Energy and Utilities Update | 5 June 2020

Written on 5 Jun 2020

Welcome to our latest update on regulatory and market developments in the energy and utilities sector. In this edition we look at the Government response to the consultation on the future of carbon pricing, the overhaul of gas transmission charges being approved by Ofgem, the call for annual Contract for Difference auctions, and more.

Government publishes response to consultation on the future of carbon pricing

This week the government published its response to the consultation on the future of carbon pricing which took place in May 2019. The response outlines how a new UK specific Emissions Trading System (UK ETS) would work as a replacement of the current EU ETS scheme once the post-Brexit transition period has expired.

Phase I of the UK ETS will run from 2021 to 2030, mirroring Phase IV of the EU ETS, and will continue to apply to power generation, aviation and energy intensive industries. The new scheme will cover activities where the thermal rate output is greater than 20MW (except the burning of hazardous and municipal waste). The UK ETS will also continue with a "cap and trade" model. A cap will be imposed on greenhouse emissions and lowered throughout the duration of the scheme to bring down overall emissions. Companies must surrender enough carbon allowances each year to cover their emissions or incur fines. Carbon allowances can be bought at auction and traded, determining their price.

The new system works alongside the UK's 2050 net zero target, but it goes further. The cap for the UK ETS will initially be set 5% lower than the UK's notional share of the EU ETS cap for Phase IV of the EU ETS. The government will consult on an appropriate trajectory for the cap for the remainder of the first phase later this year. The government has set out that its aim is that any changes to the policy to appropriately align the cap with a net zero trajectory will be implemented by 2023 if possible and by no later than January 2024.

The consultation sets out the government's proposals in respect of a standalone UK ETS, however the government does remain open to considering a linked system between the UK ETS and the EU ETS and this is subject to ongoing negotiations. Given the uncertainty of the future approach, the government will also consult on a back-up carbon pricing mechanism in the form of a Carbon Emissions Tax. This will ensure that a carbon price exists in all potential future scenarios.

Read the full consultation response here.

Ofgem approves overhaul of gas transmission charges

Ofgem has approved a modification to the Uniform Network Code (UNC), enabling a long awaited reform of the gas transmission charging regime.

Gas transmission fees are split between capacity charges and commodity charges. Capacity charges grant users of the network the right to flow gas on and off the network and are payable depending on the location of the network entry and exit points, regardless of whether an actual flow of gas is made. The UNC628A modification introduces a new methodology for setting reference prices for different entry and exit points labelled the "postage stamp" model, which will significantly reduce the locational variations for capacity charges. This means that not only will the current variation between different entry and exit points on the network be reduced, but the discounted short-haul tariff for gas users located close to import terminals will also be removed.

Ofgem has been trying to reform the gas charging regime for a number of years. In 2013, it launched the Gas Transmission Charging Review which concluded in 2015 but led to no reforms as it was determined that none of the proposed amendments were compliant with EU regulations. More recently, in January 2019, National Grid Gas Transmission proposed a new modification, UNC678 in response to which industry stakeholders submitted  alternatives which included the postage stamp model. The decision to proceed with this modification follows Ofgem's minded to decision published in January 2020 and a subsequent two month consultation period

Read more here.

Deferral of additional Covid-19 BSUoS costs modification proposal deemed urgent

Ofgem has approved the urgency of the Connection and Use of System Code (CUSC)  modification proposal CMP345, which proposes to defer the additional Balancing Services Use of System (BSUoS) charges which have arisen due to the increase in managing the electricity transmission system during the Covid-19 pandemic from 2020/21 (being the year in which they are incurred) to 2021/22.  Ofgem has unanimously decided that failure to treat the proposal as urgent may significantly impact affected parties, consumers and other stakeholders.

National Grid ESO (NG ESO) publishes monthly predictions of BSUoS charges and in May it forecasted a significant  increase in BSUoS charges for the period May to August 2020 (access here) due to Covid-19. If successful, the modification will defer approximately £500 million of BSUoS charges which will then be paid on an equal half year basis in 2021/22. Ofgem has commented that failure to defer BSUoS charges on the basis outlined in its proposal could adversely affect competition in the electricity generation and supply markets, and pose a risk to the security of supply.

Read more here and here.

Ofgem allows network payment deferrals due to Covid-19

In an open letter published on 2 June 2020, Ofgem has announced new schemes designed to allow energy suppliers to defer network payments in an attempt to protect energy suppliers and customers from the impact of Covid-19.

The new schemes have been developed by electricity network operators through the Energy Networks Association, following consultations held in April with network operators, generators and suppliers.

Although implementation will vary across sectors, the open letter confirmed that the schemes will: (i) only be available to companies without an investment grade credit rating; and (ii) apply to payments over a three month period.

The deferred payments must be of the appropriate size and availability so that they do not threaten the ability of individual network operators to fulfil their financial covenants and credit metrics. If a network operator breaches such covenants, then the scheme can be withdrawn. All payments must be paid in full by March 2021.

The regulator has made it clear that these schemes should only be used as a last resort and that uptake will be monitored carefully to prevent misuse.

Read more here.

Energy UK calls for annual Contract for Difference auctions

Energy UK, the trade association, has called for annual Contract for Difference (CfD) auctions in response to a government consultation on proposed changes to the CfD scheme which opened on 2 March (see our previous report on that consultation here).

Energy UK have said that annual auctions would have the following benefits:

  • easing pressure on environmental and planning authorities by avoiding the rush of applications from developers trying to fit into a two year cycle;
  • reducing the risk of unsuccessful projects being sterilised due to their consent or lease expiring before the next auction;
  • lowering costs by de-risking projects and increasing investor confidence; and
  • smoothing out the supply chain.

Read Energy UK's full consultation response here.

New technology for EVs could cut charging time to 10 minutes

The Faraday Institution, which researches energy storage, has granted a year-long entrepreneurial fellowship to Qdot Technology Limited (Qdot), a University of Oxford spin-out engineering company.

Qdot's patented heat transfer technology is predicted to achieve a step change in Lithium-ion battery technology by more than doubling the re-charge rate of the batteries from 6 miles per minute to over 15 miles per minute. Qdot will use the fellowship to develop a prototype thermal management system which can cater for much faster charging at battery cell level.

Read more here.