Energy and Utilities Update | 10 July 2020

Written on 10 Jul 2020

Welcome to our latest update on regulatory and market developments in the energy and utilities sector. In this week's edition we look at the approved amendments to the Connection and Use of System Code, a modification proposal to the way imbalance prices are calculated, a €1 billion fund for clean technology projects, and more.

Ofgem approves amendments to the Connection and Use of System Code

Ofgem has approved amendments to the Connection Use of System Code (CUSC), which will allow distribution network operators (DNOs) to contribute towards the costs of new alternating current subsea and high voltage direct current circuits. The amendments also provide a mechanism for these contributions to be "netted off" against  the costs faced by generators connecting to these circuits. CUSC modification CMP337 sets out the "netting off" mechanism, stating that the contributions from DNOs should be subtracted from the actual project costs which are used to calculate transmission charges, ensuring that these charges are not incurred twice. A further modification (CMP388) defines a DNO contribution as a "cost adjustment" within the CUSC in order to give effect to the netting off mechanism.

The modifications were proposed by Scottish Hydro Electricity Power Distribution (SHEPD) following an Ofgem decision in principle to allow SHEPD to contribute financially to the electricity transmission link to the Shetland Islands. Both modifications were granted urgent status by Ofgem before being approved by a majority of the CUSC panel. The implementation date for the amendments is 1 April 2024.

Ofgem sets out proposals to transform Britain's energy network

Ofgem has announced proposals for an investment programme of at least £25 billion over the next five years as part of its goal to deliver emissions-free green energy, whilst simultaneously reducing energy costs for consumers.

RIIO (Revenue = Incentives + Innovation + Outputs) is the five-year price control framework Ofgem uses for the electricity and gas transmission and distribution networks. As these networks are natural monopolies, Ofgem uses this price control mechanism to limit the prices these networks can charge during a price control period. Following the introduction of RIIO-1 in 2013 (which is due to conclude in 2021), Ofgem is now consulting on the draft determinations for the next price control, RIIO-2.

The proposals set out how Ofgem plans to place pressure on network companies to cut down on their operating and financing costs by setting tougher targets for:

  • greener networks;
  • value for money;
  • customer service; and
  • safer and more reliable networks.

The proposals will reduce electricity and gas network earnings by almost 50% and will cut £8 billion from company spending plans. Separately, the proposals also provide the electricity system operator with additional funding and responsibilities so that it can prepare the grid for net zero by 2025. These preparations involve ensuring the grid can receive increased amounts of renewable power whilst also maintaining a high level of security of supply.

Responses to the consultation are due by 4 September.

National Grid ESO proposes changes to the way imbalance prices are calculated

National Grid ESO has submitted a modification proposal (P410) to the Balancing and Settlement Code Company, Elexon. The proposal requests amendments to the Balancing and Settlement Code, which defines the rules and governance for the balancing mechanism and imbalance settlement processes of electricity.

The proposal requests changes to the imbalance price calculations in order to:

  • ensure compliance with the European Imbalance Settlement Harmonisation Regulations;
  • ensure that balancing energy pricing is reflective of the cost of balancing the system; and
  • ensure that balancing energy pricing continues to incentivise favourable imbalances and disincentivise unfavourable imbalances.

The Regulations require that transmission system operators establish a methodology for harmonising the determination and application of an imbalance price in an Imbalance Settlement Harmonisation Proposal (ISHP). National Grid ESO submit that, as drafted, the ISHP cannot be based on prices from another market and so should be amended so that the calculation of the imbalance price is compliant with the requirements of the ISHP.

Ofgem launches consultation into proposed modifications for electricity interconnector licences

Ofgem has opened a consultation setting out the proposed modifications to:

  • the standard conditions of the electricity interconnector licence;
  • the special conditions of the electricity interconnector licence held by National Grid Interconnectors Limited; and
  • the electricity transmission licence held by National Grid Electricity System Operator Limited.

Electricity interconnector licences are granted by Ofgem where electricity is generated in one market and used or traded in another. Ofgem has stated that the proposed licence modifications will align the standard conditions of the electricity interconnector licence with EU Regulations which form part of the Clean Energy for all Europeans Package. This package: establishes principles for an energy efficient electricity market; supports decarbonisation; and removes barriers to cross-border trade in electricity.

The proposed licence modifications will also establish a guideline on the Capacity Allocation and Congestion Management Regulation (CACM), which aims to maximise the efficient use of interconnection and facilitate greater cross-border electricity trade. Both the EU Regulations referenced above and the CACM apply directly to all interconnector licensees, including those in the UK whilst the UK remains subject to EU law under the transition period (which expires on 31 December 2020).

The deadline to respond to the consultation is 31 July 2020.

Government confirms extension to implementation period for Heat Network (Metering & Billing) Regulations amendments

The Department for Business, Energy and Industrial Strategy (BEIS) has this week written to heat industry stakeholders confirming that it will be extending the implementation period for proposed amendments to the Heat Network (Metering and Billing) Regulations 2014. The amendments would have required all new heat metering devices installed from 25 October 2020 to be remotely readable. BEIS now aims to introduce regulatory changes towards the end of 2020, and expects that all requirements will need to be implemented from summer 2022.

The extension follows robust feedback from industry participants and trade associations to a consultation on the proposed amendments released in October 2019, which were designed to bring the Regulations in line with the revised EU Energy Efficiency Directive 2018. BEIS conceded in its written statement that it had "taken into account current operational challenges caused by Covid-19 and broad consultation feedback that a six-month period is not sufficient to implement the required changes."

The news was welcomed by the Association for Decentralised Energy (ADE), the leading trade body for the heat industry, which remarked that the six month time limit to comply with the proposed changes was "infeasible and represented a large financial and reputational risk to the heat networks market." The ADE went on to say that the extension "hopefully brings certainty to the heat networks industry on this matter."

BEIS has yet to formally respond to its consultation on the proposed changes. We will report on the subsequent publication of responses through this sector update.

European Commission announces €1 billion for clean technology projects

On 3 July, the European Commission announced the first round of the Innovation Fund, a €10 billion investment programme running between 2020 and 2030. The first phase will see €1 billion allocated to large-scale clean technology projects to help them overcome the challenges of commercialisation.

Technologies for renewable energy; energy-intensive industries; carbon capture, use and storage; and energy storage, have been invited to apply for funding. Projects will be selected based on their potential to reduce greenhouse gas emissions, their innovative quality, project maturity, scalability and cost efficiency.

The programme is funded by revenue from the EU Emissions Trading System and unspent funds from the Innovation Fund's predecessor, the NER300 Programme. A separate budget of €8 million will be allocated to assist projects which are not yet market ready.

Projects from any EU member state (which, as of 31 January, does not include the UK) can submit an application for this first phase of the fund. The deadline for applications is on 29 October 2020.

British Gas puts in largest electric vehicle order

As part of its goal of electrifying 12,000 vehicles by 2023, British Gas has ordered 1,000 all-electric Vivaro-e vans, which amounts to the largest ever commercial order for battery electric vehicles (EVs) in the UK.

The order follows the announcement in May of the partnership between Centrica, British Gas' parent company, and car manufacturer Lotus. The partnership aims to support the rollout of a new generation of EVs whilst improving charging infrastructure and providing energy management solutions. It is also illustrative ofthe wider interest in the battery EV space.

The move by British Gas has been commended by the transport secretary, Grant Shapps, who said that the transaction was "another milestone as we continue on the road to a green transport recovery". The news comes as sales of battery EVs increased by 261.8% from June 2019 to June 2020, representing a 158.6% increase in sales.

Smart homes could eliminate evening demand peaks 

The Solar Trade Association, Loughborough University and Advanced Further Energy have published a report on the benefits for both the grid and consumers of smart homes. The report examines four "generations" of progressively smarter homes, which are categorised as:

  1. homes fitted with solar PV;
  2. solar PV homes with additional battery storage capability;
  3. solar PV + battery storage homes, where smart controls can be used to manage electricity to respond to price signals; and
  4. "ultra-flexible" homes, which includes installation of heat pumps and the use of electric vehicles (with the the potential of providing additional flexibility via vehicle to grid).

The report focuses on how 'peak shaving' can avoid electricity use at peak demand times to reduce grid stress. It found that 4.4 million generation two (solar PV + storage) homes could provide enough flexible power to flatten spikes in demand, resulting in a 50% reduction of carbon emissions and lower energy bills.

The Report also found that 'generation three homes (smart solar PV + battery storage homes) could reduce peak time consumption by 97% annually and that 4.4 million of these homes could eliminate the evening peak on a typical winter's day.

Engenie to rebrand as Osprey as it prepares for rapid expansion

Engenie, the electric vehicle (EV) charging network, has announced that it will rename itself Osprey in autumn 2020 in a bid to become "easily identifiable to all UK drivers" as it prepares for a "rapid expansion". Engenie also recently announced:

  • plans to install 2,000 rapid EV charging points before 2024; and
  • a partnership with property management company M7 Real Estate Limited for the installation of 10 rapid EV charging points at each of M7's retail sites.