Regulatory Report - February 2022

Generation

Ofgem confirmed the level of the Default Tariff Cap which will come into effect from 1 April. Ofgem confirmed the cap which impacts approximately 22mn customers would see a rise £693 from £1,277 to £1,971 per year for those that pay by direct debit.

Chancellor of the Exchequer Rishi Sunak announced a £9.1bn Energy Bills Rebate, providing all domestic electricity customers financial support after the announcement of the rise in the Default Tariff Cap.

Delivery

National Grid Electricity System Operator (ESO) issued the final transmission network use of system (TNUoS) charges to apply from 1 April 2022. The total TNUoS revenue to be collected has increased by £276mn from £3,318mn to £3,594mn between 2021-22 and 2022-23.

Ofgem issued a letter to energy suppliers setting out guidance on adopting robust risk management practices.

Ofgem announced that it will be introducing two temporary measures to protect customers from the risks of market volatility, ahead of enduring reforms.

Usage

DESNZ released guidance to help limited liability partnerships (LLPs) and in-scope companies understand how to meet new mandatory climate-related financial disclosure requirements.

Energy Systems Catapult (ESC) published a report on Resilience Electric Vehicle (EV) Charging, setting out six ways EV chargers present a risk to grid security, including step, ramp, oscillations, degraded stability, demand control and restoration.

Also covered in this Regulatory Report:

• CfD rounds to occur annually to accelerate renewable development
• Modification allows for renewables to support the grid
• Highest ever T-4 Capacity Market clearing price achieved
• Guidance published to help fleet operators switch to EVs
• £40mn awarded to UK universities to investigate net zero solutions
• SMMT: demand for used BEVs increased by 119.2% in 2021
• RPC gives opinion on DfT’s EV (Smart Charge Points) Regulations 2021

Generation

Default Tariff Cap rises by £693 from 1 April

On 3 February, Ofgem confirmed the level of the Default Tariff Cap which will come into effect from 1 April. Ofgem confirmed the cap which impacts approximately 22mn customers would see a rise £693 from £1,277 to £1,971 per year for those that pay by direct debit. Customers that are on prepayment will see an increase of £708 from £1,309 to £2,017. Ofgem highlighted that it will affect default tariff customers who have not switched to a fixed deal and those who remain with their new supplier after their previous supplier exited the market. Ofgem states that the increase is driven by a record rise in global gas prices over the last 6 months, with wholesale prices quadrupling in the last year.

Ofgem added that since the price cap was last updated in August, the current level does not reflect the unprecedented record rise in gas prices which has since taken place. In addition, over the last year, 29 energy companies have exited the market or been put in special administration in the wake of escalating global gas prices. This has affected around 4.3mn domestic customers. The report added that the main driver of the increase in networks costs is the recovery of Supplier of Last Resort (SoLR) levy costs (£68).

Jonathan Brearley, chief executive of Ofgem, said: “We know this rise will be extremely worrying for many people, especially those who are struggling to make ends meet, and Ofgem will ensure energy companies support their customers in any way they can.” Adding: “The energy market has faced a huge challenge due to the unprecedented increase in global gas prices, a once in a 30-year event, and Ofgem’s role as energy regulator is to ensure that, under the price cap, energy companies can only charge a fair price based on the true cost of supplying electricity and gas.”

HMT launches energy bills rebate

On 3 February, Chancellor of the Exchequer Rishi Sunak announced a £9.1bn Energy Bills Rebate, providing all domestic electricity customers financial support after the announcement of the rise in the Default Tariff Cap. Speaking about the announcement Sunak said that growing cost of living pressures was the “number one issue on people’s minds”, and that the package would support hard working families.

Looking at the details, the Energy Bills Rebate will provide around 28mn households with an upfront discount on their bills worth £200. Energy suppliers will apply the discount to domestic electricity customers from October. The discount will then be automatically recovered from bills in equal £40 instalments over the next five years beginning in 2023. It states in the release that this is when it is hoped global wholesale gas prices will start to decrease.

In addition, households in England, which are in council tax bands A-D (around 80% of all homes in England), will also receive a £150 rebate which will be paid directly by local authorities from April. The announcement states that this will not need to be repaid and is more targeted support (in the region of £1bn) for low-income families than a cut in VAT levels would be. In addition, a £144mn discretionary funding, will also be provided to support vulnerable people and individuals on low incomes that do not pay Council Tax, or that pay Council Tax for properties in Bands E-H. Sunak also confirmed that plans to expand the Warm Home Discount by almost a third, increasing the number of households covered to 3mn, will go ahead. In addition, the planned £10 uplift to £150 will also occur from November.

CfD rounds to occur annually to accelerate renewable development

DESNZ confirmed on 9 February the next CfD round (allocation round 5) will open in March 2023 and be the first in a series of annual auctions, doubling the previous commitment to hold auctions every two years. The press release indicates that these auctions will remain open to established technologies such as onshore wind and solar PV stating: “including them [onshore wind and solar] in the 2023 and future CfD allocation rounds will support progress towards our decarbonisation objectives at low cost.”

“There’s currently ~47GW of renewables capacity operational in GB, but our analysis shows well upwards of 90GW will be needed by 2030 and substantially higher levels still by 2050, if we want to achieve our emissions reduction targets. Annual CfD auctions will act to support these ambitions, but the precise budgets available and form of future CfD auctions remains subject to uncertainty.”

Modification allows for renewables to support the grid

National Grid ESO announced on 14 February that it will for the first time be able to procure grid stability services from renewable assets. The move is a result of a recent modification to the GB grid code. GC0137 is a grid code modification that has been developed with the help of manufacturers and developers to set a specification for ‘grid forming’, which will enable renewable generators and interconnectors to compete to provide stability services alongside conventional generators.

The change means the likes of wind, wave and solar generators can now prepare to meet the required specification to be able to participate in the procurement for system services including providing inertia and frequency support. The modification was approved by Ofgem on 31 January 2022, and the change formally implemented from 14 February 2022.

Highest ever T-4 Capacity Market clearing price achieved

On 22 February 2022, the T-4 Capacity Market (CM) auction for Delivery Year 2025-26 cleared at £30.59/kW/year. This is the highest ever clearing price in a T-4 GB CM auction and follows the T-1 auction for 2022-23, which cleared at the highest ever GB CM price of £75/kW on 15 February 2022.

The T-4 auction awarded agreements to 42,364MW of de-rated capacity, 32,305MW of which was awarded to Existing Generating Capacity Market Units (CMUs). A further 6,966MW was awarded to interconnectors, both new build and existing, followed by 1,919MW of New Build Generating CMUs, 810MW of Unproven DSR, 194MW of Proven DSR and 170MW of Refurbishing Generating CMUs.

The majority of existing capacity awarded agreements came from gas-fired assets with 20,659MW from CCGT, 4,399MW from Gas – CHP, 1,893MW from OCGT and 481MW from gas reciprocating engines. Pumped storage accounted for 2,357MW of successful existing capacity, with a further 170MW (from Ffestiniog) awarded agreements as refurbishing plant. Just 990MW of nuclear capacity was awarded agreements, with Sizewell B the only nuclear plant participating in the auction. The Heysham 2 and Torness nuclear plants opted out of the auction, but plan to remain operational over the 2025-26 Delivery Year, while all other nuclear plants currently active are scheduled to be decommissioned by the start of the Delivery Year.

Battery storage assets represented the majority of successful new build capacity with a total of 3,342MW of nameplate capacity, de-rated to 1,033MW awarded agreements. 901MW of this de-rated capacity came from 2-hour duration (651MW) and 1-hour duration (250MW) batteries. The nameplate capacity from these asset types were 1,638MW and 1,252MW, respectively. The remaining battery storage capacity was split between 1-hour, 1.5-hour, 2.5-hour, 4-hour and 0.5-hour duration assets.

Delivery

Final TNUoS tariffs for 2022-23

On 31 January, National Grid Electricity System Operator (ESO) issued the final transmission network use of system (TNUoS) charges to apply from 1 April 2022. The total TNUoS revenue to be collected has increased by £276mn from £3,318mn to £3,594mn between 2021-22 and 2022-23, although this is a £10mn decrease on the draft tariffs. The revenue to be recovered through demand tariffs for 2022-23 is £2,752mn or 76.6% of the total revenue recovered which is £35mn less than the draft tariffs.

Both average half hourly (HH) and non-half hourly (NHH) demand tariffs have reduced since the draft tariffs, with the main driver being the reduction in the total amount of revenue to be recovered through TNUoS and the change in revenue to be recovered through generation tariffs. The average HH gross tariff has decreased by £0.65/kW from the draft tariffs to £55.06/kW and the average NHH gross tariff has decreased by 0.17p/kWh to 6.81p/kWh. The ESO has calculated that the TNUoS charge will form £38.14 of consumer bills, a decrease of £0.95 from the draft tariffs.

Ofgem: suppliers to adopt robust risk management

On 4 February Ofgem issued a letter to energy suppliers setting out guidance on adopting robust risk management practices. Ofgem recognises that this consultation will increase regulatory uncertainty at a time when suppliers are having to make decisions that affect their costs for this price cap period and beyond. The regulator encourages suppliers to adopt robust risk management strategies to protect against market volatility, setting out the actions that it will take to recognise reasonable risk management.

This includes incentivising prudent risk management through its decision on the choice of mechanism to be used in allowing suppliers to recover backwardation costs. The regulator also notes that it would not use an in-period cap adjustment to enable suppliers to recover costs caused by risky behaviour or poor management strategies.

Ofgem introduces measures to address market volatility risks

On 16 February, Ofgem announced that it will be introducing two temporary measures to protect customers from the risks of market volatility, ahead of enduring reforms. From 14 April, suppliers will need to offer all tariffs to existing customers, and, if wholescale prices fall below a certain level, pay a Market Stabilisation Charge (MSC) to the losing supplier when taking on a new domestic customer.

This follows the conclusion of the regulator’s December 2021 consultation on potential short-term interventions to address the risks to consumers from market volatility, as part of the regulator’s package of measures for building energy market resilience. The proposed options included: requiring suppliers to make all tariffs available to new and existing customers; allowing suppliers to charge exit fees on Standard Variable Tariffs (SVTs); and requiring suppliers to pay an MSC when acquiring new customers. Having considered the responses, Ofgem has decided to proceed with two of the proposed temporary measures which will come into effect on 14 April 2022. It is intended that these will be in place for six months, until the end of September 2022 when enduring reforms are expected to be implemented. However, Ofgem notes it will have the ability to extend each measure through next winter if significant risks remain.

Usage

Climate-related financial disclosure requirements

On 21 February, DESNZ released guidance to help limited liability partnerships (LLPs) and in-scope companies understand how to meet new mandatory climate-related financial disclosure requirements under the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022 and Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022.

DESNZ states that the regulations were made on 17 January 2022 and apply to reporting for financial years beginning on or after 6 April 2022. It also included the scope criteria of:

• All UK companies that are currently required to produce a non-financial information statement, being UK companies that have more than 500 employees and have either transferable securities admitted to trading on a UK regulated market or are banking companies or insurance companies (Relevant Public Interest Entities (PIEs)).
• UK registered companies with securities admitted to AIM with more than 500 employees.
• UK registered companies not included in the categories above, which have more than 500 employees and a turnover of more than £500mn.
• Large Limited Liability Partnerships (LLPs), which are not traded or banking LLPs, and have more than 500 employees and a turnover of more than £500mn.
• Traded or banking LLPs which have more than 500 employees.

ESC: impacts of EV charging on electricity grid security

On 21 February, Energy Systems Catapult (ESC) published a report on Resilience Electric Vehicle (EV) Charging, setting out six ways EV chargers present a risk to grid security, including step, ramp, oscillations, degraded stability, demand control and restoration. ESC highlights a need to prepare now for increased demand in the 2030s from forecasted mass adoption of EVs and low carbon technologies. ESC states that by around 2040 demand for energy will at least double in three out of four Future Energy Scenarios (FES), and that peak demand is forecast to increase by 50% in all FES. It states that much of this demand will come from “smart” loads and that new types of smart load will introduce new system risks, noting six risks that it views EV chargers pose to grid security. These include too many chargers switching on or off at the same moment (step) and switching on or off within a few minutes (ramp), a group of chargers switching on and off (oscillations), degraded stability increasing risk of post-fault collapse, eroded defences (demand control), and that erratic behaviour after restart will hinder the restoration process.

ESC also states that common-mode behaviour decreases load diversity, noting that the 2021 FES envisages between 12 to 16mn EVs in service in 2035, and that – with typical 7kW domestic chargers – just 2% of these chargers switching on at the same time would generate a load step of between 1.7 and 2.6GW. It says smart charging control systems could cause such synchronised action by responding to Time-of-Use (ToU) tariffs, that randomisation helps soften the load, but that the volume of price-driven demand could still result in rapid multi-GW ramps. ESC states that EV charging and Vehicle-to-Grid (V2G) design is focused on customer needs, rather than grid requirements. Additionally, it says smart charging depends on an interconnected software ecosystem, creating the risk of conflicting controls and unforeseen behaviours under normal and abnormal conditions, as well as a high risk of cyber compromise.

Guidance published to help fleet operators switch to EVs

Connecting your Fleet: A Guide for Fleet Operators and Leading the charge: electric vehicle batteries and battery performance for fleet operators was published on 24 February.

Zenobē, SP Energy Networks, and Scottish and Southern Electricity Networks (SSEN) Distribution worked collaboratively – through Scotland’s Bus Decarbonisation Taskforce – to produce the guidance on how fleet operators can switch to electric by working with their network operator and making informed technology choices.

£40mn awarded to UK universities to investigate net zero solutions

On 15 February, UK Research and Innovation (UKRI) announced that four programmes led by the universities of Cambridge, Exeter, Glasgow and Oxford have been awarded £10mn each from the Natural Environment Research Council (NERC). The funding will bring together teams from a range of disciplines, including economics, environmental science, engineering, social science, and natural sciences. The four studies will tackle key challenges in the net zero transition, including biodiversity loss, achieving net zero cities, helping rural communities adapt to climate change, and providing data, analysis, and evidence for policy decisions.

SMMT: demand for used BEVs increased by 119.2% in 2021

The Society for Motor Manufacturers and Traders (SMMT) published data on UK used car transactions for 2021 on 8 February, noting record demand for used battery electric vehicles (BEVs). SMMT states that annual demand for BEV and plug-in hybrid electric vehicles (PHEVs) grew by 119.2% and 75.6% to 40,228 and 56,861 respectively. Additionally, hybrid electric vehicle (HEV) transactions increased to 137,639, growing by 50.3%. SMMT notes that these vehicles combined represented 3.1% of the market.

RPC gives opinion on DfT’s EV (Smart Charge Points) Regulations 2021

The Regulatory Policy Committee (RPC) published its opinion on the Department for Transport’s (DfT’s) Electric Vehicles (Smart Charge Points) Regulations 2021 which intend to make electric vehicle (EV) public chargepoints easier to use by addressing problem areas identified through research and engagement, on 31 January. The RPC states that, as originally submitted the Impact Assessment (IA) was not fit for purpose because the small and micro business assessment (SaMBA) needed strengthening, with the revised IA including improvements to the SaMBA and overall analysis. However, the RPC states that there remain some significant areas for further improvement and suggested the following:

• Minimum payment methods: a minimum payment method (i.e., a payment method that does not require a smartphone, such as contactless) on new chargepoints above 7kW and retrofit on 50kW+ chargepoints. (Cost estimated at £285mn over ten years in present value terms).
• Payment roaming: to enable consumers to pay to charge their EV through one app or membership card. The preferred option is to take non-regulatory action, then mandate payment roaming from 2024 if no progress is made. (£235mn).
• Price transparency: all chargepoints to use pence per kilowatt hour (p/kWh) as the standard metric for a unit of electricity. (£308mn).
• Reliability: minimum 99 per cent reliability on 50kW+ chargepoints and provision of a 24/7 helpline on all public chargepoints. The reliability requirement will be extended to chargepoints below 50kW from 2024 if no progress is made. (£285mn).
• Open data: chargepoint data, such as location, availability, etc., to be shared openly and a data standard mandated. (£12mn).