Regulatory Report - August 2021

Generation

The government has launched a call for evidence on how third party intermediaries currently operate in the retail energy market.

The government launched a consultation on 16 August to explore the extent of ‘greenwashing’ in the retail energy sector.

Delivery

The Competition and Markets Authority issued a summary of its provisional determination on the appeals made by the electricity and gas network companies against elements of Ofgem’s RIIO-2 price control determination.

The government is consulting on new proposals to introduce competition into onshore electricity networks.

Following its decision on implementation arrangements for the Market-wide Half Hourly Settlement (MHHS) programme, on 12 August Ofgem published plans for the submission of authority-led change proposals to deliver the changes.

Usage

Joint research by the British Chambers of Commerce and telecommunications company O2 found that, of over 1,000 businesses surveyed in the UK, only 11% are measuring their carbon footprint.

A new report from the BrightBlue thinktank has set out a plan for how carbon pricing could be used to help the UK decarbonise.

Also covered in this Regulatory Report:

• Hydrogen Strategy aims at both green and blue production
• Government calls for greater global ambition following IPCC warning
• Low carbon generation by MPPs fell 10% between Q2 2020 and Q2 2021
• Over 100 companies are now in the Tech Zero taskforce
• Report: COP26 must “position climate change in mainstream politics”
• Industry open letter urges government to plug gaps in Net Zero Strategy

Generation

Government seeks views on TPI operation in retail market

The government has launched a call for evidence on how third party intermediaries (TPIs) currently operate in the retail energy market.

Launched on 16 August, the call for evidence is seeking views on: information transparency; contracting and sales arrangements; customer service arrangements and wider customer protections; out-of-court dispute resolution; and energy system risks. It is also seeking views to inform the design of any future regulatory intervention if required. It is focused on both domestic and business customers. The call for evidence focuses on the following types of TPIs: Price Comparison Website; auto-switching and auto-recommendation services; bill-splitters; brokers and consultants; and load controllers who can control or impact customer energy usage using communication networks.

Ofgem estimates that more than 1,000 TPIs operate in the non-domestic retail market, with TPIs the most common way that customers decide to engage in the market. Around 49% of domestic customers used a price comparison website in 2019 and 67% of small (fewer than 50 employees) or microbusiness customers used a broker in 2018.

The government is calling for evidence on the issue of harm to consumers and there are several areas it is requesting information on, including a lack of information transparency about market coverage and commercial arrangements with suppliers or other relevant market participants.

Review launched to “stop greenwashing” of electricity tariffs

The government launched a consultation on 16 August to explore the extent of ‘greenwashing’ in the retail energy sector. This comes amid concerns that energy suppliers could be overstating the environmental benefits of their green electricity tariffs.

Over half of all new electricity tariffs are badged as ‘green’ or ‘100% renewable’. Currently, energy suppliers can market tariffs as ‘green’ if they have purchased enough Renewable Energy Guarantees of Origin (REGOs) to cover the electricity consumed by customers on that tariff.

Some critics state this is a form of ‘greenwashing’, as the electricity from the wholesale market will be a mixture of fossil fuels, low carbon, and renewable energy. 62% of customers say their purchasing decisions are influenced by how ‘eco-friendly’ a tariff is, but 75% think suppliers should be transparent and open about their tariffs, including how much of their renewable energy is purchased from other suppliers.

Energy and Clean Growth Minister Anne-Marie Trevelyan said: “Millions of UK households are choosing to make the green switch and more and more of our energy comes from renewables. But I want people to know that when they sign up to a green tariff, they are investing in companies that make a conscious choice to invest in renewable energy […] Part of that is ensuring companies are being as transparent as possible in where their energy comes from.”

In the December 2020 Energy White Paper, DESNZ committed to working with the industry to “ensure customers are provided with more transparent and accurate information on carbon content when they are choosing their energy services and products”.

Hydrogen Strategy aims at both green and blue production

The government is promising action on both green (renewables) and blue (fossil fuel-derived with carbon capture) hydrogen as part of its long-awaited Hydrogen Strategy, launched on 17 August. Hydrogen can be used as a low carbon alternative to natural gas.

Headline commitments to hit 5GW of low carbon hydrogen by 2030 include launching £240mn Net Zero Hydrogen Fund in early 2022, delivering the £60mn Low Carbon Hydrogen Supply 2 competition, and finalising the design of the UK standard for low carbon hydrogen by early 2022. The government also plans to finalise its preferred hydrogen business model in 2022, as well as providing detail on its production strategy and twin track approach by early 2022.

Heading towards 2030, the government has several aims by which it will measure progress on the strategy. By 2025, the government hopes to see 1GW of low carbon production capacity. Existing hydrogen supply should be decarbonised through CCUS and/or supplemented by electrolytic hydrogen injection. There should be a reduction in the cost of low carbon hydrogen production. There should be increased public awareness, as well as UK economic growth and opportunities, with the UK ideally as an international leader in hydrogen.

Government calls for greater global ambition following IPCC warning

The government responded to the latest report published by the Intergovernmental Panel on Climate Change (IPCC) by calling for urgent global action.

In a statement on 9 August, Prime Minister Boris Johnson said: “Today’s report makes for sobering reading, and it is clear that the next decade is going to be pivotal to securing the future of our planet. […] The UK is leading the way, decarbonising our economy faster than any country in the G20 over the last two decades. I hope today’s IPCC report will be a wake-up call for the world to take action now, before we meet in Glasgow in November for the critical COP26 summit.”

The IPCC report provides new estimates of the chances of crossing the warming level of 1.5°C in the next decades, and finds that unless there are immediate, rapid and large-scale reductions in GHG emissions, limiting warming to close to 1.5°C or even 2°C will be “beyond reach”. The IPCC says emissions of GHG from human activity are responsible for approximately 1.1°C of warming since 1850-1900, and averaged over the next 20 years, global temperature is expected to reach or exceed 1.5°C of warming.

Labour Leader Keir Starmer said: “The biggest threat we now face is not climate denial but climate delay. Those who, like our Prime Minister, acknowledge there is a problem, but simply don’t have the scale of ambition required to match the moment. Our communities and planet can no longer afford the inaction of this government, who are failing to treat the crisis with the seriousness it deserves.”

Labour committed on 4 August to pursuing a £30bn Green New Deal if it came to power.

Low carbon generation by MPPs fell 10% between Q2 2020 and Q2 2021

UK low carbon’s share of electricity generation by Major Power Producers (MPPs) fell 10.4% between Q2 2020 and Q2 2021, according to new statistics from the government. Published on 26 August, the statistics show low carbon’s share in Q2 2021 as 49.4%, while fossil fuels’ was 49.9%. DESNZ says UK indigenous energy production fell by 28% to a record quarterly low for the 21st century, as a result of nuclear outages and unfavourable weather conditions for renewables.

Delivery

CMA provisionally decides on networks’ RIIO-2 appeals

The Competition and Markets Authority (CMA) has issued a summary of its provisional determination on the appeals made by the electricity and gas network companies against elements of Ofgem’s RIIO-2 price control determination. RIIO-2 is the current price control period, and determines the rate of return that network companies are allowed to make. Appeals by the network companies were lodged at the beginning of March following Ofgem’s decision to implement licence changes that would implement the five-year RIIO-2 price controls from 1 April 2021. All the companies appealed Ofgem’s determination on the cost of equity and on the outperformance wedge - the downward adjustment of allowed returns in anticipation of out-performance - with further grounds of appeal specific to different networks or groups of networks.

On 11 August the CMA issued its provisional conclusion that Ofgem’s allowed cost of equity of 4.55% was not wrong. All the appellants had claimed that the Authority had set the cost of equity too low, and submitted evidence on the elements that made up this decision, including the risk free rate, the total market return, the beta, Ofgem’s approach to assessment “in the round”, its decision not to “aim up” from a mid-point of a range, and its assessment of the finance duty. The CMA was not persuaded that that the regulator had erred in its approach to, or estimate of, the cost of equity.

Proposal set out for onshore network competition

The government is consulting on new proposals to introduce competition into onshore electricity networks.

In the consultation, published on 3 August, the government said its reasoning is that opening up electricity network ownership and operation will allow for “new, innovative parties, with access to different sources of capital, to invest in our network infrastructure”. It will create a new market, while economies of scale and competitive forces “should drive efficiency and lower costs for consumers”. Three changes have seen DESNZ pursue this: the net zero target, new technologies and system governance changes such as the separation of the Electricity System Operator role from National Grid plc.

The proposal would work as follows: network planning processes identify a constraint; should the solution proposed in the network planning process to address that constraint meet certain criteria, a competition can be run to determine the winning bidder who can then build, own and operate their solution.

Modifications raised for MHHS implementation approach

Following its decision on implementation arrangements for the Market-wide Half Hourly Settlement (MHHS) programme, on 12 August Ofgem published plans for the submission of authority-led change proposals to deliver the changes.

Traditionally, electricity used by smaller businesses and households every half hour has been estimated. Estimates of their usage are updated as meters are read, meaning that the current Settlement process takes over a year to complete. However, now that smart meters are being fitted in homes and smaller businesses they will record actual consumption every half hour. This means the whole electricity market could be settled every half hour.

Usage

Survey finds only 10% of businesses measure carbon footprint

Published on 9 August, joint research by the British Chambers of Commerce and telecommunications company O2 found that, of over 1,000 businesses surveyed in the UK, only 11% are measuring their carbon footprint. This figure falls to 9% for small businesses and 5% for microbusinesses, with fewer than 10 employees.

In contrast, 26% of larger firms, with over 50 employees are measuring their footprint. 13% of businesses have set targets to reduce their emissions, down from 21% when firms were surveyed in February 2020, prior to the COVID-19 pandemic. 65% said that in its wake, they did not see net zero targets as a high priority, despite 49% acknowledging that their customers are worried about the environment.

One-third of respondents have yet to seek advice or information to help improve their environmental sustainability, with 22% admitting they do not fully understand the term ‘net zero’. The research also found that smaller firms were more likely to be behind on climate action, with only 9% of microbusinesses having set carbon reduction targets compared to 27% of larger firms. The survey cited high upfront adaptation costs (34%) and a lack of available finance (30%) as the main barriers preventing respondents from making their businesses more sustainable.

Respondents identified getting access to grants (28%), tax allowances (14%) and reducing the costs of making adaptations (14%) as the three steps they would most like to see to help reduce their carbon consumption over the next six months.

In response to the findings, the British Chambers of Commerce and O2 have launched a free online hub to help businesses find out how to set targets, develop an overall net zero strategy and measure their carbon footprints.

Thinktank puts forward plan for carbon tax

A new report from the BrightBlue thinktank has set out a plan for how carbon pricing could be used to help the UK decarbonise.

Published on 28 July, the report puts forward three principles for the design of a carbon price:

• Carbon pricing is about changing behaviours primarily, with revenue raising secondary to that. As emissions fall from the affected goods and services, revenue will reduce, so the Treasury should only ever see carbon pricing as a temporary source of funds, BrightBlue argues.
• Carbon pricing must be demonstrably fair. It must be designed in such a way as to be fair, including considering how tax revenues will be utilised to mitigate any negative distributional or economic impacts.
• Carbon pricing is not a silver bullet. BrightBlue says that it must be part of a suite of wider policy and regulatory interventions to enable individuals and businesses to respond adequately to the signal. BrightBlue argues against a blanket carbon tax across all areas of the economy because of the specific challenges for each sector.

Ryan Shorthouse, Chief Executive of Bright Blue, said: “Once we control Covid-19, the Government has three immediate priorities – restoring the public finances, achieving net zero emissions by 2050, and levelling up. More consistency in the taxation of carbon across different economic sectors can help with the first two.”

Over 100 companies are now in the Tech Zero taskforce

Bulb Energy announced that more than 100 companies have now joined the Tech Zero taskforce, the climate action group led by Bulb for tech companies of all sizes committed to fighting the climate crisis. In the Thursday 12 August press release, Bulb said that new additions include Confused.com, Autotrader and Dezeen.

By joining the taskforce companies commit to:

• Annually measure and publish their scope 1-3 carbon emissions.
• Set an ambitious net zero target.
• Publish a full climate action plan which includes short and medium interim targets, and publish progress every year.
• Appoint a member of the executive team to be responsible and accountable for their net zero target, and report progress to their board.

Communicate climate commitments in meaningful ways, including to customers.

Report: COP26 must “position climate change in mainstream politics”

The Tony Blair Institute for Global Change published a report setting out priorities and actions for the UK in its role as host of COP26 in November. 

Published on 29 July, Mind the Gap: Success at COP26 sets out four recommendations to “close the gap between rhetoric and action”:

• Ambitious targets backed by delivery plans. Two-thirds of the global economy are now covered by net-zero targets and several nations have increased the scope of their 2030 targets. But the Institute argues that those targets – particularly for the next decade – are not ambitious enough, and are not supported by delivery plans.
• A pathway for low and middle-income countries (LMICs) that enables decarbonisation, energy security and economic growth. The Institute argues that the £100bn committed to in the Paris Agreement committed in support for lower-income countries is “an important start, but not a true reflection of the level of assistance that will be needed”.
• Position climate change in mainstream politics and public consciousness, nationally and internationally, “for too long, climate policy has been the preserve of environmental NGOs, climate diplomats and energy specialists”. The Institute argues that mainstream politicians now have the job of placing delivery of net zero at the forefront of politics.
• Unleash the power of the private sector and the state. The Institute cites the example of private-public partnership over rapid development of COVID-19 vaccines.

Industry open letter urges government to plug gaps in Net Zero Strategy

Citizens Advice, Which?, the Federation of Master Builders and the Aldersgate Group have written a joint open letter to the government, published on 25 August, urging it to address what they say are a number of gaps in the upcoming Net Zero Strategy. They argue that many people have difficulty understanding which home technologies to install due to a lack of information, and consumer protections must be fit for purpose for the rapidly expanding low carbon, energy efficiency and smart technology markets. Additionally, most people will be unable to make the switch to low carbon alternatives without financial support like grants, low-cost loans and financing.