Posted on: 16/03/2021
This week's top headlines include: The regulator is pressing ahead with plans to reduce returns for distribution network operators in a move it said would cut charges by £2bn; The latest T-4 Capacity Market auction clears at £18/kW/year, around 12% higher than previously; The Government announces a £95m investment in offshore wind port facilities.
Gas projects accounted for almost two-thirds of capacity under contracts awarded under the latest T-4 Capacity Market auction. The auction cleared at £18.00/kW/year, up from £15.97/kW/year in last year’s round, with 40.8GW of de-rated capacity procured, including 1.7GW of new build generation. UK gas projects were awarded just under 45% of agreements by number, according to the provisional results. Demand side response (DSR), took 27.7% of contracts with successful bidders including SmartestEnergy, followed by storage (6.52%) and hydro (6.11%). A total of 30.5GW of existing generation won agreements, although 1.5GW of nuclear and 2.1GW of existing Combined Cycle Gas Turbine (CCGT) capacity did not win agreements. In total, 491 Capacity Market Units (CMUs) were awarded contracts. In a tweet, energy consultancy EnAppSys said the clearing price had been within the range it expected but at the lower end. It added it had been a bad auction for large new build CCGT projects, but with surprising wins for new large Open Cycle Gas Turbine (OCGT) projects and surprising falls for nuclear and pumped storage. The year-ahead T-1 Capacity Market auction had earlier cleared at a record high price with batteries, demand side response, and gas projects securing the lion’s share of contracts. The T-1 auction cleared at £45/kW/year with National Grid ESO procuring 2.25GW of capacity.
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Regulator Ofgem has confirmed plans to reduce returns for local electricity networks as part of a package it said will boost investment to support growth in EVs, small-scale renewables and storage.
Ofgem said the proposed new price controls for local grids starting in April 2023 will drive a major change in the way Britain travels, heats and powers its homes to support government climate change targets.
Setting out its working assumptions on the financial package that will be applied, the regulator said it will also enhance the role of Distribution Network Operators (DNOs) to create more flexible local grids that can balance demand and supply for electricity more effectively by connecting more small scale renewables and storage.
To offset the increased investment, Ofgem said it plans to significantly lower the proportion of money that goes back to network company shareholders. Returns on equity could be around 4.4%, on average a third lower than under the previous price control.
It said such changes would lower network charges on bills by around 9%, or around £2 billion, over the period compared to current arrangements.
Jonathan Brearley, Ofgem’s Chief Executive, said: “Our price control for local electricity networks paves the way for turning Britain’s streets green, unlocking the investment needed to support the UK, Scottish and Welsh Government climate change targets, particularly around the electrification of transport.
“At the same time, these financial arrangements will significantly cut investor returns to make sure consumers pay a fair price for energy whilst networks attract the investment they need to be safe and green.”
Earlier this month nine energy network operators appealed to the competition watchdog over plans to significantly reduce their rate of return in the next price control period for the transmission networks.
The operators, including National Grid, Scottish Power and Northern Gas Networks, argue Ofgem’s proposals put the investment needed for the UK's Net Zero targets at risk.
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The Government has announced an investment of up to £95m in two new ports to build the next generation of offshore wind projects. The new ports on the Humber and on Teesside will create 6,000 new jobs and construction will begin later this year. Together they will have the capacity to house up to seven manufacturers to support the development of offshore wind projects. The first has been named as GE Renewable Energy which will build a new state-of-the-art offshore wind blade manufacturing factory at the Teeside site. Due to open and start production in 2023, the blades produced by GE Renewables will be supplied to the Dogger Bank wind farm, located off the North East coast. Prime Minister Boris Johnson said: “Our multi-million-pound investment in these historic coastal communities is a major step towards producing the clean, cheap energy we need to power our homes and economy without damaging the environment.” Once complete, the two ports will have the capacity to support the development of up to 9GW of energy offshore wind projects each year – enough electricity to power around 8 million homes.
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Investment in a range of longer-duration energy storage technologies needs to be stimulated by a new market mechanism, according to a report. The report from the Association for Renewable Energy and Clean Technology (REA) estimates that the UK will need at least 30GW of longer-duration energy storage by 2050. However, it warns that the target will not be achieved under the current market and regulatory framework. The existing market framework provides investors in longer-duration storage with “very low certainty of income”, which it said disincentivises deployment when viewed in context of the high capital expenditure cost of such projects. REA director of policy Frank Gordon said: "Longer-duration energy storage will be vital to supporting our grid through the energy transition in the drive to net zero. "However, as our report shows, we are a long way from meeting our targets on current trends. "While I welcome the government’s announcement of a £68m demonstration competition for first of a kind energy storage projects, this will not resolve the barriers to deployment that affect all longer-duration energy storage technologies. "It’s clear that, in order to drive investment in this area, a new market mechanism is needed.” Gordon said the REA sees an income floor as the most appropriate option, with a ‘Regulated Asset Base’ model being the next best alternative. "We will work with BEIS to push for change in this area and hope they respond by issuing a Call for Evidence alongside the Smart Systems & Flexibility Plan update."
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Government-backed workplace pension scheme Nest is to invest around £250m this year in clean energy projects on behalf of its members. The UK’s biggest workplace pension plan, which manages some £16 billion in UK pension savings, said the investment in clean energy could rise to £1.4 billion by the end of the decade. The investment will be overseen by asset manager Octopus Renewables which is the UK’s largest independent owner of solar and onshore wind assets. The UK’s Minister for Pensions Guy Opperman said: “Nest’s action shows that schemes with economies of scale can access alternative investments, including renewable technologies, at a low cost to their members.” Nest’s Chief Investment Officer Mark Fawcett said the move signalled its ambition to “invest in the energy of the future, not the past”. “Investing in British green energy means our members will be investing in projects they can see and touch, a tangible connection to their pension and a way out of the climate crisis. The strong foundations of this kind of investment should help them achieve great returns for their future while directly investing in the future of the planet.”
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