Energy and Utilities

The Energy Transition | Heat network zoning and Ofgem consultation on retail financial resilience

Published on 27th Jun 2022

This week we look at the government's proposals for developing heat network zoning, Ofgem's consultation on strengthening retail financial resilience, the government's proposal for a regulatory framework on fusion energy and more.

BEIS publishes proposals for developing heat network zoning 

The Department for Business, Energy and Industry Strategy (BEIS) has published its proposals for developing heat network zoning. A heat network is a distribution system of insulated pipes that takes heat from a central source, such as a power plant or heat recovered from industry, infrastructure or canals and rivers, and delivers it to a number of domestic or non-domestic buildings. The aim of heat network zoning is to develop heat networks in specific areas where they can provide the lowest cost, low-carbon heat to consumers. The government proposals come as a response to a consultation launched in October 2021 seeking views on how best to implement zoning methodology.

In 2020, the Energy White Paper committed to implementing heat network zoning by 2025. This commitment was reiterated in October 2021 in both the Heat and Building Strategy and the Net Zero Strategy. Most recently, in the Queen's Speech in May 2022, it was announced that a new Energy Security Bill would be drafted containing provisions on heat network policy.

The latest response sets out the government's decision on how best to deliver heat network zoning. The key points include:

  • Developing a standardised mapping methodology to identify potential heat network zones.
  • Granting power to local governments to act as, or establish, a local zoning coordinator to designate areas as heat network zones.
  • Granting the Secretary of State for BEIS various powers, including the power to fulfil the functions of a zoning coordinator.

Within a heat network zone, specific buildings will be required to connect to a heat network within a certain timeframe, unless exempt. A building may be exempt if low-carbon heating systems have already been installed or the costs of connection to the heat network are prohibitive. To enable effective enforcement, zones will be subject to a reporting and monitoring framework and zoning coordinators will have the ability to impose civil sanctions where requirements to connect buildings to heat networks are not met. 

Heat networks are currently classified as commercial arrangements, rather than domestic. As a result, the households served by heat networks do not at present benefit from the cost protections afforded by the Ofgem energy price cap. The government's latest response commits to extending price protections to all consumers (including non-domestic consumers) who are required to connect to heat networks and to further considering whether any additional extensions are required. Future secondary legislation will specify which consumer protections will apply.

Ofgem to prevent use of customer balances as 'interest free credit cards' 

Ofgem has released a consultation on strengthening retail financial resilience. In the consultation, Ofgem sets out its proposals for protecting customer credit balances and money collected to meet Renewables Obligation (RO) payments. 

Ofgem has criticised energy suppliers for operating with insufficient capital and commercial risk management practices, thereby leaving consumers vulnerable. Currently, energy suppliers can accrue and use customer credit balances and RO payments as risk-free capital. If an energy supplier fails, customers are moved to a new company under the Supplier of Last Resort (SoLR) mechanism. Whilst customer's credit balance and RO payments remain intact as they are effectively insured through mutualisation, they are not transferred from the failed supplier to the new supplier. Therefore, the cost of replacing those balances and RO payments is shared across all consumer bills. This encourages suppliers with insufficient capital to enter the market and grow unsustainably through acquiring new customers simply to stay afloat. 

Ofgem's proposals aim to ensure that customer credit balances and RO payments can be transferred to the SoLR should a supplier fail rather than remain an asset of the insolvent company, which would reduce mutualisation costs. By reducing suppliers' reliance on customer credit balances and RO payments as working capital, this will ensure suppliers' have sufficient capital from other sources to survive market shocks. Ofgem hope that this will prevent company failures as seen in the past and ultimately, protect consumers. The consultation opened on 20 June 2022 and the deadline for responses is 19 July 2022. 

CEO of Ofgem, Jonathan Brearley, said: "The energy market remains incredibly volatile and there are a number of huge geopolitical issues continuing to apply massive pressure…. By ensuring that suppliers are operating well-financed, sustainable, and have more resilient business models, we can avoid the supplier failures we saw last year which caused huge stress and worry and added costs to everyone’s bills. But if some do still fail, consumer credit balances and green levy/renewables payments will be protected. Currently they are used by some suppliers like an interest free company credit card. Moving forward, all suppliers will have to have enough working capital to run, without putting their customers’ credit balances at risk. …"

Government releases regulatory framework proposal on fusion energy

The government has published its response to the consultation on the regulatory framework for rolling out nuclear fusion energy, which was published in October 2021 alongside the government's Fusion Strategy. In the consultation, the government sought stakeholder views on its outlined proposals for a regulatory framework for fusion energy in the UK. The proposals aim to enable safe and rapid deployment of fusion energy power plants to facilitate growth of this low carbon energy industry.

The government has assessed the hazard of fusion facilities and has concluded that the overall hazard profile remains comparable with other facilities (such as a large chemical plant) regulated by the Health and Safety Executive and UK environmental regulators. Therefore, the government has decided that the current regulators will retain responsibility for fusion and this decision will apply to all planned prototype fusion energy facilities in the UK, including those targeted for deployment in the 2030s and 2040s. However, the government is prepared to re-visit its decision on fusion regulation if new compelling evidence is presented to support an alternative approach. Additionally, the government will use the Energy Security Bill to legislate to exclude fusion energy facilities from the definition of nuclear instalments and the regulatory and licensing requirements under the Nuclear Installations Act (1955). 

Moving forward, the government has committed to using the consultation responses to develop a third party liability regime and options on export controls, nuclear safeguards and cyber security, and will publish details in due course. The government also intends to publish its plans for a Fusion Policy Statement in the coming months and, more generally, will support regulators to build technical capability to ensure effective regulation of fusion energy facilities. 

£43.7 million of funding to develop green automotive technology 

More than £43 million of government and industry funding has been awarded to help develop the latest green automotive technology. 

The two largest projects to receive funding are Project Zero Emission Norton and OX Delivers CLEAN (Clean Logistics for Emerging African Nations). Project Zero Emission Norton will use the funding to develop an electric motorbike that delivers a high level of race performance and touring range. The second project focusses on manufacturing an all-terrain pay-as-you-go electric delivery truck designed for emerging markets. The two projects combined will create hundreds of highly-skilled jobs and are expected to save around 27.6 million tonnes of CO2, the equivalent of removing lifetime emissions of over 1 million cars. The funding for these two projects is in part provided by Advanced Propulsion Centre UK (APC), a company working alongside the UK government to accelerate the transition to a net-zero automotive industry. 

Lord Grimstone, Minister for Investment, has commented: "Supporting these strategically important technologies lays the path for our electric vehicle sector to compete on a global scale, driving jobs and growth nationwide whilst also creating cleaner, more sustainable modes of transport."

In addition, funding has also been granted to 19 early-stage proposals that could further bolster the UK electric vehicle supply chain. This funding is provided in part by the Automotive Transformation Fund, a funding programme that forms part of APC and was set up to support large-scale industrialisation. Funding has been awarded to programmes with a focus on developing electric vehicle batteries and the viability of using UK-sourced critical minerals.

Ian Constance, Chief Executive at the APC said: “The projects receiving today’s investment highlight the breadth of technologies needed to help the UK accelerate to net-zero emissions. They’re reimagining not just vehicles, but the entire automotive supply chain.”  

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