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Electric shock: Could Brexit scar Britain’s energy landscape?

Britain’s exit from the EU, which will finally happen on Friday (31 January), has sparked fears of disruption to its electricity market, from higher bills to supply issues and stalled de-carbonisation efforts.

Britain depends on the European Union for much of its electricity supply.

Its own generation fell in 2018 by 1.6%, according to the latest available statistics.

This reduction stems from the gradual shutdown of coal-fired power plants, which is yet to be fully compensated by a rise in wind power.

Imports of electricity and gas have increased in response, predominantly from France, the Netherlands and Ireland, which now account for almost 40% of Britain’s energy consumption.

Britain’s imminent departure from the 28-member EU and its single electricity market therefore represents a risk for an already fragile network, which suffered a big blackout in August.

It will continue to benefit from existing arrangements during a post-Brexit transition phase, while it seeks a new agreement on everything from energy to security cooperation with Brussels.

But it is not clear if these talks will entirely resolve the issue.

British industry regulator Ofgem has said “alternative trading arrangements will need to be developed”, without giving further details.

It insists that whatever deal is struck, it does not “expect Brexit to interrupt the flows of electricity and gas”.

But at times of peak demand, Britain may find itself at the back of the line for electricity.

“EU countries could get preference,” Weijie Mak, of research company Aurora, told AFP.

As with other areas such as finance, agreeing so-called equivalence on things like CO2 emission rules – so countries who produce cleaner and more expensive electricity are not disadvantaged – will be key.

Price rise?

Uncertainty over equivalence and the possible return of tariffs or quotas if trade negotiations falter has left some sceptical that nothing will change post-Brexit.

“The electricity trade will become more expensive,” said Joseph Dutton, policy advisor at climate change think tank E3G. “It could mean higher bills for consumers.”

Trading in electricity across the Channel is currently based on an auction system, which could be upset by Britain’s EU departure.

Eurelectric, the association representing the industry at the European level, sees it as a “lose-lose situation” because of “less efficient gas and power trading”.

The hazy picture has seen the French government put on hold several interconnector projects aimed at better linking the electric power grids of Britain and the continent.

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Who pays for the EU’s €1tn green deal?

Under its president, Ursula von der Leyen, the European commission has big plans to address climate change. With a €1tn ($1.1tn) investment package, it hopes to transform Europe into a carbon-neutral economy by 2050.

But much of that €1tn for the commission’s proposed green deal would be generated through financial-leverage effects. In 2020, the EU will formally allocate for such purposes only around €40bn, most of which is already included in the budget from previous years; arguably, only €7.5bn of additional funding under the plan would actually be new.

As with the previous commission’s 2015 Juncker plan, the trick, once again, will be to muster the lion’s share of the quoted sum through a shadow budget administered by the European Investment Bank (EIB). The commission, after all, is not allowed to incur debt; but the EU’s intergovernmental rescue and investment funds are.

 The best way to help the climate is to increase the price of CO2 emissions

Jeffrey Frankel Read more

In essence, the EU is doing what the major banks did before the 2008 financial crisis, when they circumvented regulation by shifting part of their business to off-balance-sheet conduits and special-purpose vehicles. In the case of the EU, the guarantees offered by the commission and individual EU member states are sufficient for a high credit rating, and thus for the issuance of European debenture bonds. The funds generated will be used for public and private purposes, and sometimes even for public-private partnerships. But should the guarantees be called in one day, eurozone taxpayers will be the ones to foot the bill.

These planned shadow budgets are problematic, not only because they would allow the commission to circumvent a prohibition against borrowing, but also because they implicate the European Central Bank. To be sure, the ECB president, Christine Lagarde, has already announced that she wants the bank to play a more active role in climate-friendly activities within the eurozone. And the ECB is now considering whether to pursue targeted purchases of bonds issued by institutions that have received the commission’s climate seal of approval.

In practice, of course, this most likely means that the ECB would buy up the “green” bonds now being devised by the EIB. Those purchases will then reduce the interest rates at which the EIB can take on debt, ultimately leading to activation of the printing press to provide the money for spending on climate policy.

It is laudable to want to do something about climate change. But under the current plan, the ECB would be pushed into a legal grey area. The institution is not democratically controlled, but rather managed by technocrats on the executive board. Every member state, big or small, appoints its own representative, who then has equal voting rights, personal immunity, and the autonomy to operate free from any parliamentary accountability.

Moreover, under the Maastricht treaty, the ECB board is primarily obligated to maintain price stability, and may support separate economic-policy measures only if doing so does not endanger its ability to fulfil this mandate. In the case of the green deal, the dangers are obvious. If the additional demand created by an expansion of green projects is funded by printing money instead of collecting taxes, it will not withdraw demand from other sectors of the European economy and would therefore be potentially inflationary.

Situations like this serve as a reminder of why article 123 of the treaty on the functioning of the European Union strictly prohibits the ECB from taking part in the financing “of Union institutions, bodies, offices or agencies, central governments, regional, local, or other public authorities, other bodies governed by public law, or public undertakings of member states”. But, of course, the ECB has already circumvented this rule by purchasing around €2tn in public debt from the market, thereby stretching the limits of its mandate to a legally dubious degree.

The latest plans to circumvent the Maastricht treaty will not improve matters. Before the financial crisis, the ECB was concerned only with monetary policy. During the crisis, it turned into a public bailout authority rescuing near-bankrupt banks and governments. Now, it is becoming an economic government that can print its budget as it sees fit.

The impending violation of the spirit of the Maastricht treaty will be twofold: the EU will be assuming debt covertly, and it will be doing so through the printing press. As such, the commission’s plans will further undermine the credibility of the very institution on which Europe relies for its financial and macroeconomic stability and its long-term growth prospects – and this at a time when the world is becoming even more uncertain, competitive and aggressive.

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OVO completes acquisition of SSE Energy Services

Today (15 January), OVO Energy has completed its acquisition of supplier SSE’s GB household energy business.

The acquisition was first announced in September, and approved by the Competition and Markets Authority (CMA) in December.

The move will see OVO become the second largest supplier in the UK, with five million customers. It said that gaining SSE’s smart technology and exceptional talent in the form of its 8000 staff will help to accelerate OVO’s strategy to bring clean affordable energy to more households.

OVO bought SSE Energy Services for £500 million, which comprises of £400 million in cash and £100 million loan notes. These loan notes will be issued by a member of the OVO group, have an annual interest rate of 13.25% payable in kind and will be due in 2029 if they have not been repaid earlier.

The transaction will be subject to a deduction of £59m reflecting debt-like items, SSE announced, including SSE Energy Services’ accruals in respect of the Capacity Market Mechanism.

Stephen Fitzpatrick, CEO and founder of OVO said that this marks the end of one chapter for OVO but “more importantly, the beginning of the next one together with SSE Energy Services”.

“We have an integration plan that leaders from both companies have collaborated on since September. There is a lot of work to do to bring the two businesses together, but we have a really strong combination of great talent, technology and customer centricity that will enable us to succeed.

“SSE’s history of excellence at scale combined with OVO’s innovative technology and our Plan Zero commitments mean that together, as one team, we can bring millions more people with us on our journey towards zero carbon living.”

OVO was formed in 2009, and has since grown to become the largest independent supplier in the UK. It has committed to eliminating its customer’s household emissions and fit five million homes with flexible, clean energy technologies as part of a wide-ranging carbon-cutting initiative dubbed ‘Plan Zero’ it announced in 2019.

It has continued to grow over the last year, investing in clean energy marketplace Renewable Exchange and energy technology start-up firm Electron. It also announced a partnership with automotive giant Mitsubishi motors last December.

OVO also claims that it installed the world’s first domestic vehicle-to-grid charger in a customer’s home.

The CMA launched an investigation into the company’s acquisition of SSE Energy Services in October, to ensure that it would not lessen competition in the UK.

Alistair Phillips-Davies, CEO of SSE said: “We are very pleased to have completed this transaction, which we firmly believe is the best outcome for the business, its customers and its employees.

“The sale is in line with our clear strategy, centred on developing, operating and owning renewable energy and electricity network assets, along with growing businesses complementary to this core.

“SSE enters the new decade as a more focused group, even better positioned to lead the low carbon transformation required to achieve the UK’s vital net zero commitment in the years to come.”

In a blog post today, Philips-Davies said that SSE’s strategic focus had shifted to developing, building and maintaining low carbon assets.

He continued: “For SSE, our core purpose in the years ahead is clear. We are providing the energy needed today while building a better world of energy for tomorrow.”

The company has struggled in recent years, with a loss of profit of £284.6m in 2018. It has started to bounce back, with its interim results statement in November reporting a 14% increase to adjusted operating profit.

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Sadiq Khan launches his own green energy company – London Power

Sadiq Khan has launched his own green energy company, claiming it will save the average household £300-a-year on bills.

The mayor of London today unveiled London Power, in conjunction with Octopus Energy, as a part of his Energy for Londoners programme.

Read more: New Octopus Energy tarif aims to slash the charging cost of electric cars

The company – which will only be available in London – will act as a non-profit company, with all profit “reinvested into community projects”.

The service will be provided by Octopus Energy and will rely on 100 per cent renewable energy.

Khan said the new energy provider would be within the cheapest 10 per cent of similar tariffs in the market and would save the average household £300 on bills.

“It is a disgrace that many Londoners pay too much to heat and light their homes, with more than a million living in fuel poverty,” he said.

“For the first time we have a fair, affordable, green energy company specially designed for Londoners.”

London Power enters a market that is already home to 64 active suppliers, according to Ofgem.

The energy market watchdog’s 2019 report on the energy market found 53 per cent of consumers had never switched energy companies.

However, the figure for London – where energy prices are among the most expensive in the country – is not known.

Peter Earl, head of energy at Compare the Market, said he welcomed the extra competitio, but that it may be difficult to attract new customers.

“It’s an industry challenge to activate the large section of people who have never changed their energy company,” he said.

“[Khan’s] got an offering that should be attractive to people, but it’s not going to be easy.”

The formation of London Power won plaudits from green energy advocacy groups the Renewable Energy Agency (REA) and National Energy Action.

REA chief executive Nina Skorupska said: “By adopting this model, City Hall has shown themselves to be one of the pioneers in the move towards a Net Zero UK.”

Caroline Russell, Green Party leader in the London Assembly, on the other hand said Khan’s plans did not go far enough.

She said the mayor should have set up the company without the help of Octopus Energy so City Hall could have greater power over the company’s energy resources.

Read more: Sadiq Khan has increased press office spending by 26 per cent in four years

“I’ve argued with him to set up a fully-licensed company – which means wholly owned byLondon – to get the best benefits for Londoners,” she said.

“The mayor seems cautious that there will be any profits to be reinvested, but a company owned and run by the Mayor would be able to support investment in green technologies and create green jobs.

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UK SMEs aiming to ramp up sustainability actions

Lloyds Bank Commercial Banking’s Business Barometer surveyed 1,200 companies in November 2019, exploring attitudes towards environmental sustainability. While 64% claimed they wanted to become more sustainable, 63% have already taken steps to improve environmental performances in the past 12 months.

According to the survey, which first launched in 2002, 24% of SME respondents have improved the energy efficiency of their premises in the last year, while 22% have utilised suppliers that offer greener products and services.

Lloyds Bank Global Transaction Banking’s head of asset finance Keith Softly said: “With environmental sustainability high on the agenda for firms of every size – whether that means they’re doing what they can to reduce energy consumption or cut waste – businesses understand there is often a financial benefit to making their operations greener.

“As ever, before making significant investments, businesses should consider all the available funding options to decide which is most appropriate for them. When it comes to going green there are options such as government grants and asset finance solutions that help spread the cost of an investment over its lifetime, and initiatives like our Clean Growth Finance Initiative which offers discounted lending for green purposes.

Just under a quarter (23%) of respondents admitted that the organisation is primarily driven by making long-term costs savings, and that any investment into sustainability would have to generate such returns. However, 22% claimed they are primarily motivated by customer and consumer pressure regarding sustainability and climate change, which has heightened in recent months due to the climate strikes and new net-zero legislation introduced by Government.

However, barriers to match these ambitions with action and investment do exist. More than a third (34%) of SMEs say they plan to use cash reserves to become more sustainable. Meanwhile, 13% say they will rely on government grants.

Action areas

One key area of action for SMEs is that of waste management. A major survey of more than 1,000 UK SMEs last summer found that while the majority of businesses understand the importance of reducing single-use plastics, 40% are yet to carry out basic measures to reduce plastic waste.

The YouGov data, commissioned by Keep Britain Tidy and Brita UK has found that SME action to combat single-use plastics has been sluggish. The survey of more than 1,000 SME decision-makers found that only 52% are doing “all they can” to reduce single-use plastics.

Another key focus will be that of energy and heat. Last year, a programme was launched by the government’s Energy Systems Catapult centre to assist SMEs in developing low carbon heating and cooling.

The package, dubbed Incubator and Accelerator, offers SMEs support to secure investment for smart energy systems with expertise from the Catapult offered alongside a network of partners to help with business growth.

Matt Mace

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Recession Fears Cap Oil Prices In 2020

Overall, I expect that oil and other commodity prices will remain low in 2020. These low oil prices will adversely affect oil production and several other parts of the economy. As a result, a strong tendency toward recession can be expected. The extent of recessionary influences will vary from country to country. Financial factors, not discussed in these forecasts, are likely also to play a role.

The following are pieces of my energy forecast for 2020:

[1] Oil prices can be expected to remain generally low in 2020. There may be an occasional spike to $80 or $90 per barrel, but average prices in 2020 are likely to be at or below the 2019 level.

Oil prices can temporarily spike because of inadequate supply or fear of war. However, to keep oil prices up, there needs to be an increase in “demand” for finished goods and services made with commodities. Workers need to be able to afford to purchase more goods such as new homes, cars, and cell phones. Governments need to be able to afford to purchase new goods such as paved roads and school buildings.

At this point, the world economy is struggling with a lack of affordability in finished goods and services. This lack of affordability is what causes oil and other commodity prices to tend to fall, rather than to rise. Lack of affordability comes when too many would-be buyers have low wages or no income at all. Wage disparity tends to rise with globalization. It also tends to rise with increased specialization. A few highly trained workers earn high wages, but many others are left with low wages or no job at all.

It is the fact that we do not have a way of making the affordability of finished goods rise which leads me to believe that oil prices will remain low. Raising minimum wages tends to encourage more mechanization of processes and thus tends to lower total employment. Interest rates cannot be brought much lower, nor can the terms of loans be extended much longer. If such changes were available, they would enhance affordability and thus help prevent low commodity prices and recession.

[2] World oil production seems likely to fall by 1% or more in 2020 because of low oil prices.

The highest single quarter of world oil production was the fourth quarter of 2018. Oil production has been falling since this peak quarter.

To examine what is happening, the production shown in Figure 3 can be divided into that by the United States, OPEC, and “All Other.”

OPEC’s oil production bobs up and down. In general, its production is lower when oil prices are low, and higher when oil prices are high. (This shouldn’t be a surprise.) Recently, its production has been lower in response to low prices. Effective January 1, 2020, OPEC plans to reduce its production by another 500,000 barrels per day.

Figure 4 shows that oil production of the United States rose in response to high prices in the 2010 to 2013 period. It dipped in response to low oil prices in 2015 and 2016. When oil prices rose in 2017 and 2018, its production again rose. Production in 2019 seems to have risen less rapidly. Recent monthly and weekly EIA data confirm the flatter US oil production growth pattern in 2019.

Putting the pieces together, I estimate that world oil production (including natural gas liquids) for 2019 will be about 0.5% lower than that of 2018. Since world population is rising by about 1.1% per year, per capita oil production is falling faster, about 1.6% per year.

A self-organizing networked economy seems to distribute oil shortages through lack of affordability. Thus, for example, they might be expected to affect the economy through lower auto sales and through less international trade related to automobile production. International trade, of course, requires the use of oil, since ships and airplanes use oil products for fuel.

If prices stay low in 2020, both the oil production of the United States and OPEC will likely be adversely affected, bringing 2020 oil production down even further. I would expect that even without a major recession, world oil supply might be expected to fall by 1% in 2020, relative to 2019. If a major recession occurs, oil prices could fall further (perhaps to $30 per barrel), and oil production would likely fall lower. Laid off workers don’t need to drive to work!

[3] In theory, the 2019 and 2020 decreases in world oil production might be the beginning of “world peak oil.” 

If oil prices cannot be brought back up again after 2020, world oil production is likely to drop precipitously. Even the “All Other” group in Figure 4 would be likely to reduce their production, if there is no chance of making a profit.

The big question is whether the affordability of finished goods and services can be raised in the future. Such an increase would tend to raise the price of all commodities, including oil.

[4] The implosion of the recycling business is part of what is causing today’s low oil prices. The effects of the recycling implosion can be expected to continue into 2020.

With the rise in oil prices in the 2002-2008 period, there came the opportunity for a new growth industry: recycling. Unfortunately, as oil prices started to fall from their lofty heights, the business model behind recycling started to make less and less sense. Effective January 1, 2018, China stopped nearly all of its paper and plastic recycling. Other Asian nations, including India, have been following suit.

When recycling efforts were reduced, many people working in the recycling industry lost their jobs. By coincidence or not, auto purchases in China began to fall at exactly the same time as recycling stopped. Of course, when fewer automobiles are sold, demand for oil to make and operate automobiles tends to fall. This has been part of what is pushing world oil prices down.Related: Why Pirates Are Giving Up On Oil

Sending materials to Asia for recycling made economic sense when oil prices were high. Once prices dropped, China was faced with dismantling a fairly large, no longer economic, industry. Other countries have followed suit, and their automobile sales have also fallen.

Companies operating ships that transport manufactured goods to high-income countries were adversely affected by the loss of recycling. When material for recycling was available, it could be used to fill otherwise-empty containers returning from high-income countries. Fees for transporting materials to be recycled indirectly made the cost of shipping goods manufactured in China and India a little lower than they otherwise would be, if containers needed to be shipped back empty. All of these effects have helped reduce demand for oil. Indirectly, these effects tend to reduce oil prices.

The recycling industry has not yet shrunk back to the size that the economics would suggest is needed if oil prices remain low. There may be a few kinds of recycling that work (well-sorted materials, recycled near where the materials have been gathered, for example), but it probably does not make sense to send separate trucks through neighborhoods to pick up poorly sorted materials. Some materials may better be burned or placed in landfills.

We are not yet through the unwind of recycling. Even the recycling of materials such as aluminum cans is affected by oil prices. A March, 2019, WSJ article talks about a “glut of used cans” because some markets now prefer to use newly produced aluminum.

[5] The growth of the electric car industry can be expected to slow substantially in 2020, as it becomes increasingly apparent that oil prices are likely to stay low for a long period. 

Electric cars are expensive in two ways:

1. In building the cars initially, and

2. In building and maintaining all of the charging stations required if more than a few elite workers with charging facilities in their garages are to use the vehicles.

Once it is clear that oil prices cannot rise indefinitely, the need for all of the extra costs of electric vehicles becomes very iffy. In light of the changing view of the economics of the situation, China has discontinued its electric vehicle (EV) subsidies, as of January 1, 2020. Prior to the change, China was the world’s largest seller of electric vehicles. Year over year EV sales in China dropped by 45.6% in October 2019 and 45.7% in November 2019. The big drop in China’s EV sales has had a follow-on effect of sharply lower lithium prices.

In the US, Tesla has recently been the largest seller of EVs. The subsidy for Tesla is disappearing in 2020 because it has sold over 200,000 vehicles. This is likely to adversely affect the growth of EV sales in the US in 2020.

The area of the world that seems to have a significant chance of a major uptick in EV sales in 2020 is Europe. This increase is possible because governments there are still giving sizable subsidies to buyers of such cars. If, in future years, these subsidies become too great a burden for European governments, EV sales are likely to lag there as well.

[6] Ocean-going ships are required to use fuels that cause less pollution as of January 2020. This change will have a positive environmental impact, but it will lead to additional costs that are impossible to pass on to buyers of shipping services. The net impact will be to push the world economy in the direction of recession.

If ocean-going ships use less polluting fuels, this will raise costs somewhere along the line. In the simplest cases, ocean-going vessels will purchase diesel fuel rather than lower, more polluting, grades of fuel. Refineries will need to charge more for the diesel fuel, if they are to cover the cost of removing sulfur and other pollutants.

The “catch” is that the buyers of finished goods and services cannot really afford more expensive finished goods. They cut back in their demand for automobiles, homes, cell phones and paved roads if oil prices rise. This reduction in demand is what pushes commodity prices, including oil prices, down.

Evidence that shipowners cannot really pass the higher refining costs along comes from the fact that the prices that shippers are able to charge for shipping seems to be falling, rather than rising. One January article says, “The Baltic Exchange’s main sea freight index touched its lowest level in eight months on Friday, weighed down by weak demand across all segments. The Index posted its biggest one day percentage drop since January 2014, in the previous session.”

So higher costs for shippers have been greeted by lower prices for the cost of shipping. It will partly be shipowners who suffer from the lower sales margin. They will operate fewer ships and lay off workers. But part of the problem will be passed on to the rest of the economy, pushing it toward recession and lower oil prices.

[7] Expect increasingly warlike behavior by governments in 2020, for the primary purpose of increasing oil prices.

Oil producers around the world need higher prices than recently have been available. This is why the US seems to be tapering its growth in shale oil production. Middle Eastern countries need higher oil prices in order to be able to collect enough taxes on oil revenue to provide jobs and to subsidize food purchases for citizens.

With the US, as well as Middle Eastern countries, wanting higher oil prices, it is no wonder that warlike behavior takes place. If, somehow, a country can get control of more oil, that is simply an added benefit.

[8] The year 2020 is likely to bring transmission line concerns to the wind and solar industries. In some areas, this will lead to cutbacks in added wind and solar.

A recent industry news item was titled, Renewables ‘hit a wall’ in saturated Upper Midwest Grid. Most of the material that is published regarding the cost of wind and solar omits the cost of new transmission lines to support wind and solar. In some cases, additional transmission lines are not really required for the first additions of wind and solar generation; it is only when more wind and solar are added that it becomes a problem. The linked article talks about projects being withdrawn until new transmission lines can be added in an area that includes Minnesota, Iowa, parts of the Dakotas and western Wisconsin. Adding transmission lines may take several years.

A related issue that has come up recently is the awareness that, at least in dry areas, transmission lines cause fires. Getting permission to site new transmission lines has been a longstanding problem. When the problem of fires is added to the list of concerns, delays in getting the approval of new transmission lines are likely to be longer, and the cost of new transmission lines is likely to rise higher.

The overlooked transmission line issue, once it is understood, is likely to reduce the interest in replacing other generation with wind and solar.

[9] Countries that are exporters of crude oil are likely to find themselves in increasingly dire financial straits in 2020, as oil prices stay low for longer. Rebellions may arise. Governments may even be overthrown.

Oil exporters often obtain the vast majority of their revenue from the taxation of receipts related to oil exports. If prices stay low in 2020, exporters will find their tax revenues inadequate to maintain current programs for the welfare of their people, such as programs providing jobs and food subsidies. Some of this lost revenue may be offset by increased borrowing. In many cases, programs will need to be cut back. Needless to say, cutbacks are likely to lead to unhappiness and rebellions by citizens.

The problem of rebellions and overthrown governments also can be expected to occur when exporters of other commodities find their prices too low. An example is Chile, an exporter of copper and lithium. Both of these products have recently suffered from low export prices. These low prices no doubt play a major part in the protests taking place in Chile. If more tax revenue from the sales of exports were available, there would be no difficulty in satisfying protesters’ demands related to poverty, inequality, and an overly high cost of living.

We can expect more of these kinds of rebellions and uprisings, the longer oil and other commodity prices stay too low for commodity producers.

Conclusion

I have not tried to tell the whole economic story for 2020; even the energy portion is concerning. A networked self-organizing system, such as the world economy, operates in ways that are far different from what simple “common sense” would suggest. Things that seem to be wonderful in the eyes of consumers, such as low oil prices and low commodity prices, may have dark sides that are recessionary in nature. Producers need high prices to produce commodities, but these high commodity prices lead to finished goods and services that are too expensive for many consumers to afford.

There probably cannot be a “one-size-fits-all” forecast for the world economy. Some parts of the world will likely fare better than others. It is possible that a collapse of one or more parts of the world economy will allow other parts to continue. Such a situation occurred in 1991, when the central government of the Soviet Union collapsed after an extended period of low oil prices.

It is easy to think that the future is entirely bleak, but we cannot entirely understand the workings of a self-organizing networked economy. The economy tends to have more redundancy than we would expect. Furthermore, things that seem to be terrible often do not turn out as badly as expected. Things that seem to be wonderful often do not turn out as favorably as expected. Thus, we really don’t know what the future holds. We need to keep watching the signs and adjust our views as more information unfolds.

 

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Ofgem publishes 2019 Annual Iteration Process for network price controls

Publication date29th November 2019Information types

  • Press releases

Policy areas

  • Electricity – distribution
  • Electricity – transmission
  • Gas – distribution
  • Gas – transmission

Ofgem has today published the results of the 2019 Annual Iteration Process (AIP) for energy network companies under its network price controls. 

As part of the ‘Revenue = Incentives + Innovation + Outputs’ (RIIO) price controls for network companies, we make annual adjustments to the revenue that we allow the energy network companies to collect through the AIP.

The AIP updates base revenues across Ofgem’s four price controls (electricity distribution, gas distribution, electricity transmission, and gas transmission) for the next regulatory year (2020/21).

This year’s AIP has reduced the allowed revenue that network companies will collect relative to the assumptions made at the start of the price controls by around £965 million (2018/19 Prices), saving consumers money on their bills. This reduction is driven by the following factors:

  • Cost of Debt – Lower interest rates in debt markets have resulted in a lower cost of debt allowance compared to the level set at the start of the price controls.
  • Allowed Expenditure – On the whole, network companies are spending less than the amounts assumed at the start of the price controls, therefore we make a proportionate reduction to their allowed revenue.

We have published updated price control financial models (PCFMs) for the four price controls, here:

RIIO-ET1 Financial Model following the Annual Iteration Process 2019

RIIO-GT1 Financial Model following the Annual Iteration Process 2019

RIIO-GD1 Financial Model following the Annual Iteration Process 2019

RIIO-ED1 Financial Model following the Annual Iteration Process 2019

For media queries contact Ofgem media manager Ruth Somerville 0207 901 7460/ 07766 511 470 ruth.somerville@ofgem.gov.uk 

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Conservatives focus on nuclear and EVs in net-zero vision for 2050

The Conservative Party has unveiled its manifesto for a net-zero carbon economy, which includes commitments to plant more than one million trees and sets aside £1bn for electric vehicle (EV) manufacturing, but fails to match Labour’s ambition in pushing the 2050 timeframe forward.

The Tory plans for achieving net-zero carbon emissions largely stick to the recommendations provided by the Committee on Climate Change (CCC), which claimed that a net-zero target could be achieved at the same cost that is put against achieving the old Climate Change Act, which is between 1-2% of GDP in 2050. The recommendations have since been enshrined into national law.

It was thought that the Tory Party conference would be used to provide more clarity on the net-zero target, specifically whether the new target would encompass all sectors – shipping and aviation are currently covered on a territorial basis – and how carbon capture and storage (CCS) solutions and hydrogen would be supported.

Despite no clarity on most of those measures, the plan does feature a commitment to build a £220m net-zero nuclear fusion plant by 2040. The first stage of the investment will cover the initial five-year development phase of the Spherical Tokamak for Energy Production (STEP).

Other commitments listed by the Tories include plans to plant up to one million trees between 2020 and 2024 to develop the Great Northumberland Forest, deliver £1bn in funding for EVs and hydrogen fuel cell development, and a new Future Homes Standard that will be introduced in 2025 to create “world-leading energy efficiency standards”. Interim regulations for the Future Homes Standard will be introduced from 2020.

Andrea Leadsom, the business, energy and industrial strategy secretary said: “Addressing climate change is a top priority for the Conservative Party, and today’s announcements will not only help us reach our Net Zero 2050 target, but will benefit communities and households – and improve wildlife and wellbeing – while doing so.”

A 20-year gap

The announcement follows last week’s news that Labour Party members had backed a pledge to reduce greenhouse emissions to net-zero by 2030 – two decades earlier that the Conservative target.

The motion also commits the party to take Great Britain’s energy networks and biggest energy suppliers back into public ownership, introduce a complete ban on fracking and make large-scale investments in renewable and low-carbon energy.

The Tory commitments have also been criticised by green groups for failing to strengthen commitments that could move the ban on petrol and diesel cars forwards or encourage reductions in meat-based diets and eating. Friends of the Earth’s chief executive Craig Bennett claimed that the measures were “nowhere near commensurate” to tackle the issues of climate change.

“For decades, we’ve been promised that nuclear fusion is ‘just a decade away’ and yet it’s never materialised,” Bennett said. “Why throw money away on tech-fix pipe dreams, at precisely the moment that onshore and offshore wind and solar are delivering better returns than ever before?

“If the government is serious about slashing climate pollution it needs to stop fracking, stop filling the skies with more planes, and stop funding oil and gas projects abroad and instead invest in public transport, renewable energy and doubling UK tree cover.”

Theresa Villiers, the environment secretary added: “The planting of one million trees will be fundamental in our commitment to be the first generation to leave the natural environment in a better state than we found it. They will enhance our landscape, improve our quality of life and protect the climate for future generations.”

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The UK Government is committing £220M to the conceptual design of a fusion power station – the Spherical Tokamak for Energy Production (STEP).

Secretary of State for Business, Energy and Industrial Strategy, Rt Hon Andrea Leadsom MP, announced the funding package during a visit to the UK Atomic Energy Authority’s Culham Science Centre HQ in Oxfordshire – the UK’s world-leading fusion research laboratory.

Fusion offers a virtually limitless source of cleaner electricity by copying the processes that power the Sun – the collision of hydrogen atoms to release large amounts of energy. Researchers around the globe are now developing fusion reactors that can turn this into a commercial technology to help satisfy the world’s ever-increasing demand for energy.

STEP will be an innovative plan for a commercially-viable fusion power station – offering the realistic prospect of constructing a powerplant by 2040. The investment will allow engineers and scientists to produce a conceptual design for the reactor (known as a ‘tokamak’) that will generate fusion energy and convert it into electricity. UKAEA and partners from industry and academia will pool their expertise to complete the design by 2024.

The STEP programme will create 300 jobs directly, with even more in the UK fusion supply chain. In addition, the spin-outs from the design work are expected to be enormous – both in terms of synergies with other fusion powerplant design activities (such as Europe’s ‘DEMO’ prototype power station) and other hi-tech industries.

STEP builds on UKAEA’s expertise in developing so-called ‘spherical tokamaks’ – compact and efficient fusion devices that could offer an economical route to commercial fusion power. The new MAST Upgrade spherical tokamak experiment is due to start operations at Culham early in 2020. Its work will play a key role in the STEP design.

Andrea Leadsom, Secretary of State for Business, Energy and Industrial Strategy, said: “This is a bold and ambitious investment in the energy technology of the future. Nuclear fusion has the potential to be an unlimited clean, safe and carbon-free energy source and we want the first commercially viable machine to be in the U.K.

“This long-term investment will build on the UK’s scientific leadership, driving advancements in materials science, plasma physics and robotics to support new hi-tech jobs and exports.”

Professor Ian Chapman, CEO of the UK Atomic Energy Authority, added: “The UK has a proud heritage of pioneering developments in fusion research. This announcement demonstrates the UK government’s commitment to translating that R&D leadership into a working fusion reactor. We are excited to work with our partners to take the next step towards a fusion-powered future.”

If your company or research organisation is interested in taking part in STEP, more information about the project is here: https://www.gov.uk/government/news/next-step-in-fusion

The STEP Procurement Plan Schedule is available here: https://www.gov.uk/government/publications/step-procurment-opportunities

Contact: For more information please contact Nick Holloway, UKAEA Media Manager, on 01235 466232 or nick.holloway@ukaea.uk.

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UK–EU power links vital

While politically the UK may soon be decoupled from the EU, it is busy building power grid links with mainland Europe. And some say it should build more, creating offshore wind hubs and network systems to help with green power balancing, exports and imports. For example, the planned 1.4 GW HVDC Viking inter-connector between Denmark and Lincolnshire will pass through or near some big offshore wind farms. And more are on the horizon.

National Grid has done comparative connection studies for the proposed 1.6 GW Eurolink to the Netherlands and 1.5 GW Nautilus link to Belgium (completion expected by around 2025 and 2027, respectively) with the proposed Sizewell C nuclear plant area in mind, but also local offshore wind projects. Some say the UK should be looking to build many tens of gigawatts of offshore wind in the mid-North Sea and also offshore connection hubs, like the artificial island proposed for Dogger Bank, almost 100 miles out from Hull.

Grid upgrade needed

Certainly, the resource is vast, and the study of European grid issues (PDF) produced by ENTSO-E, the European Network of Transmission System Operators for Electricity, sees the UK as one of the key hubs in the network. The ENTSO-E study of EU grid issues up to 2040 updates its 2016 “Ten Year Network Development Plan” (TYNPD). It says that there will be a need for increased transmission capacity in some places, both internally and to other countries, to make the system work in 2040. This is largely due to the increasing levels and use of renewables to supply all areas of the European grid; the report says that up to 75% of the total demand of renewable energy will be reached by 2040, so that “European countries will more than ever need to rely on each other through cross-border exchanges”.

Physical connector links with the EU energy system could mean having to comply with internal EU energy market rules

Dave Elliott

However, interestingly, it suggests that there will be different balances in net supply across the EU. From ENTSO-E’s studies, it looks like NW wind, offshore especially, dominates, with a lot of surplus power shifted east at times. Much of that will presumably be from the North Sea. But it will be variable, so there will be technical, regulatory and market challenges to ensure stability, with increased system flexibility. And a need for new grids.

ENTSO-E says that, overall, the benefits of the expanded network far outweigh the necessary efforts that will need to be mobilized for its realization: “A lack of new investments by 2040 would hinder the development of the integrated energy market and would lead to a lack of competitiveness.In turn, this would increase prices on electricity markets leading to higher bills for consumers. By 2040, the ‘No Grid’ extra bill (€43 billion a year in the average case) would be largely above the expected cost of the new grid (€150 bn in total in the TYNDP 2016 plus internal reinforcements, 25% discount rate)”. A lack of investments would also affect the stability of the overall grid and could, in some regions, “threaten the continued access to electricity which also has a cost for society”. And finally, in all the scenarios the organization looked at, “without grid extension, Europe will not meet its climate targets”.

UK benefits

The UK has to be part of this, if only for parochial reasons. It will have a lot of surplus renewable power to export at times, as the renewable capacity builds up to 40, 50 and 60 GW, more than enough much of the time to meet the country’s needs (summer night-time demand is around 20 GW, peak winter demand under 60 GW).  At times though, when UK renewable availability is low and demand high, it may need some top-ups via the grid interconnectors. That said, the exports are likely to dominate, so the UK would be a net earner of substantial income, assuming the surplus can be sold at reasonable prices. That would help offset the cost of building up renewables, and the links can also clearly help with balancing. As the climate policy think tank E3G said earlier this year, the UK government must continue to work closely with the EU to develop cross-border power grid interconnections after Brexit, if it is to ensure the lowest-cost decarbonization pathway. More linking of the UK to EU power grids could help boost its energy security and flexibility as renewables grow.

Last year, interconnectors provided 6% of UK power supply, via the four existing links, making the UK a net importer of power across these links. However, as I noted in my last post, its wind potential is very large, so that pattern should change as more renewables are installed in the UK. Indeed it already has, with the UK being a net exporter to France for much of this year. The government currently plans to have at least 9 GW more grid link capacity. However, the ability to trade profitably depends on many factors — not just the availability of capacity and grid links, but also demand patterns, prices, the regulatory framework and wider policy context. The E3G paper warned that leaving the EU will “severely reduce” the UK’s ability to influence EU energy policy in line with its interests, which may make reaping the full benefits of greater inter-links harder. It could render the UK a rule-taker from the EU in some respects, as physical connector links with the EU energy system could mean having to comply with internal EU energy market rules, such as those covering energy, environment, state aid and competition. Sounds like a familiar issue…

The UK has some of the key resources needed for the emerging Europe-wide grid system (including its vast offshore wind resource) and the power engineering and marine technology expertise (including for offshore wind and undersea links). It may not like the EU single power market any more, but it may nevertheless need to get into it. At least that is the logic of the energy system. Political logic may be different, although it is perhaps worrying that, reportedly, Ireland is looking to a new 500 mile under-sea HVDC power link to France, and the EU market, by-passing the UK, with some funding from the EU.  It may also be worrying that, post-Brexit,  the UK will presumably miss out on EU funding for grid development – like the €800 m available  under the Connecting Europe programme for interconnectors. That’s supporting some of the already-planned and agreed UK links, but the UK may not be eligible for more after Brexit. So it’s all a bit uncertain and a bit of a mess, whereas the need for links is getting ever clearer and UK green power capacity is building up — offering an export potential.