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Weekly Industry Update – 19.03.18

Category : News


Week in Energy

Policy updates:

Industry updates:

Week in Energy

Monday 12/03 – The Aldersgate Group calls for the UK government to provide long-term visibility and transparency on policy direction in a bid to overcome barriers to green infrastructure investment. Private-equity firm Gore Street Capital announces it will launch the world’s first energy storage fund, aiming to raise £100mn from an initial public offering.

Tuesday 13/03 – The Office for Budget Responsibility finds that the forecast spend on environmental levies in 2021-22 (£12.5bn) and 2022-23 (£12.8bn) will be around £0.5bn/ year less because of the low prices achieved in the recent Capacity Market auction. The Lords EU Energy and Environment Sub-Committee takes evidence on the implications of Brexit for the UK’s participation in the EU Emissions Trading Scheme (ETS). The committee heard there is a growing need for certainty over the UK’s future carbon trading arrangements and it would be preferable for the UK to remain in the ETS until the end of phase three, rather than exit at the same time as it does the EU.

Wednesday 14/03 – The Public Accounts Committee finds that the Green Investment Bank was never able to live up to its original ambitions and that there is no guarantee that it will ever do so. The Unite union sets out a roadmap for the UK becoming a global leader in electric vehicle (EV) technologies in a new report, warning the biggest current barrier to investment and innovation in EVs “remains government inactivity.”

Thursday 15/03/08 – Four parliamentary committees call for a new Clean Air Act in a joint report and set out a number of recommendations for improving air quality in the UK. These recommendations include bringing forward the ban on the sale of petrol and diesel cars and aligning climate change schemes with air quality goals to prevent government policy from working at cross-purposes.

Friday 16/03 – The government seeks views on proposals for setting standards for smart appliances. O2 research finds that 5G technology will help to unlock the next generation of smart energy grids.

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Policy 1 | Committee hears of Brexit impact on EU carbon trading

The House of Lords EU Energy and Environment Sub-Committee has heard that UK industry will not gain a competitive advantage from being outside of the EU’s Emissions Trading Scheme (ETS).

On Wednesday, 14 March, the committee took evidence from Lawrence Slade, Chief Executive of Energy UK; Debbie Stockwell, Managing Director of think tank, Sandbag; and Silke Goldberg, Partner at Herbert Smith Freehiils. The panel was asked for their thoughts on the implications of Brexit for the UK’s participation in the EU ETS.

Lord Currie of Kirkhale suggested the UK’s trading competitiveness in the global market should be a factor when considering whether to stay in the scheme. However, Slade said that “crashing out” of the scheme would likely impose new costs onto businesses. It would also impact climate policy for the UK, with a “major chunk” of this driven by the EU ETS and carbon pricing. Slade suggested if the UK is going to leave, the government should provide formal advice on the long-term trajectory of the UK’s carbon price.

Similarly, both Goldberg and Stockwell made the point the EU ETS was not the only international climate change commitment the UK had. Stockwell highlighted how the Paris Agreement meant businesses had to now take carbon emissions into consideration. Goldberg stated it was unlikely exiting the EU ETS would deliver a competitive advantage. Goldberg also outlined how some companies have a long-term carbon strategy. An abrupt exit from could curtail this, leading to short-term disruptive adjustments and potential price distortions.

In terms of the UK’s exit from the EU ETS, the panel agreed that the UK should wait until the end of the current phase three in 2020, rather than leaving the same day it leaves the EU, set for March 2019. If the UK left partway through, it would lead to uncertainty and could cause the EU carbon price to drop. Slade said leaving at the end of phase three would offer companies more time to plan, whereas leaving earlier left little time to implement an alternative scheme. The panel also agreed the UK should ideally continue to participate in the scheme beyond the current phase. Goldberg explained how it provided legal certainty for companies tackling climate change, while Slade pointed out being a part of the world’s largest carbon trading scheme would be beneficial for the UK.

Outside of the EU, there was an acceptance that the UK’s influence on the EU ETS would be lessened if it continued to participate. Stockwell did state though that the ability of UK diplomats to continue influencing the scheme should not be underestimated, with the UK frequently seen as a leader in EU climate politics. Stockwell also felt the reforms to the EU ETS had not gone far enough, with step change needed particularly in the industrial sector.

The panel all noted the government still had not provided clarity on what its future plans were. Slade said the urgency to do so was increasing “notch by notch, month by month”, adding the more notice given – whatever the UK decides to do – the better for all participants. Next week, on Wednesday, 21 March, Energy and Clean Growth Minister, Claire Perry, will give evidence to the committee on Brexit and the EU ETS.

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Policy 2 | Business group sets out recommendations to boost green investment

Research by the Aldersgate Group has argued that overcoming the current barriers that are limiting private investment in green infrastructure is “essential” to achieving the government’s economic, industrial and environmental aims.

The Towards the New Normal: Increasing Investment in the UK’s Green Infrastructure report, published on Monday, 12 March, explained that boosting private investment in green infrastructure could offer a “huge opportunity” for the UK. It noted that green infrastructure is a growing market for the professional services industry and is a crucial way of reducing the cost of capital required to meet the UK’s environmental and industrial policy objectives.

The Aldersgate Group said there was a “real urgency” required in boosting green infrastructure investment, with up to £693bn of investment required by 2031 to meet policy objectives in the UK, and a total of €90tn needed worldwide over the next 15 years. To address this issue the report made a total of 30 recommendations for government, businesses and investors across three themes: policy stability and market signals, regulatory drivers and smarter public spending. Within each of these sections the group highlighted a number of particularly important recommendations.

On policy stability and market signals, the report first recommended that the government commit to supporting the long-term growth of green investment through the Clean Growth Inter-Ministerial Group. It also recommended the setting of long-term visibility and transparency on policy direction through multi-year, cross-party frameworks; engaging a wider base of investors by establishing the potential size of different sections of the green infrastructure market; and expanding UK mandatory carbon reporting to capture a larger set of companies.

In relation to regulatory drivers, the Aldersgate Group suggested: adjusting financial regulations to encourage long-term investment in infrastructure; introducing flexible and smart regulations to establish new markets and investment opportunities for investment; and introducing a “green test” to ensure sustainability considerations are meaningfully taken into account in the allocation of government infrastructure investment or grants.

Finally, on smarter public spending, the report recommended: creating targeted funds with cornerstone public funding to tackle priority policy areas with clearly evidenced market failures, such as in domestic energy efficiency; strengthening public procurement standards; and issuing a sovereign green bond and municipal green bonds.

Alex White, Senior Policy Officer at Aldersgate Group, said: “Over the next three decades, the UK needs hundreds of billions of private investment in green and resilient infrastructure to meet the objectives of the Clean Growth Strategy, Industrial Strategy and 25 Year Environment Plan. But investment isn’t happening fast enough on its own. Government must catalyse action on green infrastructure investment now to move the financial system towards a new normal if we are to meet our policy goals cost effectively while maximising benefits for UK plc.”

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Policy 3 | OBR forecasts fall in environmental levy costs

Alongside the Spring Statement, delivered on Tuesday, 13 March, the Office for Budget Responsibility (OBR) issued its Economic and Fiscal Outlook. The report stated that spending on environmental levies in 2021-22 and 2022-23 is now expected to be around £0.5bn/year lower than previously forecast, primarily as a result of the Capacity Market – the auctions used by government to ensure that an appropriate level of energy generation capacity is available during the winter at the lowest cost to consumers.

This reduction was due to the lower than expected price achieved in the most recent four year ahead auction. This, the report said, suggested a downside risk, but it added that future auctions could depend more on new build assets, which is likely to pose an upside risk. Overall the OBR believed that as these risks apply equally to both receipts and spending, they do not represent a risk to its forecast for net borrowing.

The report considered “environmental levies” to include funding spent on: the Renewables Obligation, Contracts-for-Difference (CfD), Feed-in Tariff, Capacity Market, Warm Home Discount and Carbon Reduction Commitment schemes. Total spending on these is forecast to rise from £8.6bn in 2017-18 to £12.8bn in 2022-23, with the CfD scheme accounting for the majority of new spending.

The OBR has also revised up UK oil and gas revenues in every year of the forecast, by an average of £0.4bn/ year, based on higher sterling oil and gas prices and higher expected oil and gas production.

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Policy 4 | PAC finds GIB failed to live up to expectations

The Commons Public Accounts Committee (PAC) has found that the Green Investment Bank (GIB) was never able to live up to its original ambitions and suggested that there was no guarantee that it will in the future. The report, published on Wednesday, 14 March, said that this was because its green intentions were not “sufficiently protected”.

The PAC explained that since its creation in 2012, the GIB has been able to successfully attract private investment in some areas of the green economy, such as offshore wind. However, it added that BEIS has no way of assessing whether or not the GIB has achieved its intended objectives of both encouraging green investment and creating a lasting institution.

In August 2017 the GIB was sold to Macquarie for £1.6bn, and subsequently renamed to the Green Investment Group (GIG). The report was also critical of the government’s approach to selling the GIB, noting that BEIS prioritised reducing public debt and maximising the amount of money it received for the bank, rather than the continued delivery of its green objectives. The PAC added that the sale took “far longer than planned” and that the department’s approach to the process was “reactive” and meant it had to make a number of compromises.

The committee also found that the measures put in place by BEIS to protect the GIB’s green aims were insufficient and that it is unclear whether the newly branded GIG will continue to support the government’s energy policy or climate change goals.

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Industry 1 | National Grid identifies key future role for gas

National Grid issued analysis on Monday, 9 March, illustrating how gas can support a low-carbon future.

The report is a culmination of the system operator’s Future of Gas work programme launched in 2016 to test and develop National Grid’s understanding of stakeholders view of the future, to explore emerging thinking, and to consider the important future role of gas and the National Transmission System (NTS) in more detail. National Grid’s analysis and the evidence it has gathered showed that decarbonising gas and the supporting networks can be used to meet the UK’s 2050 carbon targets and improve air quality in the most cost effective way. It also shows the “vital role” that gas plays in delivering energy to consumers now and in the future.

On the decarbonisation of heat, it was identified that rather than one solution it is likely that a range of solutions will utilised. National Grid analysis – built on the Leeds H21 project – has found that the 2050 carbon targets can be reached by using hydrogen for heat in major cities, with contributions from biomethane and bio substitute natural gas (bioSNG) for use alongside natural gas in rural or off-grid areas.

A further challenge is identified as the decarbonisation of gas in industry. Given the dependence on gas in many industrial processes, decarbonising the gas sector appears to be the most attractive option for many sections of industry. Options being developed include decarbonising gas through hydrogen, biogases and carbon capture.

Specific policy recommendations include:

  1. The government should develop a decarbonisation of gas strategy
  2. The government should appoint a lead official to cover cross-departmental issues relating to the role of decarbonised gas in the whole energy system
  3. Policy makers should publish a timeline for decision making on heat
  4. The government’s Carbon Capture Usage and Storage programme should be, and followed with a clear commitment and ambitious deployment pathway, with funding for specific projects in this Parliament and projects starting operating in the 2020s

Moving forward within the energy sector, “whole energy system” thinking is needed as the interactions between the gas and electricity systems continue to increase. Gas plays an increasingly important role in balancing intermittent and renewable electricity supplies and as energy storage, supporting the UK’s clean energy goals. Policy makers and regulators are urged to remove existing policy barriers to decarbonised gas.

Nicola Shaw, National Grid UK Executive Director commented: “This document sets out the actions that we will now start to take, alongside recommended actions for policy-makers to facilitate the future of gas as part of the low carbon economy […] We will work with governments, regulators and stakeholders to progress the actions needed to ensure that gas is able to fulfil its crucial role in providing secure, low cost and low carbon heat, power and transport in a key partnership with electricity in a decarbonised world.”

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Industry 2 | IMechE calls for “more resilient and reliable” networks to support digital infrastructure

The Institute of Mechanical Engineers (IMechE) has said that the UK needs to build new levels of resilience and reliability into its electricity networks, including protection against hackers, in order to support the country’s increasingly digital infrastructure.

Published on Friday, 9 March, its report, Smart Cities: Technology Friend or Foe? found each year energy companies globally experience around 66mn cyber security events, 25% more than other industries, of which 90% of published vulnerabilities are of medium to high risk.

As one of three priority areas for action, the report recommended that the UK government include the electricity system requirements of digitally integrated smart cities, in terms of both demand and reliability, in planning for the nation’s future power infrastructure.

Colin Brown, Director at IMechE, said: “As we become more reliant on digital infrastructure, we are becoming more dependent on our electricity network. This means it has never been more important to ensure we have secure and reliable electricity supplies, robust enough to withstand threats from potential hackers and resilient to our changing climate.”

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Industry 3 | Energy firms warned of $1.6tn at risk if they ignore global climate goals

New research conducted by Carbon Tracker think tank has warned that fossil fuel companies could waste $1.6tn in investment by 2025 if they fail to take global climate goals into account.

Published on Thursday, 8 March, the report Mind The Gap draws on three scenarios able to achieve global climate goals these include the Beyond 2 Degrees Scenario (B2DS, aligned with a 1.75°C global warming outcome); the Sustainable Development Scenario (SDS, aligned with 2°C); and the New Policies Scenario (NPS, aligned with 2.7°C).

The report suggested meeting demand in any scenario will require significant investment, with the $1.6tn figure relates to the gap between the estimated $4.8tn needed to meet global fossil fuel demand between 2018 and 2025 and the $3.3tn necessary to achieve full implementation of the Paris Agreement. Furthermore, the report found oil and gas account for over 90% of total investment under each scenario, made up from necessary material investments for new oil and gas projects, $1.6tn in the B2DS and $2,1tn in the SDS.

Senior Analyst at Carbon Tracker Andrew Grant warned that fossil fuel investments that were made on the assumption of current policies being continued risked creating “stranded assets” if international efforts to tackle climate change intensified.

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