Energy and Utilities Update | 27 May 2020
Published on 27th May 2020
Welcome to our latest update on regulatory and market developments in the energy and utilities sector. In this edition we look at the changes to the Capacity Market which will remove barriers for demand side response and energy storage, the removal of balancing services charges from imports for electricity storage, a new £40million fund for green start-ups, and more.
Changes to Capacity Market to remove barriers for demand side response and energy storage
The government ran a consultation between 3 February to 3 March 2020 on proposals for future improvements to the Capacity Market (read the full consultation here). In a decision published on 20 May, the government confirmed that it will proceed with the majority of the proposals put forward in the consultation document.
The changes to the Capacity Market will include:
- allowing demand side response (DSR) to compete for all agreement lengths available, provided that they meet the relevant capex thresholds;
- reducing the Minimum Capacity threshold from 2MW to 1MW and permitting secondary trading of capacity obligations under the minimum threshold where an entire obligation is being traded;
- enshrining in law the 50% set-aside commitment for T1 auctions and the methodology for determining the minimum set aside;
- a reporting and verification mechanism for CO2 emission limits that will be based on desk-based forecasting;
- a formal annual review of new capacity technologies not currently competing in the Capacity Market but which could effectively contribute to security of supply; and
- removal of the exclusion from the Capacity Market of long-term contract holders of short term operating reserve.
It is hoped that these changes will make it easier for even more clean technologies to compete in the Capacity Market by removing barriers to energy storage and DSR, which previously could not compete for contracts over a year. It is hoped that the emission limits will drive out high carbon emitting players, ensuring more funding for cleaner technologies. The reduced capacity threshold will also enable smaller players to compete.
The introduction of a formal annual review of new capacity technologies follows the entry of Traditional Pot 1 technologies - solar and onshore wind (read our report on this here) after a five year block, and the recent prediction that almost half of the anticipated 13GW of applicants in the 2021 Allocation Round are likely to be from Pot 1 Projects (as we reported here).
Read the government response to the consultations here.
Ofgem removes balancing services charges from imports for electricity storage
Ofgem has approved modification CMP281 to the Connection and Use of System Code, which removes balancing charges on imports to licensed storage facilities. Balancing Use of System (BSUoS) charges allow National Grid ESO to recoup the costs associated with balancing the electricity transmission system through charging demand customers and generators in respect of the amount of electricity imported or exported within each half-hourly period. Previously, energy storage facilities were paying BSUoS twice; as they were being charged in relation to both import and export. The charges mean that storage facilities will only be charged BSUoS in respect of exports.
Ofgem, reaffirming their forecast that electricity storage will become a viable proposition in the energy system, agreed with Engie's submissions that the current charging arrangements result in electricity storage providers being competitively disadvantaged because they contribute more towards the network cost of balancing the system than other generators who provide a similar service.
The implementation period is expected to be April 2021. Ofgem have yet to give a decision on sister modification CMP280.
Read more here.
New £40 million fund for green-start ups
The Department for Business, Energy and Industrial Strategy has announced the launch of a £40 million Clean Growth Fund (the Fund) in collaboration with UK fund manager CCLA.
The Fund aims to provide direct investments to early-stage, innovative and green start-ups which reduce greenhouse gas emissions. The Fund will be managed by Clean Growth Investment Management.
The £40 million is made up of £20 million of government investment, which will be matched by investment from CCLA. It is hoped that the Fund could more than double to £100 million in 2021 due to additional capital fundraising from the private sector. The Fund aims to deploy investment across the power, buildings, transport, industry and waste sectors.
Ofgem launches new consultations impacting the domestic retail market
Wholesale allowance in the first default tariff cap period
The default tariff cap was introduced in January 2019 to protect customers on standard variable and default tariffs by preventing suppliers from pricing above the tariff cap.
The allowance for the first cap period was set in October 2018 with reference to the Domestic Gas and Electricity (Tariff Cap) Act 2018 and the cap varies depending on how much energy a customer uses. For a typical default tariff customer, the cap level was set at £1,137. However, following judicial review of this decision, Ofgem have reconsidered and have concluded that the wholesale allowance in the first cap period was set too low.
In order to reverse the impact of the 2018 decision, Ofgem is proposing to include an adjustment allowance on the fifth cap period between 1 October 2020 and 31 March 2021. This adjustment will enable suppliers to charge an extra £5.91 per typical gas customer amounting to around £52 million in aggregate and an extra £1.74 per typical electricity customer amounting to around £18 million in aggregate during the fifth cap period.
A proposal to adjust the non-pass-through Smart Metering Net Cost Change (SMNCC)
Suppliers have a duty to take "all reasonable steps" to install smart meters in their customers' homes and will currently incur both costs and benefits when doing so.
Ofgem are proposing to update the SMNCC allowance in the default tariff cap (mentioned above) to reflect the net cost impact that these costs and benefits have on a supplier with an average smart meter rollout.
In light of the uncertainty around progress of the rollout and the net impact on suppliers' operating costs, Ofgem proposes to review the smart meter allowances every 12 months.
Ofgem is seeking views from people with an interest in the level of the default tariff cap and in particular suppliers and consumer groups.
A Revised Operational Performance Regime Framework
Ofgem is consulting on a revised Operational Performance Regime framework for the Data Communications Company (DCC), the body responsible for linking smart meters in homes with energy suppliers, network operators and energy service companies.
The proposals seek to optimise the incentives placed on the DCC to maximise performance and in turn to ensure consumers can take full advantage of the benefits of smart meter rollout.
The consultation includes proposals for financial incentives in three key areas: system performance, customer engagement and contract management and procurement.
In addition to the three consultations detailed above, Ofgem has also a launched a consultation on the protection of consumers with prepayment meters which can be read here.
Flexitricity to trade 75 MWh Battery for Gresham House
Flexible energy specialist Flexitricity has partnered with Gresham House Energy Fund, a fund which owns a portfolio of utility-scale operational energy storage systems, to trade flexibility from its largest battery storage scheme, a 75 MWh battery based in Thurcroft.
Flexitricity will trade the lithium-ion battery with different markets, seeking to optimise revenue for the battery whilst helping to balance the grid. The battery will be traded in wholesale markets as well as providing frequency response services.
Gresham House Energy Fund has already worked with EDF, Kiwi Power, a demand response aggregator, and Habitat Energy, a battery asset optimiser, to trade its batteries. Ben Guest, the managing director of Gresham House Energy Fund, has said that the fund "plans to grow its energy storage portfolio significantly, aiming for more than 360 MW in operational assets by the end of 2020."
Read more here.
Western Power Distribution prepares for significant increase in electric vehicle (EV) chargers by 2023
Western Power Distribution (WPD), the distribution network operator, is expecting an approximate 1,500% increase in the number of electric vehicle chargers on its network by 2023. WPD has released an updated EV strategy which recognises that the connection process must be made easier for charge point operators to cater for the growing demand for charge points. The report reaffirms that WPD's transformers will, at their maximum capability, accommodate 35kWh for cars and vans every five days and reassures that this should be adequate if charging is managed by processes such as smart charging, timed connections and vehicle to grid offerings.
Solutions which WPD explores in the report include:
- commercial flexibility achieved through larger clusters of EV chargers;
- offering EV charge point operators back-to-back leases;
- investment in network improvement projects to cater for home charging installations demand; and
- changing how electricity is supplied to street facilities such as streetlights, so as to be able to cater for increased on-street charging.
Read the updated EV strategy here.