Energy and Utilities

The Energy Transition | Renegotiation of Energy Charter Treaty and WPD's new ambitious low carbon heating strategy

Published on 4th Jul 2022

This week we look at the successful renegotiation of the Energy Charter Treaty, WPD's new ambitious low carbon heating strategy, progress in powering the Tube network with renewable energy and more.

Government announces successful renegotiation of Energy Charter Treaty

After two years of international negotiations between 53 contracting parties, the government has announced that the UK has reached a 'landmark' agreement to modernise the terms of the Energy Charter Treaty (ECT). The ECT provides a framework for international trade and investment in energy, however it was first drafted and published in 1994 when power generation was driven primarily by fossil fuels. With many EU countries now looking to reduce their reliance on fossil fuels and transition to net zero, the ECT had become outdated. 

The modernised treaty is due to be signed in November 2022 and will protect the government's right to modify the UK energy systems and impose regulations to meet emissions reductions targets. It will also offer new legal protection in the UK for overseas investments in green technologies, including: carbon capture, utilisation and storage; low-carbon hydrogen production; and other low-carbon technologies. The government hopes that this will increase private investors' confidence in green technologies as they develop which will, in turn, facilitate a quick transition to clean and affordable energy.  

In contrast, overseas investors in fossil fuels will lose legal protection under the treaty when the changes come into effect, with the exception of coal which will lose protection from 1 October 2024 (being the UK's deadline for phasing out coal generation). However, protection will remain in place for gas power stations which include carbon capture technologies.

The changes to the treaty are in line with the UK's commitment to net zero by 2050 and the government's Energy Security Strategy. Greg Hands, Energy Minister, said: "The UK cannot support an outdated treaty which holds back investment in clean energy and puts British taxpayers at increased risk from costly legal challenges. Our success in negotiating a modernised treaty will boost our move to cheaper and cleaner energy by providing greater confidence to the private sector investors and risk takers we need for this transition."

WPD publishes ambitious low carbon heating strategy

Western Power Distribution (WPD) has published a new low carbon heating strategy which it has described as its most ambitious strategy to date. The strategy sets out WPD's plan for decarbonising domestic heating by connecting customers across its network to a range of low carbon heating technologies (LCTs). 

WPD's strategy recognises that homeowners have a range of heating options available to them and that they should not be limited in their choices by constraints on the network. WPD has therefore committed to ensuring that the electrical system can support district heating networks across all locations. This will be achieved by inputting the energy required at one central point rather than to individual homes.

Additionally, WPD has set out its plans to install larger cable assets on new build substations to enable large scale connection of heat pumps, forecasting that this will enable connection of over 628,000 heat pumps across its network during the next price control period in 2023-2028. WPD hopes that this will help to deliver the government's aim of 600,000 heat pump connections a year by 2028 as set out in the government's Ten Point Plan. The strategy also highlights the role of less widely used technologies, such as thermal storage, combined heat power, hydrogen and solar district plants, in the future of domestic heating in the UK.

WPD's System Development Manage, Paul Jewell, said: "This is our most comprehensive strategy yet and details how WPD will play a formative role in decarbonising the UK’s domestic heating by accounting for the various network connections needed for not only heat pumps but district heating networks, thermal storage and hydrogen, to name just a few. While insulation measures are crucial for decarbonising the UK’s housing stock, the efficiency of low carbon technologies relies on network operators like WPD and our ability to map homeowners’ future demand patterns, connect LCTs in near real-time and reinforce the electricity network. This is how we will pave the way for reducing the carbon footprint of our homes and ultimately reach net zero by 2050.

London Mayor confirms progress in powering Tube network with renewable energy 

Marking the start of London Climate Action Week, London Mayor, Sadiq Khan, has announced the first step towards the long term goal of powering the Tube network completely by way of renewable electricity by 2030. A Power Purchase Agreement tender, launched by Transport for London (TfL), will ensure that approximately 10% of the total electricity used across the Tube network is from a renewable energy source. 

TfL is one of the largest consumers of electricity in the UK, using up to 1.6TWh per year. This is the equivalent to the electricity consumed by around 420,000 homes, or 12% of the homes in London. It is hoped that this new demand for renewable energy will provide a boost for new solar and wind generation across the UK, helping generate green jobs. This announcement comes at the same time as Sadiq Khan's confirmation that London has signed the Fossil Fuel Non-Proliferation Treaty, advocating a move away from reliance on fossil fuels. 

The tender follows various initiatives launched by TfL to help drive its ambition to net-zero by 2030. In 2020, TfL carried out a market test into supplying rail services with renewable power directly from generators. In 2018, TfL signed a deal with Engie, a global energy player with UK investments in renewable energy and storage, to install 1.1MW of solar capacity on a variety of its buildings, including bus stations and offices. 

Sadiq Khan has said: "When it comes to tackling air pollution and the climate emergency, I’m determined to ensure that London continues to take bold action. As many national governments around world dither, cities have a responsibility to act and to show what’s possible. We are the doers, not the delayers."

Lilli Matson, Chief Safety, Health and Environment Officer at TfL, has commented: "As one of the largest electricity consumers in the UK, we are absolutely committed to doing what we can to decarbonise London through clean, renewable energy."

Ofgem launches consultation on recovery of costs incurred by Suppliers of Last Resort 

Ofgem has published a minded-to consultation on the recovery of the various costs incurred by Suppliers of Last Resort (SoLRs). The consultation focusses on the ability of suppliers to recover wholesale costs under the SoLR regime. It also seeks views on various other matters, such as financing costs and traditional prepayment meter credit balances.

The SoLR regime was established in 2003 and ensures that customers affected by the failure of their energy supplier are guaranteed continuity of supply. When an energy supplier fails and exits the market, Ofgem will appoint a SoLR to take over responsibility for the failed supplier's customers. When a supplier is appointed as a SoLR, it gains a large number of customers at once and immediately has to purchase energy to supply those customers at the prices available in the wholesale market at the time of appointment. High and volatile wholesale prices created substantial cost difficulties for SoLRs appointed between September and December 2021. 

In December 2021, in light of current market conditions, Ofgem published temporary changes to the SoLR regime, including a process through which SoLRs could make an initial claim to recover wholesale costs incurred when taking on SoLR customers. To mitigate the risk of overpaying, Ofgem limited these initial claims to costs relating to energy that would be delivered within six months of the supplier being appointed as an SoLR, or before 31 March 2022, whichever was earlier. However, Ofgem made it clear that it would reconsider and consult on this issue ahead of autumn 2022.

The consultation sets out four possible options that could apply to the wholesale cost recovery process:

  • Option 1: Limit recovery to the cost of energy delivered within six months of being appointed.
  • Option 2: Limit recovery to the cost of energy delivered by the end of March 2022, or within six months of being appointed, whichever is later.
  • Option 3: Limit recovery to the cost of energy procured within six months of being appointed and which will be delivered by the end of September 2022.
  • Option 4: Limit recovery to the cost of energy that will be delivered by the end of September 2022.

Option 2 is the process that was implemented in December 2021 and is also the option that Ofgem is now minded to adopt. Ofgem states: "[Option 2] provides the best balance between the risk of adverse impacts on current consumers by allowing a longer recovery period in relation to which suppliers can claim costs, and the risk of adverse impact and costs to future consumers." However, Ofgem has made it clear that any option adopted would have limited application: the recovery process is intended to apply only in exceptional circumstances and would not set a precedent for future SoLRs. 

The consultation opened on 23 June 2022 and closes on 4 August 2022. 

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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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