General Election 2019 – A focus on energy and climate change

As the date of the General Election nears, there is little doubt that the focus is how the results will affect Brexit. However, as shown by polling carried out by YouGov, electoral concern for the environment is at an all-time high. 25% of voters place it as one of their top three issues facing the country today. This is up from 8% before the 2017 general election. A separate poll by Ipsos found 71% of people believe protecting the environment should be a priority, even if it slows economic growth.

This trend has been reflected in the released manifestos. Each party recognises the climate emergency and is dedicating space to energy and the environment.

Conservatives

The Conservative Manifesto

The Conservative party would maintain their current energy tariff cap policy. It also intends to introduce measures to lower energy bills further. In this effect, there would be a £9.2 billion investment in improving the energy efficiency of homes, schools and hospitals. The party would also support the creation of more environmentally friendly homes.

They state that their first Budget would prioritise the environment with investment in decarbonisation schemes, electric vehicle infrastructure and clean energy. They would also consult on the earliest date they believe appropriate to begin phasing out sales of new petrol and diesel cars.

There are aims to increase the capacity of the offshore wind industry from it’s current 8.5GW to 40GW by 2030. They would also help introduce new floating wind farms. Alongside development of renewables, the Conservatives would also support gas for hydrogen production and nuclear energy.

The moratorium on fracking in England would remain in place. This is unless the Conservatives believe there is scientific evidence that the practice can be carried out safely.

Further investment would include a £1 billion fund to develop “affordable and accessible clean energy”. £800 million to build the first fully-deployed carbon capture storage cluster. There would also be £500 million to help energy-intensive industries transition towards low-carbon technologies.

You can read the full manifesto here

Labour

The Labour Manifesto

The Labour party has committed to a ‘Green New Deal’. The aim is to achieve the majority of required emissions reduction by 2030.

Labour would create a Sustainable Investment Board, involving the oversight of the Chancellor, Business Secretary and Bank of England Governor. They would co-ordinate with trade unions and businesses to deliver investment to necessary areas. The Office of Budget Responsibility would be asked to incorporate climate and environmental impacts into its forecasts so as to properly evaluate decisions made.

They would also seek to bring the energy and water systems into public ownership. They believe this would allow the acceleration and co-ordination needed to upgrade networks at the speed and scale needed to transition to a low-carbon economy.

Labour’s plans would see:

  • A new UK National Energy Agency responsible for the national grid infrastructure and the oversight of the country’s decarbonisation targets.
  • Fourteen new Regional Energy Agencies to replace the existing District Network Operators (DNOs) responsible for decarbonising electricity and heat.
  • The supply arms of the ‘Big Six’ energy companies would be brought into public ownership to continue to supply households while helping consumers reduce their energy demands.

As part of Labour’s ‘National Transformation Fund’ £250 billion would be dedicated to investment in renewable and low-carbon energy and transport, biodiversity and environmental restoration.

Labour aims to deliver nearly 90% of electricity and 50% of heat from renewable and low-carbon sources by 2030. To this effect they would build 7,000 new offshore wind turbines, (this equates to around 52GW) 2,000 new onshore turbines, “enough solar panels to cover 22,000 football pitches” (roughly 157km2) and new nuclear power. Labour would also trial and expand on tidal energy and invest in hydrogen production.

The party will aim to upgrade almost all of the UK’s 27 million homes to the highest energy efficiency standards. They state that this would reduce the average household energy bill by £417 per year by 2030. It also aims to tackle fuel poverty. All new homes would be required to meet a zero-carbon homes standard.

The Labour party would introduce a Climate and Environment Emergency Bill to set out new binding standards for decarbonisation and environmental quality. In addition, they would introduce a new Clean Air Act in line with World Health Organisation (WHO) limits for fine particles and nitrous oxides. The party would aim to end new sales of conventional petrol and diesel vehicles by 2030.

You can read the full manifesto here

Liberal Democrats

The Liberal Democrat Manifesto

If elected, the Liberal Democrats would immediately implement a ten-year emergency programme designed to cut emissions substantially. They would then phase out emissions from remaining hard-to-treat sectors by 2045 at the latest.

The party has identified that their first priorities upon entering government would be:

  • An emergency programme to insulate all Britain’s homes by 2030, cutting emissions and fuel bills and ending fuel poverty.
  • Investing in renewable power so that at least 80 per cent of UK electricity is generated from renewables by 2030 – and banning fracking for good.
  • Protecting nature and the countryside, tackling biodiversity loss and planting 60 million trees a year to absorb carbon, protect wildlife and improve health.
  • Investing in public transport, electrifying Britain’s railways and ensuring that all new cars are electric by 2030.

Specifically, they would aim to accelerate the deployment of renewable power, providing more funding and removing the current government’s restrictions on solar and wind and building more interconnectors to improve security of supply. The party aims to reach at least 80% renewable electricity in the UK by 2030.

The Liberal Democrats would also seek to cut energy bills and reduce fuel poverty by providing retrofits for low-income homes to improve energy efficiency standards. They would introduce a zero-carbon standard to all new homes and non-domestic buildings by 2021. The party would also increase minimum energy efficiency standards for rented properties.

There would be a focus on investment in carbon capture and storage facilities and support to companies on cutting emissions. The party would also pass a new Clean Air Act, based on WHO guidelines.

You can read the full manifesto here

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Targeted Charging Review decision

Ofgem has published its decision on the Targeted Charging Review.

Background

Ofgem has two main projects that serve as a review of transmission, distribution and balancing charges to facilitate a transition to a more effective network. These are:

  • The Access and Forward-looking charges review is looking at the ‘forward-looking charges’. This sends signals to users about the effect of their behaviour and encourages them to use the networks in a particular way; and
  • The Targeted Charging Review (TCR). This examines the ‘residual charges’ which recover the fixed costs of providing existing pylons and cables, and the differences in charges faced by smaller distributed generators and larger generators (known as Embedded Benefits).

Specifically, the TCR has evaluated two elements of network charges within the Significant Code Review (SCR) process. These are reforms to how residual charges are set and the non-locational Embedded benefits.

Decision on Residual Charges

Ofgem has decided to implement a fixed residual charge for final demand consumers. These will be levied for transmission charges in 2021 and distribution charges in 2022. These are characterised as a series of fixed bands, including a single fixed charging band for domestic consumers and a range of fixed charging bands for non-domestic customers.

For transmission charges, charges for non-domestic consumers will use a series of fixed charging bands set for all of the country.

Changes to distribution charges will see domestic consumers pay a single residual charge set for each licensed area. Non-domestic consumers will be charged on the basis of a set of fixed charging bands also set for each distribution area.

Bands for non-domestic customers will be determined by a consumer’s voltage level. Where further segmentation is required, further boundaries can be defined based on agreed capacity for larger consumers with readily available data, and net consumption volume for smaller consumers.

The series of fixed charging bands will be published at a national level and will then be set for each Distribution Network Area. Ofgem will review and revise these charging bands and their boundaries as appropriate so that the outcome of such reviews can be implemented alongside of new electricity price controls.

Ofgem believes this to be the strongest option of those considered, as it is the least avoidable leading to minimised harmful distortions. The regulator received feedback from stakeholders supporting its view that the option would help achieve a positive balance across the charging segments.

Decision on ‘non-locational’ Embedded Benefits

The key purpose of the review of Embedded Benefits was to reduce harmful distortions which impact competition and the efficiency of the electricity market. In order to meet this objective, Ofgem has outlined a three-step process to achieve a full reform:

  1. The implementation of partial reform in 2021, to deliver the benefits to consumers by removing the two Embedded Benefits (the Transmission Generation Residual which will be set to zero and the offsetting of suppliers’ balancing services charges by reducing the Suppliers net imports at the Grid Supply Point) which cause harmful distortions.
  2. The launch of a second taskforce to consider the application of the TCR principles to balancing services charges.
  3. The second taskforce’s work and resulting modifications should deliver reforms to balancing services charges.

Implications for Triad

Ofgem has decided that the reform to transmission residual charges should be implemented in 2021 and distribution residual charges in 2022. The regulator believes that this is an appropriate compromise between addressing the largest distortions within the market to deliver consumer benefits, while reducing the distributional impacts on consumers.

A preferred implementation option of April 2021 for transmission residual charge reforms will eliminate the incentive for Triad avoidance in the following winter periods. This leaves one final Triad season to take place over Winter 20/21.

How this may affect consumers

Through the TCR residual charging reforms, Ofgem aims to reduce the distortions caused by the current system. This encourages network users to take measures to lower their contributions to residual charges.

Where residual charges incentivise behaviour – such as load reduction which reduces the share of charges paid for by that user – this results in an increase in the share to be paid by other network users. This in turn increases the incentive for other users – who then pay an increased proportion of the residual charge – to take action to reduce their charges.

It is Ofgem’s view that all final demand users who benefit from the electricity network should pay towards its upkeep in a fair manner.

Under the final TCR decision, Ofgem expects the cost of maintaining the electricity grid to be spread more fairly. As a result, the regulator says that consumers will save £300m yearly, from 2021, with £4bn-£5bn in cumulative consumer savings up to 2040.

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Market shrugs off highest energy demand of the season

The UK has recently experienced three straight weeks of below seasonal-normal temperatures. The colder than normal weather combined with low wind generation and ever darker evenings have driven up energy demand. Last week saw UK gas and power demand rise to their highest levels for the winter so far. This was driven by a significant increase in domestic consumption as households ramped up their heating to combat the cold.

Minimum temperatures in London dropped to minus 2 degrees, the lowest since early February. In parts of Scotland, temperatures overnight reached lows of minus 10 with another cold spell forecast for next week.

Temperatures

Year-on-year gas demand

Overall gas demand reached 350mcm. This is the highest since early February, with domestic gas consumption rising to over 240mcm as households increased heating use. Year-on-year gas demand was 100mcm higher as November 2018 saw the UK enjoying a late heatwave with a prolonged spell of above average temperatures. This kept gas demand under 250mcm.

LDZ Gas Demand

The increase is even more prevalent in LDZ gas demand. This has averaged 190mcm/d so far in November, the highest in more than five years. Domestic gas demand in November is so far 45% higher month-on-month. It’s 20% higher than the same period in November 2018.

LDZ gas demand graph

October gas demand was also the highest in over five years with consumption up 20% since 2017. As a share of overall gas demand, LDZ has also climbed strongly in recent months. Domestic use accounts for over 70% of the country’s overall gas consumption.

Gas is also playing an increased role in the electricity sector, which adds another element to this winter’s higher gas demand. Demand from power stations reached 78mcm last week, the highest since January. Electricity generated by gas power plants has averaged 14.9GW per day in November. This is the highest since January and an increase of 2GW on November 2018. This is despite a continued trend of reduced electricity demand from 2018 to 2019. Lower wind output, which is on average 1.5GW lower year-on-year is contributing to the increased gas use for electricity generation.

Monthly generation graph

The last time domestic gas demand was close to this high was in 2016. Front-month gas prices climbed nearly 30% as temperatures dropped in early November. In November 2018, front-month gas prices averaged 50p/th – 25% higher than the current Dec 19 contract.

However, so far this winter, gas prices across the curve have moved lower, breaking below a long-standing trading range. The December 19 gas contract has fallen 20% since the start of October, while the Summer 20 prices are at their lowest level in over 18 months.

Gas months graph

 

High demand no match for supply flexibility

If demand is higher then why has the price reaction been muted or even bearish? Increased gas demand from home heating and the electricity sector during the last three weeks of cold temperatures have seen very little price support. This is because the impact of the increased consumption has been entirely offset by the levels of spare and flexible gas supplies available to the market. This is notably from an influx of LNG tankers and record high levels of gas in storage. Supply levels are persistently matching fluctuations in demand with flexibility from Norway, LNG and storage helping to manage the higher demand levels seen recently.

LNG Imports

The UK has enjoyed an influx of LNG arrivals this winter, with Britain an attractive destination for tankers amid an oversupplied global market for the fuel. Fifteen tankers arrived in October, eighteen tankers are booked for November and seven arrivals are confirmed for December. LNG imports for Q4 2019 have already surpassed levels from Q4 2018.

lng imports graph

The influx of LNG and flexibility from Norwegian and UK gas flows have left storage withdrawals and Interconnector imports struggling to get gas onto the grid. Both sources offer around 150mcm of combined gas supplies which can be attracted to market when required. It is this extent of spare capacity available to the gas system which has kept prices so depressed, in spite of rising demand levels.

Gas Storage Withdrawals

Storage withdrawals had averaged 8mcm/d for the winter and colder temperatures last week lifted that withdrawal rate to around 40mcm/d. The potential for sendout is over 90mcm/d across the country’s seven facilities.

However, even with last week’s increased withdrawals – which have seen reserves declining at 0.4TWh per day – stocks are still at record highs for the time of year. European storage stocks are also at all-time highs, after surpassing 1,000TWh in September, with zero net withdrawals recorded so far this winter.

gas storage graph

European imports via the Interconnector have been untouched, with gas prices unwilling to increase to a sufficient premium over the European market to encourage deliveries. If the price response was sufficient, however, an additional 60-70mcm per day of gas could be available. This is further strengthening the health of the current gas system and its flexibility in responding to spells of higher demand.

With the extent of spare capacity available, the gas system is able to manage prolonged spells of below seasonal-normal temperatures. It will likely take a severe cold snap, alongside a breakdown in supply or a slowdown in LNG imports to warrant a significant rebound in prices across the energy market.

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EIC success at the Energy Awards 2019

The London Hilton on Park Lane played host to the Energy Awards 2019 last week on Thursday 21 November. EIC were nominated for two awards, Energy Buying Team of the Year and Energy Data Collection and Analysis: Software/Technology/Service.

Despite sterling competition, we’re delighted to have been crowned Energy Buying Team of the Year. The honour underlines our continued focus on best-practice risk management and flexible procurement trading. Managing energy risk related to flexible energy procurement has been a core part of our business for the last 20 years. In fact, we were one of the very first energy consultancies to support clients with flexible buying strategies and trading.

Commenting on our win, the Energy Awards judging panel said they were “impressed with the great examples of client savings and the logical approach to energy procurement. The quality assured approach to these processes with sound market advice has resulted in great customer feedback.”

A team effort

There are multiple teams working collaboratively to make the flexible procurement service a success. Our Market Intelligence team track and interpret the energy markets so our clients don’t have to. The insights they deliver ensure our energy traders are on hand to buy and sell energy, working in-line with our clients’ strategy and pre-agreed risk management policy framework.

All our clients are fully supported throughout the energy buying process with a dedicated Account Management team. One of the team was recognised earlier in the year as the TELCA Secret Star award winner. By fully managing the energy buying process, liaising with suppliers, creating savings and minimising risk we allow our clients to focus on what they do best – running their business.

Energy trading success

In just one week, our flexible procurement traders locked in a massive £343,000 for our flexible procurement clients. In fact, in a single month – March 2019 – savings topped £771,000. What’s more, calendar year savings have exceeded a staggering £2.1million for the period January – August.

We can help you

Find out more about our flexible energy procurement services here or talk to us today on 01527 511 757 to see how we can help you.

Loose gas creating tight margins in the power market

Gas has led the way, particularly in the balance of winter contracts. These falls have come partly due to the very high levels of storage but also because of all the spare capacity that could be called upon if required. As a result, power prices have fallen due to the lower fuel cost.

LNG has been the main game changer with the deluge of tankers flooding in to Europe over the last year. Increased export capacity in the US and Russia has led to the increase in extra imports to Europe. It is also a symptom of the global oversupply in the worldwide market place. The liquid commodity markets and high import capacity make the UK an ideal location to offload any excess supply. LNG terminals are currently operating at 75% of their capacity, with all the extra gas being sold into the NBP pushing prices lower.

 

LNG imports graph

LNG imports graph

European imports have been virtually non-existent throughout the winter but more gas could be attracted through these pipes. There is a potential capacity of 94 MCM/d to come over the BBL and the Interconnector. To start attracting this gas the premium over TTF would firstly have to rise above the NBP entry charge of 1.56p/th and then cover the cost of using the pipelines. This means that if prices increase their premium over the continent to more than 2p/th additional gas will start coming to Britain.

 

IUK flows with Belgium
IUK flows with Belgium

 

Given the competition between supply sources, storage just cannot make it onto the grid, even on higher demand days, and this capacity overhang is weighing on prices.

 

Gas spare capacity graph

Gas spare capacity graph

However, the falls in prices for power have been less substantial and purely driven by the falling cost of fuel. Fundamentally the UK grid is seeing some of its tightest conditions in years. With nearly 3GW of coal capacity having retired in the last 12 months. The remaining coal units are now running as baseload and all flexibility is coming from gas. There remains spare capacity but this is the least efficient or most costly plant.

On windless, cold days we are seeing some stress on the system. Currently Monday, 18 November, has a negative margin with 300MW still required to meet anticipated demand. This has pushed power prices to their highest since February at £54.50MWh.

 

Power capacity graph
Power capacity graph

 

On Wednesday evening we saw the highest demand of the winter so far, of 45.2 GW. The above chart shows where generation was coming from at the peak on the left, with remaining output available for Monday on the right. While this shows the potential generation that could come on at the current price levels, it isn’t expected to on Monday, hence the negative margin.

So far Monday’s price reaction has been relatively muted, but it has occurred at a time when the gas systems oversupply is weighing heavily on the whole energy market. If it was happening amidst different market conditions the price outlook would be very different.

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Our Market Intelligence team keep a close eye on the energy markets and industry updates. For the timeliest updates you can find us on Twitter and LinkedIn.

Consultation to improve MEES

The Department for Business, Energy & Industrial Strategy (BEIS) has published a consultation to seek views on proposed targets for the Minimum Energy Efficiency Standard (MEES). Currently MEES make it unlawful to grant new leases to properties with an Energy Performance Certificate rating of F and G.

The Government’s options

The Government has identified two potential trajectories for strengthening the PRS (Private Rented Sector) Regulations. These aim to unlock the economic opportunities of low carbon growth, and deliver important energy and carbon savings:

  • The Government’s preferred route is that all non-domestic privately rented buildings achieve a Minimum Energy Efficiency Standard of a B rating, by 1 April 2030. This is provided the measure (or package of measures) required to reach an EPC ‘B’ proves cost effective.
  • The alternative option is that all non-domestic privately rented buildings reach a ‘C’ rating by 1 April 2030, if cost effective.

In both cases, the Government recognises that not all buildings will be able to reach the required minimum standard. In this instance the Government proposes that landlords can continue to lease their building (from 2030) providing they can prove that the building has reached the highest EPC band that a cost-effective package of measures can deliver.

The impacts

BEIS estimates that using the ‘B’ rating EPC route, an investment of approximately £5 billion up to 2030 is required. The estimated average payback time would be 4-5 years. Their modelling suggests this will translate to £1 billion in bill savings for business in 2030. This would deliver an overall value of £6.1 billion to the UK economy. The annual benefit to businesses by using this option is projected to be approximately double that of the ‘C’ rating EPC.

Regardless of the option chosen, BEIS proposes that existing exemptions will continue to apply. This means that landlords will be required to carry out upgrades that are cost-effective, with an expected payback on energy savings of seven years or less. If the work cannot meet this criteria then landlords are able to register an exemption, valid for five years.

The proposed timescale

The Government has asked whether a single implementation date of 2030 is appropriate for landlords to meet the determined rating. As an alternative it has been suggested that incremental targets leading up to 2030 could be introduced. This would encourage landlords to improve the EPC rating of their buildings over time.

The consultation is expected to close on 7 January 2020.

Stay informed with EIC insights

Our Market Intelligence team keep a close eye on the energy markets and industry updates. For the timeliest updates you can find us on Twitter and LinkedIn. To find out more about our Minimum Energy Efficiency Standard (MEES) solutions click here.