Energy and Utilities

The Energy Transition | BEIS report on energy pricing and Ofgem funding for innovation projects

Published on 1st Aug 2022

This week we look at a new BEIS Committee report on energy pricing, Ofgem's £8 million funding for innovation projects, a call for evidence on the policy framework of power CCUS, and more. 

BEIS Committee report: Energy pricing and the future of the energy market

The Strategy Committee for the Department Of Business, Energy and Industrial Strategy (BEIS) has published a report on energy pricing and the future of the energy market. The Committee's role is to scrutinise the policy, spending, and administration for BEIS and its public bodies (including Ofgem). In its report, the Committee sets out its concerns that Ofgem has proved to be "incompetent as the regulatory authority of the energy retail market over the last decade".

The report considers several areas within the energy market. Firstly the report considers Ofgem's performance, citing a "significant and systemic failure to effectively regulate the energy retail market". The Committee suggests that a more robust regulation of suppliers by Ofgem could have mitigated the collapse of 29 energy retailers between July 2021 and May 2022. The Committee believes that Ofgem allowed companies with "glaringly inadequate financial arrangements" to enter the market, which were then unable to absorb the sustained increases in the wholesale energy prices. The report concludes that this was compounded by Ofgem's failure to enforce its own rules. The report is also critical of the relationship and oversight between the government and Ofgem and urges the government to publish its "long-delayed" Strategy and Policy Statement for Ofgem so that this relationship can be further clarified and scrutinised.

Secondly the report looks at supplier exit arrangements. This includes a review of the Supplier of Last Resort (SoLR) process which concludes that this process should be reformed. The Committee criticises the current process for creating a risk imbalance in which suppliers can exit the market with little consequence, but customers ultimately pay for the cost of supplier failure via their energy bills (which include payments towards the industry-wide levy imposed on energy suppliers). The report also considers the Special Administration Regime, used for the first time to deal with Bulb Energy's collapse, and recommends that the costs of the Regime are paid through general taxation and not through energy bills.

The report goes on to consider reforms to the supplier market. The Committee touches on Ofgem's Action Plan on retail financial resilience (published December 2021) and is supportive of Ofgem's objective to ensure suppliers are well-capitalised and prudently run. The Committee highlights two priorities for reform: first to ensure that customer credit balances are protected, and second to ensure any policies put in place to secure this also prevent an increase in energy bills. The Committee proposes that Ofgem considers alternative forms of price protection and review the costs and benefits of the energy price cap to inform its decision. The report suggests that the Energy Retail Market Strategy is urgently updated.

Lastly the report looks at support for households in light of the estimated price cap increases in January 2023 (forecast to be £3,363). The Committee urges the government to provide immediate and better-targeted updates to its support package to align with these expected price increases. The Committee notes further protections should be afforded for the more vulnerable customers in respect of payments, debt collections, and those on prepayment meters who are at risk from self-disconnection. It calls on the government to improve energy efficiency and states that "the absence of a home insulation programme is an unacceptable gap in policy that must be urgently rectified".

Ofgem grants £8 million of funding to 18 innovation projects

Ofgem has granted around £8 million of funding across 18 projects as part of the second phase of the Strategic Innovation Fund (SIF). The SIF is a funding mechanism for the Electricity System Operator, Electricity Transmission, Gas Transmission and Gas Distribution sectors. It seeks to support network innovation that contributes to the transition to net zero while delivering net benefits to consumers. Click here for a previous update on the challenge areas identified under the scheme. 

The SIF, delivered in partnership with Innovate UK, operates in three phases across a five year period (2021-2026). In total, £450 million will be granted to innovation projects with a focus on clean forms of heat, zero emission transport, data and digitalisation and whole system integration. There is the option to increase the funding amount and extend the time period if necessary. The phase one "feasibility" stage launched in spring 2022 and saw 40 projects awarded up to £150,000. Phase two now grants further funding to 18 out of those 40 projects, with up to £500,000 per project and a total of £8 million across the board. The 18 project teams have six months to use the funds to explore their concepts in more detail, after which they can enter a further competition (phase three) for large-scale funding to support the effective roll out of successful ideas into the market.

The projects cover a range of technologies across a variety of subject areas. Projects that are focussed on hydrogen include new technology that compresses and blends hydrogen for use in gas networks, and the testing of a new coating to protect pipework from accelerated wear and tear. Circuit breaker technologies which are designed  to facilitate the efficient connection of increasing amounts of power from offshore wind turbines to the grid also feature among the funded projects, along with weather data technology which is capable of predicting risks and faults in the energy network and testing new superconductor cables. The SIF aims to support the development of transformative new technologies, products and services which can be launched across UK energy networks, making them fit for the future and delivering benefits for both consumers and the planet.

Ofgem Director for Strategy and Decarbonisation, Neil Kenward, has said: "I am very pleased to see these innovative ideas progress from the feasibility study stage and take the next step towards becoming a reality. They are all part of a concerted drive which will help us diversify our energy supplies in the future, protecting consumers from future energy shocks while also protecting the planet."

Ofgem publishes call for evidence on the future deployment of power with CCUS

Ofgem has published a call for evidence seeking views on how best to support the continued deployment of gas-fired power generation with carbon capture, usage and storage (CCUS) projects. Whilst CCUS initiatives such as the Dispatchable Power Agreement and the Cluster Sequencing process have already been launched, this consultation focusses on how to develop future policy framework beyond these schemes. It seeks to ensure the future, continued and effective use of CCUS in facilitating the transition to net zero by 2050.
 
In October 2021, the government published the Net Zero Strategy, committing to delivering four CCUS clusters by 2030 and at least one power CCUS plant by the mid-2020s. The British Energy Security Strategy built on this by setting out how the decarbonisation of gas in power, in part through the deployment of power CCUS, will complement the growth of renewables whilst maintaining security of supply. Power CCUS is capable of providing low-carbon generation that is non-weather dependant and more cost competitive. It can operate alongside nuclear, interconnectors and energy storage to support a primarily renewables-based system in 2035, whilst adding the benefit of increased stability. 

The consultation covers the following six topics:

  • How the power CCUS business model should evolve over time.
  • How to introduce competitive allocation in the 2020s.
  • The removal of barriers to deployment.
  • How to maximise economic benefits through future policies.
  • How the power CCUS sector is expected to develop.
  • How power CCUS could work with wider electricity markets. 

Ofgem will use the information received to help develop future policies for delivering power CCUS and also to feed into wider policy initiatives, including the Review of the Electricity Market Arrangements, as reported on last week. The consultation opened on 25 July 2022 and responses must be submitted by 17 October 2022.

Octopus raises £458m to boost energy tech investments

Octopus Energy Group has announced that it has raised £458.1 million from existing investors and Canada Pension Plan Investment Board which it will use to invest in green energy technology.

Octopus have said that part of the proceeds will be used to improve its Kraken platform. The platform, which supports the smart grid and automates various aspects of the energy supply chain, was launched in 2019 and was initially built to help support energy retailers and improve the efficiency of energy use. Currently its customers include EDF and E.ON, and Kraken is licensed to support 25 million accounts globally. Octopus is now looking to expand this technology to support other utilities, such as water and broadband.

The proceeds will also be used to invest in other products and solutions that can "help solve the energy crisis and drive renewables at scale".

This funding is additional to the £497 million investment that Octopus Energy Group received from Generation Investment Management in September 2021 who took a ~13% stake in the business. 

Greg Jackson, chief executive and founder at Octopus Energy Group, said: "We are in grasping distance of a clean, cheap, secure energy system – but it needs continued boldness from innovators like Octopus, and the backing of visionary investors like CPP Investments, Generation, Origin and Tokyo Gas.”
 

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