Never a dull moment!

Today my energy blog, Watt-Logic is three years old!

Energy markets are never dull…

The big news over the past year has of course been Brexit, however as far as energy has been concerned, it has been more of a side-show, with the main energy news being the introduction and subsequent raising of the retail price cap, and the suspension of the capacity market. Also important for market participants, although less high profile in the regular press have been Ofgem’s transmission charging proposals.

The jury is still out on whether the price cap will be seen to be a success by the public or policymakers. That Ofgem was forced to raise the cap by just over 10% from April, just four months after its initial implementation was entirely predictable, but undermines the scheme in the eyes of the ordinary consumers it was designed to protect.

The cap is just one of the many challenges faced by small suppliers. I wrote last year:

“Small retailers are beginning to struggle, and there are questions being asked as to how they will manage in an environment of price caps which will undermine their ability to differentiate on price. Some minnows are feeling the effects of a low price/low margin offer, and a number have been forced to close in recent months. Others are facing pressure to address customer services failings amid criticisms that new entrants are being granted supply licences while lacking the robust operational processes to support their businesses.” 

This continues to be the case, with further small suppliers going bust in recent months. The pressures have not reduced, and more exits can be expected.

The capacity market was suspended in November following a ruling by the European General Court that effectively nullifies the scheme’s state aid approval. The European Commission has responded by both challenging the ruling and launching a state aid investigation, while Tempus Energy has applied to the English High Court for a judicial review of the Government’s decision to continue to operate the market, albeit with all payments suspended, seeking court orders to force a full suspension of the market.

The Government is trying to maintain the status quo and pressing ahead with the five-year market review, however, the outcome is far from certain, with a possibility that if state aid approval is not granted, or if the market requires modification for approval to be secured, then there may be a requirement to claw back previously made capacity payments, which would be highly problematic for more marginal thermal plant that had relied upon capacity contracts to stay open.

Network charging reform, while having a lower profile in the mainstream press, has the potential to have a far greater impact on the electricity markets. The reforms are in two parts – the first area which Ofgem has address, somewhat counter-intuitively, concerns residual charging, with changes to forward-looking charging and network access following a little later.

There have been some rather hysterical responses to the proposals, with some market participants suggesting the reforms will destroy the economics for providers of flexibility. This is unlikely to be the case as the fundamental changes in market structure due to the increased use of intermittent generation will continue to drive the need for flexibility on the networks, so the financial frameworks to support these will need to be developed. The economics may be delivered through different market mechanisms, but the fundamental value of flexibility will certainly not be destroyed by any new network charging approaches.

Elsewhere, there has been disappointing news for new nuclear projects with Hitachi’s withdrawal from the Wylfa Newydd project, leaving the focus on Sizewell C as the next most likely scheme after Hinkley Point C. A new policy approach to small modular reactors is expected this summer as part of the Government Energy White Paper.

…where might we be a year from now?

Over the next year, we should expect to see further progress on National Grid’s reform of its balancing and ancillary services – this is where providers of flexibility will find their income streams, as well as further developments to the emerging local markets for flexibility being created by distribution network/system operators.

The trend for suppliers to offer new and varied tariffs is also likely to continue, potentially with more progress on smart tariffs.

On the policy front, we can probably expect more talk about heat networks and hydrogen, but it seems doubtful that anything concrete will emerge in either area over the next 12 months. As Greg Clark announced the end of the “trilemma” in November he also committed to a new Energy White Paper that is expected in the summer, setting out the Government’s key energy policies for the coming years. However, the hash that has been made of Brexit has raised the prospect of yet another General Election, so perhaps we should not hold our breath for any meaningful new energy policies just yet.

On the other hand, the exact opposite could happen!

“There is not the slightest indication that nuclear energy will ever be obtainable. It would mean that the atom would have to be shattered at will,”
– Albert Einstein