Ofgem update Targeted Charging Review timeline

Ofgem has published a letter to stakeholders to provide an update on timing and next steps on Future Charging and Access reforms. The regulator has three ongoing projects that serve as a review of transmission, distribution and balancing charging to help facilitate a transition to a more effective network. These are:

  • Electricity Network Access and Forward-looking Charging reform (Access reform)
    • A Significant Code Review (SCR) designed to develop improved access and forward-looking charging arrangements
    • A wide-ranging review of Distribution Use of System (DUoS) charges
    • A focused review of Transmission Network Use of System (TNUoS) charges
  • Targeted Charging Review (TCR)
    • A review of residual network charges, as well as some of the remaining Embedded Benefits to explore how costs may be more fairly shared amongst users
  • Balancing Services Charges Task Force
    • Designed to operate in parallel to the SCR and TCR, Ofgem have established an industry-led task force to evaluate Balancing Services Use of System (BSUoS) charges
    • The Task Force are evaluating how cost reflective and effective current BSUoS charges are

The new timeline

Ofgem have updated the timelines for the TCR and Access reform, providing clarity on dates in their original consultations.

The TCR consultation nominated April 2020 and April 2021 as potential dates for the reform of Embedded Benefits to come into effect. Ofgem have now ruled out April 2020, citing April 2021 as their preferred date. Options for the implementation date for new residual charging arrangements were April 2021 or phasing between 2021 and 2023. The regulator has indicated that they now consider April 2023 as a leading option, alongside the other two.

Regarding the Access reform, Ofgem originally scheduled changes to transmission charges to come into effect in April 2022, and changes to distribution arrangements in April 2023. This has now been revised to April 2023 for both changes.

Future Triad periods

Under the TCR proposals transmission demand residual charges (Triads) would be changed to a fixed or agreed capacity, avoiding the incentive for Triad avoidance in the future. The nomination of a potential implementation date of April 2023 for new residual charging arrangements increases the likelihood that the last Triad could be Winter 2022/23, totaling three Triad periods overall.

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UK LNG terminals filling up fast

With 16 tankers now booked for May, this month has already marked more LNG coming to the UK in 2019 than the whole of last year. With that, capacity at the terminals is dwindling. Across the three terminals – South Hook, Dragon and Isle of Grain – there is enough capacity to store 1.25BCM of gas, a similar amount to all the UK’s Medium Range gas storage. However, despite the strongest average daily sendout since 2011, storage at the three terminals is rapidly filling and there is limited scope for demand to increase to absorb further LNG on to the grid.

The gas market remains well supplied with demand continuing to edge lower. The plentiful supply is largely thanks to LNG which in recent weeks has been making up an increasing share of UK supply to over 30%. Average daily sendout for the last month has been the highest since 2011.

Of the 16 tankers that are booked so far this month 12 have gone to South Hook which has enabled the terminal to send out at over 50MCM/d. Of these tankers seven have been Q-Flex carrying around 126MCM of gas and five have been Q-Max carrying 155MCM. With sendout at 50MCM/d it is getting through a Q-Flex every two days, and a Q-Max every three. This means stock at the terminal has grown from 35% full at the end of April, and is expected to be over 90% full at the end of this week, with three tankers set to arrive in the next six days.

 

Sendout, other than boil off, from the other two terminals has largely stopped since 14 May. With Dragon 64% full, and having only a third of the capacity it will have to increase flows in order to accommodate a tanker. Following the arrival of the Ougarta, from Algeria, into the Isle of Grain this week the terminal is going to be over 90% full and therefore will have no room for further cargoes without increasing withdrawals.

 

Therefore, if the UK is going to receive similar amounts of LNG in the near future sendout is going to have to increase. How much potential demand there is to absorb this gas is limited, with the interconnector running at booked capacity and storage already 50% full. The potential for further and prolonged oversupply in the gas system could lead to more declines in short-term energy prices. The front-month gas contract has already dropped to its lowest level in three years at 30p/th.

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Record Breaking Solar Generation

A week of clear skies and warm temperatures has seen the UK break its all-time record for solar PV generation twice in as many days.

National Grid reported a new all-time peak for solar generation on Monday 13 May at 9.47GW. This surpassed the previous record which had held for two years, when supply hit 9.38GW in May 2017.

 

 

This record was then broken again the following day, when output peaked at 9.55GW on Tuesday 14 May. On that day, at its peak, solar generation was producing 27% of UK electricity.

Peak solar generation has averaged 8.7GW since Saturday as temperatures climbed over the weekend and weather conditions turned significantly brighter. The previous week when conditions were far cloudier, generation peaked at less than 5GW on average.

 

Growth in Solar Capacity

The new record for solar generation has come despite minimal growth in installed solar capacity in recent years. Total installed solar capacity has risen by just 0.5GW since April 2017, following the closure of the Renewables Obligation subsidy scheme. Total capacity is currently 13GW, having grown nearly 10GW in the three years from 2014 to 2017.

 

Impact on Demand

Solar output has a narrower window of generation than other fuel sources. High levels of solar generation during daylight hours are more impactful on reducing system demand, both the overall daily peak and the afternoon low. Solar generation raises the volume of embedded electricity, in which homes and businesses are generating their own supply via solar panels. Embedded generation removes the demand for that electricity from the transmission network. The higher the availability of embedded generation the lower the system demand. This is why the transmission network sees a sizable reduction in consumption across the middle part of the day, when solar output is at its strongest.

During the record solar generation on Tuesday, demand on the transmission network saw a drop of more than 6GW from the early morning high. Consumption dropped to just 25GW before climbing again for the post-work peak.

 

 

Peak electricity demand on the network is at record lows and is forecast to fall even further as the summer season progresses. 2019 as a whole has seen peak consumption trend lower than previous years, reflecting the greater efficiencies and renewable availability on offer. In the last week of May, a half-term school holiday, electricity demand is forecast to peak at just 31GW, an all-time low.

 

 

A Benefit to All Customers

In addition to the environmental advantages of renewable generation, distributed solar provides many benefits to the grid and by extension to all electricity consumers. Reduced demand on the system improves grid security and the often onsite nature of solar generation leads to less losses in electricity.

The demand reductions caused by higher levels of distributed solar generation, mean that less fuel is being used to power the electricity network. As demand falls wholesale prices fall,  the less efficient gas plants are no longer required so overall cost of generation is lower. These dips in demand means that hourly prices for the early afternoon are now on at similar levels to the prices normally recorded in the middle of the night. As more solar reduces prices in the daylight hours the cumulative effect of all the additional generation is to bring prices lower.

The government is currently analysing feedback on the proposal for a Smart Export Guarantee (SEG), designed to replace the now-closed Feed-in Tariff. This scheme would legislate for suppliers to provide tariffs to pay small-scale low-carbon generators, such as solar panel owners, for the electricity they export to the grid. Some suppliers have already begun to offer tariffs, based on the same concept, to incentivise the export of solar power to the grid.

 

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Increase in carbon costs likely as EU cut supply of allowances

The European Commission has published the annual surplus indicator for the EU Emissions Trading System (ETS) Market Stability Reserve. As long as the surplus exceeds the level set in the legislation, a total of 397 million allowances will be placed in the reserve, 24% of the total permits currently in the market. This is an increase on the 2018 publication, which saw almost 265 million allowances placed into the reserve in January 2019. The allowances will be placed into the reserve in the period of September 2019 to August 2020.

 

Purpose of the Market Stability Reserve

The Market Stability Reserve (MSR) was introduced to address the large oversupply of carbon allowances that built up following the 2008 global financial crisis. This saw carbon prices reach all-time lows for an extended period of time and by the end of 2016, the European Emissions Trading Scheme had an oversupply of 1.7bn tonnes worth of EUAs. The oversaturation of allowances provided a weaker incentive to reduce emissions.

The MSR will see 900 million allowances, which were removed between 2014 and 2016, transferred to the Reserve, rather than be auctioned in 2019-20. After this, unallocated allowances will also be transferred to the reserve.

Each year, the Commission will continue to publish the total number of allowances in circulation by 15 May. This will allow them to examine whether more allowances should be placed into the reserve or whether allowances should instead be released. This will allow the Commission to better regulate the allowances available.

 

An impact to carbon prices

The restriction of carbon allowances as part of the Market Stability Reserve has been the cause of substantial price increases since 2017. The cost of carbon is currently at €26/tCO2e, having doubled in value year-on-year.

The impact of further allowances placed in the reserve is likely to see continued price rises, as the MSR continues to restrict the availability of supply to the market. The introduction of the reserve caused prices to rise from €4 to over €25 in eighteen months. With the volume of allowances into the EU ETS system remaining tightly restricted, there is the likelihood of further price rises, notably towards the all-time high of €30/tCO2e, last seen in 2008, shortly after the EU ETS was created.

A further increase in carbon prices, particularly if prices were to break to new highs at over €30/tCO2e, would provide a strong bullish signal to the wider energy mix, and likely result in higher wholesale gas and power prices.

 

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UK holds record storage levels

UK medium-range storage stocks are at record highs for the time of year with reserves more than 50% full just over a month into the summer season. A combination of low gas demand during Q1 2019 and the record levels of LNG imports that have reached the UK since October left the UK oversupplied. Medium-range storage stocks reached full capacity by the end of November 2018 and remained at record highs through December and January before operators began a spell of heavy withdrawals, seeking re-injections during the summer season when prices were expected to be even lower.

Since 1 April excess gas was exported to Continental Europe over the Interconnector. However, annual maintenance on the UK-Belgium gas interconnector halted the availability for the UK to export gas to the Continent. Britain had previously acted as transit nation for Norwegian supplies passing to Europe. While exports were unavailable LNG imports continued at a record pace. Twenty LNG tankers arrived in April delivering the most LNG in one month since 2011.

With demand limited – particularly during the very hot Easter holiday weekend, oversupply in the gas system forced flows into storage.

During the Interconnector’s ten day shutdown injections into storage averaged over 400GWh per day. Stocks more than doubled from 3.2TWh to 7.8TWh. The average level of storage for this time of year is just 3.8TWh and the previous highest level was just under 5TWh in 2016/17. Current reserve levels are 107% above average for the time of year.

With the loss of the Rough storage facility, the UK has limited storage capacity, with around 15TWh of medium-range sites. These offer a faster injection and withdrawal process, but lack the scale of the Rough facility which operated on a seasonal basis. Total European gas storage reserves are also at very high levels. LNG imports flooded North West Europe during Winter 2018/19 and the Continent enjoyed a similarly mild Q1 2019. Total European reserves are broadly tracking the previous strongest year for storage in 2013/14. Before the end of April, total gas stocks in Europe were over 50% full with 500TWh of gas in reserve.

The healthy short-term fundamentals have driven Balance of Summer gas contracts back towards the levels from early April, with the front-month contract at lows not seen since August 2017. With storage stocks fuller than ever before at this stage of the summer, there will be limited availability for injections later in the season. This will limit demand and could lead to further price falls over the summer, unless LNG imports or Norwegian production turns down significantly.

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Task Force publish initial findings on BSUoS

In collaboration with the ESO (Electricity System Operator), Ofgem announced their decision to create a Balancing Services Charges Task Force in November 2018.

The main goal of the Task Force is to conduct investigation and analysis that can support decisions on the future direction of Balancing Services Use of System (BSUoS) charges. These charges recover the costs of ESO balancing actions that are necessary to handle the daily operation of the National Electricity Transmission System.

Whilst considering wider implications (i.e. Targeted Charging Review SCR, TNUoS, Electricity Network Access Project SCR, etc), the Task Force have delivered an initial Draft Report, providing three deliverables to assess whether Ofgem should attempt to improve cost-reflective signals through BSUoS, or whether BSUoS should be treated as a cost-recovery charge.

Deliverable 1 –
Does BSUoS currently provide a useful forward-looking signal?

Following assessment, the Task Force has found that BSUoS charge does not currently provide any useful forward-looking signal. This makes the charges hard to forecast, reducing the influence of the charge on user behaviour.

They believe reasons for this are that the current BSUoS charges are complex and becoming increasingly volatile. In addition, there are other market signals that are more noticeable to users, which then take priority. The Task Force also note that the charge is applied across the transmission basis equally.

Deliverable 2 –
Potential options for charging BSUoS differently, to be cost-reflective and provide a forward-looking signal

The Task Force assessed whether individual elements of BSUoS have the potential for being charged more cost-effectively and hence could provide a forward-looking signal. They identified four potential options:

  1. Locational Transmission Constraints
  2. Locational Reactive and Voltage Constraints
  3. Response and Reserve Bands
  4. Response and Reserve Utilisation

Deliverable 3 –
Feasibility of charging potentially cost reflective elements of BSUoS to provide a forward-looking signal

The Task Force assessed the feasibility of the four potential options from Deliverable 2. They concluded that whilst there are some theoretical advantages to all four potential options identified, the implementation of each would not or could not provide a cost-reflective and forward-looking signal to drive efficient and effective market behaviour.

An important constraint to consider is that BSUoS is based on total costs incurred by the ESO, which can see significant variation. The Task Force believes that an effective forward-looking signal should come from marginal costs, rather than the total costs, so that market parties face only the cost they impose on the system. Although they have determined that it is unclear how to accomplish this through BSUoS.

In addition to this, if a forward-looking BSUoS signal was to be developed the Task Force expects that this signal could end up being ineffective. Other signals already in place through the market and charging arrangements could lead to double-counting issues. This can create the risk of under or overestimation of charges, leading to market distorting signals.

Current Conclusion – Any change to customers?

The Task Force has so far concluded that it is not feasible to charge any of the BSUoS components in a more cost-reflective and forward-looking manner that would effectively influence behavior that would help the system and/or lower costs to customers. It is on this basis that the costs included with BSUoS should all be treated on a cost-recovery basis.

It is for Ofgem to decide, but the Task Force recommends that cost-recovery charges should aim to minimise market distorting signals, to benefit both the system and customers. They note that the current construction of BSUoS may inadvertently be sending signals that are detrimental to the system, but the structure of the charge is out of the scope of the Task Force.

The Draft Report has been framed as a consultation with a response date of 17 May 2019. Feedback received during this period will be considered in the final version of the report, expected to be published 31 May 2019, and submitted to Ofgem.

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Energy Policy Dates for 2019

As we look ahead to 2019, we’ve outlined key energy industry changes and dates to take action by.

EU ETS – Market Stability Reserve (MSR)

1 January – MSR Implementation

The European Commission is introducing a solution to the oversupply of allowances in the carbon market, which will take effect in January.

EU carbon allowances, or European Allowances (EUAs) serve as the unit of compliance under the European Emissions Trading Scheme (EU ETS). In response to a build-up of these allowances, following the 2008 global financial crisis, the European Commission has introduced a long-term solution known as the Market Stability Reserve (MSR). With Brexit looming, there’s uncertainty as to whether these changes will affect the UK.

 

Energy Price Cap

1 January – Price Cap implementation

Price protection for 11 million customers on poor value default tariffs will come into force on 1 January 2019. Ofgem has set the final level of the price cap at £1,136 per year for a typical dual fuel customer paying by direct debit.

When the price cap comes into force suppliers will have to cut the price of their default tariffs, including standard variable tariffs, to the level of or below the cap, forcing them to scrap excess charges. The cap will save customers who use a typical amount of gas and electricity around £76 per year on average, with customers on the most expensive tariffs saving about £120. In total, it is estimated that the price cap will save consumers in Great Britain around £1 billion. Read more here.

 

Ofgem’s Targeted Charging Review (TCR) – the end of Triad season?

4 February – Consultation conclusion

Ofgem has launched a consultation, due to conclude on 4 February 2019, into how the costs of transporting electricity to homes, public organisations, and businesses are recovered. Proposed changes could remove the incentive for Triad avoidance.

Costs for transporting electricity are currently recouped through two types of charges:

  • Forward-looking charges, which send signals to how costs will change with network usage
  • Residual charges, which recover the remainder of the costs

In order to ensure that these costs are shared fairly amongst all users of the electricity network, Ofgem are undertaking a review of the residual network charges, as well as some of the remaining Embedded Benefits, through the Targeted Charging Review (TCR). Ofgem are exploring the removal of the Embedded Benefit relating to charging suppliers for balancing services on the basis of gross demand at the relevant grid supply point. This is important as it would eliminate the incentive of Triad avoidance.

 

Brexit

29 March – Scheduled date to leave the EU

Whilst not a specific energy policy announcement, the UK’s departure from the EU is a significant event that has raised a lot of questions concerning UK energy security.

We put together a Q&A on how Brexit may impact the UK energy industry and climate change targets. Read more here.

 

Closure of the Feed-in Tariff (FiT) scheme

31 March – Scheme Closes

The Government has confirmed plans to remove the export tariff for solar power, which currently provides owners of solar PV panels revenue for excess energy that they generate. This will coincide with the closure of the Feed-in Tariff (FiT) scheme.

The FiT scheme was introduced in April 2010 in order to incentivise the development of small scale renewable generation from decentralised energy solutions such as solar photovoltaics (PV), wind, hydro, anaerobic digestion and micro Combined Heat and Power (CHP). Generators were paid a fixed rate determined by the Government, which varied by technology and scale.

The scheme will close in full to new applications from 31 March 2019, subject to the time-limited extensions and grace period.

 

Streamlined Energy and Carbon Reporting (SECR)

1 April – SECR implementation

Streamlined Energy and Carbon Reporting (SECR) is on the way, due to come in to effect from 1 April 2019. The introduction of this new carbon compliance scheme aims to reduce some of the administrative burden of overlapping schemes and improve the visibility of energy and carbon emissions when the CRC scheme ends.

EIC can help you achieve compliance. Read more about SECR in our blog, or visit our website.

 

UK Capacity Market

Early 2019

The UK Capacity Market is currently undergoing a temporary suspension, issued by the European Court of Justice (ECJ), on the back of a legal challenge that the auction was biased towards fossil fuel generators.

The ECJ’s decision means that payments made under the Capacity Market (CM) scheme will be frozen until the UK Government can obtain permission from the European Commission to continue. In addition, the UK will not be allowed to conduct any further CM auctions for energy firms to bid on new contracts.

The UK government has since iterated that it hopes to start the Capacity Market as soon as possible and intends to run a T-1 top-up auction next summer, for delivery in winter. This is dependent on the success of a formal investigation to be undertaken by the European Commission early in the New Year.

 

Spring Statement and Autumn Budget

The UK Government’s biannual financial updates are always worth looking out for.

The Spring Statement will be delivered in March and the more substantial Autumn Budget is scheduled for October. The 2018 budget had a very heavy focus on Brexit, with very little to say concerning energy policy. It is likely this will be the case for the Spring Statement and potentially going forward.

 

Energy Savings Opportunity Scheme (ESOS)

5 December – ESOS Phase 2 compliance deadline

ESOS provides a real chance to improve the energy efficiency of your business, on a continual basis, to make significant cost savings.

In Phase 1 of ESOS we identified 2,829 individual energy efficiency opportunities, equivalent to 461GWh or £43.9m of annual savings across 1,148 individual audits. Our team also helped over 300 ESOS Phase 1 clients avoid combined maximum penalties of over £48million.

With EIC you can achieve timely compliance and make the most of any recommendations identified in your ESOS report.

To find out how we can help, contact us on 01527 511 757, email esos@eic.co.uk, or visit our website.

 

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LNG over Christmas – let it flow, let it flow, let it flow

Here we look at why imports to the UK have increased in the last few months and where they’ve come from.

Liquefied Natural Gas (LNG) is natural gas or methane that has been chilled down to liquid form at -162°C. In this state, it takes up 1/600th of its normal volume, allowing it to be put onto tankers and transported around the world. Here we look at why imports to the UK have increased in the last few months and where they’ve come from.

 A standard tanker carries around 143,000 cubic metres of LNG. When this is re-gasified, that equates to around 85 million cubic metres (MCM). The largest Q-MAX tankers can hold nearly double this.

The last three months have seen a huge increase in the amount of LNG coming to the UK and Europe, with import volumes at their highest since the Japanese Tsunami in 2011.

 

Why is the UK seeing more LNG?

There has been a big increase in Atlantic supply and more of that gas is now heading to Europe. During winter the Northern Sea route to supply Asia is closed due to ice, which makes the Isle of Grain one of the closest markets for Russian LNG.

Last year Europe received very little LNG. Those tankers that did come from the newly commissioned Russian export facility at Yamal, had their gas reloaded onto new tankers and sent on to higher priced markets. There remains a limited number of the ice breaker class LNG tankers, required to cross the Arctic Ocean, and as a result ship-to-ship transfers are now taking place in northern Norway. This enables the terminal to run closer to its capacity, which continues to grow as the third LNG train has just come online. This will lead to a similar jump in Russian supply as the one seen in June 2018.

Europe also received very little gas from the US last year, largely because other markets were paying more and drawing the gas away from Europe.

Even this year when we have received a lot more Russian LNG, a high proportion of that has been shipped on to higher priced destinations.

 

Further growth in US LNG expected

Looking at the forward prices for the UK and Asia, the spread is set to remain relatively tight for the next six months, which will keep more Russian LNG in the Atlantic (while the Northern Sea route is closed during winter).

The recent supply growth may have almost peaked in Russia with the commissioning of Yamal train three in December. However, we’re only halfway there from the US with a huge growth in supply due in the near future.

With journey times to the UK being half that of Asia, and the future prices showing a marginal Asian premium, some of this gas will come to the UK.

Current shipping rates from Sabine Pass stand at around $1.4 million British Thermal Units (MMbtu) to the UK while they are almost $3MMbtu to Japan.

 

Market size

For the time being we could see more LNG, but that largely depends on what happens in Asia, which has an LNG market four times the size of Europe’s.

Looking forward, the price difference between Asia and the UK supports the case that the near term surge in supply will take some time for demand or import capacity to catch up, with the market not tightening until the early part of 2020.

Whilst nothing can be guaranteed, the growth in supply that had long been expected is finally having an effect on the UK energy market. However, the increasing demand for cleaner fuels will mean that any surplus we see over the next twelve months is likely to be quickly absorbed.

 

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Government confirms closure of Feed-in Tariff

The Government has confirmed plans to remove the export tariff for solar power, which currently provides owners of PV panels revenue for excess energy that they generate. This will coincide with the closure of the Feed-in Tariff (FiT) scheme.

Though a large proportion of respondents to the governmental consultation disagreed with the plans, the Department for Business, Energy and Industrial Strategy (BEIS) has decided that both the Feed-in Tariff subsidy scheme and the export tariff will close to new participants after March next 2019.

 

What was the FiT scheme?

The Feed-in Tariff scheme was introduced in April 2010 in order to incentivise the development of small-scale renewable generation from decentralised energy solutions such as solar photovoltaics (PV), wind, hydro, anaerobic digestion, and micro Combined Heat and Power (CHP). Generators were paid a fixed rate determined by the Government, which varied by technology and scale.

Payments to the small-scale generators were made quarterly by FiT-licensed suppliers and recovered from all consumers. A levelisation process also took place every quarter, as not all suppliers were required to offer FiTs and their exposure to the scheme varied.

 

The Government response

The response from the Government argues that the closure of the FiT scheme represents their “desire to move towards fairer, cost reflective pricing and the continued drive to minimise support costs on consumers”, adding that the current scheme does not support the vision set out in either the Industrial Strategy or the Clean Growth Strategy.

The scheme will close in full to new applications from 31 March 2019, subject to the time-limited extensions and grace period.

The Government has decided to provide a 12-month grace period for “Renewals Obligation Order Feed-In Tariff (ROO-FiT) scale” (all hydro and anaerobic digestion, solar PV, and wind with a declared net capacity over 50kW) installations that apply for preliminary accreditation on or before the cut-off date, are accepted into the cap, and then suffer grid and/or radar delay beyond their control. This means they are unable to accredit during their preliminary accreditation validity period.

It’s also been decided that projects in oversubscribed deployments caps at the close of the scheme will not be eligible for either generation or export tariff payments under the scheme, and so Ofgem will not grant them preliminary or full accreditation.

 

How will this impact you?

The results of these closures will mean that anyone that adds solar generation from April 2019 will not be paid for any excess power that is exported to the grid. These changes will not affect the circa 800,000 homes that have already solar panels fitted since the Feed-in Tariff scheme launched in 2010.

The Government is reportedly preparing to announce a market-based replacement to the export tariff early in the New Year, which would see new rules on how suppliers could purchase the excess power.

However, there will likely be a gap between the closure of the Tariff and the implementation of any new plans, meaning any new solar generators will be affected during this time.

 

We can help you realise the benefits of decentralised energy

Solutions such as Solar, Battery Storage, and Combined Heat & Power (CHP) can be an integral part of your wider energy strategy, as well as generate additional revenue through lucrative Demand Side Response (DSR) schemes.

To find out how, visit our webpage, call us on 01527 511 757, or email info@eic.co.uk.

EU temporarily suspend UK carbon permit processes

EU temporarily suspend UK carbon permit processes

The European Commission has implemented a “no-deal” Contingency Action Plan across specific sectors to help mitigate the continued uncertainty in the UK surrounding the ratification of the Withdrawal Agreement.

The main talking point, regarding energy policy, is the Commission’s plans for the UK’s access to the EU Emissions Trading Scheme (EU ETS).

EU carbon allowances, or European Allowances (EUAs) serve as the unit of compliance under the EU ETS. EUAs are auctioned for use by energy-intensive industries that fall under the scheme, namely power generators, oil refiners, and steel companies, entitling them to emit one tonne of CO2.

How this affects the EU ETS in the UK

The Commission has adopted a number of actions in the area of EU climate legislation to “ensure that a “no-deal” scenario does not affect the smooth functioning and the environmental integrity of the Emissions Trading System.”

This involves a decision to temporarily suspend the free allocation of emissions allowances, auctioning, and the exchange of international credits for the UK effective from 1 January 2019.

The Commission has also elected to allow an appropriate annual quota allocation to UK companies for accessing the EU27 market, until 31 December 2020. This will be supplemented through regulation to ensure that the reporting by companies differentiates between the EU market and the UK market to allow a correct allocation of quotas in the future.

The full Contingency Action Plan can be read here.

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Will Ofgem’s Targeted Charging Review bring an end to Triads?

Ofgem has launched a consultation into how the costs of transporting electricity to homes, public organisations, and businesses are recovered. Proposed changes could remove the incentive for Triad avoidance.

Costs for transporting electricity are currently recouped through two types of charges:

  • Forward-looking charges, which send signals to how costs will change with network usage
  • Residual charges, which recover the remainder of the costs

In order to ensure that these costs are shared fairly amongst all users of the electricity network, Ofgem are undertaking a review of the residual network charges, as well as some of the remaining Embedded Benefits, through the Targeted Charging Review (TCR).

 

Proposed options for residual charges

On setting transmission and distribution residual charges, Ofgem has conducted an analysis of different approaches, leading them to two primary options that they are consulting on, the first of which is a ‘Fixed Charge’. This is highlighted as Ofgem’s preferred option, in which charges would be set for individuals in customer segments, with these segments being based on an existing industry approach.

The second option is an ‘Agreed Capacity Charge’. This would see a charge calculated directly for larger users who have a specific agreed capacity. Capacity for smaller households and businesses would be based upon assumed levels.

Ofgem’s assessment is that a reform of residual charges would result in potential net system benefits up to 2040 between £0.8bn and £3.2bn, with benefits to consumers as a whole in the range of £0.5bn to £1.6bn. In addition to this, Ofgem assess that the proposed changes would save around £2 a year for households in the longer term.

Either scenario would see a fixed rate for Transmission Network Use of System (TNUoS) charges. However, under the Agreed Capacity Charge option, as charges would be based on capacity, there would potentially be some room to reduce contribution to the residual charges.

 

Changes to Embedded Benefits

There are a some notable points within the TCR regarding Embedded Benefits; notably, Ofgem are consulting on setting the Transmission Generation Residual to zero, subject to maintaining compliance with the current cap on overall transmission charges to generators. This will remove a benefit to larger generators that receive a credit from these charges at present.

Another key point is that Ofgem are exploring the removal of the Embedded Benefit relating to charging suppliers for balancing services on the basis of gross demand at the relevant grid supply point. This is important as it would eliminate the incentive of Triad avoidance. Currently, National Grid identifies three Triads each year in order to calculate the TNUoS charges an organisation will incur. Such transmission costs can be reduced if demand is decreased when a Triad Alert is called (a warning that demand will be high that day). Find out more about what Triads are and how you can avoid them here.

For both of these points, Ofgem believes that whilst these benefits reduce costs for individual companies or consumers, they don’t reduce the total network costs that users need to fund collectively. This can lead to greater costs for other users and, if not addressed, Ofgem say this will lead to less efficient outcomes that are not in the best interests of consumers as a whole.

 

BSUoS changes

The Review outlines a proposal for Ofgem to set up a Balancing Services Use of System (BSUoS) task force. The task force would be responsible for considering how cost-reflective and effective the current charges within BSUoS are. From this, they would evaluate the potential to provide a better system in the future, looking to make it more cost-effective. This would come with the responsibility of assessing how feasible any improvements to BSUoS charges are.

Ofgem are deliberating between two reform options; a partial or a full reform of BSUoS. A partial reform would see a reduction in suppliers’ contributions to BSUoS charges, while a full reform would see the removal of BSUoS payments, and require smaller embedded generators to pay BSUoS charges.

Under the current system, suppliers are charged BSUoS based on net demand. A bill is calculated on gross demand and then any embedded generation reduces this cost to the supplier, which is recouped from consumers via a separate non-commodity cost (NCC) charge. Under the proposed full reform, embedded generators would be considered the same as transmission connected generators, leading them to be charged for BSUoS with no savings.

 

The impact to Triads

Triads are currently evaluated based on average demand during the three highest half-hourly peaks of electricity use between November and February. These periods can be forecast, allowing network users who employ Triad avoidance to reduce their electricity consumption in anticipation, for example by instead using on-site generation, Demand Side Response (DSR), or storage. Ofgem argue that whilst this reduces their own costs, the total network cost doesn’t change, meaning that those unable to employ the same avoidance methods pay a larger cost.

Under the proposals by Ofgem, charges will remain roughly the same to users where no Triad management is in place. However, it is expected that large increases will occur for those who use Triad avoidance to reduce the impact.

The new system would see single fixed charges applied based on voltage level. Ofgem believe this will result in reductions in charges for larger SMEs, whilst SMEs at the lower end of consumption will see moderate increases. Importantly, users with on-site generation will pay the same charge as those without, in contrast to the current arrangements.

The Triad period this winter will be unaffected, as will winter 2019 going by Ofgem’s timetable. However, this will have a significant impact on how businesses may seek to recover operating costs in the future. No replacement could see a lack of incentive for DSR, resulting in adverse constraints on the market.

 

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ESOS Phase 2 – stay ahead of the deadline

The compliance date for ESOS Phase 2 is fast approaching. Make sure you’re on track to meet the 5 December 2019 deadline.

With under a year to ensure your compliance with ESOS Phase 2, it’s critical to make sure you’re ready to complete all compliance activity within the next 12 months.

The qualification date is 31 December 2018. This means that if you know your business will fit the ESOS criteria, you can start some compliance activities now.

ESOS applies to large organisations, classified as those with:

  • More than 250 employees or;
  • A turnover of more than €50,000,000 and an annual balance sheet total of more than €43,000,000 or;
  • Part of a corporate group containing a large enterprise.

ESOS compliance can help you get a head start with upcoming Streamlined Energy and Carbon Reporting (SECR) compliance – find out more here.

 

Three reasons to comply with ESOS Phase 2

1 – avoid paying over the odds

Many organisations delayed the start of their compliance journey until close to the Phase 1 deadline. This led to a squeeze in service provision, leading many suppliers to increase the cost of their services. Environment Agency (EA) data shows a significant spike in compliance notifications around one month prior to the 5 December 2015 deadline. What’s more, 33% of all who complied by July 2016, did so in the final week of Phase 1. A further 30% of notifications were logged by the end of January 2016.

Had demand for ESOS compliance support been smoothed over the course of 2015, costs may have been more reasonable as the deadline approached.

The lesson here is not to wait until the final months of 2019 to get started with Phase 2.

 

2 – ESOS Lead Assessor numbers are limited

There were almost 950 ESOS Lead Assessors accredited across 14 approved registers by the Phase 1 deadline. BEIS suggests there were enough Lead Assessors to help organisations reach compliance. By 5 December 2015 there were 7.3 qualifying undertakings per Lead Assessor. This is based on an estimated 6,933 organisations that met the ESOS qualification criteria.

However, this doesn’t take into account the Lead Assessors that become accredited purely to certify their own organisations alone. So, in fact, the 900+ Lead Assessors would’ve been spread far more thinly. There’s also a broad scope of the size of organisations (by employee size) and number of sites per qualifying business, meaning not every organisation would have been as easy, or as quick, to assess as another.

Our advice would be to seek guidance from compliance partners you already know who have a proven track record with Phase 1 compliance.

 

3 – Acting now enables you to seize your energy saving opportunity

Delaying compliance for as long as possible means by the time you comply you’ll simply be ticking a box and more than likely paying an unreasonably high cost.

Acting now allows your organisation to really invest in the compliance process by ensuring you have strong and accurate reporting of your energy consumption data. Accurate data is the start of being able to visualise and truly understand when, where, and how you use energy and, more importantly, how you can improve your efficiency to increase savings. EIC can assist you with implementing any energy saving measures identified as part of your ESOS recommendations report. We’ll also ensure these measures work in harmony with each other as part of a bespoke, joined-up Strategic Energy Solution.

 

Why make EIC your trusted compliance partner?

Whether it’s ESOS, SECR, or CCAs, EIC will work with you to reach compliance deadlines and targets. In Phase 1 of ESOS our team identified 2,829 individual energy efficiency opportunities, equivalent to 461GWh or £43.9m of annual savings across 1,148 individual audits. We also helped over 300 ESOS Phase 1 clients avoid combined penalties of over £48m, based on maximum fines.

With under a year until the ESOS Phase 2 deadline, we’re urging you to make a start with compliance. To find out more about how we can help you comply, call us on 01527 511 757 or email esos@eic.co.uk