The Energy Transition | Climate disclosures and £160m for offshore wind farms
Published on 8th Nov 2021
This week, we look at compulsory climate disclosures for the UK's largest companies, £160m in funding for offshore wind farms, Ofgem's Global Regulatory Accelerator and price cap review, and more.
COP26 daily updates
The 26th UN Climate Change Conference of the Parties (COP26) commenced last week in Glasgow. The first week saw the world leader's summit take place as well as specific days on finance, energy, youth and public empowerment, and nature. For a digest of each day's agenda and a review of the previous day's events, follow OC's daily updates.
UK to mandate climate disclosures for largest companies
The government has announced that over 1,300 of the UK's largest companies and financial institutions will be required to disclose climate-related financial information from 6 April 2022, subject to Parliamentary approval. The UK will become the first G20 country to make such disclosures mandatory.
The legislation will apply to many of the largest UK-registered traded companies, banks and insurers, as well as private companies with over 500 employees and more than £500m in turnover. The intention is that the most economically and environmentally significant companies will be forced to consider the risks and opportunities stemming from climate change, and will be encouraged to formulate plans for reducing emissions.
This legislation comes following recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD), detailed in its 2017 Recommendations Report. The TCFD's 2021 Status Report revealed growing global momentum for climate-related financial disclosures and the Task Force itself has accrued over 2,600 supporters globally, with a combined market capitalisation of over $25trn.
Energy and Climate Change Minister Greg Hands said, "If the UK is to meet our ambitious net-zero commitments by 2050, we need our thriving financial system, including our largest businesses and investors, to put climate change at the heart of their activities and decision making. By mandating large businesses to disclose their climate risks and opportunities – the first G20 country to do so – we are showing global leadership by making our financial system the greenest in the world."
Government announces £160m funding for floating offshore wind farms
Prime Minister Boris Johnson has announced up to £160 million of government funding for developers and manufacturers looking to invest in large-scale floating offshore wind ports and factories in Scotland and Wales. This funding, boosted by private sector investment, is designed to develop port infrastructure capable of mass-producing floating offshore wind turbines and installing them out at sea. The government believes that this will "support the target in the Prime Minister’s Ten Point Plan to deliver 1GW of energy through floating offshore wind by 2030" and will be a "stepping stone to substantial further growth in the UK of this technology."
Floating turbines allow wind farms to be built further out to sea in deeper waters where winds are stronger. The government indicates that the new funding will offer opportunities for Scotland's coastal communities and that the Celtic Sea presents a "major development opportunity for the offshore wind sector" that will create significant opportunities for development in Wales.
Business & Energy Secretary Kwasi Kwarteng said, "Floating offshore wind is key to unlocking the spectacular wind energy resource we enjoy in the UK, particularly in the deep waters around the coasts of Scotland and Wales. This new investment will put us in a leading position to capture the full economic benefit of this fast growing industry."
Ofgem launches global Regulatory Energy Transition Accelerator
Ofgem has launched a global initiative, the 'Regulatory Energy Transition Accelerator', together with the International Energy Agency (IEA), the International Renewable Energy Agency (IRENA) and the World Bank. The Regulatory Accelerator aims to help regulators speed up the global energy transition at the lowest cost. In particular, the initiative aims to help countries who have not yet developed carbon-intensive energy systems to avoid doing so.
The Accelerator aims to bring together knowledge and expertise from the World Bank, the IEA and IRENA as well NGOs specialising in assisting regulators into its work programme. The initiative will be governed by a steering committee made up of representatives from the delivery partners, and a selection of representative regulators, and chaired or co-chaired by regulators on a rotating basis. Around 20 regulators covering every continent have already committed to participating in the Accelerator, with more expected to follow after the COP26 climate summit in Glasgow.
Jonathan Brearley, chief executive of Ofgem, said:
“The Accelerator will help regulators to learn from each other’s experiences and develop new approaches for the systems of the future. We are keen to see as many regulators as possible join the accelerator, particularly those from developing countries."
“We must think entirely differently to power the global economy without fossil fuels. It’s clear that the future for all of us lies in flexible energy systems powered by clean electricity, paid for fairly. In the long term this will better shield consumers from commodity price shocks as well as protecting the planet we all share.”
Ofgem announces energy price cap review
In an open letter to energy suppliers, Ofgem's chief executive, Jonathan Brearly outlined a series of measures that Ofgem is planning to undertake in response to the rise in wholesale energy costs. In particular, Ofgem has announced its intention to consult on the price cap methodology in order to ensure it appropriately reflects the costs, risks and uncertainties facing suppliers. The price cap methodology includes a range of mechanisms to allow suppliers to recover uncertain costs based on what is considered reasonable at the time.
The consultation will seek views on whether these existing mechanisms should be adjusted in light of the increased costs and risks facing suppliers. This is line with legislative requirements, whereby Ofgem must protect consumer interests, and consider the need for suppliers to finance their efficient costs. Ofgem expects to publish the consultation this month, with the decision to be published in February 2022. This will allow Ofgem to implement any changes in the forthcoming price cap period (from 1 April 2022), if appropriate to do so.
Ofgem has stressed that its immediate priority remains ensuring energy consumers, both domestic and non-domestic, are protected. To ensure clarity for suppliers and consumers, it has set out expectations with regards to compliance with regulatory obligations, including where suppliers are appointed as the Supplier of Last Resort (SoLR). Ofgem has published a separate letter surrounding the SoLR process.
Ofgem also intends to respond to the rise in gas prices by 'raising the bar' of what it expects from suppliers with regards to financial risk management. This will be done through utilising existing licence conditions, reviewing where those licence conditions might need to be strengthened and guidance updated and considering where new licence conditions may be needed. Ofgem has further indicated that it will continue to take robust action against any suppliers that fail to meet licence conditions.
Jonathan Brearley notes that the steps set out in the letter, "will make a material difference to reduce the risks facing energy consumers going forward", but also recognised that "there is a case for wider and deeper changes to ensure that the energy sector is resilient against potential continued global market volatility, and is able to deliver the transition to net zero in consumer interests."
Government publishes response on Domestic Renewable Heat Incentive consultation
The government has published its response to a consultation, which ran from February to May 2021, concerning proposals for the closure of the Domestic Renewable Heat Inventive (DRHI) scheme. Taking into account the views of stakeholders and wider government policy objectives, the government has decided to proceed with most of the proposals outlined in the consultation. These include:
- closing the DRHI to new applications on 31 March 2022;
- improving scheme administration by amending the regulations for the replacement of part of plants, annual declarations, and occupancy;
- providing the Microgeneration Certification Scheme and the consumer codes with an opportunity to update their standards and codes of practice;
- simplifying the metering requirements and Metering and Monitoring Service Package arrangements;
- requiring that all solid biomass used on the DRHI meet the fuel quality requirements being introduced to the Biomass Suppliers List; and
- reducing the publishing and reporting requirements once the scheme closes.
The government is also considering whether to backdate DRHI payments so that when a property changes ownership, the new owner can receive DRHI payments backdated from the date Ofgem is notified of the change in ownership. Currently, DRHI payments are suspended following a change in ownership and resume only from the date that Ofgem competes its change of registration. This can take some time and may mean that scheme participants miss out on DRHI payments if there are delays.
Elexon announces alternative CAP review process
Elexon, the administrator and manager of the Balancing and Settlement Code (BSC), has announced that it will start to use an alternative means of setting the Credit Assessment Price (CAP). This follows a consultation that closed on 22 October 2021.
The CAP has seen numerous rises in recent months, triggered by rising wholesale prices. It has increased by a total of £163/MWh since August 2021. The changes announced to the CAP review process are intended to give Elexon's Credit Committee greater flexibility to set a CAP faster, allowing it to be more responsive to such volatile market conditions.
Under the usual process, when a mechanistic trigger event occurs Elexon issues a consultation for five working days for a new CAP, based upon the price suggested by the indices. Any responses and changes in circumstances are considered by the Credit Committee, who agree the new CAP. Once confirmed, the industry is notified and the new CAP is implemented after a minimum of 15 days. The result is that the CAP can be out of date before it is implemented, particularly in a turbulent market.
Under the alternative mechanism, the Credit Committee can request to suspend this usual process in conditions where volatile prices are causing a high number of CAP breaches or significant changes in CAP. Instead, the Credit Committee would review and potentially propose a new CAP every two weeks. The consultation period would be shortened to one working day and the CAP would become effective on the 10th working day after the industry notification. This alternative process would also allow the Committee to utilise a wider range of data sources when determining the CAP, including forward market prices and the reference price.