Week in Energy
Monday 21/05 – Prime Minister Theresa May pledges that new technologies and modern construction practices will be harnessed to at least halve the energy usage of new buildings by 2030. The two task forces established by Ofgem under the Charging Futures Forum to consider network access arrangements and the forward-looking elements of network costs issue their final report.
Tuesday 22/05 – The government consults on its draft Clean Air Strategy, confirming it plans to maintain the existing EU model of integrated industrial pollution control post-Brexit.
Wednesday 23/05 – Energy UK shares its views on potential improvements to the Energy Market Reform framework, including introducing a revenue stabilisation Contract for Difference mechanism. Energy and Clean Growth Minister Claire Perry commits £21.5mn of UK funding towards a global carbon capture and storage challenge.
Thursday 24/05 – Scottish Climate Change Secretary Roseanna Cunningham pledges that Scotland will be one of the first countries in the world to achieve a 100% reduction in carbon emissions. It is announced that Arriva will be powered by 100% renewable electricity after entering a three-year electricity supply contract with SSE Business Energy.
Friday 25/05 - SSE commits to building a £350mn 840MW power station at Keadby. The Business, Energy and Industrial Strategy Committee launches an inquiry to examine draft guidance on the determination of nuclear waste disposal planning applications.
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Policy 1 | Energy UK proposes changes to Electricity Market Reform framework
On Wednesday, 23 May trade association Energy UK released recommendations on the forthcoming review of the Electricity Market Reform package introduced through the Energy Act 2013.
The Act is due for review in 2019 and the trade association has put forward its recommendations on how the UK can to respond to the energy trilemma, through its continued support of the programme’s two major elements – the Contracts for Difference (CfD) and Capacity Market auctions. The proposed changes would aim to ensure these programmes remain fit for purpose in future scenarios by providing a level playing field for all participants and technologies, while enabling investment at lowest cost.
The report called for a level playing field for low-carbon technologies in Contracts for Difference (CfD) auctions through the introduction of revenue stabilisation. Currently, low-carbon technologies, such as onshore wind, have experience greater cost reductions and become exposed to greater fluctuations in wholesale prices. This is a result of low carbon technologies requiring a strike price closer to current wholesale price levels, compared to conventional price-setting gas generation.
In addition, Energy UK called for an advance notice of future auctions at regular intervals to maximise competition and proposed was an extension of Milestone Delivery Dates (MDD) for CfD projects from the current 12 months to 18 or 24 months. An extension to the MDD period would allow developers time to run additional tender rounds with suppliers, assess new suppliers and negotiate financing. This would result in lower financing costs to other technologies and promoting innovation to benefit the UK supply chain and reduce the overall costs to consumers. The proposal recognised that the complexity of the Capacity Market rules and the inconsistencies in their application had been problematic for industry, acting as a barrier to entry for new market participants and a burden on existing developers. Therefore, the report proposed the Capacity Market rules and governance, including penalties and fees should be revised to ensure they remain fit for purpose. The report also highlighted the uneven playing field is represented in termination fees within the Capacity Market.
Furthermore, Energy UK suggested the Capacity Market design should be technology neutral, allowing for innovation and facilitating decarbonisation. Enabling unsupported renewables access to the Capacity Market would assist low carbon technologies to stack different revenue streams. To allow this National Grid should aim to consult with industry to ensure that renewable plant is de-rated appropriately and can participate in Capacity Market auctions as soon as possible.
Lawrence Slade, Chief Executive of Energy UK, said EMR: “shows that with the right framework and incentives, low carbon energy can be delivered at an ever-reducing cost to customers […] However, it is essential that we not only keep up the pace of decarbonisation in future but go further and faster.”
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Policy 2 | EU climate policy is “holding back” industrial decarbonisation: Sandbag
Climate change think tank Sandbag has published a report examining the existing barriers to industrial decarbonisation across the EU. The paper, which is based on evidence provided to Sandbag from stakeholders about their experiences of EU industrial emissions policy, states that “in practice, cutting emissions has proven to be particularly challenging for a host of reasons”.
The EU Emissions Trading System (ETS) is currently the largest market of its kind, covering 1.8Gt of CO2 emissions from more than 14,000 power, industrial and aviation permit holders. And while Sandbag notes that European power sector emissions have fallen significantly, progress in cutting emissions from the industrial sector has been “slower”.
According to the report, a lack of alignment between the ETS sectoral emissions trajectories and the overall emissions targets set by the EU under the Paris Agreement sends “mixed signals” to the market. It explained that, while a less ambitious target set in the short term might seem less onerous to industry, the implication is that “most of the work to cut emissions will be delayed until after 2030”. Stakeholders felt that this was not conducive to the ongoing process of attracting investment in European industrial production.
Over a third of stakeholder respondents said that the ETS encourages a “cautious approach” to cutting emissions presently – one that is largely geared towards distributed incremental improvements rather than supporting breakthrough CO2 abatement technologies.
Sandbag reports that EU climate policy has hindered the development and commercialisation of processes and technologies that can reduce emissions from carbon-intensive industries. The report says that producers of low-carbon substitutes for commonly used materials have been excluded from the ETS because the manufacturing processes they use differ from the traditional production methods that are defined by ETS benchmarks.
On technology, it is explained that CO2 reduction solutions that incur low or negative costs are not being used to their full potential due to their being treated under different EU benchmarks. This approach, in some cases, has caused “competitive distortions that favour more polluting technologies over innovative products and processes”. Respondents also added that existing ETS benchmarks do not fully account for product lifecycle emissions or cross-border material flows. Possible solutions for this include green public procurement, crediting useful manufacturing by-products under the ETS, including upstream emissions in benchmarks and carbon pricing, consumption taxes and trade policy.
The report concluded that “numerous” opportunities exist to decarbonise the EU’s industrial sector, but that in some cases these are not being pursued. Possible solutions to overcome the barriers raised include more active involvement of Member State governments to facilitate the deployment of low carbon technologies, improved coordination of EU and National funds for sizeable decarbonisation projects and aligning EU Paris Agreement ambitions and industrial emissions targets to provide greater certainty.
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Policy 3 | PM pledges that UK to halve the energy usage of new buildings
Prime Minister Theresa May has announced that the UK will use new technologies and modern construction practices to “at least halve the energy usage of new buildings by 2030”. Delivering a speech on the government’s industrial strategy on Monday 21 May, the Prime Minister pointed to four “grand challenges” that could yield “enormous potential for the UK economy”.
Discussing the “clean growth grand challenge”, May said that heating and powering buildings accounts for 40% of our total energy usage. Embracing smart technologies and working to make our buildings more energy efficient, she said, would reduce overall demand for energy, enable the UK to meet its carbon reduction targets and slash household energy bills. Halving the energy use of both commercial and residential buildings could reduce energy bills “by as much as 50%,” May added.
The Prime Minister also outlined plans to halve the costs of reaching the same standard in existing buildings. Meeting this challenge, May said, will be a catalyst for new technologies and more productive methods that can be exported to a “large and growing global market for clean technologies”. It will also serve to drive higher standards and innovations in the construction sector, help the UK meet homebuilding targets and provide jobs and new opportunities to “millions of workers” across the country.
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Policy 4 | Crown Estate Scotland to open seabed leases to boost offshore wind
The Crown Estate Scotland has launched proposals to lease areas of seabed with the aim of encouraging a new generation of offshore wind projects in Scotland’s waters. The report, New Offshore Wind Leasing for Scotland outlined the draft process and asks for interested parties’ feedback to shape the final project.
The report stated that “much has been achieved”, with 211MW in operation (Robin Rigg and Hywind Scotland, the world’s first floating offshore wind farm suitable for deep water sites), 680MW in construction and 1,400MW due to begin construction over the next years. However, it adds that “we need to do more”.
Consequently, the newly proposed offshore wind leasing process will look to support supply chain development and innovation in the sector, while also encouraging employment and stimulating economic growth. This will be achieved by providing clarity to attract investment, being transparent, open and fair, stimulating innovation and a competitive market, and facilitating early engagement with various stakeholders.
Roseanna Cunningham, MSP for Environment, Climate Change and Land Reform said that the potential benefits of offshore renewable energy are “enormous” for Scotland. “It is important that Crown Estate Scotland makes available the right seabed locations at the right time, in order to contribute to delivery of our energy strategy, attract inward investment, develop new technology and continue to drive down the associated costs of offshore energy,” she said.
The report recommended that work “needs to start now to ensure new projects are being built from late-2020s onwards”.
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Industry 1 | Consultants warn that heat decarbonisation could cost up to £450bn
A report for the National Infrastructure Commission by Element Energy Limited and E4Tech was issued on Thursday, 17 May, providing an analysis of the cost of decarbonising the UK’s heat infrastructure.
The analysis suggests that space heating and hot water provision currently accounts for approximately 100 MtCO2/ year, a contribution that is likely to be required to fall below 10 MtCO2/year by 2050 to be compatible with the UK’s economy-wide 2050 carbon emissions target.
A series of scenarios were developed and explored in the analysis, with different mixes of heat pumps, biomass, hydrogen and electric heating (see chart right).
All heat decarbonisation options studied are “significantly” more costly than the status quo under all scenarios. The cumulative additional cost to 2050 versus Status Quo (discounted at 3.5%) is in the range £120-300bn under the report’s “Central cost” assumptions. Under the “Best case” assumptions, the corresponding range is £100-200bn and in the “Worst case” assumptions £150-450bn.
The study said that these figures for increased costs also have to be placed in the context of the wider growth of the economy, which it expects to triple in size by the middle of this century, based on anticipated average GDP growth of 2.3% per annum between now and then.
A substantial role was identified for energy efficiency. Under the maximum deployment of energy efficiency measures, in the “High cost EE” scenario (corresponding to 204TWh of heat demand savings across the domestic and non-domestic sectors) carbon emissions from heat fall to 76 MtCO2/ year by 2050.
The study finds that re-purposing the gas grid to deliver low-carbon hydrogen, if delivered safely and at scale, is the lowest cost option for decarbonising the heat. However, it says it is “unproven” whether hydrogen can be safely delivered to the millions of buildings that would need to be retrofitted.
Responding to the report’s findings, David Smith, Chief Executive of Energy Networks Association, said: “Britain’s energy network operators are committed to creating an efficient, smarter, cleaner energy system fit for our homes and businesses. The NIC figures suggest that a Whole-System Approach to decarbonisation, which involves planning how to use our energy network infrastructure in a more integrated way by using low carbon gasses like hydrogen, could save £55 billion to 2050 compared to an electricity only solution.”
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Industry 2 | Arriva to power UK bus and rail sites with 100% renewable electricity
It was announced on Thursday, 24 May that Arriva will be powered by 100% renewable electricity after entering a three-year electricity supply contract with SSE Business Energy in the UK.
The new contract will allow Arriva to report zero carbon emission electricity, preventing an estimated 27,000 tonnes of CO2/ year. SSE Business Energy will supply most sites operated by the Group’s UK businesses – including UK Bus, Arriva Rail North and Chiltern Railways – with electricity backed by Renewable Electricity Guarantee of Origins (REGOs) and independently verified by Carbon Clear, a CDP Accredited Provider.
Andrew Clark, Head of Environmental Sustainability, Arriva Group, said: “The signing of this contract marks an exciting step forward in our journey towards ‘Destination Green’ as we strive to reduce our environmental impacts […] As well as the actions we’re taking to reduce the environmental impact of our vehicle fleets, the new contract helps us achieve our goals relating to our wider business impacts. It’s a clear example of our commitment to decarbonising the transport sector and helping the UK meet its sustainability targets”.
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Industry 3 | UK renewables provide good investment returns, academics find
UK companies that own renewable energy projects – known as UK Yieldcos – are generating greater risk-adjusted returns than those in the broader equity market, according to research by Imperial College London.
The study published Friday, 18 May, found that over a three year period, UK Yieldcos delivered an annual return of 8.09%, which is comparable to the FTSE All-Share Index (8.23%), but with much lower volatility. The study found, returns from UK projects also outperformed those in the US and Canada.
In addition to financial returns, the report highlighted that “Yieldcos also help mitigate the impact of climate change by meeting the demand of investors who want to proactively participate in the transition from fossil fuels to renewable energy”.
Overall, the study aimed to address the lack of a robust historical record of risk and financial returns, one of the key challenges facing increasing investment to clean energy projects, such as wind or solar technologies.
Director of the Centre for Climate Finance and Investment at Imperial College Business School, Dr. Charles Donovan said: “The findings have displayed a robust evidence about the risk-return profile of clean energy investing, with Yieldcos in the UK performing better than conventional energy.”
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