Utility Focus January 2015

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1 Utility Focus January 2015 FocusOn Government climate adviser says energy bills to rise News this month Government focuses of network investment Energy security guaranteed by capacity auction Former minister calls for gas storage investment PriceFocus Explained The mixed blessing of lower wholesale prices JanuarySpotlight 0 January 2015

2 FocusOn Government climate adviser says energy bills to rise Over recent years, the government has, with a view towards its long-term statutory carbon targets, enacted a number of policies that seek to incentivise the deployment of low-carbon power generation, and to increase energy efficiency in homes and businesses across the UK. But these policies come at a cost to end consumers, who pay for the schemes through their electricity and gas bills. As the move towards a low-carbon economy accelerates, these costs are expected to increase. In a recent report, the government s climate watchdog charted the historic trajectory of these costs, and it provided a view on how they were likely to develop over the next two decades. Among the report s headlines was the suggestion that commercial energy bills could rise by as much as 48% between , owing to the cost of the government s low-carbon policies. Low-carbon policies to drive rise in commercial energy bills Figure 1: Projected changes in bill to 2020 and 2030 for different commercial users In its third Energy Prices and Bills - Impacts of Meeting Carbon Budgets report, which was published on 10 December, the independent Committee on Climate Change (CCC) said that between energy bills for commercial users had increased by around 135%-155%. The increase was attributed primarily to the rise in the cost of wholesale gas prices. The average price faced by a mediumsized non-residential consumer in 2013 was 10.1p/kWh for electricity and 3.3 p/kwh for gas. But low-carbon policies also had an impact accounting for 15%-35% of the overall increase. In total, these charges added 2.0p/kWh-2.6p/kWh to the average electricity price paid by medium-sized businesses in But the report noted that energy costs still made up a relatively small proportion of overall business operating costs. Since 2004, energy costs have on average accounted for 0.5% of the total costs in the commercial sector. The CCC said low-carbon policies would drive an increase in commercial energy bills of between 15%-48% over the period between , with a central estimate of 31%. Over the same period the effect on the industrial sector energy prices was expected to be between 14%-38%, with a central estimate of 26%. However, the report said that energy costs were likely to remain a small component of total costs to business: on average, under 1% of costs in the commercial sector and under 3% of costs for industry. Nevertheless, the CCC accepted that rising energy costs would present a competitiveness risk for certain energyintensive industries. To help to offset the impacts, the government has put in place a compensation package and has plans to introduce further measures for sectors most at risk. Source: CCCAs well as costs, the CCC highlighted the opportunities that the transition to a low-carbon economy presented to businesses. It estimated that the installation of energy efficiency measures could reduce business energy consumption by as much as 18% by the end of the decade. The CCC suggested that a 10% energy saving could be achieved through energy management and building fabric efficiency measures. A further 8% of energy savings could be delivered through the replacement of electrical appliances and products that will need to meet stringent new EU minimum efficiency standard regulations. The CCC s findings were aligned with the government s own study of the cost impact of its energy policies, which was published on 6 November. The report suggested that by the end of the decade energy policies would add 450,000 (33%) to the average energy bill for medium-sized businesses, which would stand at 1.8mn overall. By 2030, policies would add 39% ( 610,000) to an average bill totalling 2.2mn, the government report said. FocusOn recap December 2014 November 2014 October 2014 ESOS qualification deadline approaches Government says business energy bills to rise Political parties set out visions for energy sector 1 January 2015

3 News this month Government focuses on network investment Around 34bn of investment in the UK s electricity networks is essential before the end of the decade, a new government report has claimed. Delivering UK Energy Investment: Networks, which was published on 8 January, highlights the significant progress already made in investing in the network over the past five years. In particular, it notes that 16bn has been invested across the electricity network, 3.8bn across the gas network and 1bn in interconnector projects being delivered. At present, the UK is the most energy secure country in Europe and fourth in the world as a whole, the report claimed. But it warned that, if the UK was to transition to a low-carbon economy, further investment would be required. Among the key challenges for the future would, the report said, be the increasingly diverse sources and types of power generation, as technologies such as heat networks and smart grids were integrated. Smart grids, which use digital communications technologies to detect and react to localised changes in usage, have the potential to deliver an estimated 13bn boost to the economy between now and They should, it is hoped, enable power supply to be managed more efficiently. The report said that heat networks could also provide a valuable service to the electricity grid, both storing and balancing, as well improving the resilience of the overall system. At present, 122 heat network projects in 91 local authorities are benefiting from 7mn in government grant funding for development studies. Their potential contribution is, the report said, enormous ; it suggested that they could, by 2050, meet 43% of heat demand in UK buildings. The report also said that some 7.6bn of investment would be required in the gas networks in the period to Energy security guaranteed by capacity auction Just under 50GW of electricity capacity has been procured through the government s first capacity market auction. The capacity market was introduced by the government as a form of energy guarantee, helping to ensure that peak electricity demand could be met in the future. The clearing price of the first auction was 19.40/kW/year, amounting to a total cost to the consumer of 0.96bn. This was at the lower end of industry forecasts for the cost of the 2 January 2015 mechanism. Those successful in the first auction are promising that they will able to provide power when needed in , which is the first year that the capacity market will be running. Confirming the results on 2 January, energy and climate change secretary Ed Davey welcomed the outcome as fantastic news for both households and business. We are guaranteeing security at the lowest cost for consumers, he said. The successful bidders in the auction were largely existing power stations. Gas was the most successful technology at the auction, with a total of 22.3GW (45%) procured. Coalfired plant was the second most successful contributor with 9.2GW (19%), followed by nuclear power with 7.9GW (16%). However, new investment was also unlocked, such as a 1.8GW independent gas plant in Manchester. 174MW of demand-side response (DSR) was also successful, though the industry is hoping that regulation changes will make the scheme more favourable to DSR in future years. Accompanying the announcement, the government also highlighted moves being made to guarantee energy supplies in the more immediate future, with three power stations offered contracts by National Grid to serve as a reserve for Former minister calls for gas storage investment The UK urgently needs new gas storage facilities, former energy minister Charles Henry has argued. Writing in The Telegraph on 4 January, Hendry, who was energy minister from , said that during four of the last nine winters UK storage levels had become disturbingly low. Hendry attributed this primarily due to events in Europe, and said that challenges to supply security had been met because the systems that manage gas storage had functioned as intended and luck was on our side. The UK currently has around two weeks gas storage compared to days in France and Germany. Hendry said that previously having ample gas storage had been less essential as the North Sea acted as a reserve. However, with North Sea production dwindling and the UK becoming increasingly dependent on imported gas, Hendry argues that better storage is now essential to energy security. Hendry claimed that relying on the market had been unsuccessful in promoting the development of new storage facilities, and that the possibility of direct government financing needed to be considered. He said: There are projects already identified, and some with planning consent, which could double our gas storage capacity, but which remain unfinanceable. This is so central to our national security that we now need to go further and require more capacity to be built.

4 News this month European emissions trading scheme fix backed by report The planned Market Stability Reserve (MSR) is a good starting point towards addressing oversupply within the EU Emissions Trading Scheme (EU ETS), but it will need careful review to be a success, a government-commissioned report has concluded. The EU ETS is one of the main pillars of the EU s climate policy, placing a cap on emissions from public and private sector organisations. But the economic downturn in 2008 left the market oversupplied with allowances, and the mechanism s ability to incentivise the development of lowcarbon technologies has been significantly undermined. To reduce this oversupply, the European Commission has set out plans to introduce an MSR, which would withhold a certain number of allowances from being auctioned when the market surplus is above a certain level, and then reintroduce them when the surplus falls back. The report, which was released on 6 January, assessed the various design options for the mechanism, both in terms of the choice of trigger type that could be employed and the trigger levels. It suggested that that a surplus-based trigger would increase the scheme s efficiency by allowing the emissions cap to be adjusted as new information was revealed. The study also said it would be less susceptible to gaming than a price-based mechanism. Ofgem sets out vision for wholesale market The energy regulator Ofgem has set out its perspective on what a well-functioning UK wholesale electricity market should accomplish. In a submission made to the Competition and Markets Authority (CMA) on 12 December, Ofgem said it believed that a well-functioning market was one in which supply was consistently able to satisfy demand, and where the liquidity of the market would help to minimise transaction costs. Robust and competitive pricing was also key, the report said. The regulator noted that a series of policy developments, such as the smart meter roll-out and Electricity Market Reform (EMR), would have a significant bearing on the future of the wholesale market. Ofgem encouraged the CMA to study these changing aspects of the market design in its ongoing investigation of the energy industry, and to take them into account as part of any remedies that it decided were necessary. Smart meter installations reach record levels The smart meter roll-out has made significant progress, according to the latest government figures. 3 January 2015 The statistics, released by the government on 18 December, confirmed that 15,300 advanced meters and 700 smart meters were installed in smaller non-domestic sites in the third quarter of The new installations mean there are now a total of 515,300 smart and advanced meters currently in operation in smaller non-domestic sites in the UK. This means that 18.9% of meters in operation in those sites are smart or advanced. Despite this progress, the energy regulator Ofgem has backed a recommendation by the House of Commons public accounts select committee that it should, along with the government, outline how it will guarantee that the potential cost savings from smart meters are passed onto consumers. It was also announced on 5 January that technology company Gamma would provide the back-end communications that will facilitate access to the Data and Communications Company. This will enable companies to access smart metering infrastructure and consequently make use of accurate billing data. Falling oil price to have limited effect on renewables deployment The impact on the low-carbon transition of the falling oil price will vary between regions, but the overall effect will be limited, according to new analysis. Some concern has been expressed in recent weeks that low oil and gas prices could hamper the progress of renewable technologies towards cost competitiveness. But In a report published on 22 December, Bloomberg New Energy Finance (BNEF) said that in Europe, cheaper gas, combined with a carbon price that increased by 44% in 2014, had helped to reverse the recent surge in coal generation. In the US, too, it said that the low oil price would have a negligible impact on clean technologies, given government regulations. Regulator sets out non-domestic RHI changes Ofgem has published a factsheet detailing the government s proposed changes to the non-domestic Renewable Heat Incentive (RHI) on 9 January. The changes to the non-domestic RHI regulations will take effect from February. They include a new tiered biomethane tariff, and increased clarity with regards to key enforcement powers. The requirement to demonstrate that a biomass boiler has been specifically designed and installed to use solid biomass as its primary fuel source will also be removed. The regulator expects to publish revisions to the relevant guidance by the date the regulations come into force.

5 PriceFocus Brent crude oil The month reviewed Brent crude oil prices fell to five-year lows in December, as high production levels continued in the US and amongst OPEC nations. Despite low prices, global demand remained weak. November Crude oil ($/bl) Opening price Closing price Maximum price Minimum price Overall change -22.5% The month ahead At current prices, many production sites will find it difficult to remain profitable. It is expected that expensive production sites could start to close, which could decrease the current supply glut and stabilise prices. April 15 natural gas The month reviewed Seasonal gas prices returned to downward trends in December, as low oil prices fed into the market and LNG deliveries to the UK surged higher. Annual April 15 gas dropped to a record low of 49.80p/th. November April 15 gas p/th Opening price Closing price Maximum price Minimum price Overall change -11.2% The month ahead LNG deliveries are set to continue to the UK, as falling demand in Japan, the world s biggest LNG importer, means suppliers are looking to the UK. Further deliveries could add to GB gas storage supplies and reduce gas prices further. April 15 baseload electricity The month reviewed Annual April 15 baseload power hit its lowest recorded level in December, as power contracts reacted to falls in coal and gas. Record wind generation, which pulled down spot prices also filtered through into long-term contracts. November April 15 power /MWh (inclusive of Renewables Obligation uplift) Opening price Closing price Maximum price Minimum price Overall change -5.1% The month ahead The successful restart of three nuclear reactors over December, previously taken offline in August, have increased market confidence that a fourth reactor at Heysham will also return successfully. Higher nuclear production should improve supply margins for the rest of winter and could reduce power prices. 4 January 2015

6 January 2015 Explained The mixed blessing of lower wholesale prices Oil prices continued to fall across December and into January, dropping to below $50 a barrel. While generally welcome news for consumers, the price falls have sparked calls from the North Sea oil and gas industry for greater political support, and in particular for faster implementation of the reforms to the sector s fiscal regime announced in last year s Autumn Statement. The North Sea industry, already operating in a relatively high cost basin, has been hard hit by recent events. On 12 January, Oil and Gas UK chief executive Malcolm Webb said: Evidence of the threat from the falling oil price to UK investment and jobs is mounting daily, with oil and gas companies cutting exploration and capital budgets and reviewing headcounts. The Treasury s promise [ ] of a simplified tax allowance to encourage new investment must be delivered by Budget 2015 if it is to have any impact. Speaking on 8 January, Scottish secretary Alastair Carmichael pledged that the government would stand by the industry. He said it would not only take into account additional measures that the industry wanted to see implemented, but would explore whether those reforms already announced by the government could be fast-tracked into effect. Carmichael said: Me and my colleagues will be listening closely to what the industry has to say and having a full exploration of the additional options available to us to help secure jobs and the future of this key sector. Meanwhile, the Scottish government announced the creation of a new Energy Jobs Taskforce, which will seek to safeguard employment in the oil and gas industry during the current downturn in prices. Gas prices have followed oil lower, and there has been growing media scrutiny in recent weeks as to why this reality has not resulted in lower energy bills for consumers. Political interest in the energy sector, which has in any case been strong for the last year and a half, has intensified, with MPs from across the main parties calling on the energy firms to ensure that wholesale cost falls are passed onto end users. It was reported on 12 January that the government had opened an investigation into the relationship between wholesale costs and retail prices; on the same day, energy minister Matt Hancock confirmed that he had written to the Big Six firms requesting an assurance that lower wholesale prices would be passed onto consumers. The energy industry has continued to emphasise the range of factors that explain why lower wholesale prices do not instantly feed through into lower bills; in particular, their needs to purchase energy years ahead of delivery, and the fact that other components of industry costs have in fact been increasing. In mid-january, E.ON UK became the first of the Big Six to respond to recent developments with a cut to its standard gas price. But the opposition Labour Party argued that this was insufficient, and has continued to call on the government to adopt a more interventionist approach to ensuring that consumers receive a fair deal. On 11 January, leader Ed Miliband said that the energy regulator Ofgem should have the power to force energy companies to cut their prices when wholesale prices fell. Miliband said: [The government] has been making noises about energy bills. Now they can put their money where their mouth is because, if we work across party lines, we can bring in new powers for the regulator to cut bills. The government remains steadfastly opposed to such an approach; however, plenty of attention will be paid, over the coming weeks, to the way in which policy-makers factor the lower prices into their platforms ahead of the General Election. Spotlight Monday Tuesday Wednesday Thursday Friday 1 2 Westminster Hall debate on Effect of 5 6 the CfD allocation process on offshore wind developments 12 Energy and Climate Change Select 13 Committee session on Implementation of 14 Opposition Day debate on Energy 15 Opec Oil Market Report published 16 Electricity Market Reform Inquiry prices Greenhouse gas emissions Q data published IEA Oil Market Report published Renewable Heat Incentive quarterly report to December 2014 published Consultation close: Climate Change Agreements Target Review 2016: Discussion Paper and Call for Evidence Consultation close: Supplier Guaranteed and Overall Standards of Performance Statutory Consultation and Proposals Energy Trends and Prices November published January

7 ContactUs The Energy Brokers Ltd Sheene Road, Leicester, LE4 1BF Tel: +44 (0) Fax: +44 (0) NB / This publication and all that is contained within it are copyright: the energybrokers ltd. 6 January 2015

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