Regulatory Report - October 2021

Generation

The government published the UK’s Net Zero Strategy – detailing policies and proposals for decarbonising all sectors of the UK economy to meet its net zero target by 2050.

DESNZ outlined its new Heat and Buildings Strategy in which it targets for all new heating systems installed in UK homes by 2035 to be either using low carbon technologies, such as electric heat pumps, or supporting new technologies like hydrogen-ready boilers.

Delivery

Elexon published recommendations to Ofgem following the Code Change and Development Group’s consultation on the transition and migration approach to support Market-wide Half Hourly Settlement implementation.

DESNZ published an open consultation Offshore Transmission Network Review: proposals for an enduring regime and multi-purpose interconnectors, seeking views on a new enduring regime for windfarm development and offshore transmission.

Ofgem release a call for evidence on the Transmission Network Use of System (TNUoS) charges regime covering issues previously highlighted by stakeholders and outlines the regulator’s current thinking on potential areas for reform.

Usage

The Department for Transport and Office for Zero Emission Vehicles announced a consultation to consider technologies to transform travel over the next decade.

The International Energy Agency (IEA) released its World Energy Outlook 2022 report noting that a new energy economy is emerging around the world for renewables and other low carbon technologies.

Also covered in this Regulatory Report:

Government unveils goal to decarbonise power system by 2035
Solar PV most popular technology in first year of SEG
Sufficient capacity to ensure winter supplies say system operators
Zero Waste Scotland research forecasts battery demand growth
EAC to examine carbon border tax measures
78% of providers likely to apply for housing decarbonisation fund

Generation

Government publishes Net Zero Strategy

On 19 October, DESNZ published the UK’s Net Zero Strategy – detailing policies and proposals for decarbonising all sectors of the UK economy to meet its net zero target by 2050 including provisions for power, fuel supply & hydrogen, industry, heat and buildings, transport, natural resources, and greenhouse gas removals. Key policy commitments relevant to each sector are presented, some having previously been announced. Requirements within the sector to meet the overall 2050 target as well as greater detail on the opportunities and priorities identified are also outlined. Key policy commitments that contribute to the strategy for power include:

Ensuring all UK electricity comes from low carbon sources by 2035, subject to security of supply.
Undertaking a review of the frequency of Contracts for Difference (CfD) auctions to accelerate generation deployment through the scheme.
Delivering 40GW of offshore wind including 1GW of floating offshore wind by 2030.
Implementing the Dispatchable Power Agreement (DPA) approach to supporting Carbon Capture Utilisation and Storage (CCUS) plant deployment.
Securing a final investment decision on large-scale nuclear by the end of the current Parliament session, while taking measures to inform future investment decisions. It reiterated commitments to establish the Regulated Asset Base model, which would see upfront costs recovered from energy suppliers.
A new integrated regime for onshore and offshore electricity networks proposed in DESNZ’s Offshore Transmission Network Review in addition to providing £380mn of investment for the offshore wind sector.
Reforming whole-system governance in line with net zero ambitions and ensuring consumers pay fair, affordable prices for their energy and engage in an energy market which offers them choices that support net zero.
Introducing fixed minimum annual smart meter installation targets for suppliers from 1 January 2022.
Exploring the system needs case for long duration storage and hydrogen in electricity.

£3.9bn of funding announced in Heat and Buildings Strategy

On 18 October, the government outlined its new Heat and Buildings Strategy in which it targets for all new heating systems installed in UK homes by 2035 to be either using low carbon technologies, such as electric heat pumps, or supporting new technologies like hydrogen-ready boilers.

The Heat and Buildings Strategy forms a key part of DESNZ’s Clean Growth Strategy and Ten Point Plan. While the overarching aim of the strategy is to help achieve net zero by 2050, other benefits of decarbonising buildings include growth of the economy, new green jobs and “greener, smarter, healthier homes and workplaces with lower bills”. It is acknowledged that the necessary changes are dependent on building type, the property owner or occupier, local and regional circumstances, and wider energy system considerations.

Fairness and affordability are at the heart of the approach with support for low-income households to pay for improvements, £5,000 Boiler Upgrade Scheme grants and a reduction in the costs of heat pumps by at least 25-50% by 2025. Cost parity for heat pumps is also fundamental. The government has opted for a gradual move away from fossil fuels for heating with the phasing out of new gas boilers from 2035. This is to allow time for the costs of low carbon alternatives to fall. No decisions have been made yet on the role of hydrogen for heat. Instead, the government will base its decision on research, development, planning and innovation over the coming year. However, DESNZ plans to set out its strategic decision on the role of hydrogen in 2026. DESNZ announced investment of £338mn over 2022-23 to 2024-25 in a broader Heat Network Transformation Programme to scale up low carbon heat network deployment.

Government unveils goal to decarbonise power system by 2035

On 7 October, the government unveiled plans to decarbonise UK power system by 2035 with aims to focus on home-grown, green technologies such as offshore wind and nuclear energy which will support the UK to transition away from its reliance on fossil fuels. The announcement followed widely briefed reports during the Conservative Party Conference which took place over 3-6 October.

Following the close of the Conservative Party Conference, DESNZ officially confirmed the plans to decarbonise UK power system by 2035. The new target brings forward by 15 years the government’s commitment to a fully decarbonised power system by 2050 set out in the Energy White Paper and builds on the Prime Minister’s 10 Point Plan for a Green Industrial Revolution to secure a future clean electricity supply.

Solar PV most popular technology in first year of SEG

Ofgem published the first Smart Export Guarantee (SEG) annual report, on 29 September, which covers scheme activity from its opening in January 2020 to March 2021 (SEG Y1). The report presents statistics on the range of tariffs offered by licensees, payments made to generators, a breakdown of electricity exports by technology type and details on instances of licensee non-compliance in order to present a clear picture of the SEG export tariff market development since the launch of the scheme.

A total of 4,593 generators took a SEG tariff in the first 15 months of the scheme, collectively receiving payments of £114,480.37 and exporting 2,568,810kWh low-carbon electricity. Solar PVs made up over 99% of installations and capacity installed under the SEG, exporting 2,567,211kWh of low carbon electricity to the grid. The only non-solar PV installation was a combined heat and power installation with a capacity of 0.75kW. Nearly 99% of installations had a capacity of less than or equal to 10kW with ~92% of the £114,480.37 in payments made during SEG Y1 going to solar PV installations.

Sufficient capacity to ensure winter supplies say system operators

The electricity and gas system operators released their Outlook Reports on 7 October for the coming winter. Introducing his company’s Winter Outlook 2021-22 Report, Executive Directive of National Grid ESO Fintan Slye commented: “The Winter Outlook confirms that we expect to have sufficient capacity and the tools needed to meet demand this winter. Margins are well within the reliability standard and therefore we are confident that there will be enough capacity available to keep Britain’s lights on”. The company’s analysis shows a derated peak margin of 6.6% (3.9GW), higher than that for 2015-16 and 2016-17. It also stated that “all demand suppression assumptions related to COVID-19 have been lifted, leading to higher peak demands than last winter.”

On gas, National Grid Transmission commented that the “supply margin is expected to be sufficient in all of our supply and demand scenarios”. The maximum supply capability was expected to be “comparable to last winter” with the company adding “as in previous winters, a positive market price differential to both Global and European markets will be required for a number of sources of flexible supply to direct flow into Great Britain.

Delivery

CCDG issues recommendations on MHHS transition

Following the Code Change and Development Group’s (CCDG) consultation on the transition and migration approach to support Market-wide Half Hourly Settlement (MHHS) implementation, on 30 September, Elexon published its recommendations to Ofgem. The CCDG said that it supported Ofgem’s proposed timeline, but believes that it would benefit from an enabling phase of activities in the period from November 2022 to October 2024. It said these would allow data cleansing and site-based activities to be undertaken while new systems and processes are being developed.

In supporting the MHHS transition, it is the CCDG’s recommendation that a subset of the Registration Service data items required for MHHS should be introduced into the existing Smart Meter Registration Service (SMRS) systems between November 2022 and February 2023. It said that these items would play a critical role in the MHHS rules and process, and that going live with poor quality data has the potential of requiring unnecessary time spent on fixing issues during the 12-month migration period. This is then recommended to be followed by a period of data cleansing from February 2023 to October 2024 to ensure that data items critical to a successful migration and used in the target state are accurate at the beginning of the migration period. In regard to the migration plan, it is recommended that it be set at market level and coordinated centrally to account for the capacity constraints of MHHS services and participant/agent systems.

Offshore Transmission Network Review

On 28 September, DESNZ published an open consultation Offshore Transmission Network Review: proposals for an enduring regime and multi-purpose interconnectors, seeking views on a new enduring regime for windfarm development and offshore transmission, running to 23 November 2021. The current point-to-point, uncoordinated approach in connecting offshore wind projects, first designed when offshore wind was a nascent technology, could pose a major barrier to its future deployment, according to the consultation. Additionally, the scale of expected offshore deployment has rapidly increased in light of the UK’s net zero and renewable generation ambitions, and therefore the construction of individual transmission links is no longer suitable in delivering the best outcomes for consumers, the environment, or local communities.

DESNZ is therefore consulting on proposals to develop a new enduring regime, taking a more strategic approach to windfarm development, considering the offshore transmission system holistically with the onshore network, for a more coordinated approach. DESNZ is also considering how best to facilitate Multi-Purpose Interconnectors (MPIs), combining market-to-market interconnection and offshore transmission.

Call for evidence issued on possible TNUoS review

On 1 October, Ofgem published a call for evidence on the Transmission Network Use of System (TNUoS) charges regime. The document covers issues previously highlighted by stakeholders and outlines the regulator’s current thinking on potential areas for reform. The regulator has compiled views presented in related stakeholder engagements, including the Targeted Charging Review and Forward-Looking Charges Significant Code Review, to form general trends in the issues and areas of concern being brought to its attention. It considers there may be sufficient need for a holistic review of the TNUoS charging regime, as at this stage there has been no opportunity for specific formal discussion on solutions to such issues.

Usage

Future of Transport Consultation launched by DfT and OZEV

On 28 September, the Department for Transport (DfT) and Office for Zero Emission Vehicles (OZEV) announced a consultation to consider technologies to transform travel over the next decade.

The proposals include plans for an expansive and robust chargepoint network to support more chargepoints at popular destinations, and along streets and motorways, to make them more accessible. Views are also sought on autonomous vessels and drones, and the UK aims to implement tougher environmental standards on new vehicles.

The consultation is looking for views on new primary legislation. There are 4 areas that that the government have asked for a view on to deliver sufficient charging infrastructure and appropriate consumer protections in place to meet the needs of electric vehicle (EV) drivers. These are:

A statutory obligation to plan for and provide charging infrastructure.
Requirements to install chargepoints in non-residential car parks.
New powers to support the delivery of the Rapid Charging Fund.
Requirements to improve the experience for electric vehicle consumers.

IEA publishes World Outlook Report

On 14 October, the International Energy Agency (IEA) released its World Energy Outlook 2022. According to the report, a new energy economy is emerging around the world for renewables and other low carbon technologies. However, progress is “still far too slow to put global emissions into sustained decline towards net zero.

This year’s World Energy Outlook has been redesigned this year to be a “guidebook” for those attending the COP26 Climate Change Conference in Glasgow. It offers key decision points for those attending and a detailed stocktake of how far countries have come in their clean energy transitions. The report projects fossil fuel demand slowing to a plateau in the 2030s and then falling slightly by 2050. However, despite this, it delivers some “stark” warnings predicting that carbon emissions will decrease by just 40% by the middle of the century if countries stick to their climate pledges.

The announced pledges already made by countries will see a doubling of clean energy investment and financing over the next decade, but this acceleration is not sufficient to overcome the inertia of today’s energy system. In fact, according to the report, bridging this gap would require up to $4trn in investment over the next decade. Investment is the “missing link” to the path to the net zero, with the report stating that governments need to accelerate flows of capital to support the energy transition.

The IEA analysis highlights that the volatility that is currently being experienced in the wholesale market will “present a continued risk” unless investment in clean power is boosted and quickly. Discussing the report Dr. Fatih Birol Executive Director at the IEA, said, “Reaching that path requires investment in clean energy projects and infrastructure to more than triple over the next decade.”

Energy transitions can provide a cushion from the shock of commodity price spikes, according to the report, but only if consumers can get help to manage the upfront costs. Due to the less reliance on fossil fuels and energy efficiency, a large commodity price shock in 2030 is 30% less costly to households in the reports net zero emissions scenario.

Zero Waste Scotland research forecasts battery demand growth

On 27 September, Zero Waste Scotland announced that research it had commissioned – in partnership with Scottish Enterprise and Transport Scotland – has forecasted that used batteries will triple in the next 25 years to potentially reach more than 60,000t/y in Scotland by 2045. The report – Battery use in Scotland now and in the Future – adds to previous evidence that most used batteries are currently sent to landfill or exported for recycling and Zero Waste Scotland finds that around 40% of battery waste in the future could come from electric vehicles.

Key recommendations by the research include introducing carbon footprint declarations and battery recycling targets, updating the existing Extended Producer Responsibility scheme for batteries, and designing new batteries with end of life in mind.

EAC to examine carbon border tax measures

The Environmental Audit Committee (EAC) has announced on 24 September a new inquiry into carbon border adjustment mechanisms (CBAMs). A CBAM is a tax at the border on imported products based on their embedded emissions, or carbon footprint. The enquiry will evaluate the role CBAMs could play in preventing carbon leakage and meeting the UK’s environmental objectives, while considering the wider impacts, risks and opportunities of the UK government introducing its own unilateral CBAM.

EAC notes that the Climate Change Committee has said that a CBAM could prompt other manufacturing countries to decarbonise – helping the UK to reduce the carbon footprint of its imported goods. As part of the inquiry, the Committee launched a Call for Evidence – inviting written submissions on the subject.

78% of providers likely to apply for housing decarbonisation fund

On 11 October, DESNZ published the results of its study into providers’ attitudes to improved energy performance, barriers to implementing new measures, and funding. It surveyed 449 providers and held interviews with 39 providers between November 2020 and May 2021. The results found:

Energy efficiency improvements are not often the primary motivator for improving stock, but many providers are seeking to improve energy performance in the future.
Social housing tenants do not generally refuse to allow retrofit work in their homes - 52% of social housing providers report tenants never refuse work.
Greater effort is required by social housing providers to sufficiently engage with future challenges of retrofitting mixed-tenure housing stock, that is buildings containing both social rented and privately-owned dwellings. Half (49%) of providers who have carried out energy performance improvement work on their stock included mixed-tenure units.
The Social Housing Decarbonisation Fund is perceived positively: 78% of providers were likely to apply, of which 90% would seek assistance from the Technical Assistance Facility (TAF).

Energy UK: Less than 400,000 customers switched in August

Energy UK published its August electricity switching statistics on 29 September, reporting that in total 397,827 customers switched supplier during August. This represents a 12% decrease on July 2021 and 16% decrease when compared to August 2020. Of these switches, 46% were between larger suppliers, 24% were from larger to small and mid-tier suppliers (SaMS), 16% were from SaMS to larger suppliers and 14% were between SaMS. The net gain by SaMS (the number of switches from larger to SaMS minus the number of switches from SaMS to larger suppliers) was 8% of all domestic switches. Nearly 3.8mn customers have changed supplier this year, a 3% decrease compared to the equivalent period in 2020.a