Energy and Utilities Update | 21 August 2020

Written on 21 Aug 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 launch of an evaluation into balancing costs on the electricity system, the announcement of an extension for non-domestic RHI projects, the injection of biomethane from cow manure into the gas grid, and more.

BEIS report proposes CfD model to help drive the UK's green hydrogen economy

Large-scale, low-carbon hydrogen projects could soon be included in the UK Contracts for Difference (CfD) auctions, according to a report commissioned by the Department for Business, Energy and Industrial Strategy (BEIS), which was released this week.

The report entitled 'Business Models for Low Carbon Hydrogen Production', which was produced by Frontier Economics on behalf of BEIS, explores how the government can best support hydrogen production with a capacity of 100MW or more in the near-term. According to the report, BEIS believes that “low-carbon hydrogen technologies and markets may be less mature” for several years to come.

Some of the main findings set out in the report include:

  • Support for "green hydrogen" (being hydrogen produced with a net-zero carbon impact) through the CfD mechanism would "give more certainty to investors" than a scheme providing regulated returns.
  • A recommendation that hydrogen generators are given a premium on top of market revenue for selling low-carbon hydrogen and investing in expanded low-carbon production capabilities.
  • Proposed government guaranteed returns to producers through the CfD. Such a model would see BEIS top up revenues if they fall short of the contract. Conversely, producers would pay money back to the government if revenues spike, with, taxpayers receiveing a cut of the revenue.
  • An obligation scheme guaranteeing purchases - similar to the Renewable Obligation – would be the worst option. It could potentially expose business and domestic consumers to “very high payments”, proving unpopular with taxpayers and incompatible with ‘just transition’ principles.

BEIS is expected to further investigate different contractual, regulatory and hybrid models before making any changes to legislation. The Committee on Climate Change has repeatedly concluded that hydrogen will play a "non-optional" role in the UK's transition to net-zero by 2050, meaning government support for the sector is widely anticipated.

Ofgem launches evaluation of balancing costs

 In an open letter addressed to all interested industry parties, Ofgem has launched an evaluation into the high balancing costs on the electricity system for spring and summer 2020. The evaluation is intended to assess areas which would benefit from further exploration by Ofgem with the aim of reducing costs for consumers and ensuring long term preparedness, crisis management and lessons learned for the future.

The electricity system has seen a significant increase in balancing costs, largely due to the shift in the demand for electricity due to Covid-19 lockdown measures. Ofgem reports that the period from March to July 2020 saw system balancing costs total £718 million, which is 39% higher than the costs forecasted in February 2020 by the electricity system operator for the same period..

The Ofgem open letter follows the measures already taken to mitigate the unprecedented changes in widespread electricity demand, which included the introduction of the new Operational Downwards Flexibility service and a cap on the Balancing Services Use of the System charges.

As part of its evaluation process, Ofgem will be seeking evidence from the electricity system operator in august, with a view to holding virtual roundtables in September. The review is expected to conclude by the end of October.

Extension for non-domestic RHI projects impacted by Covid-19

The government has announced a six-month extension for certain non-domestic Renewable Heat Incentive (RHI) projects. The extension will be available to projects which have invested capital into project development, but are unable to accredit under the scheme prior to its closure date of 31 March 2021, due to 'Covid-19 related delays'.

Provided that a valid 'extension application' is submitted before 31 March 2021, eligible projects will be offered an additional six months (until 30 September 2021) from the scheme closure date to submit a complete application for accreditation. This new form of application must include evidence that capital was invested in the project prior to the announcement of the extension on 17 August. Due to the variations between projects and technologies as to what investment of capital might look like, the government has not yet confirmed the exact evidential requirements for the 'extension application'. However  it is expected that these requirements will be similar to those of a full application for accreditation, but with some exceptions.

The news follows the changes to the RHI announced in June, including the confirmation that non-domestic RHI applicants who successfully applied during the second allocation of tariff guarantees will be offered an extension to deliver their low-carbon projects to a flat date of 31 March 2022.

MEEF funds charging infrastructure for London Buses  

In a move intended to bolster London's commitment to zero emission transport, the Mayor of London's Energy Efficiency Fund (MEEF) has provided a loan (figure undisclosed) to energy equipment and solutions company Zenobe Energy for the installation of a charging infrastructure solution at a bus depot in Walworth.

The MEEF is managed by Amber Infrastructure Group and seeks to address market failures in London's low carbon sector. The solution installed by Zenobe Energy includes a static battery energy storage system, which ensures that the charging requirements of the electric buses at the depot are met by local grid infrastructure.

National Grid trials injection of biomethane from cow manure into the gas grid

Biomethane from a farm in Cambridgeshire has been connected to the National Grid's Gas National Transmission System in a move which is the first of its kind in the UK and a step towards the decarbonisation of the gas network. .

The renewable gas being injected into the grid is produced via anaerobic digestion, which involves the sealing of waste (in this instance, cattle manure and straw) in tanks absent of oxygen. The material is then broken down into biogas by naturally occurring micro-organisms. The pipeline has capacity to transport a maximum of 15,000 cubic metres of biogas into the grid hourly, which is roughly equivalent to the demand of 10 homes.

UKPN launches Heat Street project to advance localised decarbonisation

Network operator UKPN has this week launched a new project, Heat Street, to examine how local authorities can advance low carbon heating.

The project will take a "data-driven" look into future energy systems for local authorities in London, the South and East of England. It will then use this information to create a forecasting model that will allow local authorities throughout the UK to plan for the significant rise in low carbon heating and energy efficiency measures needed for the UK to hit its net zero carbon target.

Heating is currently one of the UK's largest sources of carbon emissions, accounting for about one-third of the country's total emissions, or almost 120 million tonnes of CO2 according to official estimates. UKPN will engage with a wide range of stakeholders including property owners, local councils, property developers, businesses, academics and consumer groups, in order to analyse the best steps in specific local areas to tackle heating emissions,

Heat Street will look at a broad range of low carbon heating alternatives, including switching from gas boilers to heat pumps, installing cavity wall insulation, switching to another type of heating supply, or combinations of all of these measures.

Additionally, the project will utilise "heat zoning" (based on assessments using independent Energy Systems Catapult recommendations), which will place different areas in different zones depending on the best method of decarbonising heat based on their particular features.

Electric vehicle developments this week

Anheuser-Busch fleet gets upgrade

Brewing company Anheuser-Busch has confirmed plans to convert approximately 30% of its vehicle fleet to renewable natural gas. As Anheuser-Busch hones in on its sustainability goal of reducing carbon emissions by 25% by 2025, 80 vans will be converted to renewable natural gas, resulting in an estimated 70% reduction of emissions compared to conventional diesel.

Innovative new charging points in London

Charging infrastructure solutions start-up Trojan Energy has announced plans to install 200 charge points across the Brent and Camden boroughs of London. The technology is particularly innovative because it has no permanent footprint or 'street clutter', as the charging hardware is only visible when a vehicle is charging.

The chargers will be able to provide charge rates ranging from 2kW to 22kW, and up to 18 chargers can run in parallel from one electricity network connection. Therefore, electric vehicle owners may be able to use spare capacity in their batteries to provide services to electricity network operators which could lower the cost of owning and running electric vehicles.