storage products.

The Smart Energy Storage Solutions Hub scheme will be backed by £2.3mn of EU funding, with the remainder of funding coming from the university and industrial partners. The hub will collaborate with businesses in sectors such as low carbon, energy and environment and ICT, giving them access to the university’s specialist research facilities.

Finance Secretary Professor Mark Drakeford said: “We are committed to driving forward cutting-edge research in the low-carbon economy and collaboration between business and universities will help us achieve this”. He also claimed that the project will help the Welsh government “realise its energy-efficiency potential and to become a major exporter of energy efficiency technology and know-how.”

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Industry 1 | Regulator consults on allowing networks to to recover additional costs of £90mn

On Wednesday, 8 August Ofgem confirmed it is minded to allow network companies to recover an additional £90mn funding – ultimately added to energy bills – to tackle cyber and physical security threats.

The regulator is consulting on its initial views on six “reopener mechanisms”. These were included in some cost categories of the current RIIO price controls where there was uncertainty about expenditure requirements at the time of setting allowances. The mechanism allows network companies to propose adjustments to their baseline expenditure allowances once there is more certainty in order to cover any extra costs.

Ofgem received submissions from National Grid Electricity Transmission, National Grid Gas Transmission, Cadent Gas and Wales and West Utilities in May 2018 and is now consulting on its initial views on these submissions.

National Grid, Wales and West Utilities and Cadent applied to pass on an additional £144mn of costs to be used for improving resilience to cyber security and physical threats, compensating landowners for work on gas pipelines and managing street works. Ofgem noted that in its Final Proposals for the RIIO T1 and RIIO GD1 price controls it had said that costs related to improving physical security were uncertain, thus it included the provision for a reopener mechanism. On the networks’ submission, Ofgem reduced the additional amount that it intends to allow for security threats to £90mn.

In a separate submission, National Grid requested funding to pass on close to £263mn to consumers for the replacing of a gas pipeline across the Humber estuary and to maintaining gas compressors. This was submitted under the “one-off asset health costs” category due to National Grid identifying a risk of underwater damage to the pipeline. The regulator proposed to refuse the request related to the new pipeline on the basis that National Grid has not demonstrated that the replacement will be “in the best interests of consumers”.

On National Grid’s request for funding to maintain gas compressors, Ofgem proposed to “reject the vast majority of the company’s request”. It stated its belief that some of the works are already funded by the price controls and that some areas of investment are not related to ensuring the gas compressors are compliant with the European Industrial Emissions Directive, as was National Grid’s stated intention.

The regulator is also consulting on a submission from National Grid for an adjustment of around £118mn to its allowances for installing 9km of electricity cables in the Dorset Area of Outstanding Natural Beauty. In its initial view on the submission, Ofgem considered that the cost could be lowered by more than £2mn and thus it proposed allowing National Grid £116mn for the project.

Ofgem is seeking views on each of the submissions and is required to decide on submissions all by 30 September 2018.

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Industry 2 | IMechE warns hotter summers to increase energy use in the water sector

Hotter, drier summers will drive a “vicious cycle” of increased electricity use and emissions, the latest report from the Institute of Mechanical Engineers (IMechE) has warned.

Dr Jenifer Baxter, IMechE Head of Engineering said that such a forecast highlights the urgent need to decarbonise the energy system. IMechE’s report, Water: Drought and Flood, focused on the impact of the UK’s recent heatwave, as well as the wider effects of climate change, on the water sector. It found that as hotter weather leads to increased water use, treatment plants will have to run at peak rates for longer leading to increased energy consumption, as well as higher maintenance and running costs.

“This summer is definitely a reflection of the changing climate” said Dr Baxter, adding that “we are using more electricity now than perhaps we would have done […] this is a vicious cycle”. The report said that ageing infrastructure and a “complex web of responsibilities” make collaboration key to tacking future challenges.

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Industry 3 | IRENA identifies renewables innovation priorities

The International Renewable Energy Agency (IRENA) has outlined the innovation priorities required to accelerate the global transition to a sustainable energy system. The four policy-level recommendations were set out in a chapter of the 2018 Global Innovation Index (GII) report, titled Innovation Driving the Energy Transition.

A range of priority areas were identified including the fostering of a system-wide approach to innovation that looks beyond research and development. Here, said IRENA, innovative approaches to enabling infrastructure, business models and system operation should be considered alongside technology developments to leverage synergies “across all sectors and components of the energy system”.

International cooperation is critical to nurturing innovation, IRENA noted, saying that a focus should be on prioritising existing platforms designed to foster international collaboration. This would allow countries to pool resources and co-develop the programmes necessary to advance the energy transition. It also pointed to the need for a “significant scaling-up” of the share of renewable power in global electricity systems. This should increase from a quarter today to around 85% by 2050, a target that will require increasing the flexibility of power systems in supply and demand.

Finally, IRENA said a portfolio of technologies to electrify and decarbonise end-use sectors such as transport, industry and heating should be supported. Francisco Boshell, Analyst at IRENA said: “Electrifying energy demand of end-use sectors represents a ‘win-win’ that can reduce emissions whilst supporting the integration of higher shares of renewable power.”

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