Energy and Utilities

The Energy Transition | BSC modification to support net zero, ETS auctions to launch in May, Budget announcements on green growth

Published on 5th Mar 2021

This week we look at a balancing and settlement code modification to support net zero, the launch of the new UK ETS auctions, ENA updates to its standard flexibility contracts, the National Security and Investment Bill excluding energy retail, and more.

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Elexon welcomes ‘ground-breaking’ code modification to support net zero

Elexon, the administrator of the Balancing and Settlement Code (BSC), has praised a "ground-breaking" modification to the BSC.

BSC Modification P375 ‘Metering behind the Boundary Point’ has now been approved by Ofgem. This will allow data from asset meters fitted at units behind the boundary point, being the point at which sites connect to the distribution network, to be used for settlement from 30 June 2022. At present, only data on electricity flows from the boundary point can be used for settlement purposes.

Elexon will need to introduce "extensive changes" to implement the modification, but stated that it will have clear benefits, including giving smaller asset owners more opportunities to provide balancing services. Further benefits of the modification were highlighted by Dr Alastair Martin, Chief Strategy Officer at demand respond aggregator Flexitricity, who noted that flexible energy played an important role in helping to deliver net zero.

'Ambitious' UK ETS auctions to launch in May

The government has confirmed that the first auction of the UK Emissions Trading Scheme (ETS) will open in May 2021. Intercontinental Exchange (ICE), the firm which operates the EU ETS, has been appointed to host the emissions auctions on behalf of the UK government's Department for Business, Energy and Industrial Strategy (BEIS). ICE has published its allowances auction calendar for the year and is planning to launch the first ICE UK Allowance auction on Wednesday 19 May 2021, with auctions to run every two weeks.

The UK ETS is replacing the EU ETS in the UK following the UK's departure from the EU, which we previously reported on here. ICE claims that its approach set out in its calendar is aligned with the UK's 2050 net-zero target and the ways in which carbon is accounted for under the Climate Change Act. Energy Minister Anne-Marie Trevelyan has said that the calendar outlined by ICE will make the UK ETS "even more ambitious" that the EU ETS.

Electricity networks streamline standard flexibility contract

The Energy Networks Association (ENA) has updated its common contract for flexibility procurement to "offer more transparency and unlock liquidity in local markets for flexibility". The standard flexibility contract was created through the Open Networks project and was agreed by distribution network operations (DNOs) and the Electricity System Operator (ESO) at National Grid. It was first announced in April 2020, with all of the DNOs offering the standard contract.

The new contract has been updated following feedback from industry stakeholders, including Ofgem and BEIS. The ENA has said the core contract has been simplified to provide greater alignment with the ESO’s approach, whilst various clauses have also been made more accessible. A public consultation of the next version of the contract is due to take place in August ahead of its planned launch at the end of this year.

Net zero could provide £350bn investment opportunity, report suggests

Reaching the 2050 net zero target presents a £350 billion investment opportunity for the energy sector, a new report from financial consultants Lane Clark & Peacock (LCP) has concluded. The report, Aligning the Stars: Asset owners and energy investment, notes that decarbonising the power sector will require a substantial increase in the amount of installed capacity on the power system, creating significant opportunities for private capital.

The report analyses two different scenarios and scales of investment that could occur in the coming years. A “business-as-usual” scenario sees UK asset owners extending their infrastructure investments to £70 billion over the next 10 years, leaving a funding gap of £100 billion by 2030. The report states this gap can be closed by targeting assets specifically at the needs of asset owners. This forms the basis of its second, more optimistic scenario, which sees carefully designed investments of up to £125 billion by 2030, reaching the required £350 billion for net zero by 2050.

Kyle Martin, head of market insight at LCP stated that, “[t]here is a broad diversification in both the technologies and assets that will be required, from existing technologies such as wind and solar…to emerging technologies such as hydrogen and carbon capture." LCP has called on government to encourage further investment through policy and financial mechanisms.

Energy retail will not be covered by National Security and Investment Bill

The latest revision of the National Security and Investment Bill (NSIB) has excluded energy suppliers from its remit. The Bill gives the government the power to intervene in transactions across 17 sectors on the grounds of risk to national security. These sectors include areas such as energy, civil nuclear and data infrastructure. Where there are certain proposed transactions involving the sale and purchase of a 15% stake in an entity in one of these sectors, those involved in the deal are obliged to notify the government that such a transaction is due to take place. Transactions which pose a risk to national security will then be 'called in' for further review.

After launching a consultation on on the remit of the NSIB, BEIS has concluded that it would not apply to energy suppliers and that all references to 'supply' or 'suppliers' will be removed. It was recognised that subjecting energy suppliers to compliance with the new rules would likely be "detrimental and burdensome", especially on retail energy suppliers that do not own any infrastructure.

Drax unveils plans to host UK's largest carbon capture project by 2027

Drax has announced this week that an application for a development consent order (DCO) will be made this month for the UK's largest commercial-scale bioenergy with carbon capture (BECCS) site, which will be located in North Yorkshire. The DCO process takes up to two years and construction on the site is expected to begin in 2024, with the ambition to have the site fully operational by 2027. By 2030, Drax intends to become a carbon negative company.

Will Gardiner, CEO at Drax Group, has said that the BECCS site "will be permanently removing millions of tonnes of CO2 from the atmosphere and making a significant contribution to efforts to address the climate emergency, whilst creating thousands of new jobs and supporting a post-covid economic recovery".

Budget announcement commits to green growth

This week, Chancellor Rishi Sunak delivered the spring 2021 Budget to the House of Commons. Whilst much of the focus was on the economic recovery from Covid-19, the government reiterated the need for a "real commitment to green growth”.

At a glance, Sunak announced:

  • Three new low-carbon technology programmes that will fall within the Net Zero Innovation Portfolio (a £1bn fund);
  • The UK Infrastructure Bank, located in Leeds, which will be operational this spring and will have initial capitalisation of £12 billion (which is expected to support £40 billion of total investment in infrastructure).
  • The introduction of eight freeport locations, and support for new port infrastructure to help build offshore wind projects in Teeside and Humberside.
  • A freeze on fuel duty.
  • The launch of a world-leading Sovereign Green Bond to allow the public to invest in the green industrial revolution.

We have published an Insight which discusses the green Budget announcements in more detail which you can view here.

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