Regulatory Report - April 2022
The UK Government published its Energy Security Strategy, responding to energy price hikes and Russia’s illegal invasion of Ukraine.
The UK Emissions Trading Scheme Authority opened a consultation seeking views on proposals to develop the UK ETS.
Ofgem issued a consultation on changes to the Market Stabilisation Charge parameters and calculation.
The government and Ofgem announced their commitment to proceed with the creation of a new Future System Operator (FSO) to oversee and strengthen the resilience of the UK energy system.
Ofgem published its decision to implement several policy reforms in order to provide more support to microbusinesses.
The government opened a consultation on its proposed approach to allocating Hydrogen Business Model and Net Zero Hydrogen Fund support through a joint allocation process for electrolytic hydrogen projects.
The EV Energy Taskforce published its Charging the Future: Drivers for Success 2035 report.
Also covered in this Regulatory Report:
- DESNZ/Ofgem not to proceed with options to address RO supplier default
- RenewableUK calls for onshore wind planning reforms
- DESNZ seeks views on removal of use of Guarantee of Origins in GB
- Response to ECO4 scheme consultation published
- EV Infrastructure Strategy published
- Government responds to WHD consultation
- IPCC report highlights that urgent action is needed to decarbonise energy
Government publishes Energy Security Strategy
The UK Government published its Energy Security Strategy on 7 April, responding to energy price hikes and Russia’s illegal invasion of Ukraine. It reaffirms its commitments to offshore wind and solar power set out in the Net Zero Strategy and Prime Minister’s Ten Point Plan for a green industrial revolution. It also details the government’s intentions to further develop nuclear power as gas is phased out.
The strategy sets out new commitments and ambitions in the following areas: immediate support on energy bills for families and industry, energy efficiency measures, oil and gas, offshore wind, solar and other renewables, nuclear power, hydrogen, networks, storage and flexibility and international delivery.
This includes doubling the innovation funding for green finance projects to £20mn and running a Heat Pump Investment Accelerator competition in 2022 worth up to £30mn, to develop heat pumps. It also set out its ambition to deliver up to 24GW of nuclear by 2050, 50GW of offshore wind by 2030 (of which it is hoped 5GW will be floating wind), up to 10GW of low carbon hydrogen production capacity by 2030 and increase in the deployment of solar five-fold by 2035.
To support its nuclear ambitions a new government body, Great British Nuclear, will be immediately set up to bring forward new projects along with the launch of a £120mn Future Nuclear Enabling Fund in April.
Consultation opened on future development of the UK ETS
The UK Emissions Trading Scheme (ETS) Authority opened a consultation on 25 March, seeking views on proposals to develop the UK ETS. This aims to ensure that the UK ETS drives emission reductions, and the UK continues to demonstrate its “leading” position in carbon pricing.
The consultation, which closes on the 22 June 2022, addresses several areas. This includes changes to align the UK ETS cap and trajectory with the net zero target; a call for evidence on potential drivers of evolving market conditions in the UK ETS and objectives for market stability policy as the scheme evolves; and possible changes to the rules for sectors currently covered by the UK ETS to ensure more greenhouse gas emissions are covered by the scheme.
On the issue of aligning the emissions reductions with net zero, the consultation refers to the Climate Change Committee (CCC) advice for the sixth carbon budget and the greater emissions reductions highlighted in the Net Zero Strategy. It states that the Net Zero Strategy provides the foundation for the net zero consistent cap trajectory from 2024 and would allow a total cap for the of between 887mn and 936mn allowances for first Phase (2021-2030).
The current legislated cap for the whole phase is 1,365mn allowances, with the new trajectory a reduction of between around 30-35% over the course of the phase. This would require a step change in the level of the cap in 2024, with the cap becoming tighter over the phase and an annual cap of around 50mn allowances in 2030.
As this will lead to a significant drop in allowances the authority is considering bringing a portion of 2021-2023 unallocated allowances and/or flexible share to auction to smooth the transition to the net zero consistent cap.
Having considered responses to their consultation, DESNZ and Ofgem have decided not to proceed with proposed options to address supplier default under the Renewables Obligation (RO).
Option 1 would place a legislative requirement for suppliers to settle their RO more frequently; option 2 would introduce a licence-based requirement for suppliers to protect their accruing obligation against the risk of default; and option 3 would continue with existing policy.
While responses indicated a preference for more frequent RO settlement, some concerns were raised that this would negatively impact some suppliers. Support was also received for a licence-based requirement, a combination of a legislative and licenced-based approach, or for continuing with existing policy.
Given the mixed views, and changes to the energy market since the August 2021 consultation, DESNZ does not consider that legislating now for more frequent RO settlement is the right approach. As such, it plans to gather more evidence later in the year to further develop policy thinking around the RO.
Renewable energy trade association RenewableUK has called on the government to increase the country’s onshore wind capacity to reduce reliance on gas sources.
In a release issued on 25 March, RenewableUK stated that the UK can more than double its total onshore wind capacity from a current 14GW to 30GW by 2030 – adding £45bn to the economy and supporting 27,000 jobs. The association highlights that the current planning system in England blocks the development of nearly all new onshore wind projects – asking that the government address this.
Renewable UK also urges the Scottish Government to progress with its Onshore Wind Policy Statement and planning reforms to facilitate the development of new capacity.
On 29 March, DESNZ published a consultation on the proposed removal of Feed in Tariff (FIT) and Contracts for Difference (CfD) scheme cost exemptions for green imported electricity and the recognition of EU Guarantees of Origin (GoOs) altogether.
Electricity suppliers are currently able to seek exemption for payments to electricity generators supported by the CfD and FiT schemes through the presentation of EU GoOs. These green import exemptions (GIEs) are not included in a supplier’s market share for the purpose of calculating their payment obligations under the CfD and FiT and can therefore be used to reduce their liability to contribute towards the costs of these schemes. Following the UK’s exit from the EU, the government is consulting on the withdrawal of these exemptions and has outlined three potential options. The first option, to do nothing and retain current arrangements, is not favoured by the government. The second option, to extend GIEs to all international trading partners to develop a fairer approach to trade, is also not favoured due to its complexity. The third option is to repeal the exemptions, which the government considers offers the most straightforward approach and would ensure fair opportunity for all trading partners. Two implementation dates for the removal of GIEs have been proposed - 1 October 2022 and 1 April 2023.
A final decision on the preferred option and timing will be released following industry responses to the consultation, which closes on 10 May 2022.
Ofgem consults on market stabilisation charge changes
On 31 March, Ofgem issued a consultation on changes to the Market Stabilisation Charge (MSC) parameters and calculation. Given recent geopolitical events, Ofgem considers it necessary to review the arrangements to ensure they remain fit for purpose.
Changes include reducing the threshold at which the MSC arrangements are triggered from 30% below the wholesale prices used to set the current price cap to 10-20%. It also proposed an increase in the derating factor, used to determine the percentage of hedging losses covered by the MSC, from 75% to within the range of 80-90%.
Responses were requested by 14 April, which is the same date that the MSC took effect. It was expected that any changes arising from this consultation would take effect from 27 April.
Government to create FSO to oversee UK energy system
On 6 April, the government and Ofgem announced their commitment to proceed with the creation of a new Future System Operator (FSO) to oversee and strengthen the resilience of the UK energy system.
The FSO will be a new public body, funded by consumers through price control arrangements regulated by Ofgem. It will take on all the main existing roles and responsibilities of National Grid Electricity System Operator and the longer-term planning elements of the gas system. The FSO will also have a duty to provide advice, upon request, to Ofgem and the government. The primary objectives of the FSO will be to facilitate the transition to net zero; maintain security of supply; and ensure an efficient, coordinated, and economical electricity and gas system.
The FSO could be established by, or in, 2024, dependent on several factors such as timings of legislation.
On the same day, the government and Ofgem published their decision to proceed with their preferred option for energy code reform. As a result, Ofgem will be given new strategic code functions, including the ability to establish and regulate one or more code managers. It is anticipated that Ofgem’s new strategic functions could be established around 2023.
Ofgem approves reforms to support microbusinesses
On 28 March, Ofgem published its decision to implement several policy reforms in order to provide more support to microbusinesses. The Microbusiness Strategic Review was launched in 2019, and Ofgem said that disruption caused by the COVID-19 pandemic and current energy wholesale market volatility means that greater access to important information and a more secure protections framework is more important than ever.
The changes include strengthening the provision of principal contractual terms, including more transparency on third party costs; banning termination notification requirements with the exception of evergreen contracts; and requiring suppliers to only work with brokers signed up to an alternative dispute resolution scheme.
Ofgem is also working with Citizens Advice to provide improved materials to increase awareness about the market and consumer rights. Changes will take effect from 1 October 2022, except for the change regarding broker dispute resolution, which will take effect from 1 December 2022.
New packages for hydrogen, CCUS and nuclear
On 8 April, the government opened a consultation on its proposed approach to allocating Hydrogen Business Model (HBM) and Net Zero Hydrogen Fund (NZHF) support through a joint allocation process for electrolytic hydrogen projects. This would fully integrate the application process for revenue support through the HBM and CAPEX support through the NZHF.
In addition, having consulted in July 2019 on potential new business models for carbon capture usage and storage (CCUS), on 12 April the government issued two further consultations. These are seeking views on its proposed business model for industrial facilities with carbon capture (ICC) and the associated draft Dispatchable Power Agreement contract. Responses to both consultations are requested by 10 June.
Funding for hydrogen, nuclear and CCUS were launched as part of the governments Energy Security Strategy, with a £375mn package for innovative technologies that will power GB homes and businesses. This includes the £240mn Net Zero Hydrogen Fund for low carbon hydrogen production projects; £2.5mn to develop nuclear technology; and £5mn towards CCUS research.
The government also published a statement on 11 April on the procedure and criteria for designating a nuclear company under the nuclear regulatory asset base (RAB) model. A nuclear company should first notify DESNZ of its intention to submit a designation application and then make an application to the Secretary of State detailing its proposals for a nuclear project.
Following this, the application will be assessed by DESNZ and consulted on before a decision is made. It also outlines the designation criteria, based around the maturity of the project and its value for money. Subject to meeting these criteria, the nuclear company’s electricity generation licence would be amended to allow it to receive a regulated revenue for activities associated with its nuclear project.
£7bn investment needed in UK charging infrastructure by 2035
The EV Energy Taskforce published its Charging the Future: Drivers for Success 2035 report on 31 March. This states that 2.5mn Battery Electric Vehicles (BEVs) will need to be sold per year in the UK by 2030 to meet the Sixth Carbon Budget. It predicts electricity demand from transport will increase to 55TWh per year by 2035 and has a central estimate that 490,000 public charge points are needed by 2035, equivalent to a £7bn investment. It also states 60,000 enroute rapid chargepoints will be needed along the strategic road network by 2035, and that as many as 50% of public chargepoints need to be targeted at providing charging for drivers in homes without dedicated parking. Furthermore, it suggests without smart charging, domestic charging prices will be 25% higher.
As such, the taskforce has identified five key enabling conditions for creating charging infrastructure fit for the future. This includes that public charging must be built ahead of need, and that local authorities must have tools, resources, and powers to ensure integrated transport and energy planning. It also sets out that public chargepoints must be visible, connected, accessible, secure, and interoperable and that smart charging is essential if system cost is to be managed and the importance of informing, educating and protecting EV users.
On 1 April, the government published its response to its consultation on proposed changes to the Energy Company Obligation (ECO) scheme for the fourth phase of the scheme (ECO4), which will run from April 2022 until March 2026. It set out that subject to certain measure exclusions, up to 10% of ECO3 delivery may be carried over into ECO4 and that measures may be installed to ECO3 rules between 1 April and 30 June 2022. Early delivery of ECO4 measures during any gap between ECO regulations will be allowed and carry-under will not be implemented. It also states that up to 50% of the obligation target can be met under the reformed ECO4 Flex – designed to target households on low income – with the eligible pool to be at least 3.5mn homes. In addition, it set out that only energy efficiency band D-G homes are eligible for ECO4, and that score uplifts of 35% will be introduced in off-gas rural areas in Scotland and Wales. Regulation will be laid in Parliament, with the expectation that it will come into force later in 2022.
The government published its Electric Vehicle (EV) Infrastructure Strategy on 25 March, stating that it will focus on two sectors. The first will aim to accelerate the rollout of at least 6,000 high-powered chargers on the strategic road network by 2035, via the £950mn rapid charging fund. The second is focussed on supporting local governments to develop chargepoint strategies and scale up public chargepoint rollout on local streets, with a £500mn local infrastructure support programme. Other plans set out in the strategy include consideration of amendments to the Transport Planning Practice Guidance relating to chargepoints in summer 2022; introducing legislation to improve people’s experience when using public chargepoints; and mandating for private chargepoints in GB to be smart and meet minimum device-level requirements from June 2022. A commitment to publish a joint EV Smart Charging Action Plan with Ofgem is also noted, for summer 2022.
On 1 April, the government published its response to its consultation on proposals to extend, expand, and reform the Warm Home Discount (WHD) scheme, which provides support to fuel poor households with the costs of heating their homes. The government set out its plan to implement its main proposals including an expansion of the overall spending of the scheme to £475mn (in 2020 prices) each year (from £350mn) for GB, while also increasing the value of the rebates to £150. The government will maintain the current Core Group (renamed Core Group 1), which provides rebates to around 1mn low-income pensioners, and will introduce a new Core Group 2 to provide rebates to around 1.9mn households on low incomes and with high energy costs. In addition, the supplier participation thresholds will be reduced in 2022 to 2023, and again in 2023 to 2024. Regulations will be laid for the changes in England and Wales, with the reforms to take place from the 2022-23 onwards. It also plans to consult on introducing a separate scheme in Scotland.
The IPCC published a report on 4 April, highlighting that although growth in global emissions has slowed over the past decade, the window to keep 1.5˚C in reach is closing fast. It notes that in the scenarios assessed, limiting warming to 1.5˚C requires global greenhouse gas emissions to peak before 2025 at the latest and be reduced by 43% by 2030.
It sets out that limiting global warming will require major transitions in the energy sector, including substantial reductions in fossil fuel use, widespread electrification, improved energy efficiency, and use of alternative fuels such as hydrogen.