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BEIS Energy White Paper “Powering of our Net Zero Future”

18/12/2020

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Below is a brief non-comprehensive summary of the 156 pages White Paper put together by Ian Shinwell. Please contact Ian if you require more information at ian.shinwell@energy-potential.com.

The BEIS Energy White paper consists of a wide range of measures backing up Boris Johnson’s “10-point plan” for achieving net zero carbon by 2050.  The UK accounts for <1% of global emissions and has reduced emissions much faster than other G20 countries since 2000 and aims to remain at the forefront of the net zero target within an affordable green recovery from Covid 19.  There is a general target to deliver mainly decarbonised power by the 2030s.

A number of specific measures and aspirations are included and outlined below.
  1. UK ETS cap and trade scheme to be developed from January 2021[1]  A cap on businesses’ greenhouse gas emissions will diminish over time and initially apply to only energy intensive industries, electricity generation and aviation.  The target from this and other measures is to cut emissions from industry, transport and buildings by 230 tonnes p.a. over the next 10 years
  2. Support for the fuel poor worth at least £6.7 billion over the next six years, achieved through ECO[2] (extended to 2026), WHD[3] (expanded up to 2026) together worth £4.7b and £400 bill credits grants for those on Universal Credit and the Green Homes Grant for low-income households
  3. Installation of electric heat pumps[4] to grow from 30,000 to 600,000 p.a. by 2038.
  4. Pledges to invest £1b in 4 low carbon CCUS[5] regional clusters by 2030 and one net-zero by 2040 aiming to capture 10MtCO2 p.a. by 2030.  Several regions are competing for this.  BP, Eni, Equinor, Shell and Total have signed up to spearhead the development of the Net-Zero Teesside CCUS.  Hydrogen expected to feature heavily in this initiative. Jobs and export opportunities will result.   The aim is for 2 clusters by the mid-2020s and a further 2 by 2030)
  5. Drax, Equinor and National Grid planning world's first zero-carbon industrial hub in Humber region by 2040.   2 innovation funds with £140m available created October.
  6. All measures intended to create 220,000 jobs in the next decade across infrastructure, hydrogen, and carbon capture.
  7. Government commitments reiterated to establish 40GW of offshore wind by 2030 (a fourfold increase on current level) in combination with other non-intermittent generation sources.
  8. Will develop a Hydrogen strategy in 2021 building on the £240m Net -Zero Hydrogen Fund with a target of 5GW of low-carbon hydrogen production capacity by 2030. 
  9. All new heating systems installed by the mid-2030s to be low carbon.
  10. Government to work with North Sea O&G producers to make UK continental shelf a net zero basin by 2050.  Includes protection for staff and communities and will create jobs
  11. Government is exploring funding options for achieving FID for at least one nuclear project by end of this Parliament.  NB the government is discussing Sizewell C nuclear project with EDF
  12. The government has established the Jetzero Council to promote new technologies to enable net zero emissions for transport.  Competitions for £20m funding for designing clean maritime technology and £14m for sustainable aviation will be established.  The shift to zero emission vehicles is expected to provide 40k jobs
  13. Building world-leading digital infrastructure for our energy system based on strategy to be increasingly less dependent on fossil fuels
  14. Create a fair deal for consumers/fuel poor balancing investment against bill impacts.  Consult by March 2021 on measures including promoting competition (reform/regulation of switch mechanisms and third parties i.e., brokers and comparison websites).  Consulting on ending gas grid connections to new homes from 2025
  15. Promotion of smart tariffs designed to support low carbon technology e.g. Electric Vehicles and heat pumps. The government will publish a smart systems plan in 2021.   This is a response to the expected huge increase in end user demand for electricity as it replaces fossil fuels
  16. Establishing the Future Homes Standard to ensure all newbuild homes are zero carbon ready.  Consulting on regulatory measures to improve the energy performance of homes and mortgage lender support in making these improvements
  17. Requiring that all rented non-domestic buildings will be EPC[6] Band B by 2030 and as many domestic premises as possible to achieve EPC Band C by 2035


[1] UK leaves EU and EUETS

[2] Energy Company Obligation

[3] Warmer Homes Discount

[4] These extract heat from air, ground or water and deliver it to central heating systems & replace fossil fuel-based heating

[5] Carbon Capture Usage and Storage

[6] Energy Performance Certificate
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Energy Potential assessment of Ofgem review of supplier licensing

23/11/2018

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​A new Ofgem review looking at supplier licensing will focus on the financial management of supply companies. It says that “[sic] we are reviewing our approach to supplier licensing, to ensure that appropriate protections are in place against poor customer service and financial instability. This consultation sets out our proposals to strengthen the criteria we use to assess supply licence applications, and amend the process for applying for a licence. We intend to increase ongoing scrutiny and oversight of those already operating in the energy retail markets, and are seeking views on options for achieving this.”

Having worked for many years within the investment banking sector, this sounds like Ofgem have been talking to their counterparts in the Financial Conduct Authority (FCA). In the financial sector ‘capital adequacy’ (also called ‘regulatory capital’) regulations require an institution holds sufficient assets to cover their liabilities. Put simply, you must demonstrate you are able to service the risks you manage, with current regulation requiring capital reserves against market, credit and operational risks.

While a simple and sound principle, the overhead to compliance is considerable. The rules are complicated, and satisfying can require a basket of actions impacting the highest and lowest levels of an organisation. At the highest level, ideas of ownership and oversight must be embedded into the governance framework. Business strategies must be provided, and can be examined in great detail by the Regulator. The practicalities of measuring liabilities (risk) may drive the creation of new processes which must be ’fit for purpose’, all thoroughly documented. New risk measurement methodologies may be required, which have to be designed, tested and implemented. At the lowest level, calculations can involve very large data sets, owned by disparate parts of the institution. Demonstrating data is ’clean’ and fit for use can be an enormous exercise.

It is unlikely that Ofgem would go from a standing start to banking type overhead, but even relatively ‘lightweight’ rules will need  be taken very seriously. For new entrants Initial Business strategies will get increased scrutiny, and may need to evidence an increased standard of financial planning. Once operating, standard market risk and credit risk assessments and reporting will be needed perhaps adopting established, standard methodologies from the banking sector.  Managing cash is core to solvency, and the interaction between risk, future cashflow expectations and working capital may be a central focus. 

But it’s not all downside. Regulatory Requirements should drive improved governance, business planning and risk management. Robust, scalable business strategies should be preferred. Transparent, timely risk measurement and communication supports active risk management, which will in turn support ongoing financial stability.  Energy Potential is supportive of these changes. As experts in this area we can help suppliers ensure they have appropriate risk controls in place. If you would like to discuss how Energy Potential can help your business please contact Gary Huish at gary@energy-potential.com
​
https://www.ofgem.gov.uk/publications-and-updates/supplier-licensing-review
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Generation Dominated Areas

30/7/2018

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Synopsis

Ofgem published their consultation on future network charging arrangements on 23 July 2018 (www.ofgem.gov.uk/publications-and-updates/getting-more-out-our-electricity-networks-through-reforming-access-and-forward-looking-charging-arrangements). Within this consultation, Ofgem sets out its intent to consider whether Low and High Voltage generation within Generation Dominated Areas  (GDA) should incur a charge rather than always receive a credit, as is currently the case. 

To assist embedded generators assess whether they currently connect to a GDA, Energy Potential has compiled an impact analysis. This analysis is based upon data compiled and published by DNOs in 2015 when the issue of GDAs was last considered. Although this data is a number of years out of date, it is probably the best data currently available to provide an indication of whether a primary substation is considered generation dominated and would be captured if Ofgem decide to charge generators in these areas.

The spreadsheet below provides the a list of the primary substations  that are considered to be generation dominated. In some cases the MPANs of HV connected generation is also provided. The definition of a Generation Dominated area used is as follows:
  1. Test 1 seeks to identify if the maximum generation connected to the substation would be greater than the minimum capacity of the substation once the minimum demand is taken into account. This is effectively the summer minimum demand test; and
  2. Test 2 then seeks to identify if the maximum generation connected to the substation would be greater than the maximum demand at the substation. This effectively tests to see if the substation would need reinforcing for demand purposes before needing reinforcing for generation purposes
The data set also sets out the timescale when the primary substation is expected to become generation dominated, by applying the two tests above at 2.5, 5, 7.5 and 10 years. Whether this definition of GDA will be adopted by Ofgem remains to be seen. Also, the actual mechanism for applying charges is unknown. The proposal from DNOs in 2015 (which was rejected by Ofgem) was that generators in GDAs should have their credits reduced based on the time to the network becoming generation dominated with those primaries closest to reinforcement having their credits removed altogether.
I hope this is useful and please contact me directly if you would like any more information on this area: andy.pace@energy-potential.com 

list_of_gda_primaries.xlsx
File Size: 22 kb
File Type: xlsx
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Residual DUoS charges for Storage at Low and High Voltage

25/4/2018

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Synopsis
Northern Powergrid has put forward a draft change proposal which will remove the residual charge element of DUoS for the demand side of storage sites connected at low and high voltage. This short paper shows the impact for a 500kW and 1MW storage site by DNO region.

The full paper can be downloaded here:
Impact of DUoS residual on storage
File Size: 202 kb
File Type: pdf
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Improving the cost reflectivity of network use of system charges

13/12/2017

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Synopsis
Energy Potential has put together a thought paper on how the derivation of Distribution Use of System (DUoS) charge could be improved. This paper has been prepared as a submission to the Ofgem led taskforce currently looking at forward looking charges.  We highlight a key difference between the methodologies used to set network charges across different voltage levels, and suggest a new probability driven approach that has clear benefits to network users.

The asset cost model used within the Common Distribution Charging Methodology (CDCM) determines the cost of building new network infrastructure, and is the key building block of the methodology. However, the DNO may or may not actually build the new network infrastructure. In the case where the network infrastructure is never built, no cost is incurred, and yet the CDCM model has allocated the majority of this ‘hypothetical’ cost for recovery by network users via unit rates which are avoidable by end users. This is inconsistent with the network charging methodologies used at higher voltage levels where asset costs are recovered weighted by the likelihood that the cost is incurred. Energy Potential believes that incorporating a similar probabilistic assessment around the 500MW model would improve the CDCM with more cost reflective prices that reflect the likelihood that each DNO will incur future capital expenditure.

This new approach could be used to determine the proportion of costs recovered from unit based charges. Unit rates would be higher where there is a greater likelihood of real reinforcement occurring, both across DNOs and by voltage level. Conversely, when reinforcement is deemed unlikely, the benefit to the network company of users changing their consumption pattern is much reduced. The approach would also result in more cost reflective credits to generators which would be higher at voltage levels and/or in DNO areas where reinforcement is more likely to be incurred. Furthermore, the methodology would aid the transition from DNOs to DSOs as it will require Distributors to understand their network reinforcement requirements on a more granular basis. 

The full paper can be downloaded here:
Potential amendments to CDCM
File Size: 415 kb
File Type: pdf
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