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Climate change and target net zero are areas the Conservative Party and the Prime Minister would love people to be concentrating on right now. Alas government sleaze, including the alleged dubious funding for the refurbishment of the Downing Street flat, is taking the press’s attention.
Well let’s do our bit for Boris by summarising the latest on climate change. The BEIS press release on the 6th and latest Carbon Budget of 20th April and the PM’s speech to the Leaders’ Summit on Climate hosted by President Joe Biden on 22 April do, to be fair, showcase the efforts that the UK continues to make in tackling climate change. See details of each: https://www.gov.uk/government/news/uk-enshrines-new-target-in-law-to-slash-emissions-by-78-by-2035 https://www.gov.uk/government/speeches/pm-statement-at-the-leaders-summit-on-climate-22-april-2021 The press release headlines were:
The UK is leading the world in tackling climate change and today’s announcement signposts that the low carbon future is in sight. The targets set in the sixth Carbon Budget will see the UK go further and faster than any other major economy to achieve a completely carbon neutral future. At the same time, the government believes UK will be home to pioneering businesses, new technologies and green innovation as progress is made to net zero emissions. It hopes this will lead to decades of economic growth and the creation of many jobs in the energy sector. This 2035 target shows the world that the UK is serious about protecting “the health of the planet”. It is already on track to outperform the third Carbon Budget which ends in 2022, as it did for the previous 2 budgets. This is due to significant cuts in greenhouse gases with the UK bringing emissions down 44% overall between 1990 and 2019, and two-thirds in the power sector. This was achieved largely by the growth in renewables (more than quadrupled since 2010) and low carbon electricity overall now provides more than 50% of total generation. Prior to enshrining its net zero commitment in law, the UK had a target of reducing emissions by 80% by 2050 – through the sixth Carbon Budget announcement, the government is aiming to achieve almost 80% by 2035. The government aims to establish a detailed, cross-departmental net zero strategy to drive private investment in low carbon goods and services, supply chains, jobs and skills. The UK was the first country to incorporate long-term carbon budgets into legislation as part of the 2008 Climate Change Act. Since then, 5 carbon budgets have been put into law putting the UK on track to meet its ambitious goal to achieve net zero emissions by 2050. The new target will enter law by the end of June 2021, with legislation setting out the UK government’s commitments already laid before Parliament. ------------------------------------------------------------------------------------------------------------------------------------- In his speech to the US Leaders’ Summit on Climate the PM talked up the strides the UK had made compared to other major economies to date. He urged countries to raise their ambitions on tackling climate change and join the UK in setting stretching targets. He stresses that all should include shipping and aviation. Whilst reiterating all the points made in the press release the PM made a grand statement the UK wants to see world leaders match the UK ambition in the run up to the crucial climate summit COP26[3] in order to protect the planet. Powerful words but are you still thinking about the refurbishment of the Downing Street flat? Let’s see what happens. [1] The measure of climate change by 2035 to be based on greenhouse gases emitted over 5 years to 2037. [2] Limiting global warming to well below 2°C. [3] COP26 will take place in Glasgow in November 2021 with Cabinet member Alok Sharma as President
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Below is summary of the energy implications of the Governments Spring 2021 Budget. If more in depth analysis is required please contact Ian.Shinwell@energy-potential.com.
Climate Change was not the headline act of Wednesday’s Spring Budget for obvious reasons. However, interested parties were no doubt looking for confirmation that the government is not rolling back on some of the promises made in the Energy White Paper “Powering Our Net Zero Future” published on 14 December and the Prime Minister’s 10-point plan published in November. The Chancellor did state that his “budget lays the foundations for a strong recovery and a greener economy”. Indeed, green finance has been added to the remit of the Bank of England. The White Paper described how the UK intends to clean up its energy system in order to reach net zero emissions by 2050. Since the White Paper the UK experienced a huge resurgence in new Covid 19 infections and deaths which prompted the enforcement of a severe lockdown of the British economy, the closure of schools, severe limitations on social interaction and the shut-down of non-essential shops and travel and virtually all hospitality. As a result of the lockdown the Chancellors budget on 3 March was, perhaps understandably, designed to protect companies and jobs. He extended furlough and support for the self-employed until September 2021. The cost of this was added to the extraordinary public health spending on Covid 19 testing and vaccines together with the reduced tax revenues from the shrinking economy and the support given to businesses particularly since the March 2020 lockdown. As a result of this enormous cost the highest tax rises for 30 years were announced. The most significant of these are freezing of tax-free allowances and a 6% increase in corporation tax. This background was not the most promising for those wishing for more climate change action. To be fair the Chancellor did not overtly roll back on the White Paper. Let’s look at some of the measures announced and see if the government’s is still committed to net zero. As part of the Bank of England’s aforementioned remit it is expected to facilitate an increased supply of green finance and encouragement for infrastructure projects via:
Finally, Carbon price support will be frozen at £18/tonne of CO2. This UK Government policy was implemented to support the EU Emissions Trading System (EU ETS) in 2013 to underpin the price of carbon at a level that drives low carbon investment, which the EU ETS has not achieved. It remains to be seen if it will continue to be required when we are reliant on the UKETS. 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 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 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 SynopsisOfgem 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:
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 
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: 
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:
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