Regulatory Report - June 2022
DESNZ opened a consultation on the government’s proposed revenue stream mechanics under the nuclear regulated asset base model.
The government published a consultation seeking views on its proposals to improve liquidity in the 2023 Capacity Market auctions.
DESNZ published the outcome of its July 2021 consultation on maximising non-domestic smart meter consumer benefits.
The National Audit Office published a report on the energy supplier market, evaluating the role of Ofgem and DESNZ in the events leading to recent supplier exits and how well they handled them.
Ofgem published a policy consultation seeking views on proposals to implement new protection mechanisms for customer credit balances and Renewables Obligation payments.
The Society for Motor Manufacturers and Traders announced nearly three quarters of a million vehicles on the road can be plugged in.
DESNZ published the response to its consultation which sought views on the design and operation of the proposed approach to recovering the costs of heat network regulation.
Also covered in this Regulatory Report:
- DESNZ asks ESO to explore options for bolstering winter energy security
- Report shows that UK has biggest pipeline of floating wind in the world
- Government responds to greening imports report
- Plug-in grant for cars to be refocused to boost other plug-in vehicle sales
- Infrastructure Bank to invest £22bn in climate change and energy security
- Scottish Government to improve new-build housing efficiency
- Government invests £31mn in industry to reduce fossil fuel usage
Proposed revenue stream for the nuclear RAB model
On 14 June, DESNZ opened a consultation on the government’s proposed revenue stream mechanics under the nuclear regulated asset base (RAB) model.
The nuclear RAB model would allow nuclear companies to be able to share some of their construction and operating risks for a new project with consumers and taxpayers, thus reducing the project costs they incur and helping encourage private sector investment. Crucial to the successful implementation of the nuclear RAB model is establishing a robust revenue stream between electricity suppliers and a licensed nuclear company.
The government’s proposal for the RAB model revenue stream is based upon the existing Contract for Difference (CfD) scheme used to incentivise private investment in low-carbon energy generation. A CfD-like model was deemed the least disruptive to the market as suppliers, generators and investors are already familiar with this revenue stream model.
A primary focus of the consultation, which closes on 9 August 2022, is around how the revenue regulations would differ from the CfD revenue regime to account for nuclear RAB specific design mechanics. This includes the payment calculation method, as the nuclear RAB model would be overseen by Ofgem and the allowed revenue, as set by Ofgem, would be recovered through both market sales of electricity and levies on suppliers. The information sharing mechanism would also differ in that the revenue collection counterparty would be able to require Ofgem to notify it of the amounts it can pay to or receive from the licensed nuclear companies. Similarly, Ofgem would be able to request information from the revenue collection counterparty on reference price data to help with calculating the forecast market revenue of a nuclear company. It also sets out that the notice period given to suppliers of interim levy rates and reserve amounts will be at least a month, compared to the three months given under CfD regulations.
Proposals to improve Capacity Market auction liquidity
The government published a consultation on 8 June seeking views on its proposals to improve liquidity in the 2023 Capacity Market (CM) auctions.
The two time-limited proposals are to: postpone the introduction of the statutory requirement for independent verification of fossil fuel emissions and to temporarily allow plant that have been mothballed to apply to pre-qualify for CM auctions. It states the first proposal “which effectively rolls over arrangements from previous years, is necessary to mitigate the risk of applicants failing to prequalify for the 2023 CM auctions as a result of potential inability to access emissions verification services”. The second proposal “is necessary to remove a barrier to prequalification for mothballed plants that would otherwise prevent their prequalification for the 2023 CM auctions.”
The government considers that the amendments will remove barriers to pre-qualification for the 2023 round of CM auctions, therefore improving security of electricity supplies in the winter of 2023-24 and beyond.
Responses are requested by 22 June. If the decision is made to proceed with the proposed changes, they will be implemented before the Prequalification Window for the 2023 auction round opens in July 2022.
A letter from the DESNZ Secretary of State to National Grid Electricity System Operator (ESO), regarding the security of electricity supplies for winter 2022-23, was published on 27 May. The letter was sent in the context of Russia’s invasion of Ukraine and the possibility of disruption to Russian gas supplies to Europe.
To mitigate these risks and bolster energy security, DESNZ has requested that the ESO works with industry to explore and seek to deliver frameworks to support the operations of additional non-gas-fired capacity over the coming winter. DESNZ added that in support of this, certain coal plants have been identified that could be considered as part of any potential solution under the frameworks agreed, where appropriate. It noted that any frameworks agreed will need to ensure system stability and encouraged that these be put in place swiftly.
The letter stated: “I [the Secretary of State for DESNZ] remain committed to the government’s coal generation closure deadline of September 2024, and the government’s deadline for phasing out imports of Russian coal by the end of the year.”
RenewableUK published its EnergyPulse - Global Offshore Wind Special Report – June 2022 on 21 June, reporting that the global pipeline of offshore wind projects has almost doubled over the past 12 months, from 429GW of capacity a year ago to 846GW.
The pipeline includes projects that are operational, under construction, consented or planned, with China having the biggest offshore wind project pipeline at 98GW, followed by the UK at 91GW and the USA with 80GW. In addition, the data shows that the UK has the biggest pipeline of floating projects in the world at 32GW and the biggest operational floating capacity at 80MW.
RenewableUK’s CEO Dan McGrail said: “Countries around the world recognise the urgent need to ramp up the transition to clean power - not only to tackle climate change, but also to provide secure supplies of low-cost homegrown electricity for people hit hard by international gas prices going through the roof. Add to that the benefits of creating millions of skilled jobs and attracting billions in private investment, and you can see why offshore wind is surging ahead globally.” McGrail added: “It’s great to see that the UK has the biggest global pipeline of floating projects, as this will prove to be a gamechanger in reaching net zero faster, as well as creating opportunities for us to export innovative British technology all over the world, building up new supply chains.”
The government published its response to the recommendations set out in the Environmental Audit Committee’s report on Greening imports: a UK carbon border approach on 21 June.
Among other things, this includes its agreement that multilateral solutions are needed to address carbon leakage, highlighting its intention to consult later in the year on a range of carbon leakage mitigation options and whether measures such as a UK Carbon Border Adjustment Mechanism (CBAM) could be used.
In addition, it noted that it is actively engaging with the EU on their CBAM proposals and said that it agrees with the importance of aligning the approach to carbon leakage with the wider environmental, trade, development, and fiscal policy.
Changes to maximise non-domestic smart meter data offer
On 1 June, DESNZ published the outcome of its July 2021 consultation on maximising non-domestic smart meter consumer benefits.
Currently suppliers are not required to provide non-domestic customers or a third party with their energy consumption data, and despite expectations that innovation would have brought forward a range of services for non-domestic customers, DESNZ said that this is not happening at the pace needed to maximise smart metering benefits for non-domestic customers. As a result, DESNZ issued plans to require suppliers to establish a baseline data offer that non-domestic smart meter customers (covering SMETS and advanced meters customers) would be entitled to receive. DESNZ plans to proceed with policy changes to improve the smart meter data offer for non-domestic customers, but several changes have been made following stakeholder feedback.
The new requirements consist of “on-request data offer”, which will enable non-domestic customers to request free access to their historic smart meter energy use data, and a requirement for energy suppliers to raise customer awareness of the routes by which they can access their smart meter energy use data for free under “awareness raising requirements with respect to data”. Both requirements will come into effect from 1 December 2022. Energy suppliers will also need to provide free, user-accessible energy use information to smaller non-domestic customers with smart meters under the “default data offer” and will have until 1 October 2024 to implement this.
NAO report published on energy supply market
On 22 June, the National Audit Office (NAO) published a report on the energy supplier market, which aims to set out the facts regarding the recent energy supplier exits and to evaluate the role of Ofgem and DESNZ in the events leading to the exits and how well they handled them.
The report concludes that while Ofgem could not have prevented the increase in wholesale prices in 2021 from affecting consumers, it did not do enough in the preceding years it to ensure the energy supplier sector was resilient to external shocks. It states that Ofgem and DESNZ must ensure the supplier market recovers from its current state, facilitating a longer term transition of the supplier market to one that truly works for consumers and supports the achievement of net zero.
Ofgem consults on protection for CCBs and RO payments
On 20 June, Ofgem published a policy consultation seeking views on proposals to strengthen the financial resilience of suppliers by implementing new protection mechanisms for customer credit balances (CCBs) and Renewables Obligation (RO) payments.
The proposals centre around ringfencing customer credit balances and RO payments, ensuring they are available to a customer’s new supplier should their current supplier fail, reducing mutualisation costs. Ofgem also provided initial thinking on options for preserving the value of an insolvent supplier’s hedges and allowing customers to access the benefits of these. Additionally, early thoughts are set out on capital adequacy, specifically around requirements for suppliers to maintain sufficient minimum levels of capital to contend with volatile markets and encourage improved risk management.
Responses are required by 19 July. Alongside the consultation Ofgem has published a report from NERA which assesses the impacts of the credit balance and RO interventions.
BEV sales more than double diesel registrations last month
On 31 May, the Society for Motor Manufacturers and Traders (SMMT) announced nearly three quarters of a million vehicles on the road today can be plugged in, including 720,053 cars, 26,990 vans, 993 buses, and 313 trucks, with plug-ins representing around one in 50 cars on the road.
Additionally, it states 1.1% of cars are battery electric vehicles (BEVs), 1.3% of buses and coaches are BEVs, that electric trucks account for under 0.1% of Heavy Goods Vehicles (HGVs), and that 0.6% of vans are now plug-in-electric.
When looking at the commercial vehicle sector, the data indicates that plug-in electric vans are around two years behind that of cars despite both vehicle classes having the same end of sale date for new petrol and diesel registrations. When looking at HGVs, it adds that development of zero-emission technology for these vehicles continues. In addition, the report showed that 58.8% of all plug-in cars are registered to businesses. The report states this is reflective of incentives for the business market.
DESNZ responds to consultation on heat network regulation
On 16 June, DESNZ published the response to its consultation which sought views on the design and operation of the proposed approach to recovering the costs of heat network regulation, which will be administered by Ofgem as future heat networks regulator.
Having outlined four approaches to the recovery of heat network regulation costs, DESNZ has decided to proceed with its preferred solution in forthcoming heat network legislation. This will see Ofgem’s and Citizens Advice’s total ongoing costs of regulating the heat networks, gas, and electricity markets spread evenly across heat network, gas and electricity consumer bills. It is estimated that this approach would result in heat network, gas and electricity consumers paying an additional £0.10 per year, compared to forecasts of £10 or more per heat network consumer bill per year if costs were solely to be recovered through heat network consumers.
The consultation also sought views on the affordability of the cost recovery proposals, with the majority of respondents in agreement that the preferred approach would be affordable for consumers and businesses. Under the government’s preferred approach to cost recovery, it is suggested that the regulatory fee paid by a heat network regulated entity should be based on the number of heat network consumers it supplies. This proposal received mixed responses with some stakeholders outlining a need to consider distinguishing between consumer types to avoid discrepancies in rates. DESNZ continues to envisage regulatory fees to be calculated and collected based on number of consumers served by a heat network. However, further work will be undertaken to consider the definition of the term ‘consumer’, as well as ways to efficiently obtain the necessary data to help understand the consumer groups served by each heat network.
A de minimis threshold was also suggested within the consultation which would exclude smaller heat networks from paying regulatory fees to reduce the administrative complexity of cost recovery. This also received mixed responses, with respondents suggesting that a threshold may not be appropriate while the market is made up of many smaller networks, but that it might become more appropriate as the sector consolidates. DESNZ outlined that further consideration and engagement with industry will be taken to assess the merits and drawbacks of a threshold. DESNZ also stated that a threshold would only be introduced if the cost of regulation for larger heat networks and their consumers remained affordable.
The government announced on 14 June that it is closing the plug-in car grant scheme to concentrate funding towards the main barriers to the electric vehicle (EV) transition, including public charging and supporting the purchase of other vehicles.
As such, it said that £300mn in grant funding will now be refocused to boost sales of plug-in taxis, motorcycles, vans and trucks, and wheelchair accessible vehicles. The announcement stated that “the scheme has succeeded in creating a mature market for ultra-low emission vehicles, helping to increase the sales of fully electric cars from less than 1,000 in 2011 to almost 100,000 in the first 5 months of 2022 alone.” It adds that more than half of new cars sold are battery and hybrid EVs.
On 23 June the UK Infrastructure Bank launched its first Strategic Plan, setting out its ambitions to invest £22bn in clean energy, including transport, digital, water and waste. The Plan aims to tackle climate change, boost regional growth, improve security and supply and tackle economic inequality.
Chris Grigg CBE, Chair of the UK Infrastructure Bank said: "Over the last year I am proud to say that the Bank has grown hugely in capability and maturity. We have also made significant progress both in terms of transactions, closing seven deals worth £610mn, and in terms of defining our role. It is already clear that we can have a real impact on infrastructure across the UK."
On 15 June, the Scottish Government published new regulations to reduce the emissions of new-build homes. The new standards will apply from December 2022, with several key elements. This includes: improved performance targets which will reduce emissions from new homes by an aggregate of 32% and new non-domestic buildings by an aggregate of 20%; the introduction of a new energy target for new buildings to set and report on performance of decarbonisation as new buildings are decarbonised; a focus on reducing energy demand; and changes to make connection to low-carbon heating solutions such as heat networks easier.
The plans also support the development for all new buildings to have zero emissions heating systems from 2024. The new standards have been employed to help the government work towards its target of reducing emissions across Scotland’s building stock by more than two thirds by 2030.
On 31 May, DESNZ announced that the government will invest over £31mn to support industry to reduce its reliance on fossil fuels and slash carbon emissions. The funding includes over £6.6mn to help industry move away from using red diesel, also known as gas oil – a type of fossil fuel commonly used for off-road vehicles and machinery.
Over £5.5mn is also being invested to develop technologies that support industry to cut back use of high carbon fuels and switch to cleaner power sources, such as hydrogen, electrification or fuel from biomass and waste products.
On the same day, DESNZ announced that £20mn in grant funding for projects developing carbon capture, usage and storage (CCUS) technology and processes that reduce the cost of deployment, as part of its CCUS Innovation 2.0 competition. The funding will be available over two calls. Projects for Call 2 will be split into three: Mid Stage CCUS innovation, Late Stage CCUS innovation and Next Generation Carbon Capture Technology feasibility study.