Regulations Newsletter - January 2016

26 January 2016

 

  1. Nexus Update

    Project Nexus will replace the central industry systems in the gas market and introduce a number of process changes which will affect all gas industry participants. These changes are due to go live on 1st October 2016 but since our last update, the rollout has faced a number of challenges. In December the overall project status was downgraded from AMBER to RED and this has led to the proposal to remove “non-core” functionality. This proposal is being finalised and we expect to see the outcome towards the end of this month. In terms of industry testing, concerns remain over both the quality of test data and the time that will be required to test systems sufficiently ahead of October.

    Our view: Project Nexus continues to be a high risk implementation with the project moving between AMBER and RED status. This leads to mitigation strategies that inevitably increase the amount of parallel activities being attempted by Xoserve and Gas Shippers. We’re unsure how much contingency is left but a major problem would need to arise (with no alternative available) before the Project Nexus Steering Group considers any movement in the go live date.

  2. CMA delays energy market investigation findings by two months – updated timetable published.

    The Competition and Markets Authority (CMA) has delayed the next stages of its Energy Market Investigation by two months.

    A provisional decision on remedies was due this month but will now not be published until March, while the final report is now expected in June 2016 instead of April 2016.

    Energy Market Investigation Timetable

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  3. Energy Intensive Industries (EII) – Compensation for renewable costs set to become exemption from renewable costs.

    There have been recent developments in the Government’s steps to support businesses in Energy Intensive Industries (EIIs). The Government believes their new policies will give EIIs greater certainty around energy costs and will save manufacturers hundreds of millions of pounds.

    RO and FIT Compensation

    The EU Commission has approved the Government’s plans to compensate EIIs for renewable costs on electricity bills. Alongside this, the Department for Business, Innovation and Skills (BIS) published a guidance document covering the eligibility, application and compensation process on the 19th January.

    EII customers will be able to submit an application to BIS and receive compensation for up to 85% of Renewables Obligation (RO) and Feed-in Tariffs (FITs) costs, directly from the Government.

    Only those organisations that pass the 20% electricity intensity test and manufacture a product in the UK within an eligible sector (defined by 4-digit NACE code) will be eligible to make a claim.

    The Government has committed to backdating initial compensation claims to when state aid clearance was granted. Any claim for RO/FITs relief received by Thursday 31st March 2016 will be payable from 14th December 2015 however, any claim received after this date will only receive compensation from the start of the month in which the claim is received. 

    RO and FIT exemption

    In the Government’s Autumn Statement, published on 25th November 2015, it was announced that RO and FIT compensation will transition to an exemption. This will see eligible EIIs pay less for their electricity each month, rather than retrospectively claiming compensation from the Government. 

    It is thought that the Government may need to make a new state aid application to the EU Commission, in which case the exemption may not replace compensation until April 2017. Further detail is expected in the coming months.

    CFD FIT Exemption

    In addition, the Government has a similar state aid application currently with the EU Commission on exempting EIIs from Contract for Difference (CFD) FITs costs. A decision on this is expected to be taken within the coming months.

    Our view: 

    The costs of the RO and FITs schemes have increased significantly over the last few years so EIIs will welcome some reduction in energy costs. EIIs will want to check their eligibility within the Government’s guidance document and submit their application before the 31st March 2016. For non-EII consumers, the move to an exemption is less favourable as it will see them picking up a greater share of RO and FIT costs.

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  4. Capacity market

    The Government’s second capacity market auction concluded on 11th December for capacity during the year October 2019 – September 2020.
    The auction secured 46.354GW of capacity at a price of £18/kW/year. The capacity costs will be paid for by all electricity suppliers and ultimately consumers, during the relevant year.
    A full report on the auction can be viewed here.

     Breakdown of Awarded Capacity by CMU and Technology Type

    Our view:

    The Capacity Market is now considered an essential mechanism to ensure future security of supply to the UK electricity system. Customers will want to note that electricity suppliers must start bearing the costs of the main capacity market auctions from October 2018. However, there will be some smaller costs relating to the operation of the scheme and demand-side response before then.

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  5. Government decision on review of Feed-in Tariff (FIT) Scheme

    The Government has decided that the FIT scheme will remain open and changes will largely go ahead as proposed in the consultation. Changes will apply from 8th February 2016. Below is a summary of the decisions made by the Department of Energy and Climate Change (DECC):

    In general, generation tariffs for solar PV, wind and hydro technologies have been reduced significantly from the current levels. However, tariff reductions are less drastic than the consultation proposed.

    A number of cost control measures are also to be introduced, aimed at slowing the cost increase of the FITs scheme and the resulting costs which are passed onto consumers. These will include:

    • Quarterly caps on number of installations that can accredit each quarter
    • Generation tariff reductions at the end of each quarter
    • Further generation tariff reductions where quarterly caps are hit
    • In addition, there will be a maximum overall budget of £100 million a year for new installations

    Our view:
    The Government’s decision continues along the path of recent policy announcements, namely trying to limit future increases to consumer energy bills as a result of Government policy costs. The measures taken are expected to reduce the number of new installations within the FIT scheme and help slow the rapid increase in FITs costs experienced since 2010.

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