As we rapidly approach the end of the year, the Utility Week team looks back at some of the highs and lows for utilities.

Energy networks and generation

By Tom Grimwood, energy correspondent

“Decarbonisation is the stated goal, but how do we get there?”

Change is usually accompanied by uncertainty. Driven by the need to decarbonise, the energy industry is in the midst of a radical transformation. Whilst the end goal is clear, the route there is still being plotted out.

Although 2018 has brought plenty of answers, many questions still remain and yet more have emerged.

Take, for example, the government’s flagship policy for supporting the rapidly maturing renewables sector – the contracts for difference scheme.

In July, energy and clean growth minister Claire Perry announced an auction timetable for less established “pot 2” technologies. Starting in spring 2019, they will be held once every two years for the next decade.

In November, the Department for Business, Energy and Industrial Strategy (BEIS) also published the preliminary budget for the next auction, revealing that £60 million of annual subsidies will be on the table.

Initially it may not seem like much. But given the relatively small difference between the wholesale reference prices and the strike price caps for offshore wind (£53/MWh and £56/MWh) this could support multiple gigawatts of new capacity. That is, of course, if developers can squeeze underneath the caps.

With the previous auction delivering two projects at a strike price of just £57.50/MWh, this certainly seems achievable. If the auction is competitive, we could even see the first “subsidy-free” contracts next year.

There is no word yet on how the government plans to split the £557 million of total subsidies it has committed to future pot 2 auctions. However, the way forward for offshore wind is far clearer than for more established technologies such as onshore wind and solar.

In an interview with The House magazine in May, Perry said they will be able to compete again in future, but there has been no further update since.

With the final grace period for securing support under the Renewables Obligation ending in January and the Feed-in Tariff due to close to new applicants in March 2019, developers will soon be left almost completely reliant on merchant revenues to secure investment in new capacity.

The solar sector may have taken relief when Perry announced that the export element of the Feed-in Tariff will be retained in some form but the government has since revealed that the scrapping of the mechanism is going ahead.

However, the government has ultimately failed to explain how these supposedly mature technologies will be delivered in the coming years, particularly as power prices are increasingly cannibalised by those with access to support.

The future is no more certain for the nuclear sector. The big story of year was the announcement by Toshiba in November it was pulling the plug on the Moorside nuclear project in Cumbria after failing to find a buyer.

The government has given assurances this is not an omen for the rest of the industry; Toshiba’s decision was the result of the financial difficulties brought about by the bankruptcy of its US nuclear arm Westinghouse.

But Hinkley is looking increasingly lonely. It’s now more than two years since EDF gave the final go-ahead and still no others have signed on the dotted line.

If more are to follow, they will need to bring down costs. And for that they are looking to the government for help, for example, by taking a direct stake or allowing them to be funded under a regulatory asset base model. Throughout 2018 ministers have reiterated their support for nuclear, repeatedly indicating their willingness to consider such options.

Then there is the capacity market.

In February, the T-4 auction cleared at a record-low price of £8.40/kW as large-scale gas was once again pushed out – this time by interconnectors – perhaps explaining why RWE decided in November to abandon its plans to build 2.8GW of gas turbines at Tilbury in Essex.

Coal continued to be driven off the system, with 2.8GW of capacity failing to win contracts in the T-1 auction as it too cleared at a record-low price of £6/kW. This proved to be the final straw for Eggborough power station which closed for good in September.

The next auctions were due to take place in early 2019. However, these have now been postponed indefinitely after the European Court of Justice annulled a 2014 decision by the European Commission to approve the capacity market, saying the commission had failed to properly establish the compliance of the mechanism with state aids rules.

The government has vowed to reinstate the capacity market as soon as possible and plans to hold a replacement T-1 auction over the coming summer and then a T-3 auction in early 2020. Before this can happen, the scheme will need to be reapproved by the European Commission, and this may require reforms.

The shock ruling has also created uncertainty over the existing contracts, worth roughly a billion pounds for 2018/19. Will capacity providers be held to their contract commitments? Will they still receive the payments and, if so, when? Currently there is no answer.

For aggregators like Tempus Energy, the company which filled the challenge, 2018 appears to have been a good year on the whole.

Not only has the government been pushed towards making long-sought changes to the capacity market – admittedly with some short-term pain – they are finally being granted access to the lucrative balancing market.

Limejump entered the first “virtual power plant” into the balancing mechanism in August under a temporary derogation from Ofgem and the following week the regulator approved several changes to network codes to allow others to follow in their footsteps.

With regards to networks codes, there were several other key developments in 2018.

In June, a court upheld Ofgem’s 2017 decision to cut residual triad avoidance payments for distributed generators and in August the regulator announced plans to hold a significant code review examining forward-looking network charges and connection arrangements.

In November, it published its minded to decision for the significant code review into residual charges launched the year before, choosing a fixed charge “line rental” model as its preferred option for recovering them.

At the same time, it outlined the scope of yet another wide-ranging review looking at industry codes and governance in general, saying there is a “growing industry consensus” that the present arrangements have become outdated and a barrier to progress.

The networks themselves received some important updates on the amount they will be allowed to charge.

Ofgem launched a consultation in March on the RIIO2 price controls, starting in 2021 for electricity transmission and gas, and 2023 for electricity distribution.

The regulator proposed to rein in networks profits by, among other things, substantially reducing the cost of equity. It also proposed a reduction in the length of the price controls from eight to five years to reflect the growing uncertainty faced by the sector.

Both these changes were confirmed in July as well as plans to introduce competition to the delivery of high value network upgrades.

They also gave some updates on their own plans.

The Electricity Networks Association launched a consultation in August outlining some of the potential options for the future structure of the energy system, including the new role of distribution system operators and their relationship to the transmission system operator.

The gas networks responded to one of the biggest questions facing the energy industry – how to decarbonise heat – by fleshing out their proposals for hydrogen conversion.

In May, Cadent announced its intention to invest £900 million in a hydrogen network anchored around industrial sites in Manchester and Liverpool and blend hydrogen into the gas supply for around two million nearby homes.

And in November, Northern Gas Networks released the blueprint for a much larger £22.7 billion network serving roughly 3.7 million homes across the north of England. The report also proposed extending the network to a further 12 million homes by 2050 via a six-stage rollout.

Whether this roadmap is followed remains to be seen.

Read Utility Week’s full round up of 2018 here.

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