Another Capacity Market auction – how low can we go? (January and February 2018)
The fifth and sixth Capacity Market auctions are scheduled for early 2018. T-1 and T-4 Capacity Market auctions will be held to secure generation capacity, one year and four years ahead of schedule.
The T-1 for delivery in winter 2018/19 starts on 30 January, and the Government hopes to secure a volume of 6GW. The T-1 auction is aimed at securing Demand Side Response (DSR). On 6 February the T-4 auction begins with a targeted volume for procurement of 50.1GW, delivering in 2021/22. The previous Capacity Market auction reached record lows, clearing at £6.95/kW/Yr. The auction was criticised for the large volume of gas and coal-fired power plants which were awarded contracts and for procuring more volume than would be needed.
The new auction next year will offer 15-year contracts to try to attract new-build generation. With coal plant ordered to close by 2025 due to Government carbon emission measures, there is a need for new gas-fired power stations to be developed to ensure sufficient baseload capacity.
Those in the industry will be eager to see how low the clearing price goes and whether advancements in technologies such as offshore wind can drive the price down even further. Moreover, the nature of the technologies which win contracts, and those that are uncompetitive, will provide an indication of the future make-up of the generation stack.
RIIO (Revenue = Incentives + Innovation + Outputs) 2 – next network price control
Ofgem is set to outline its early thinking on the next price control period for network companies running the UK energy transmission and distribution networks. The new RIIO 2 controls are designed to determine how much networks can spend and their future transmission and distribution charges. Ofgem has promised to account for the impact of electric vehicles when deciding on the next RIIO controls. The next price control from transmission charges will start in 2021, with the electricity distribution charges starting in 2023. A consultation is expected to get underway in early 2018, with a Framework Review published in the summer.
Utilitywise will be reviewing how the new approach will impact network charging in the future. In particular, we’ll look at how successful the plans are in accounting for technology changes and managing the transition to a smart energy system model.
Ofgem next-day switching
Ofgem has decided to introduce next-day switching for both business and domestic consumers in summer 2020.
In 2018, the regulator is going to decide on system readiness, outputs and transitional arrangements for suppliers (e.g. a trial period where switching will be performed within five working days). The benefit of next-day switching is simply to reduce the time burden of the current process, which can take as long as 15 days.
Market-wide half-hourly (HH) settlement
This will see both small businesses and domestic customers rolled into HH electricity settlement. It will affect all advanced and smart meter types.
Ofgem has yet to decide on a service solution and preferred approach to access the data – it plans to consult on an option and Business Case in the second half of 2018.
Post 2020 EU ETS reforms – 6 February
The European Emissions Trading Scheme (ETS) which manages the sale and purchase of carbon permits is undertaking a major overhaul. The system regulates emissions at around 12,000 industrial and power stations. The planned reforms attempt to address a significant oversupply of permits which have kept the cost of allowances low, as well as ensuring the bloc meets greenhouse gas emission reduction targets. Negotiators reached a provisional deal in November 2017 after months of talks. Plans include the removal of more allowances from the market, and doubling the rate at which the Market Stability Reserve soaks up excess allowances. Carbon prices rose around 75% in the second half of 2017, from €4.50/tCO2e to highs close to €8/tCO2e as the market anticipated a bullish price impact as a result of the reforms.
The EU Parliament will vote on final proposals on 6 February 2018 and we’ll be keen to see how the market responds to clarity over the reforms. Analysts argue the reduction of permits should push the carbon price to €20/tCO2e by 2030, though it remains to be seen if the final deal will meet market expectations.
German Parliament negotiations
Following the German Federal elections in September, the governing CDU party entered coalition talks with the FDP and the Green Party. The Green Party pushed its pro-environment agenda, seeking a quick closure of the country’s coal plant. The closure of Germany’s nuclear and coal plant could leave the country with low levels of baseload generation, heavily dependent on gas burn and renewable output that cannot be guaranteed.
Talks have subsequently collapsed, raising uncertainty in German politics. There is the potential for new elections which could change the make-up of the Parliament. Meanwhile, the Social Democratic Party are set to reopen talks with the CDU over another ‘Grand Coalition’ which had been in power from 2013-2017.
How negotiations are concluded in 2018 will have an impact on Germany’s decarbonisation plans and subsequently demand for coal and gas across Europe. The longer German negotiations continue with no formal Government in place, the larger the impact to ongoing Brexit negotiations, with the official leaving date for the UK now less than 18 months away.
Plans for flexible storage – how will the UK cope coming out of winter?
The UK gas supply network has come under stress this winter season. A series of supply outages coincided with a sharp cold snap which lifted demand to three-year highs. The North Sea’s largest gas and oil pipeline, Forties, is expected to be closed for 2-4 weeks for repairs. UK’s domestic output has fallen during this period and the country has been even more dependent on foreign imports and storage. Medium-range storage reserves are entering the Christmas period at record lows for the time of year, having withdrawn over 40% of its stock to cover short-term supply issues.
System breakdowns are more common during such harsh weather conditions but these developments have raised concerns over the viability of the UK’s aging gas infrastructure. The country’s largest storage site, Rough, has now closed as the 40-year old facility reached the end of its operating life. This already left the UK with limited supply flexibility heading into this winter season. Additional problems in Norway and on the Continent exacerbated this and prices spiked sharply in response.
Cushion gas is being withdrawn at Rough but the available supply is on track to run out by mid-January. There is the potential for more gas to be taken out, however, as the site is now closed, this requires the operator Centrica to receive fresh regulatory approval.
Following the dependence on medium-range storage there may be fresh calls for additional storage sites to be developed. National Grid’s Ten Year Gas Statement outlined proposals for around 9 billion cubic meters of storage capacity, across seven sites covering medium-range and long-range seasonal storage cycles. All the proposed sites have been granted planning permission, but haven’t yet received a Final Investment Decision (FID).
Spring Statement and Autumn Budget
The UK Government’s biannual financial updates are always worth looking out for. The Spring Statement is in March and the more substantial Autumn Budget is scheduled for November. However, after the 2017 budget outlined no major changes until 2025 for the Levy Control Framework (LCF) or new Contracts for Difference (CfD) subsidies, the 2018 budget announcements are unlikely to provide anything ground-breaking.
At Utilitywise, we’re eager to see if more details emerge on plans to integrate battery storage and electric vehicles onto the grid, and whether support for the oil and gas industry will continue. In addition, clarity on energy relationship arrangements after Brexit will also be welcomed.
Domestic price cap
In an attempt to protect domestic consumers from rising energy bills, the UK Government has introduced legislation to cap Standard Variable Tariffs (SVTs) and encourage more customers to switch to cheap fixed-price deals. The draft bill compels regulator Ofgem to change licence conditions for energy suppliers. The bill must pass through the legislative process and gain approval from the House of Commons and is unlikely to enter into force until at least winter 2018/19. However, more details on how the cap will work and at what level prices will be fixed should emerge in the coming year.
The water regulator Ofwat is going to publish their Final Determinations on the household price controls in December 2019. Ofwat’s price control regime will affect bills between 2020 and 2025 by setting the five-year price, service, and incentive package that the water companies need to deliver.
This month Ofwat confirmed that it targets 2.3% Weighted Average Cost of Capital (WACC), which is 1.4% lower than previous price control period in 2014. Ofwat hopes that this difference can be passed on to consumers, making average household bills at least £15 to £25 a year cheaper after 2020.
Zonal transmission charges
A Competition and Markets Authority (CMA) recommendation is going to come into force in April 2018 looking to introduce zonal transmission losses. This will be different than the current process which allocates those losses on a national average. The changes would also reflect changing consumption through the year, making it even more important to understand when and how consumers use electricity.
The change is set to address the problem in the system where the majority of the generation is produced in the north of the country while demand is highly concentrated in the south. As a result, it is expected that transmission charges will be more proportionate to location and demand. The change will also have an effect on investment and incentivise the building of generation closer to demand.
Stay informed with Utilitywise
Our Market Intelligence team will keep a close eye on the energy markets and industry updates throughout 2018, keeping our clients informed at a frequency to suit them. Visit our website to find out more about Utilitywise Market Intelligence and our Triad Alert service.