Targets for 2019/20 Renewables Obligation published

The Department for Business, Energy and Industrial Strategy (BEIS) has published the Renewables Obligation (RO) for 2019/20, which will bring an estimated cost increase to consumers of £2.21/MWh.

The Renewables Obligation is the main financial mechanism by which the Government incentivises the building of large-scale renewable electricity generation. Ofgem issues Renewables Obligation Certificates (ROCs) to generators in relation to the amount of eligible renewable electricity they produce.

Generators sell these ROCs to suppliers or traders, which allows them to earn a premium in addition to the wholesale electricity price received for the electricity generated.

BEIS has outlined that electricity suppliers will need to produce 0.484 ROCs per MWh during this financial year across England, Scotland, and Wales.

This marks an increase of 3.4% from the 2018/19 Obligation, which was 0.468 ROCs per MWh. The new targets translate to an increase in the cost to consumers of an estimated £2.21/MWh from current levels.

 

Exemption for Energy Intensive Industries

BEIS established an exemption for Energy Intensive Industries (EIIs) from up to 85% of the indirect costs of the RO in 2017. This was implemented in England and Wales, then subsequently by the Scottish Government, meaning that under current arrangements there is a single obligation level for Great Britain.

The exemption means that the obligation level applies to:

  • 100% of electricity supplied to non-EIIs
  • 15% or more of the electricity supplied to EIIs

 

ROCs for biomass

New to the Renewables Obligation Order is the introduction of annual flexible caps on the number of ROCs that certain RO-eligible biomass co-firing and conversion units can receive.

The new regulation will define two types of generating stations – ‘capped’ and ‘mixed’ – to which the flexible cap mechanisms will apply. These stations will be subject to a different amount of ROCs that can be assigned.

Capped generating stations comprise only of non-grandfathered ‘capped’ units, whilst mixed generating stations comprise of these and also grandfathered ‘exempt’ units. A grandfathered unit is one that has a policy commitment to receive no less support under the RO than they have received historically. The cut-off date for grandfather biomass units was 12 December 2014. Any units that generated at the biomass conversion band after this date are not grandfathered.

At capped stations, there is a limit on the number of ROCs that the station can be issued in an Obligation year, equal to 125,000 ROCs for each unit at the station.

At mixed stations, an overall cap will be calculated by adding an allowance of 125,000 ROCS for each of the stations’ capped units to an estimate of the number of ROCS likely to be issued for generation at the exempt units during the Obligation year.

Currently, only Drax Power Station in Selby meets the BEIS definition of a mixed generating station for 2018/19.

 

How EIC can help

Our Market Intelligence team work hard to demystify the energy markets for clients. When these changes come into effect, we can ensure the accuracy of your energy bills by checking your invoices on an ongoing basis.

We can also provide actionable insights with our Long-term Price Forecast Reports which detail predicted rises for all commodity and non-commodity charges up to five years in advance.

To find out more, contact us on 01527 511 757 or email info@eic.co.uk. You can also download more information about the report here.

An insight into SECR

SECR will require all quoted companies, large UK incorporated unquoted companies, and limited liability partnerships (LLPs) to report their energy use and carbon emissions relating to gas, electricity, and transport, and apply an intensity metric, through their annual Directors’ reports.

 

Summary of the Government’s proposed SECR framework

From April next year, large organisations in the UK will need to comply with the SECR regulations. The new scheme is part of the Government’s reform package.

Its aim is to reduce some of the administrative burden of overlapping carbon schemes and improve visibility of energy and carbon emissions. As such, it will be introduced to coincide with the end of the current Carbon Reduction Commitment (CRC) Energy Efficiency Scheme.

SECR will build on the existing mandatory reporting of greenhouse gas emissions by UK quoted companies and the Energy Savings Opportunity Scheme (ESOS).

 

Who needs to comply with SECR?

SECR qualification will follow the Companies Act 2006 definition of a ‘large organisation’, where two or more of the following criteria apply to a company within a financial year:

  • More than 250 employees.
  • Annual turnover greater than £36m.
  • Annual balance sheet total greater than £18m.

There is no exemption for involvement for energy used in other schemes – e.g. Climate Change Agreements (CCAs) or EU Emissions Trading Scheme (ETS).

 

What are the reporting requirements?

From 1 April 2019, affected organisations will be required to:

  • Make a public disclosure within their annual directors’ report of energy use and carbon emissions.
  • Report using a relative intensity metric e.g. tCO2/number of employees.
  • Provide a narrative on energy efficiency actions taken during the reporting period.

Reporting will align with an organisation’s financial reporting year.

 

Is anyone exempt from SECR?

Yes – those exempt from complying with SECR include:

  • Public sector organisations.
  • Organisations consuming less than 40,000kWh in the 12-month period are not required to disclose SECR information.
  • Unquoted companies where it would not be practical to obtain some or all of the SECR information.
  • Disclosure of information which Directors think would be seriously prejudicial to interests of the company.

 

There seem to be similarities to ESOS – can ESOS compliance help with SECR?

Yes. Though ESOS and SECR are separate schemes, and will continue as such, the information from your ESOS compliance can be used to support SECR reporting.

 

Where do I start with compliance?

The detailed guidance for SECR will soon be published. EIC can assist with compliance as well as providing bespoke reporting to ensure that you have real visibility of your energy and carbon emissions both at organisational and site level.

If you would like to know more about SECR, what it means for your business visit our Streamlined Energy and Carbon Reporting (SECR) service page.

UK Capacity Market suspended by European Court of Justice

Somewhat lost amongst the noise surrounding the proposed Brexit Agreement comes the news that UK’s Capacity Market (CM) will undergo a temporary suspension.

 

What is the Capacity Market?

The Capacity Market allows plant to offer capacity to the electricity system at a price set by auction. The market has been introduced to prevent a short-fall in electricity generation due to the closure of older fossil fuel plant. Every year, the Government decides how much capacity will be needed to safeguard the system. Both generators that are currently operating, and those that are being developed, can take part in the scheme.

 

The Court’s Ruling

The ruling from the European Court of Justice (ECJ) follows Tempus Energy’s challenge to the UK Government that took place in 2014. The company took issue with the decision to grant the UK’s Capacity Market with State Aid approval, making claims that the design was biased against small, clean energy, making it easy for coal, gas, and diesel generators to control the market.

The ECJ said that the European Commission was wrong to not more closely investigate the UK’s plans to establish the CM in 2014, when the organisation was originally responsible for assessing whether the policy complied with State Aid rules.

Under EU State Aid rules, it is required that member states need to consider alternative options to meeting power demand before subsidising fossil fuel generation. The rules also require any measures taken to increase capacity to be designed in a way that encourages operators of new clean technologies.

 

What’s next?

The ECJ’s decision means that payments made under the Capacity Market scheme will be frozen until the UK Government can obtain permission from the European Commission to continue.

Furthermore, the UK will also not be allowed to conduct any further CM auctions for energy firms to bid on new contracts. The nearest auctions were scheduled for early 2019.

Sara Bell, CEO of Tempus Energy, said: “This ruling should ultimately force the UK Government to design an energy system that reduces bills by incentivising and empowering customers to use electricity in the most cost-effective way – while maximising the use of climate-friendly renewables.”

 

How will this affect you?

The Government has released a statement saying that security of supply will not be impacted over this winter.

They acknowledge a ‘standstill period’ on the Capacity Market during which they will be working closely with the European Commission in order to aid their investigation and seek approval for the Capacity Market.

The cost of the Capacity Market is recouped via customers and currently accounts for 2.9% of an electricity bill.

The suspension of the payments to generators may result in customers receiving a refund, or at least a halt to ongoing payments while the suspension is in place.

However, if the scheme is cancelled all together it would lead to the removal of one cost to customers; the Capacity Market charge is just one of numerous non-commodity charges, paid on top of the wholesale price of energy, that are rapidly increasing.

 

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How will Brexit affect the UK energy industry?

The energy sector in the UK had already seen significant changes with the Energy Act 2011 and various proposals for reform of the electricity market. The potential impacts of Brexit on the UK and global economy could be far-reaching. However, the direct impact on the energy industry is likely to be more muted.

Oil and gas markets are traded on an international level and the EU has little influence over the make-up of a member states energy mix. There will be no danger of blackouts or supply shortages and in the short-term you may see little day-to-day change.

However, the longer-term outlook for post-Brexit energy may be altered, with one of the major issues being the UK’s relationship with, or role within, the EU Internal Energy Market (IEM).

 

The EU Internal Energy Market (IEM) – will the UK stay a part?

The IEM is a borderless network of gas and electricity transfers between EU member states. Common market rules and cross-border infrastructure allow for energy to be transferred tariff-free between countries.

Post-Brexit, the UK is likely to have less influence over EU energy regulation but will be able to adopt a different, potentially lighter, framework for its energy polices. The extent to which the UK still adheres or follows the EU energy regulation will be dependent on any ‘deal’ reached before March 2019.

Continued access to the IEM is a key priority for the UK Government in its Brexit negotiations. This would allow the country to continue to take advantage of various benefits associated with the IEM including increased security of supply, market coupling, cross-border balancing and capacity market integration.

Having recognised the benefits of the IEM the Government is seeking to retain as free as possible access to internal market and to maintain a strong influence on energy within the EU.

Plans to increase interconnectivity with the Continent are continuing and enhancing with many new interconnector links currently in development (see below). Irrespective of negotiations, this will require close cooperation with the EU Internal Energy Market going forward.

However, there are some inconsistencies in regards UK plans encompassing full membership of the IEM. Continued participation in the IEM is likely to involve the UK adopting various European legislation, which may not tally fully with UK judicial ambitions unless the UK remains part of the institutions which handle EU energy regulation (ACER, ENTSO-E and ENTSO-G for example).

 

Will Brexit impact on connectivity between the UK and Europe? What about Interconnectors?

The ongoing Brexit negotiations are having no real impact on developments, with four new Interconnector links now under construction.

The Government wants to see all the current planned projects through to operation, the majority of which will not be completed until after the UK has left the EU. Business Secretary Greg Clark had indicated he was keen for the UK to remain in the EU’s Internal Energy Market, although the final result will depend on the outcome of Brexit negotiations.

Regardless of the outcome, the UK’s energy network connections to the EU will remain in place. The Government recently posted guidance on the trading of gas and electricity with the EU if there is no Brexit deal. The publication highlights that there are only small changes expected to Interconnector operations, advising operators to engage with relevant EU national regulators to confirm any requirements for the reassessment of their access rules.

The main area that may see impact is for proposed Interconnectors; those which are still in the stages of project development, without final financial decisions. Uncertainty caused by Brexit, surrounding commercial, regulatory, and operational impacts, will likely see planning stages revisited to adjust for these challenges.

The UK may lose access to the Connecting Europe Facility (CEF) going forward. The CEF help to provide funding for Interconnectors across Europe through targeted infrastructure investment. The Government has confirmed any commitments that have already been made by the CEF regarding Interconnectors into the UK will be safe following the UK’s withdrawal. However, it is not clear whether companies in the UK will be able to seek investments for new projects.

 

Will EU State Aid rules still apply to the UK?

Unless the UK remains part of the European Economic Area (EEA), then the EU State Aid rules would no longer apply. The Government has said it will transfer existing EU State Aid law into domestic law after Brexit. The Competition and Markets Authority (CMA) will take over responsibility of State Aid enforcement. Going forward, UK rules may diverge from the EU but the extent of this will be limited by the terms of a future UK-EU trade deal.

In the immediate aftermath of Brexit, no significant change to State Aid rules is expected.

 

Will coal plants stay open?

Coal-fired power plants in the UK are required to adhere to the EU Industrial Emissions Directive (IED) which places conditions on such plants in order to control and reduce the emissions and waste they generate. Strict emissions limits often require substantial investment in technology to reduce pollution. Several plant determined this was not cost effective, and will close down. All but one coal plant has chosen not to adhere to the new regulations and will close by 2023, and several have already done so.

Despite Brexit, these unabated coal plant will close. The Government has confirmed its policy to remove coal from the fuel mix entirely by 2025.

The Medium Combustion Plants Directive 2015 (MCP) operates in a similar manner, limiting the emissions of harmful pollutants. The UK has adopted both the IED and the MCP into its European Union (Withdrawal) Act, meaning that in the short-term these regimes will continue beyond March 2019. In the long-term the UK and EU will need to agree on common standards following Brexit.

 

What about EU investment in energy projects?

Several EU initiatives promote investment in energy infrastructure which encompasses funding towards UK projects. The EIB, for example, has invested over €13bn into UK energy projects since 2010.

The draft EU Withdrawal Treaty anticipates this funding will continue, at least for projects approved by the EIB for investment before 29 March 2019.

After withdrawal from the EU, the UK will not be eligible for specific financial operations from the EIB which are reserved for EU member states. New projects may be supported by the EU depending on the nature and if it aligns with the EU’s own energy policy. Cross-border projects, such as Interconnectors and pipelines, may be available to non-member states.

The UK Treasury has sought to boost funding certainty and has vowed to underwrite all funding obtained via a direct bid to the European Commission and has also confirmed Horizon 2020 projects will still be funded.

 

What about the gas market, will supplies or prices be affected?

The UK already operates a diverse import infrastructure, consisting of Interconnectors and Liquefied Natural Gas (LNG) terminals to allow for the import of gas, mitigating against supply risks. Operations and gas flows are expected to continue as normal, irrespective of Brexit.

A more significant impact is likely to come from the expiry of long-term supply contracts and restrictions which allow for selling capacity on a long-term basis. The tariff network code restricts the price at which Interconnectors can sell their capacity. With Brexit it is unclear whether Interconnectors will continue to be bound by these restrictions.

Other benefits like the Early Warning Mechanism and the Gas Advisory Council may be lost unless the UK can negotiate to retain its role in these.

For Brexit to have a significant impact on gas prices (barring any substantial currency moves) then the withdrawal from the EU would need to lead to export tariffs on EU gas flowing to the UK.

 

How will Brexit affect the nuclear sector?

The UK indicated its intention to withdraw from the European Atomic Energy Community (Euratom) and the associated treaty (the Euratom Treaty) on 29 March 2017 as part of the Article 50 withdrawal process.

A report from the House of Lord’s energy sub-committee in January 2018 highlighted the potential for this withdrawal to impact UK nuclear operations such as fuel supply, waste management, and research.

However, the Government has made clear withdrawal from Euratom will not affect nuclear security and safety requirements. A Nuclear Safeguards Bill was introduced to Parliament in October 2017, highlighting how this will be achieved by amending the Energy Act 2013.

The Government will also continue to fund nuclear research in the UK, through programs like the Joint European Torus, Europe’s largest nuclear fusion device. Going forward, the UK will negotiate nuclear cooperation terms with other Euratom and non-Euratom members.

 

What about environmental impacts?

We’ve taken a look at the potential affect of Brexit on the UK’s climate change and renewable energy targets – find out more at our blog.

 

Stay informed with EIC insights

For the latest news on the energy markets and industry updates, you can find us on Twitter.

Follow @EICinsights today.

What impact will Brexit have on UK climate change targets?

The energy sector in the UK had already seen significant changes with the Energy Act 2011 and various proposals for reform of the electricity market. The potential impacts of Brexit on the UK and global economy could be far-reaching. However, the direct impact on the energy industry is likely to be more muted.

 

How will Brexit impact on the carbon market and the EU ETS?

The Government has published plans for the implementation of a UK carbon tax in the case of a ‘no-deal’ Brexit.

Under a ‘no-deal’ scenario, the UK would be excluded from participating in the EU Emissions Trading Scheme (ETS). This would mean current participants in the EU ETS who are UK operators of installations will no longer take part in the system.

In this instance, the UK Government will initially meet its existing carbon pricing commitments through the tax system. A carbon price would be applied across the UK, with the inclusion of Northern Ireland, starting at £16/tCO2, marginally less than the current EU ETS price, maintaining the level of carbon pricing across the UK economy post-Brexit.

The tax would be applied to the industrial installations and power plants currently participating in the EU ETS from 1 April 2019.

The House of Commons Business, Energy and Industrial Strategy (BEIS) Committee has strongly recommended remaining in the EU ETS at least until the end of Phase III in 2020.

The UK’s 5th carbon budget, adopted in 2016, assumes continued participation in the EU ETS, and will need to be altered if the UK leaves the EU ETS.

 

Will Brexit affect the UK’s climate change targets?

The UK’s climate change targets are expected to continue unaffected by whatever Brexit deal is reached. The Climate Change Act 2008 established that such goals are undertaken on a national level.

However, there are several international issues in this area which will need to be settled. The UK’s emissions reduction target forms part of the EU target under the Paris Agreement and this will need to be withdrawn. The UK would also need to submit its own Nationally Determined Contribution under the United Nations Framework Convention on Climate Change (UNFCCC) processes.

 

What about renewable energy?

After Brexit, the UK will no longer be obligated by renewable energy targets as part of the EU Renewable Energy Directive. Additional freedom from State Aid restrictions has the potential to allow the Government to shape renewable energy support schemes.

The development of large-scale projects may be impacted by the availability of funding from EU institutions such as the European Investment Bank (EIB). However, renewable and low-carbon energy will remain a focal point of UK energy policy post-Brexit, with national and international decarbonisation obligations unaffected by their relationship with the EU.

As part of the European Union (Withdrawal) Act 2018, EU legislation will be initially transposed into UK law from 29 March 2019. For some elements of the EU law, the UK will need to reach an agreement with the EU in order to maintain the status quo.

 

Stay informed with EIC insights

For the latest news on the energy markets and industry updates, you can find us on Twitter.

Follow @EICinsights today.