Regulations Newsletter - August 2016

17 August 2016

Regulation Newsletter - August 2016

In this issue...

  1. Creation of the Department of Business, Energy and Industrial Strategy
  2. Further delays to Project Nexus .
  3. CMA publishes final report for energy market investigation
  4. The Government’s Capacity Market Changes and Upcoming Auction Parameters
  5. Energy Intensive Industry (EII) exemptions from renewable costs
  1. Creation of the Department of Business, Energy and Industrial Strategy

    The UK's new Prime Minister, Theresa May, made extensive changes to the Cabinet in July and put an end to the Department of Energy & Climate Change (DECC) to create the Department of Business, Energy and Industrial Strategy.

    The former Communities Secretary, Greg Clark, was appointed Secretary of State for Business, Energy and Industrial Strategy on 14 July 2016.

    The removal of the term “climate change” from a government department may raise concerns across the green lobby, but there is no reason to suspect that the UK’s position on climate change will alter. The Climate Change Act 2008 is enshrined in law (emissions in 2050 to be 80% below 1990 levels) and more recently the fifth carbon budget was accepted by government (emissions target between 2028 and 2032 to be 57% below 1990 levels).

    Our view:

    Brexit will become a primary focus for the BEIS and no doubt a huge amount of time and resource will be spent considering the future relationship of the UK energy market with the EU market, not least whether we intend to remain part of the single energy market. To read biographies and responsibilities of Cabinet ministers and all ministers by department visit www.gov.uk/government/ministers#cabinet-ministers.

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  2. Further delays to Project Nexus

    The implementation of Project Nexus was originally planned for October 2015 but is now running over 12 months late after it was announced that delivery would be 01 April 2017 at the earliest.

    The gas industry has been eagerly awaiting the implementation of Project Nexus which will see new central systems to support innovations such as smart and advanced metering and faster, more reliable switching but over the last few months, increasing concerns were raised over the ability of Xoserve, who manage the central gas systems, to meet the revised go live date of 01 October 2016.

    Ofgem appointed PwC to undertake a review of industry readiness and after consulting with industry players, Ofgem decided that it was essential to delay the implementation of Project Nexus until at least 01 April 2017 because pursuing the October 2016 date was too significant a risk on consumers.

    Our view:

    Whilst this review was supposed to support the principles of predictability, stability and transparency we don’t appear to be making much progress. We can’t predict what’s going to happen, the Project appears unstable and we still have no transparency as to what’s happening and why. We have urged Ofgem that it forthwith sets a firm implementation date with an assurance that this date will not be changed again.

    For more information about the changes Nexus will bring, visit our Project Nexus page.

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  3. CMA publishes final report for energy market investigation

    The day after the EU referendum coincided with the deadline for the Competition and Market Authority’s (CMA) final report of its energy market investigation. The two-year long investigation culminated in the publication of a number of conclusions and remedies aimed at improving competition.

    As expected the most significant items mooted early in the investigation, such as issues of vertical integration, were not progressed. While perhaps the more eye-catching remedies are in the domestic sector, such as a price cap for the 4 million pre-payment meter customers, there are a number of areas that will impact on the non-domestic sector, particularly to microbusinesses.

    Some of the key decisions include:

    • The end of 12 month fixed period auto-rollover contracts for microbusiness, as just 30 days’ notice will be required to end a rollover contract.
    • The requirement for suppliers to provide online quotes for small microbusiness customers to aid price transparency and comparisons.
    • An Ofgem database of “disengaged microbusiness customers” e.g. those on default contracts for three or more years that rival suppliers can market to via post.
    • Providing Price Comparison Websites (PCWs) access to the central databases to minimise erroneous transfers.
    • A recommendation to Ofgem to ensure implementation of Project Nexus by 1 February 2017 (or as soon as possible after that date).
    • Monthly meter reads for gas sites with smart meters or automated meter reading (AMR) devices.
    • The introduction of locational electricity transmission losses.
    • The review of the costs and benefits of all electricity customers moving from non-half-hourly to half-hourly settlement.
    • Greater responsibility for Ofgem and code administrators to manage industry code modifications.

    Notably, the CMA has not introduced any remedies relating to the non-domestic Third Party Intermediary (TPI) Code of Practice, where it has left space for Ofgem to continue with its previous work.

    Implementation of the confirmed remedies will be through a mixture of CMA Orders, Ofgem amendments of supplier licence conditions and recommendations on Ofgem/the Government.

    There will be initial consultation in August and September with the formal consultation from the CMA coming in October. A deadline of 23 December 2016 has been set for implementing the Order.

    Our view:

    The CMA’s final report and remedies largely aligned with the provisional report published in March so there were no major surprises. Much of the impact is on suppliers with the CMA hoping that microbusiness engagement will increase. Perhaps the most controversial of remedies is the database of “disengaged” microbusiness (and domestic) customers that rival suppliers can market to, with consumer groups concerned about potential spam. The industry will now be busy implementing the wide-ranging remedies over the next few months.

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  4. Upcoming Capacity Market auction parameters

    Since our last update, the Government has confirmed it will be making changes to the capacity market and it has recently set the target capacity it wants to procure in the up-coming auctions. The changes will have a direct impact on energy users’ electricity costs.

    The Capacity Market (CM) was introduced through the Government’s Electricity Market Reform (EMR) programme. The aim of the scheme is to ensure that there is enough generation capacity to meet demand through the year.

    The total costs paid out through the CM are to be recovered from energy suppliers, and ultimately their customers, based on peak winter periods, defined as supply volumes from 4-7pm on working days between 01 November and the end of February.

    The key change is the introduction of an early CM year for Winter 2017, with an unplanned auction taking place in January 2017 for around 53.8GW of capacity. This was only recently confirmed, and is likely to see significant new costs relating to consumption in the peak winter periods.

    In addition to this will be the operational costs that are already in place for the administration of the scheme and costs relating to the demand-side response transitional arrangements auction that took place in January this year.

    In the longer term, the Government confirmed it plans to buy more capacity in the four-year ahead auctions. The next T-4 auction will take place in December 2016 and will see an expected 52GW of capacity procured for the 2020/21 delivery year. The Government believes that procuring additional capacity may increase the clearing price of the auction and result in more new-build generation investment coming forward.

    A second transitional arrangements auction focussing on the demand-side will take place in March 2017 for the 2017/18 delivery year.

    The key auction timings are outlined below:

    July 2016 Secretary of State confirms auction parameters - including target capacity and price cap - for the early auction
    August 2016 Prequalification for all auctions to open 
    October 2016 First payments for 2016/17
    December 2016 The third T-4 auction (for 2020/21 delivery) takes place
    January 2017 The early capacity (for 2017/18 delivery) takes place
    March 2017 The second TA auction (for 2017/18 delivery) takes place
    October 2017 First payments for 2017/18

    Our view:

    The introduction of an early Capacity Market auction for 2017/18 may be necessary from a security of supply perspective but it will unfortunately see material costs introduced at short notice for energy suppliers and consumers. The auctions taking place at the end of the year and the start of 2017 will indicate the cost of the measures, while it remains to be seen what the impact on forward wholesale prices may be as generators receive more revenue through other streams.

    For more information about the Electricity Market Reform (EMR) visit our EMR page.

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  5. Energy Intensive Industry (EII) exemptions from renewable costs

    The Government issued another consultation on Energy Intensive Industry (EII) renewable cost exemptions in July, with the latest indication that an exemption from 85% of Contract for Difference (CfD) Feed-in Tariff (FiT) costs should be introduced by the end of February 2017.

    EIIs defined by Government through a sector and business test are currently eligible to receive compensation for the costs of the Renewables Obligation (RO) and the Feed-in Tariff (FIT) schemes.

    The compensation, introduced earlier this year, allows in scope businesses to receive up to 85% of their costs back under the RO and FiT schemes. This comes directly from the Government after costs have been paid out on electricity invoices.

    The Government recently consulted on the RO and FiTs moving to an exemption which would align with what has already been proposed for CfD FiTs. This would see a reduced liability for energy suppliers who would then be expected to invoice a reduced amount to the relevant customers. The maximum exemption would still be 85% and the Government hopes for it to replace the compensation scheme from April 2016.

    As noted above the Government also recently consulted on the CfD FiTs scheme exemption for EIIs. There is currently no compensation available under this scheme because the costs so far have not been material. However, costs are expected to increase from October 2016. The expectation is that by 28 February 2017, eligible EIIs (which should be the same customers as those eligible for RO and FiTs) will pay a reduced amount on their supply invoices.

    Our view:

    EIIs will welcome the reduced costs they face for renewable policies and the move to an exemption should provide greater certainty of costs and the removal of the payment lag for EIIs. All non-EII customers should be aware that they can expect to attract a greater proportion of costs once exemptions are in place.

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