Informer Issue 499 - 09/02/2021

Hundreds of millions of pounds could be invested in network upgrades over the next two years to kick start the green recovery from the pandemic and accelerate the push to net zero.

The Energy Networks Association (ENA) and Ofgem said the ‘Green Recovery’ project aims to get investment quickly into the ground ahead of the start of the new price control in 2023.

The ENA has now launched a six-week call for local authorities, developers and other parties to make the case as to why extra capacity in their area should be selected for investment.

It said it was particularly interested in locations where network investment can be made to support shovel-ready developments that underpin the transition to a net-zero economy.

With tens of millions of pounds available for investment in each distribution network licence area, there is up to £300m available across Great Britain.

Ofgem said the projects would be funded under the current price control and it would grant extra funds where needed, subject to a cap.

“However, we will only green-light projects that companies can demonstrate strike the best possible deal for consumers, both on cost and on delivering net zero carbon emissions,” it said.

David Smith, the ENA’s Chief Executive, said: "Our energy network operators have already helped turn Britain into a superpower of renewable energy. With this backing from Ofgem and the Government, we can ramp-up the network investment to support not only renewables, but battery storage, electric vehicles, heat-pumps and all of the other technologies we will need to achieve our net zero future."

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Six new offshore wind projects off England and Wales are to move forward in what is described as a major vote of confidence in the UK’s green economy and net zero ambitions.

Oil and gas giants BP and Total were among the successful bidders in The Crown Estate’s Round 4 leasing process, a further sign of the major shift which is seeing fossil fuel firms diversity into renewables.

However, concerns have been raised that the high prices paid for the new seabed rights could drive up energy costs for consumers.

The six potential projects together represent just under 8 GW of potential new capacity with the potential to power seven million homes and will now progress to environmental assessment.

The Crown Estate said that the projects emerging from Round 4 could deliver a 21% increase in the nation’s offshore wind pipeline, a major contribution to supporting the UK Government’s target of delivering 40GW by 2030, and beyond.

The successful bidders have committed an initial investment of £879m in option fee deposits.

Round 4 was the first time a bidding process to set ‘option fees’ has been used in the leasing process. Previously the Crown Estate had set fixed annual option fees.

However, industry body RenewableUK said it was concerned over the level of fees being paid by developers. Deputy Chief Executive Melanie Onn said: “The result of this leasing round shows that while demand for new offshore wind projects has never been higher, too few sites were made available to meet this demand.

“Any auction run on that basis will inevitably lead to high fees like these, and our concern is that this could ultimately mean higher costs for developers and consumers.”

WindEurope Chief Executive Giles Dickson also criticised the mechanism.

“The last time the UK allocated seabed rights 10 years ago, it was for four times more capacity than what they’re auctioning now. Yet now they’re trying to build far more offshore wind. And there are more companies who want to build it. Plus it’s unclear when the next auction will take place. So there’s a price frenzy in the bidding – that’ll just get passed on to energy bills,” he said.

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The increase in wholesale energy prices seen as demand recovered from last year’s first lockdown is being blamed for the domestic price cap returning to pre-pandemic levels.

After wholesale prices fell sharply last year, the price cap fell by £84 in October for the current winter period.    However, Ofgem said demand for energy has since recovered which has pushed wholesale prices back up to more normal levels.

For the six months from 1 April the price cap will increase by £96 to £1,138 for 11 million default tariff customers, and by £87 to £1,156 for 4 million pre-payment meter customers.

The new cap from 1 April includes an additional sum for suppliers to start to recover some of their additional costs related to Covid-19, such as higher levels of bad debt from more customers being unable to pay their energy bills.

Jonathan Brearley, Chief Executive of the regulator, said:  "Energy bill increases are never welcome, especially as many households are struggling with the impact of the pandemic. We have carefully scrutinised these changes to ensure that customers only pay a fair price for their energy."

"As the UK still faces challenges around Covid-19, during this exceptional time I expect suppliers to set their prices competitively, treat all customers fairly and ensure that any household in financial distress is given access to the support they need."

However, Peter Earl, Head of Energy at price comparison website Comparethemarket.com, described the increase as an “extraordinary move in the current environment”.

"It calls into question the whole point of a price cap which was designed to protect the most vulnerable households,” he said.

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Changes which will lower the likelihood of mutualisation of the Renewables Obligation (RO) scheme when suppliers fail to pay what they owe are set to be introduced from next month.

Following a consultation, the Government said the new arrangement would “restore the balance of risk between generators and suppliers that was established when mutualisation was first introduced”.

The mechanism, which sees suppliers make up the shortfall of those who fail to pay, has been triggered in each of the last three years. BEIS said that whilst the level of payment default has been relatively small to date in comparison to the overall scheme, it nevertheless places a financial strain on suppliers required to make the payments.

Under the proposed changes, the RO mutualisation threshold will be linked to the annual cost of the scheme.

The mutualisation threshold will rise from £15.4 million to about £62m for the 2021 to 2022 obligation year, but the figure will rise or fall in future years as the cost of the scheme changes.

The Government said it recognises that the new arrangement will increase the sum that might remain unrecovered in the event of supplier payment default, equivalent to an increase from about 0.25% to 1% of the £55 “notional value” of a ROC.

It said it notes that this will have a small impact on generator returns but it believes the benefits for suppliers and their customers outweigh the costs.

BEIS also sought views through a call for evidence on a revised approach to the way the mutualisation amount is calculated once it has been triggered. It said it will respond to that call for evidence in due course.

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More than 16.1GW of battery storage capacity is operating, under construction or being planned in the UK across 729 projects, according to new figures.

RenewableUK’s latest data show the capacity figure has grown by around 60% over the past year and highlights the market how rapidly the market has developed since 2012 when the pipeline stood at just 2MW.

The new report reveals that 1.1GW of battery storage capacity is currently operational compared to 0.7GW identified in December 2019. A further 0.6GW is under construction, 8.3GW of capacity is consented and 1.6GW is in the planning system. 4.5GW are identified as being at an early stage of development for future submission into the planning system.

An additional 6GW of energy storage from liquefied and compressed air, pumped hydro, flywheels and gravity-based technology is operating, under construction or being planned, bringing the total UK energy storage portfolio capacity to more than 22GW.

RenewableUK’s Director of Future Electricity Systems Barnaby Wharton said: “This is our deepest dive ever into the state of play in the UK’s innovative energy storage sector, revealing more comprehensive statistics than anyone has published before."

“However, many of our projects need access to capital at a lower cost and more stable revenues. We’re hoping that the forthcoming update to the Smart System and Flexibility Plan will set out how the Government envisages making revenue streams for storage projects clearer. We also need a stable network charging regime and a long-term vision for the sector to encourage further investment by cutting-edge companies.”

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