We look at some of the key developments in the energy sector expected in 2019, including the end of FiT, next steps in the Capacity Market redetermination process and the ongoing grid charging reviews
The end of Feed-in Tariffs
Currently, owners of certain categories of small scale renewables can apply for financial support via Feed-in Tariffs (FiT). Applicants can receive a Generation Tariff, which pays a fixed price per unit of energy generated, and an Export Tariff which pays an additional amount for any electricity that is exported to the National Grid. The tariff awarded is usually payable for the first 20 years of the system’s life.
Scheme closure and replacement
The FiT scheme is ending on 1 April 2019. No new applications will be accepted after this point. This is largely a result of the scheme having been far more successful than initially anticipated: for example it was thought that 750,000 eligible solar PV installations would apply for FiT support by 2020 but in reality 730,000 had already applied by 2015. This unexpectedly high uptake and the resultant cost of subsidy to consumers, combined with the reduction in the cost of installing renewable technologies has led the government to discontinue the scheme.
The government is currently consulting on a replacement for the FiT scheme which will offer a route to market for small-scale generation which exports to the grid. This has been labelled a 'Smart Export Guarantee' (SEG). Under an SEG, an energy provider would pay a fixed price for each unit of surplus energy produced. Energy providers would be free to decide how much they pay per unit, with owners then free to choose the provider to whom they sell exported power.
Considerations for generators
Exact details of the scheme are unclear as at the date of publication of this article, however it is expected that payments received under an SEG will be lower and more changeable than FiT payments. Whilst many schemes are likely to try to apply as early as possible before 1 April 2019 to fall within the FiT scheme, the existence of deployment caps may act to limit the number of successful applications which can qualify for the FiT scheme before the deadline expires.
The consultation is open for feedback until 5 March 2019.
What next for the Capacity Market?
Two months have passed since the decision of the General Court of the European Union to annul the European Commission's approval of the UK Capacity Market, which brought the current scheme to a standstill (see our thoughts at the time of the ruling). Since then, the government has expressed its belief that the decision for annulment was taken on procedural grounds, while Tempus Energy (the original applicant for its annulment) maintains its view that the nature of Capacity Market is itself problematic and needs amendment. The basis of Tempus Energy’s challenge was the allegation that the Capacity Market unfairly favours fossil fuel generators over clean energy projects, including demand side response. Which position is true will be decided following the European Commission's formal investigation, which is expected during 2019.
The formal investigation
Once the European Commission initiates its formal investigation, the government and interested parties will be called to submit comments within a prescribed period – usually 1 month. After comments are submitted, the European Commission will have up to 18 months to deliberate and issue its decision. The government is currently in talks with the European Commission and state they are working closely with them to ensure that the investigation runs smoothly (with the government hoping that a decision will be reached by this summer). The government ran a concurrent consultation, which closed on Thursday 10 January. The consultation sought industry and stakeholder views on whether there should be technical amendments made to the Capacity Market in light of the current standstill period.
Replacement auction for 2019/2020
The government has also confirmed its intention to run an interim auction in the summer of 2019 for the winter period of 2019/2020, essentially as a rearrangement of the postponed T-1 auction schedule for January 2019. Participants should note that the replacement auction will be run prior to the conclusion of the Commission's formal investigation, so State aid approval for agreements up for auction will not be guaranteed. Due to this, government intends to 'de-couple' the auction from the actual granting of capacity agreements, which will not be issued until (and unless) the Commission grants State aid approval to the Capacity Market as a whole.
The postponed T-4 auction is intended to be run as a T-3 auction in 2020, subject to the Commission completing its formal investigation and approving the scheme as a whole.
Introduction of renewables into the Capacity Market?
Earlier in 2018, the government ran a call for evidence as part of the 5 year review of the Capacity Market required under the Energy Act 2013, in which it stated that one of government’s key priorities is considering whether renewable technologies which cannot currently participate, in particular wind and solar, should be given a route into the Capacity Market. This call for evidence came prior to and was unrelated to the November decision, suggesting potential government appetite to amend the scheme to allow for increased renewables participation.
Following on from this, National Grid published in early January indicative de-rating factors for renewable technologies participating in the Capacity Market going forward. De-rating factors are intended to reflect the anticipated availability of participant technology types during system stress events, usually set to reflect historical performance. The indicative de-rating factors are calculated using an Equivalent Firm Capacity methodology, framed around the question: 'for a penetration of that resource, what is the amount of perfectly reliable firm capacity it can displace while maintaining the exact same risk level?'.
On this basis, National Grid has suggested de-rating factors of 8-9 per cent for onshore wind, 12-15 per cent for offshore wind, and just 1-2 per cent for solar. This is in contrast to the de-rating factors of established participant technologies, for example combined-cycle gas turbines with a de-rating factor of 89 per cent, which will be retained.
Feedback on National Grid’s methodology for calculating the renewables de-rating factors can be given until 31 January 2019.
2019 Contracts for Difference (CfD) Auction
The CfD scheme, the government’s flagship mechanism for supporting low-carbon electricity generation, encourages the financing and development of renewable projects by paying developers a flat (indexed) rate for the electricity they produce over a 15-year period, protecting them from volatile wholesale prices.
There have been two CfD auctions to date (with the latest auction round running from March to September 2017). The next round will begin in May 2019 (with further auctions running every two years) and will be open to the following, 'less established' technologies:
- advanced conversion technologies
- anaerobic digestion
- dedicated biomass with CHP
- offshore wind
- remote island wind
- tidal stream
Up to £557 million has already been committed by the government for future CfD contracts. In the 2017 allocation round, offshore wind accounted for over 95 per cent of projects awarded a CfD and this trend is widely predicted to continue. Notably, solar and (mainland) onshore wind technologies remain ineligible for CfD contracts.
Ofgem’s grid charging reviews
Back in 2017, Ofgem launched its Targeted Charging Review (TCR) of the electricity industry, looking into how electricity network residual charges should be set in future. The TCR has particular focus on:
- ‘residual’ transmission and distribution network charges
- the remaining embedded benefits (which are more favourable charging arrangements for smaller generators connected to the distribution system)
Within the current framework, residual charges are recovered from larger consumers by a combination of per unit consumption charges for distribution and peak demand charges for transmission (determined through the Triad mechanism levied during certain periods of peak demand). Ofgem is concerned that technology is increasingly being used to minimise or avoid consumption-based charges, which could lead to a distorted and inefficient use of the network.
Ofgem proposes to move residual charges away from a consumption based model to a fixed charges model, applied to all consumers irrespective of their ability to reduce their impact on the grid through generation or flexibility. Ofgem also recommends that the remaining embedded benefits for smaller generators are gradually brought to an end, which will have a negative impact on many decentralised and flexible energy resources, including those seeking to minimise peak demand charges.
Ofgem launched a public consultation on its proposals for reform through the TCR in late 2018, which is open for feedback until 4 February 2019.
As part of the TCR, Ofgem is simultaneously conducting a Significant Code Review (SCR) in respect of the same issues to establish the detail of the reform to be made to the industry.
The proposals are set to be implemented from 2021.
Progress on fracking
Current progress: initial explorations in Lancashire
In mid-October 2018, hydraulic fracking restarted in the UK for the first time since 2011. Currently the only active drill site is at Preston New Road in Lancashire, with several more sites across England currently at the pre-planning or planning application stage. By contrast, the Scottish and Welsh governments currently have moratoriums on any applications to carry out fracking. Shale gas has flowed to the surface at the Lancashire site but the site operators, Cuadrilla, will only be digging horizontal exploratory wells for the early part of 2019 to establish whether the site can provide a significant, commercially viable source of shale gas.
What can we expect going forward?
The new National Planning Policy Framework implemented in July last year urges local authorities to 'recognise the benefits of on-shore oil and gas development, including unconventional hydrocarbons, for the security of energy supplies and supporting the transition to a low-carbon economy; and put in place policies to facilitate their exploration and extraction'. Business secretary Greg Clark has also proposed removing the need for planning permission for drilling exploratory wells. This indicates a willingness by central government to promote and encourage fracking by loosening the regulatory regime that drilling companies would operate under.
Certain areas of local government however seems to be at odds with this willingness: the 10 local authorities that make up the Greater Manchester region are moving to put planning measures in place to create a presumption against fracking for shale gas, London has finalised a similar scheme and several other authorities including Leeds, Wakefield, Hull and York have expressed opposition to fracking. It is not yet clear how this difference in approach will be resolved. Additionally, the government policy on fracking is currently subject to a High Court challenge which alleges that the environmental impacts of fracking were ignored in the development of the National Planning Policy Framework.
2019 promises to be another interesting year in the UK shale gas story.