Energy and Utilities

The Energy Transition | Contracts for Difference auction receives £22m funding boost

Published on 7th Aug 2023

Welcome to our top picks of the latest energy regulatory and market developments in the UK's transition to net zero

Energy storage fields, with solar panels and wind turbines

This week we look at a funding boost for the latest Contracts for Difference auction, recent government announcements concerning hydrogen infrastructure, new rules to improve customer service for energy customers, and more.

Contracts for Difference renewables scheme receives £22m funding boost

The government has announced that the latest auction in the Contracts for Difference (CfD) scheme will receive £22 million of additional funding. The additional funding is intended to boost renewable energy generation to help improve energy security and progress the transition of the UK's energy system to net zero.

Launched in 2014, the CfD scheme supports low-carbon electricity generation by offering renewable power developers a guaranteed price for their electricity. In this latest (fifth) CfD round, the budget for established renewable technologies such as solar and offshore wind will increase by £20 million, bringing the total amount of funding available for these technologies to £190 million. There will also be an additional £2 million allocated to emerging technologies such as floating offshore wind, for which a total of £37 million will be available.

Neil McDermott, CEO of the Low Carbon Contracts Company, said: "The £22 million boost to the Contracts for Difference (CfD) Allocation Round 5 reaffirms the government’s commitment towards transforming Britain into a global leader in renewable energy. Contracts for Difference play a crucial role in enhancing energy security, driving economic prosperity and propelling us towards a more sustainable future."

Government announces a number of hydrogen strategy updates

The government has provided updates on its plans for new business models and market strategy for hydrogen, with the aim of promoting and accelerating green hydrogen projects across the UK. The announcements concern all aspects of hydrogen generation, from production and development to storage and transportation. 

In its recently published response to a consultation on hydrogen transport and storage infrastructure, the government stated that it is minded to introduce a new Regulated Asset Base model as well as an external subsidy mechanism via private revenue support contracts to support the development of hydrogen transport infrastructure. In terms of support for hydrogen storage providers, the government has indicated that it's favours the introduction of a revenue floor via 15-year contracts to mitigate demand risk.

Additional proposals include plans to give the newly announced Future Systems Operator a key role in the planning and monitoring of hydrogen transport and storage infrastructure projects. Further details of this new role will be included in a future government publications.

The government also recently announced that £8 million of government funding has been allocated to support hydrogen-powered transport in the North East of England. The support has been awarded to two projects which both focus on different applications of green hydrogen energy. One project, based at Teesside Airport, will develop hydrogen-powered airport ground-based support vehicles, such as tow trucks for aeroplanes and sweepers to clean runways.. The second project plans to scale up the availability of hydrogen refuelling stations, with four new publicly available fuelling stations to be created. The government stated that funding for these projects is expected to "bring the UK closer to decarbonising some of the heavier and more complex vehicles, such as airside operations, which will be essential in reaching net zero".

An additional £300,000 of funding will also be allocated to colleges in the North East, with the aim of educating and upskilling the local workforce to ensure the availability of skills needed to deliver these projects.

Ofgem announces new rules to improve customer service for energy customers

Following engagement with energy suppliers, businesses, and consumers, Ofgem has announced a series of proposed reforms to improve customer services for homes and businesses. The regulator has published:

The decision on minimum capital requirements will come into effect from 31 March 2025 and  will ensure that companies hold sufficient capital to withstand "severe but plausible" market shocks. This is intended to create long-term stability in the market by reducing the likelihood of future supplier failures.

Other proposals which will affect households include: requiring energy suppliers enquiry lines to stay open longer and be easier to contact via various methods; more effective support for customers struggling with bills; emergency support 24/7 for customers cut off from power or gas supplies as a result of supplier issues; and making information available on customer services performance.

Ofgem's review also flagged issues that require regulatory changes. The regulator has therefore indicated that it will consult on these matters, which include introducing better complaint handling between suppliers and businesses and extending micro business protections to all businesses and creating better guidance over deemed contract rates.

Read more about these reforms here.

Network needs must be factored into offshore leases

The government has recently reiterated the need for developers to fully consider the needs of the transmission network when planning future offshore wind seabed leasing.

Issues surrounding the delivery of transmission connections are a significant limiting factor in the expansion of offshore generation capacity. The Offshore Transmission Network Review and the subsequent consultation on the "Future Framework" for offshore transmission were launched to consider how to move away from a project-by-project approach to transmission network connections, and towards a more coordinated approach which considers future projects and the sharing of infrastructure.

The government's latest comments form part of a response to a consultation on the "Future Framework" of offshore wind transmission connections which aims to address barriers to deployment, facilitate early planning of network infrastructure, and reduce overall costs. In the response, the Department for Energy Security and Net Zero (DESNZ) set out three recommendations that it will be adopting as part of the future framework delivery model. DESNZ has said that it will:

  • work with project partners to develop options for a strategic approach for the deployment of offshore wind and interconnectors that evolves over time as roles and responsibilities.
  • work with Ofgem to adopt delivery models that maximise efficiency in terms of cost and risk; and
  • consider the timing of transmission design and delivery.

The proposals include taking the location of network connections into account as part of transmission planning. The government hopes that these considerations could ensure that "once deployment areas are chosen, there is sufficient time to plan networks in advance and address any constraints in time for projects’ connections". DSENZ has also suggested that, in the future, the recommended strategic approach could be extended to account for other renewable technologies and to take a more whole-system view.

 Ofgem rules out rollover for gas price controls

Ofgem has published its decision on the future of gas price controls, following its consultation on frameworks for future systems and network regulation. Instead of introducing a short-term control (which had been considered in light of uncertainties impacting the sector), it will develop a medium-term ex-ante price control for the gas networks which will start in 2026. For electricity distribution, the price control will run until March 2028.

A framework decision is expected to be published in autumn 2023 which will look at a new price control framework. Currently it is proposing to take forward the design of a price control which is broadly similar to RIIO-2.

A further consultation is expected later in 2023, which will look to streamline the price control process and consider whether existing outputs should be retained or removed, and only introducing new outputs where essential. The regulator will also adapt the existing cost assessment process, as appropriate, and consider the arguments for changing the length of the price control from five years. This comes as a result of the uncertainty on the future of gas networks in light of carbon budget targets.

Ofgem has anticipated that there will be challenges around increased risk to the long-term life of the gas network assets which they hope to mitigate through the choice of depreciation rates and regulatory asset lives, and through price control re-openers.

This article was written with the assistance of Jack Duffy and Amy Lewis, trainee solicitors.

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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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