Energy and Utilities

The Energy Transition | Consultation on price cap and £200m boost for zero-emission lorries

Published on 23rd May 2022

This week we look at Ofgem's consultation on a quarterly price cap, the government's £200 million investment in zero-emission heavy goods vehicles, Ofgem's announcement on changes to the Market Stabilisation Charge and more.

Ofgem launches consultation on quarterly price cap

Ofgem has published a 'minded-to' consultation which sets out its proposal to reduce the price cap period from six to three months. In addition, Ofgem is seeking to reduce the notice period for the implementation of any adjustments to the cap level from two months to 30 working days.

Ofgem is also proposing to change the wholesale methodology to enable suppliers to recover backwardation costs. Backwardation refers to where the current short-term market price of an underlying asset is higher than prices trading in future markets over the long-run. The current wholesale methodology does not include backwardation costs as, when the market is stable, suppliers will recover such costs over time as the difference between the prices paid by suppliers and the prices used to set the cap index will net out. However, whilst the market is experiencing periods of high volatility, over and under recovery may not net out over time leaving suppliers with backwardation costs. Ofgem hopes that introducing these changes will make the market fairer and more resilient by enabling suppliers to recover their costs and therefore deliver better outcomes for consumers.

The consultation sits alongside a .separate consultation in which Ofgem seeks views on whether suppliers are incurring additional wholesale costs, beyond existing allowances in the cap in summer 2022 and winter 2022 as a result of wholesale price volatility. Both consultations close on 14 June 2022. Ofgem intends to make a decision before the next cap update in August 2022 and the new quarterly price cap structure could be implemented from October 2022.  

CEO of Ofgem, Jonathan Brearley, said: "Today’s proposed change would mean the price cap is more reflective of current market prices and any price falls would be delivered more quickly to consumers. It would also help energy suppliers better predict how much energy they need to purchase for their customers, reducing the risk of further supplier failures, which ultimately pushes up costs for consumers."

Government to invest over £200 million in zero-emission heavy goods vehicles

The Department for Transport has announced that over £200 million of government funding will be provided for an extensive three year zero emission road freight programme. The programme, launching later this year, will see an open-call for manufacturers, energy providers and fleet and infrastructure operators to showcase their green technology on UK roads, beginning with battery, electric and hydrogen fuel cell heavy goods vehicles. The announcement follows on from the government's successful £20 million zero-emission freight trials which ran in 2021 and were delivered by the innovation agency, Innovate UK.

The programme seeks to facilitate a smooth transition to a zero-emission freight sector by 2050. It will gather evidence on zero emission technologies that are best suited to HGVs and the requirements for refuelling and recharging infrastructure. The programme aims to eliminate the sector's current reliance on fossil fuels and imports of foreign oil, improve air quality and create greener jobs.

The programme will also have cost benefits for the industry and consumers. The government estimates that the programme will enable the roll out of hundreds of zero-emission HGVs across the UK, saving the industry money as a result of the lower overall running costs of green vehicles. Consumers will ultimately see improvements as well, with more efficient deliveries enabling haulage companies to keep prices down and protect consumers from rising costs.

Commenting on the announcement, Transport Minister Trudy Harrison said: "Our road freight industry is one of the most efficient in the world … [b]ut we must accelerate our journey towards our net zero goals […]. Our ambitious plans will continue to ensure food is stocked on the shelves and goods are supplied while eliminating fossil fuels from HGVs and making our freight sector green for good."

Ofgem announces changes to the Market Stabilisation Charge

Ofgem has published its decision to alter the parameters of the Market Stabilisation Charge (MSC). First introduced in April 2022 as a five month temporary measure, the MSC applies where a domestic supplier loses a customer who is then acquired by a second supplier in circumstances where wholesale prices fall significantly below the level assumed in the price cap. If triggered, the MSC requires the supplier that is acquiring the customer to make a payment to the losing supplier, with the amount paid being calculated as a proportion of the economic loss to the losing supplier.

The MSC has not yet been triggered and suppliers are currently only required to make a payment to the losing supplier if wholesale prices fall by more than 30%. In addition to the 30% wholesale price drop threshold, the MSC is also governed by the de-rating factor which determines the proportion of nominal hedging losses beyond the trigger point covered by the MSC. This is currently set at 75%.

In light of the increasing volatility of wholesale energy prices and in order to make the MSC more robust, Ofgem ran a consultation from 31 March 2022 to 14 April 2022 seeking views on proposed technical changes to the MSC calculation methodology. Ofgem's decision, which takes into account stakeholder responses to the consultation, sets out two key revisions to the MSC calculation methodology:

  • the threshold for drops in wholesale energy prices will decrease from 30% to 10%; and
  • the de-rating factor will increase from 75% to 85%.

These changes are intended to ensure that the MSC parameters are set at the minimum intervention level to allow an efficient and well-managed supplier to remain financeable, gain stability in the market and make prudent hedging decisions. As a result, suppliers should be able to better perform their function of procuring energy on behalf of customers in current market conditions, avoiding the risk that consumers end up paying more in the long run. The changes will come into force on 25 May 2022.

Whilst the MSC was intended as a temporary measure which would expire in September 2022, Ofgem has the authority to extend the measure until March 2023. Although the recent consultation did not expressly seek views on the extension of the measure, most stakeholder responses still commented on the issue, showing strong support for an extension. As a result, Ofgem anticipates that it will extend the MSC until March 2023 and will seek views on this proposal by way of consultation later on in the year.

Government announces £120 million Future Nuclear Enabling Fund

The government has announced a £120 million fund, known as the Future Nuclear Enabling Fund (FNEF), to support the development of a limited number of new nuclear energy projects. The FNEF forms part of the government's ambition to increase nuclear power up to 24GW by 2050 as set out in the British Energy Security Strategy.

Currently, there is only one new nuclear plant under construction by EDF, known as Hinkley Point C. Once built, this will be the first new nuclear power station in more than 20 years.

Funding through the FNEF will be competitively allocated and the government hopes that this will stimulate competition in the industry and therefore attract private investment to accelerate rollout of new nuclear power stations across the UK.

The government has invited nuclear stakeholders to register their interest in bidding for funding and to provide information on projects to help inform fund design. The government is also interested in obtaining further information from nuclear stakeholders who are not intending to bid in order to assist with maturing fund design. The indicative timeline set out by the government provides that the application window will open in July 2022 and close in August 2022, with confirmation of grant awards in December 2022. The government has also stated that, whether successful or not in gaining an FNEF award, projects will still be able to participate in the following selection process in 2023.

Energy minister, Greg Hands, said: "This government is backing nuclear power as a critical part of our British Energy Security Strategy. This Fund will accelerate the development of new nuclear – from SMRs to larger-projects – and bring fresh innovation into the market."

 

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