Energy and Utilities

The Energy Transition | British Energy Security Strategy and National Grid's stability investment

Published on 11th Apr 2022

This week, we look at the government's announcement of the British Energy Security Strategy, National Grid ESO awarding £323 million to grid stability projects, the new Future System Operator public body, the government's decision not to amend the current approach to unmet ECO supplier obligations, and more. 

Energy storage fields, with solar panels and wind turbines

The British Energy Security Strategy is announced

The much anticipated British Energy Security Strategy has now been released by the government. The strategy has been produced in response to record high power prices and current market volatility, with the aim of bringing energy prices down and making the UK 'energy independent'.

A key part of the strategy is the acceleration of new nuclear power and the government has set a new target of installing up to 24GW of total capacity by 2050 in order to meet 25% of the UK's projected electricity demand. Reaching this target is equivalent to opening a new nuclear reactor every year for the next 10 years and will be supported by a new government body, Great British Nuclear. The government also plans to provide a £120 million Future Nuclear Enabling fund, set to launch this month.

Additionally, the strategy has set ambitions for up to 50GW of offshore wind by 2030 and 5GW of floating offshore wind - an increase from the 1GW pledged in the ten point plan. In order to speed up the process of realising offshore wind projects, planning rules will be reformed in order to halve the current approval times for these projects.

Some support has also been provided for solar, hydrogen and heat pumps. Targets for hydrogen production are being doubled to up to 10GW by 2030, and a Heat Pump Investment Accelerator Competition worth up to £30 million will be run in 2022 in order to expand the production of British heat pumps. The government is also looking to increase the UK's solar capacity by up to five times the current 14GW capacity and intends to consult on amending planning rules to favour ground-mounted solar development on non-protected land. 

Whilst some of the measures proposed by the government have been welcomed, the strategy has been met with criticism from many in the energy sector due to the lack of focus on short-term reduction of energy demands. For example, there has been criticism of the reliance on nuclear power due to the associated lengthy approval and construction times, and the corresponding failure to address the current energy security challenge in the short term. 

National Grid ESO awards £323 million to green grid stability projects

National Grid ESO (NG ESO) has awarded 10 contracts to grid stability projects in Scotland worth a total of £323 million in a bid to improve the long-term stability of Britain's electricity system. These contracts have been awarded as a result of the ESO Stability Pathfinder Phase 2 tender, which attracted 225 proposals. 

The transition away from fossil fuels towards more renewable (often intermittent) sources of energy in the UK will result in a loss of inertia in the electricity system, thereby increasing the risk of system instability. It is hoped that these new 10-year contracts, which will start in April 2024, will decrease this risk and replacement inertia previously provided by coal or gas power with carbon-free sources.

The 10 contracts have been awarded in relation to two types of technologies, both of which operate to solve insufficient short circuit levels and provide "green" inertia to stabilise the system. Five of the successful solutions are synchronous condensers, which consist of ‘green’ motors with free-spinning flywheels, whilst the other five are comprised of what is thought to be a world-first use of new grid forming converters at multiple locations across a region, The use of grid forming converters enables non-synchronous technology, including batteries, wind and solar, to connect to the system to provide inertia and short circuit levels. 

NG ESO's procurement of these carbon-free inertia solutions will provide the combined short circuit levels and inertia equivalent to almost four coal-fired power stations. This should allow for a higher concentration of renewable energy in the electricity system, and is also greener and cheaper for consumers when compared to coal or gas power plants.   

Government set to launch a new public body to oversee UK energy system

The government, Ofgem and NG ESO have issued a joint statement on their vision for a new, independent Future System Operator (FSO) – a public body which will take  on some or all of the roles currently undertaken by NG ESO and National Grid Gas. This comes as part of the government and Ofgem's response to the FSO consultation issued on 20 July 2021. 

The response to the consultation noted that creation of the FSO will require both primary and secondary legislation. The need to set the body up as soon as practicable was however emphasised, and the response noted that it could be established by, or in, 2024.

It is expected that the FSO will take on all the main existing roles and responsibilities of NG ESO, as well as providing strategic oversight of long-term planning and forecasting for gas. However, no real-time gas system operation or emergency co-ordinator functions will be taken on by the FSO. A statutory advisory duty to provide expert advice and analysis to the government and Ofgem will be placed on the FSO (amongst others). The body will also have statutory powers to request information and data from the sector. The overall aim of the FSO is promote the following three objectives:

  • achieving net zero; 
  • ensuring security of supply of electricity and gas; and 
  • ensuring an efficient, coordinated and economical electricity and gas system.  

Chief executive of Ofgem, Jonathan Brearley, said: "A fully independent system operator will help to transform Great Britain’s energy system and cut customers’ energy bills. Critically, the FSO will ensure that we will build a smart, efficient and flexible system that will mean that Britain moves to a secure low carbon and low-cost system."

Government will not amend rules on unmet ECO supplier obligations 

The government has published its response to the consultation on the next stage of the programme to deliver energy efficiency measures in homes across Great Britain, the Energy Company Obligation (ECO),  which was issued in July 2021. In the response, the government has ruled out any amendment to the current approach for handling unmet obligations of existing suppliers in ECO4 (the next phase of the ECO). Under the ECO scheme, large energy suppliers have a legal obligation to deliver energy efficiency measures to domestic premises. Energy suppliers are required to achieve savings of £8.253 billion during ECO3 (the 2018 to 2022 period) and this target is divided between obligated suppliers, relative to their share of the domestic gas and electricity market. 

Despite the fact that 11 obligated suppliers have exited the market during ECO3 , this has only translated to a loss of less than 2% of the obligation. Therefore, the government is not intending to allow suppliers' energy efficiency obligations to be passed onto the rest of the market, which would require transfer to new suppliers during the Supplier of Last Resort process. 

In its response, the government has stated that such a change would require additional administrative and financial resources. This would likely include additional costs for lead generation and new contracts to the detriment of their customers. The government has said that it does not want to place additional unmet ECO obligations on remaining suppliers as this carriers the risk of impeding their ability to operate and would translate into increased costs for consumers. 

National Grid ESO set to deliver substantial constraint cost savings

NG ESO has awarded 15 'post fault' contracts to 10 companies with generating units, including windfarms and battery storage. These contracts are the result of NG ESO's Constraints Management Pathfinder Phase 1 which was launched in March 2021, and which sought to find new ways of operating the Anglo-Scottish boundary (B6) system to reduce constraint costs and increase the use of renewables. 

At present, in order to manage constraints, generators are pre-emptively bid off the system prior to a fault occurring. This can be expensive however so, to reduce costs, NG ESO has procured 1.7GW of transmission connected generation through the pathfinder project. This will make 800MW available to be tripped off at any one time when there is a constraint on the B6 boundary, avoiding the need to pre-emptively curtail generation. 

The contracts are due to commence in October 2023 and run through to September 2024. It is estimated that they could save £20 million to £40 million per year, whilst also supporting transition to a 100% zero carbon grid. 

Head of Networks at NG ESO, Julian Leslie, said: "These services give our control room more flexibility, enabling renewable generation to stay on the system for longer and taking us another step closer to 100% zero carbon operation. They’re part of the ESO’s wide-ranging 5-point plan which will allow us to manage constraints on the system more effectively in the years ahead, reduce balancing costs and ultimately save consumers millions of pounds."

Ofgem intends to strengthen Market Stabilisation Charge

Following Ofgem's announcement on 16 February 2022 that it plans to implement a temporary Market Stabilisation Charge (MSC), Ofgem has released a consultation seeking views on changes to the MSC parameters. 

The MSC is intended to support domestic suppliers during the recent period of market volatility to ultimately protect consumers. Suppliers gaining new customers will pay the MSC to suppliers losing customers where wholesale gas and/or electricity prices fall to 30% below the price cap (referred to as the trigger point). The aim of this MSC payment is to compensate for a portion of the economic loss suffered by suppliers who lose customers and stabilise any effects of changes in wholesale energy prices. Ofgem also set a derating factor of 75% which is the percentage of incremental supplier hedging losses covered by the MSC. 

However, in the recent consultation, Ofgem is consulting on a change to the threshold figure within the range of 10 – 20% in order to mitigate the risk of excessive losses on hedge positions before activation of the MSC. Additionally, as potential losses are expected to rise, Ofgem has proposed an increase to the derating factor to between 80 – 90% to reduce the potential losses companies are expected to absorb. 

The MSC takes effect on 14 April 2022, which is when the consultation will close. Any changes are intended to be implemented on 27 April 2022. 
 

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* 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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