The Energy Transition | Last Resort Supply financing and National Grid's "call for innovation"
Published on 21st Mar 2022
This week, we look at Ofgem's licence modifications which allow new forms of financing for Last Resort Supply Payment claims, National Grid's call for low-carbon backup generators, a new hydrogen electrolyser initiative in Teesside, and more.
Ofgem enables Suppliers of Last Resort to access third party financing
Ofgem has approved licence modifications which will enable Supplier of Last Resort (SoLR) costs (known as the "SoLR Levy"), claimed via the Last Resort Supply Payment (LRSP), to be financed by third parties and spread across a longer period. Ofgem initially announced these plans in a statutory consultation published on 30 December 2021 and has now decided to proceed with the licence modifications after concluding this is in the best interests of consumers.
The recent increase in the number of supplier failures will translate into higher network charges for the 2022/2023 financial year due to SoLR Levy payments. Ofgem's proposal will enable third party financiers to purchase SoLRs future payment rights, which can be adjusted to take account of: decreased SoLR working capital costs due to a reduced payback period; and any increase as a result of additional financing costs. Payment timings can also be altered to reduce the impact on consumer bills in any given year. The hope is that this will not only prevent higher network charges but will also increase competition, leading to more suppliers contributing to the SoLR process. However, requests for assignment of LRSPs will require approval by Ofgem which will determine whether the transfer is in the best interests of consumers by considering all relevant circumstances, including fees, interest rates, terms of the proposed disposal and mechanism of implementation.
Simon Wilde, Ofgem's director of analysis and assurance, said: “We have now concluded that the longer term facilitation of new forms of financing of LRSPs remains – in principle – in consumer interests and have therefore decided to proceed with the licence modifications, building on the work we did with licensees and the 3rd party to refine our initial proposals. We consider it important to do so in order to increase market liquidity, all the more so as volatility is continuing and may increase as a result of geopolitical events.”
National Grid seeks low-carbon alternatives for backup generators
National Grid Electricity Transmission has issued a 'Call for Innovation' to businesses to find alternatives to the current use of diesel backup generators in the event of a failure of primary supply sources. National Grid hopes to gain visibility of what products and services are available in the industry and establish new relationships with third party suppliers through this approach.
Despite backup generators rarely being used, they are situated at over 250 sites across England and Wales. In the event that backup power is needed, swapping to low-carbon emission alternatives to these generators could decrease carbon intensity of such power by 90%.
Low-carbon diesel fuels are already available on the market, but National Grid has said it wants to facilitate the adoption of new technologies. Such technologies should be optimised for space efficiency, require minimal civil works for installation and utilise an interface with supervisory control and data acquisition. This is being supported by Ofgem which will provide funding from Ofgem's Network Innovation Allowance. Interested suppliers have until the 14 April 2020 to apply.
National Grid's Innovation Engineer for Net Zero Innovation, Ben Kuchta, said: "As the electricity transmission owner for England and Wales, we play an important role at the heart of the UK’s transition to net zero. It’s important we lead by example, reducing our own emissions and working with others to enable and accelerate the transition to net zero. Finding new low-carbon alternatives to diesel generators is another step on that journey and we encourage suppliers to come forward."
New green hydrogen production centre proposed as part of decarbonisation initiative in Teesside
EDF Renewables has announced its plans to develop a 30 - 50 MW hydrogen electrolyser in Teesside.
In its initial stages, the electrolyser will be 30 - 50 MW in size but is designed to be able to scale up to over 500 MW in line with increasing demand. Known as "Tees Green Hydrogen", the electrolyser will utilise power from an existing local offshore wind farm as well as from a new 49.9 MW solar farm which EDF Renewables intends to construct nearby. It is anticipated that Tees Green Hydrogen will provide local business and customers with green hydrogen in an effort to support decarbonisation efforts in Teesside and contribute to the reduction of industrial pollution.
As carbon intensive industries look for sustainable pathways to decarbonisation, Tees Green Hydrogen follows in the footsteps of other companies which, in late 2021, announced their plans to develop green hydrogen projects in Teesside. These include a 40 MW project backed by green hydrogen energy company Protium and a 500 MW project run by bp, one of the world's seven oil and gas "supermajors".
Tristan Zipfel, Director of Strategy and Analysis at EDF Renewables UK, said: “Tees Green Hydrogen is a ground-breaking project, which will utilise locally produced green electricity to create the means to decarbonise local industry and safeguard its operation for many years to come, well beyond Net Zero 2050. In the current world climate the importance of locally produced renewable power cannot be underestimated."
Two year extension announced for government's plug-in van and HGV grants
The government has extended its subsidy programme for electric vans and trucks for another two years until 2025. Launched in 2012 for vans, and extended to –heavy goods vehicles (HGVs) in 2016, the grants were introduced as part of the government's drive to decarbonise transport. Nearly 5% of the UK's CO2 emissions currently come from vans and this two year extension is seen as essential to support the government's climate change and air quality commitments.
The government plans to phase out the sale of new petrol and diesel vans by 2030 and the grants help bridge the price gap between diesel vans and trucks and their ultra-low emission counterparts. The existing scheme has supported the purchase of more than 26,000 electric vans and HGVs across the UK and the two year extension is expected to facilitate the purchase of tens of thousands more.
Alongside the extension, from 1 April 2022, the eligibility criteria will be recategorised with a focus on heavier vehicles; the threshold to claim the small truck grant of up to £16,000 will be increased from 3.5 tonnes to 4.25 tonnes and vans up to 4.25 tonnes will be able to claim the large van grant of up to £5,000. Drivers holding standard car driving licences will still be allowed to drive electric goods vans at a weight limit of 4.25 tonnes, compared with a 3.5 tonne limit for diesel vans. With an increasing number of large vans on the market, the government hopes that these initiatives will ensure that funding is directed towards where it is most needed.
Transport Minister Trudy Harrison said: "As demand for electric vehicles continues to grow at speed, this extension to our grant scheme will allow tens of thousands more vans to be purchased, transporting goods in a way which is kinder to our environment. This will support our vital, ongoing work to clean up our air in towns and cities right across the country and build back greener."
Ofgem reduces the price cap implementation period
With energy prices set to increase by 54% in April, research conducted by Citizen's Advice has revealed that if the October price cap exceeds £3,000 then around 14.5 million people will not be able to afford their energy bills. The UK government is due to set out its "energy supply strategy" to enhance the UK's self-sufficiency by utilising more domestic energy resources. More will need to be done to augment national energy efficiency and to decarbonise homes to prevent fuel poverty.
Ofgem has announced its contingency decision to reduce the price cap notice period and delay the price observation window, following support for this after it issued a consultation on 4 February 2022. Subject to any further changes, this will result in the price observation window for the October price cap being pushed back by one month, running from 1 March to 31 August 2022. For calculating the ninth price cap, prices observed from 1 February 2022 will still be used, despite delaying the observation window. This means a 50% weighting will be applied to prices from 16 March to 19 May 2022. We await Ofgem's statutory consultation, due to be published in early May, on further price cap methodology changes.
Neil Lawrence, Ofgem's director of retail, said: "We are aware that changes to the cap observation window could affect wholesale market liquidity, so rather than stopping price observations for a period, we will reduce the weighting of prices to transition more slowly towards the target observation window. Further changes to the cap methodology may push the target observation window even later, so it is prudent to make a change to guidance as soon as possible, to avoid the need for deeper reductions later in the period."