How will Brexit impact on the energy industry?

More than three years have passed since the United Kingdom voted to leave the European Union. Debate is still ongoing over the process of our departure, any possible “deal”, payments or a transition period. However, following his appointment to Prime Minister, Boris Johnson has hardened the UK’s negotiating position, promising that the UK will leave the EU on 31 October 2019, deal or no deal. Here we attempt to provide some insight into how this may impact various facets of the 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 possible impact 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 state’s 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’s Internal Energy Market (IEM).

The EU Internal Energy Market (IEM) – will Britain 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 between countries tariff-free.

Post-Brexit, Britain 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 the deadline.

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 co-operation with the EU Internal Energy Market going forward.

However, there are some inconsistencies in regards to UK plans encompassing full membership of the IEM. Continued participation 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 negotiations regarding the UK’s 2019 exit from the E U, 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 in 2019. Former Business Secretary Greg Clark had indicated he was keen for the UK to remain in the EU’s I E M, although the final result will depend on the outcome of Brexit negotiations.

Regardless of the outcome, the UK’s energy networks’ 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. Interconnector operators have been advised 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, which are still in stages of project development, without final financial decisions. Uncertainty caused by Brexit, surrounding commercial, regulatory and operational impacts, will likely see planning stages re-visited 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 have confirmed that 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.

How will Brexit impact on the carbon market? Will the UK be part of 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 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, 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 4 November 2019. The aviation sector would be exempt from this tax.

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 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 are expected.

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.

Will Brexit affect the UK’s climate change targets?

The UK passed law in June to reach Net Zero carbon emissions by 2050. The country’s climate change targets will remain unchanged, regardless of whether a Brexit deal is reached. However, there are expectations that potential economic impact from a no-deal Brexit may act as a significant hindrance to decarbonisation efforts.

Additionally, 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. It is yet to be determined whether the UK will continue to participate in the EU ETS post-Brexit but plans under a no-deal scenario were outlined in the October 2018 budget.

The House of Commons Business, Energy and Industrial Strategy 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.

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. 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 2019 EU legislation will be initially transposed into UK law from 31 October 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.

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 generated by these power plant. 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. The Cottam plant announced it will shut down at the end of the summer, while Fiddlers Ferry will close its remaining units in March 2020. 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 October 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 European Investment Bank (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 whether 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 be affected?

The UK already operates a diverse import infrastructure, consisting of interconnectors and 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 any 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 coderestricts 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.

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Pound slides to multi-year lows on Brexit concerns

Boris Johnson’s appointment as Prime Minister has seen a change in strategy regarding the UK’s negotiating stance with the European Union over its exit. The new PM has pledged to leave the EU by 31 October, deal or no deal. Furthermore, while his wish is very much for an agreed exit, Mr Johnson is taking a hard line with negotiators, refusing to meet with EU leaders until a new deal is offered, without the Irish backstop.

The heightened risk of leaving the Union without a withdrawal agreement has had a negative influence on the value of the pound. Sterling has fallen more than 2% against the Euro and 3% against the Dollar in the first week of the new PM’s premiership. The pound’s value against the Dollar is the lowest in nearly two and a half years, approaching the lows reached after Article 50 was triggered in March 2017.

Increased Costs

The weakness in the value of the pound will increase costs for consumers. British imports of energy from the Continent will require a price premium which covers the wholesale and shipping costs in delivery of supply. Weakness in the pound will make these imports even more expensive when the purchase price is converted from Euros. This would be a particular issue during periods of high demand, extreme weather or supply disruptions.

Impact on Supply

In previous blogs, we have explained how Brexit is very unlikely to mean the lights go out. The UK continues to strengthen Interconnector links with Continental Europe with the capacity for power links expected to double to over 8GW by 2022.

Britain is seeking to retain as free as possible access to the EU Internal Energy Market, post Brexit. Gas and power will still be able to flow between the EU and the UK but there is the potential for legislative issues, and trading could become less efficient while long-term security of supply is less clear.

It is a similar situation in the gas market, although the UK is much more reliant on imports, with more than half of the country’s natural gas being imported from countries in the European Economic Area – the vast majority from Norway. The UK can also import supplies of liquefied natural gas (LNG) shipped on tankers and pipeline flows from Belgium and the Netherlands.

Brexit is not expected to impact on the availability of this gas, even under no deal. However, less efficient trading, the possibility of new regulations, and heightened currency variations would all likely increase costs for consumers.

With the UK unable to meet demand with its own indigenous supply, the country is expected to become increasingly reliant on energy imports from foreign sellers, making these issues more prevalent in the day-to-day trading of energy.

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LONG-TERM FORECAST REPORT

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Capacity Market T-1 auction clears at all-time low

Capacity Market T-1 auction clears at all-time low

The rescheduled 2018 T-1 Capacity Market (CM) auction cleared at an all-time low price of £0.77/kW, falling from the previous low seen at the last CM auction of £6.00/kW. A total of 129 CMUs (Capacity Market Units) were awarded agreements, procuring a total 3.6GW capacity.

Overall, gas-powered and combined heat and power (CHP) units received the majority of agreements, obtaining 45 and 30 respectively.

The low clearing price proved discouraging for demand-side response (DSR) units with a total of 29 DSR agreements awarded to providers, down from 74 DSR agreements in the 2017 T-1 auction. Storage projects were also deterred, with 6 total projects awarded agreements.

A full breakdown of the results and applicants is provided by National Grid ESO here.

Current State of the Capacity Market

The CM scheme is currently under suspension, following a ruling on 15 November 2018 by the European Court of Justice that its design was biased against small-scale, clean energy units and therefore shouldn’t be eligible for State Aid approval. 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 Court’s decision means that payments made under the CM scheme will be frozen until the UK Government can obtain permission from the European Commission to continue in an official capacity.

The European Commission has to undertake a formal investigation of the CM to clear it. If successful, the Department of Business, Energy and Industrial Strategy (BEIS) has said that auction results to date will still stand and that payments are legal.

In the meantime, BEIS has asked the National Grid Electricity System Operator (ESO) to keep the Capacity Market scheme running, short of making payments. BEIS has said that if those with contracts deliver their obligations, they may then be eligible for deferred payments if the market is reinstated.

BEIS expects a decision by the Commission to be made by early next year.

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An update on Smart Export Guarantee

The Department of Business, Energy and Industrial Strategy (BEIS) has published a response to their consultation on the future for small-scale low-carbon generation, which sought views on policy proposals for a Smart Export Guarantee (SEG).

The SEG will require suppliers with at least 150,000 domestic customers to provide a minimum of one tariff offer to small-scale low-carbon generators. Exporters of up to 5MW capacity of anaerobic digestion, hydro, micro-combined heat and power, onshore wind, and solar photovoltaics are eligible for payment.

It is the government’s opinion that small-scale low-carbon electricity generation should be supported by competitive, market-based solutions. To this effect, the government will not specify a minimum tariff rate in order to allow the market to develop. However, a supplier must provide payment greater than zero at all times of export.

The SEG is a replacement for the Feed-in Tariff (FiT), which closed to new generators in March 2019. The Feed-in Tariff scheme was originally introduced in April 2010 in order to incentivise the development of small-scale renewable generation from decentralised energy solutions. Generators were paid a fixed rate determined by the Government, which varied by technology and scale.

How will this impact you?

All suppliers that meet the SEG criteria will be required to offer at least one tariff by an expected date of 31 December 2019, providing small-scale generators with a choice of who they want to export to.

Currently, there are very few suppliers that offer tariffs of this nature. However, as the deadline approaches it can be expected that all larger suppliers will begin to offer their own options, allowing generators to choose the best tariff for themselves.

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Government to make further adjustments to Capacity Market

Following a consultation in March on additional measures to keep the Capacity Market (CM) running smoothly during the current standstill period, the government has published a decision detailing planned legislative changes.

The government maintains that the CM scheme is still the right mechanism to provide security to electricity supplies at the least cost. In order to continue this, the government intends to:

  • Replace the planned T-4 auction with a T-3 auction for delivery in 2022/23.
  • Allow certain renewable technologies to participate.
  • Remove the historical floor from the interconnector de-rating methodology.
  • Make minor corrections and additions to the CM Rules to ensure they are clear and operate as intended.

When implemented, these rules will see renewable technologies allowed to bid for contracts for the first time under the Capacity Market, having previously failed to qualify due to funding through subsidies. Renewable generators that do not receive support via the Contract for Difference, Renewables Obligation or Feed-in Tariff schemes will be allowed to participate.

The rearranged date for the delayed 2018 T-1 Capacity Market Auction is scheduled to go ahead on 11-12 June 2019 for delivery in the 2019/20 year.

The current state of the Capacity Market

The CM scheme is currently under suspension, following a ruling on 15 November 2018 by the European Court of Justice that its design was biased against small, clean energy and therefore shouldn’t be eligible for State Aid approval. 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 Court’s decision means that payments made under the CM scheme will be frozen until the UK Government can obtain permission from the European Commission to continue in an official capacity.

The European Commission has to undertake a formal investigation of the CM to clear it. If successful, the Department of Business, Energy and Industrial Strategy (BEIS) have said that auction results to date will still stand and that payments are legal.

In the meantime, BEIS has asked the National Grid Electricity System Operator (ESO) to keep the Capacity Market scheme running, short of making payments. BEIS has said that if those with contracts deliver their obligations, they may then be eligible for deferred payments if the market is reinstated.

BEIS expects a decision by the Commission to be made by early next year.

How the closure may affect you

In the short-term the Capacity Market charge will still be levied on customer’s bills, currently accounting for 0.3p/kWh, approximately 2.5% of a bill. This means that consumers will likely see little immediate change.

However, the ongoing suspension could mean a halt to the charge. An unsuccessful investigation by the European Commission could potentially see UK consumers receive a refund for previous CM charges paid through their electricity bills. This could be partially offset by a resultant hike in wholesale energy prices as guarantees of supply from larger operators are no longer certain.

Smaller operators in the scheme may be faced with a dilemma as missed capacity payments could result in cash flow issues. However, a closure to the Capacity Market could see the early shutdown of some coal plants, raising market power prices, and providing opportunity to these smaller operators.

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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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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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7 things you need to know about SECR

    1. SECR stands for Streamlined Energy and Carbon Reporting, a new UK Carbon Reporting framework. Companies in scope of the legislation will need to include their energy use and carbon emissions in their Directors’ Report as part of their annual filing obligations.

 

    1. It starts on 1 April 2019 and companies will need to report annually, reporting deadlines align with the company’s financial reporting year.

 

    1. The scheme affects UK quoted companies and ‘large’ unquoted companies and LLPs, defined as those meeting at least two of the following; 250 employees or more, annual turnover of £36m or more or an annual balance sheet of £18m or more.

 

    1. It will affect over 11,000 firms from high street retailers to manufacturers.

 

    1. SECR requires companies to report the following: their Scope 1 (direct) and Scope 2 (indirect) energy and carbon emissions (electricity, gas and transport as a minimum). Previous year’s figures for energy and carbon. At least one intensity ratio (e.g. tCO2/turnover). Detail of energy efficiency action taken within the reporting year. Reporting methodology applied.

 

    1. Not meeting the reporting requirements can result in accounts not being signed off and missing the filing deadline could lead to a civil penalty. So it’s important for organisations to fully align communications between their energy and finance teams and to get a head start where possible!

 

  1. There is an overlap with other reporting and compliance schemes such as ESOS so savvy businesses can save time and hassle by using data collection from one to support compliance with another.

Find out more by downloading our SECR factsheet here https://hubs.ly/H0h2jWT0

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.

 

Stay informed with EIC insights

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

Visit our website to find out more about EIC Market Intelligence and how we keep our clients informed at a frequency to suit them.

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.