Energy regulations and manufacturing – a speedy summer update

Changes to energy regulations can have big implications for budgets and operations, but with so many publications and consultations underway, staying ahead of the latest issues and changes can be a challenge for busy manufacturers. Ørsted has summarised four key topics to keep an eye on over the coming months, and what they could mean for your business.

A better scheme, on balance?

By participating in different demand management schemes, larger manufacturers have been playing a role in keeping the UK’s energy system balanced for some time. Increasing or decreasing consumption, or switching to on-site generation when requested by the National Grid, helps to respond to fluctuations in demand – and take some strain off the network during peak periods.

National Grid has taken steps to simplify its balancing schemes, to make it easier for more organisations and technologies to participate. Previously, there were a large number of National Grid products to navigate. These ranged from second-by-second frequency balancing to other schemes with different requirements and rewards, depending on how quickly an organisation could respond to a request to reduce consumption.

National Grid’s new, simplified balancing schemes will create two products for short term operating reserve; one requiring less than 20 minutes to respond, and one with a longer response time. For Fast Reserve, contract terms are being revised, enabling greater flexibility. Participants can tender for contracts from one month up to 10 years.

Existing contracts have not been cancelled but some products will be phased out completely: Firm Frequency Response Bridging, Frequency Control by Demand Management, Enhanced Frequency Response, Short Term Operating Reserve (STOR) Runway and Enhanced Optional STOR.

With system balancing such an important factor in maintaining the UK’s energy system, there are a number of options beyond the National Grid-procured schemes, such as Ørsted’s Renewable Balancing Reserve. You can read more here.

 

Embedded benefits under review

Many manufacturers have chosen to install small scale generators on-site to help manage energy costs. Switching to on-site supply during peak demand periods can significantly reduce network charges, but exporting power during peak times can also generate additional revenue, taking advantage of higher prices. However, last year Ofgem ruled that the embedded benefits received by small generators connected to the distribution network were distorting the market, at a cost to consumers. Benefits average around £29.4/kW for 2018/19, but are reducing to £15.8/kW for 2019/20. By 2020/21, benefits will average out at £3/kW. Forecasts are published here on the National Grid site.

A judicial review is underway to challenge the decision, pointing out that many generators will have had these benefits at the heart of their business case to invest in embedded generation. If reversed, this could also have an implication for those manufacturers on pass-through contracts, as Ofgem retrospectively adjusts charges. All eyes will be on the outcome of the review, which is expected this summer.

 At the same time, Ofgem is also conducting a review into network charging, which will mean network charges are rebased for everyone. This should be in place from April 2020 – although it’s too soon to tell whether this will lead to savings or extra costs for consumers. Alongside a review into residual charging, there could be changes afoot in network charges.

Industrial users in the spotlight

In its industrial strategy white paper, the Government set out its commitment to reducing rising energy costs for industrial users. Measures range from exempting energy intensive users from some low carbon levies, to a new scheme that would support industrial users with energy efficiency.

While the transition from compensation to exemption from the Contracts for Difference (CfD), Renewable Obligation (RO) has already been completed for Energy Intensive Industries, a consultation is still expected to look at how to extend these exemptions to benefit more industrial users.

The Government has also pledged to develop a scheme to support investment in industrial energy efficiency, but there are no further details yet. This will help large industrial users cut their energy use and improve their productivity – more information is expected to be published as part of a consultation during 2018.

 

Energy in a post-Brexit world

Earlier in the year, the House of Lords EU Energy and Environment Sub-Committee published a report on what Brexit meant for the UK’s energy security. As a net importer of energy, with direct pipelines and interconnectors between us and our European neighbours, the ease with which the UK can trade energy with continental Europe is vital to both future security of supply and the cost of energy.

The report acknowledged that uncertainty around Brexit creates risks for trades with the EU and any subsequent management of potential supply shortages. It concluded that the UK may be more vulnerable to energy shortages in the event of unplanned generation outages or extreme weather, both times where import volumes would be higher. For this reason, the Sub-Committee has asked the Government to set out how it will work with the EU to anticipate and manage these conditions.