Energy and Utilities

The Energy Transition | The Autumn Budget, RIIO-2 appeal decision and nuclear finance

Published on 1st Nov 2021

This week, we look at the recently announced Autumn Budget, the Competition Market Authority's decision on the RIIO-2 appeal, a new finance model for new nuclear plants, UN Environment Programme Finance Initiative's net-zero recommendations for financial institutions, and more.


Autumn Budget 2021

The UK chancellor of the exchequer, Rishi Sunak, presented his Autumn Budget and Spending Review to Parliament on Wednesday 27 October 2021. The Budget reiterated many of the commitments made by the government earlier year, including from last week's Net Zero Strategy and the Heat and Buildings Strategy.

New commitments included a pledge to cut air passenger duty for domestic flights, £1.7bn of direct government funding for a large-scale nuclear project, and further funding for nature recovery and clean transport (electric vehicles and zero-emission buses).

According to the HM Treasury: "Building on the £26 billion of capital investment announced for the Net Zero Strategy just last week, this Budget and Spending Review brings the total committed by the government since March 2021 for a green industrial revolution in the UK up to £30 billion.

"It includes £380 million for our world-leading offshore wind sector and £6.1 billion to deliver the Transport Decarbonisation Plan by boosting the number of zero emission vehicles, helping to develop greener planes and ships, and encouraging more trips by bus, bicycle and foot.

"£3.9 billion will decarbonise buildings, including £1.8 billion to support tens of thousands of low-income households to make the transition to net zero while reducing their energy bills."

Find out more about what the Budget had to say about decarbonisation and the transition to net zero in our OC insight piece.

Final decision on RIIO-2 appeal

The Competition Market Authority (CMA) has announced its final determination on the appeals made by nine energy companies in relation to the Gas and Electricity Markets Authority's (GEMA) decision on the RIIO-2 price controls for electricity transmission, gas transmission and gas distribution.

The final determination, which reconfirms the CMA's provisional determination published in August, importantly upholds GEMA's decision to set the cost of equity for licensees under the new price controls at 4.55%. The CMA was not persuaded by the appellants arguments that GEMA had erred in its approach to, or estimate of, the cost of equity. As a result, the CMA determined that GEMA’s allowed cost of equity of 4.55% was not wrong.

The CMA has, however, found against GEMA on the following grounds and sub-grounds:

  • Outperformance wedge: the CMA found in favour of all appellants that GEMA was wrong to impose the outperformance wedge, a downward adjustment mechanism on cost of equity to account for outperformance by licensees.
  • Ongoing efficiency: the CMA found in favour of four appellants that GEMA was wrong to impose the innovation uplift.
  • Licence modification process: the CMA has partially found in favour of two appellants that GEMA had acted ultra vires in the manner in which it sought to use a directions process to modify certain licence conditions.
  • Local transmission system rechargeable diversions: the CMA has partially found in favour of Cadent Gas Limited to the extent that GEMA has conceded an error.
  • Business Plan Incentive Stage 4: the CMA has partially found in favour of Northern Gas Networks Limited (NGN), to the extent that GEMA has conceded an error. NGN subsequently withdrew the rest of the ground.

The CMA found in favour of GEMA on all other grounds and sub-grounds, and the appeals were dismissed.

GEMA published its decisions for the RIIO-2 price control on 3 February 2021, which set the revenue that companies will be entitled to collect from their customers for their regulated activities over the period 1 April 2021 to 31 March 2026 (the price control period). On 3 March 2021, nine gas and electricity companies, including Cadent, National Grid Electricity Transmission and NGN, sought permission from the CMA to appeal this decision on several grounds discussed above. The CMA granted permission to appeal to all the appellants on 31 March 2021, and also granted permission to the British Gas Trading and Citizens Advice to intervene in the grounds of appeal related to the cost of equity and outperformance wedge on 6 May 2021. The CMA issued its provisional determinations to parties and interveners on 11 August 2021.

Dame Clare Moriarty, chief executive of Citizens Advice, said: “This decision is good news for consumers and a major step forward in fixing the problem of excessive profits made by network companies."

David Smith, chief executive of Energy Networks Association, said: “The CMA’s decision will take time to review in detail but we remain committed to keeping energy flowing and maintaining world-class levels of reliability and customer service."

Net-zero guidance set for financial institutions

The UN Environment Programme Finance Initiative (UNEP FI) published its G20 input paper, ‘Recommendations for credible Net-Zero commitments from financial institutions’, ahead of the G20 Rome Summit that took place 30-31 October 2021.The guidance seeks to help financial institutions achieve consistency in target setting and the implementation of their net-zero goals. The paper contrasts the relatively low greenhouse gas (GHG) emissions for which financial institutions are directly responsible with the large influence they possess over real-economy companies and the financing they can provide to enable the transition.

 The paper has 11 recommendations, which include:

  • Aligning with science-based targets with no/low overshoot 1.5°C scenarios as soon as possible: Financial institutions are advised to utilise a consensus of Intergovernmental Panel on Climate Change-reviewed 1.5°C no/low overshoot scenarios, and transparently identify the scenarios selected (as according to the IPCC, high overshoot scenarios delay action and/or rely on large-scale deployment of carbon dioxide removal).
  • Establishing near-term (ideally five-year) decarbonisation targets: Financial institutions are advised to transparently communicate in the near term – ideally five-year targets – and report publicly on these targets on an annual basis. The target should specify the financial entity’s whole business, starting with the proportion of the portfolio or loan book covered.
  • Establishing an appropriate emission scope: The paper suggests financial institutions should address their own Scope 1 and 2 emissions, however, they should strive to prioritise Scope 3, where an estimated 97% or more emissions reside for financial institutions.
  • Financing the transition which also includes unlocking emerging technologies that will play a future role in the transition: UNEP FI recommends financial institutions target the most urgently needed technology and research and development investments.

New finance model for nuclear power stations

The government has introduced the Nuclear Energy (Financing) Bill to parliament, which will use a new funding model - the Regulated Asset Base (RAB) - to fund future nuclear power stations in Britain. The government said the method is "tried and tested" and has previously financed infrastructure projects such as the Thames Tideway Tunnel and Heathrow Terminal 5. Under the current Contracts for Difference scheme developers have to finance the construction of new nuclear projects and only receive revenue when the station starts generating electricity. According to the government, this model has led to the cancellation of recent potential projects such as Hitachi’s project at Wylfa Newydd in Wales and Toshiba’s at Moorside in Cumbria.

In contrast, under the RAB model, consumers will contribute to costs during the construction phase. The government estimates that consumers will save more than £30 billion over the project's lifetime on each new large-scale nuclear power station compared with existing funding mechanisms.

Currently, around 16% of the UK's electricity generation is attributable to nuclear power. According to the government, "the RAB model will play an important role in attracting private investors to back new large-scale nuclear power stations, working alongside renewables on an increasingly low-carbon electricity grid".

Business and Energy Secretary Kwasi Kwarteng, said: "In light of rising global gas prices, we need to ensure Britain’s electricity grid of the future is bolstered by reliable and affordable nuclear power that’s generated in this country."

"Our new model is a win-win for nuclear in our country. Not only will we be able to encourage a greater diversity of private investment, but this will ultimately lower the cost of financing new nuclear power and reduce the costs to consumers and businesses."

All-female renewable energy investment trust plans £150m float

Atrato Onsite Energy, an investment trust targeting renewable energy assets, is planning to raise £150m when it floats on the London Stock Exchange next month. It is thought to be the first time that a company with an all-female board has listed in London.

The trust will invest primarily in solar photovoltaic systems installed on the rooftops of large commercial buildings such as warehouses and factories. The power generated by the solar panels will be sold to the buildings' occupants via long-term, indexed power purchase agreements.

The trust hopes to receive the London Stock Exchange's Green Economy Mark, which recognises London-listed companies and funds that derive over 50% of their revenues from green sources.

Juliet Davenport, who leads the board, said: "The UK's binding net zero emissions target in 2050 and the resulting future demand for green energy means that additional generation from low carbon sources such as rooftop solar is growing. The company will play a leading role in providing new green power capacity, delivering businesses a dedicated clean energy supply at a low fixed cost."


* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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