Coronavirus impact….
COVID-19 has had a destructive impact on economies and industries across the globe, with the energy sector no exception. Government lockdowns have significantly reduced demand levels and disrupted supply chains, with fuel markets also badly affected as planes are grounded and cars are off the road.
Despite the easing of lockdowns, a prompt return to business has not been straight-forward, with fears of a second wave raising concerns of further government measures being taken.
Companies within the energy & utilities sector must plan for all scenarios during the pandemic, affecting their ability to budget and provide accurate forecasts.
There are a number of potential issues which could provide short & long-term problems for the sector:
Risk & Volatility
Government restrictions are likely to be imposed well into 2021, until a vaccine for the virus is found, placing great importance on a business’ ability to remain flexible and implement resilient strategies.
The main factor for shifts in energy consumption will be the workforce, preparations must be made in case in operations need to be temporarily shut down, or employees are forced to work from home again.
Supply
Suppliers have been challenged with keeping the lights on during the pandemic, with reduced demand resulting in technical headaches for system operators in terms of voltage management, shifts in distribution levels and forecasting.
Operators must plan for any number of scenarios and work closely with the government and energy regulators to ensure energy remains affordable, supply is secure and the generation mix is balanced.
The Oil and Gas Industry
Oil prices have plummeted during the pandemic and future pricing remains uncertain due to weak global demand and failing economies.
OPEC+ announced the world’s biggest ever production cut measures in response to the situation, reducing output by 10 million barrels per day.
However, travel, working and consumer restrictions will continue to destabilise the oil market and undermine OPEC’s efforts.
A volatile oil market will directly impact gas prices and protective measures will need to be taken across the industry to manage future pricing and supply.
Brexit Implications….
The UK’s decision to leave the European Union will also directly impact the industry in terms of energy trading, legislation and overseas investment.
Guarantees of Origin
Renewable Guarantees of Origin and Guarantees of Origin for combined heat and power, issued within the European Union will continue to be accepted in the UK until the 1st of January 2021.
However, any new Guarantees of Origin issued within the UK will no longer be recognised within the EU.
It is also possible, although unlikely that existing contracts with electricity suppliers or traders based in the EU, which require an EU-recognised
Guarantee of Origin may no longer be valid.
As such, it is important to raise a query with the supplier or trader in question if you think you may be affected.
UK Participation in the EU ETS
The UK will remain a full participant in the EU Emissions Trading System until the 31st of December 2020, meaning all UK operators must meet their compliance obligations until this time.
UK operators will have until the 31st of March to submit their Verified Annual Emissions Report for emissions in 2021. Equivalent allowances must also be surrendered to 2020 verified emissions by the 30th of April 2021.
Free allocation of remaining allowances must be confirmed with the National Administrator on or before the 31st of December 2020, as stated by the European Commission. This is subject to possible changes to the allocation before the end of the current transition period.
Interconnectors
Supply between interconnectors should not be impacted by the UK’s exit from the European Union but operators must make the necessary preparations.
Operators and owners of Interconnectors should work with regulators and stakeholders to prepare alternative trading arrangements and new rules before the 1st of January. These new rules and arrangements should provide connected markets with the relevant information so trading can continue without disruption.
Existing Transmission System Operator certificates will remain valid and the government has confirmed that Brexit will not result in additional domestic administrative requirements.
However, operators must continue engagement with EU national regulators to prepare for any changes to their Transmission System Operator certifications in the future. Ofgem and the Northern Ireland Utility Regulator will provide support during this process.
Environmental Obligations….
Climate Change Agreements
The deadline for new applicants and counter proposals for the Climate Change Agreement (CCA) scheme has been extended till March 2025 following a government announcement in the Spring Budget.
CCAs work by setting energy reduction targets for businesses in return for a discount in the Climate Change Levy on their energy bill.
Just under 9,000 facilities in the UK benefit from the agreement and the latest evaluation showed that 80-100% of eligible businesses enrolled on the scheme in most participating sectors.
A consultation was launched in April this year, establishing how the government would implement the extension. The consultation also asked for opinions on potential reforms, should the CCA scheme be re-launched in the future.
The extension and the CCL discount was welcomed by all respondents involved with the consultation which would result in a £300m annual saving for businesses.
Respondents were also in favour of maintaining existing rules and eligibility criteria to provide consistency for operators.
Despite the positive response, some concerns included: tight timelines, the increase to the buy-out price and no option to use surplus within the added Target Period.
Targeted Charging Scheme….
Ofgem’s Targeted Charging Review proposed changes to residual charges and embedded benefits.
In 2019, the government regulator announced its intention to change the way residual Transmission Network Use of System (TNUoS) charges work.
Residual Charges pass on costs to the consumer, regardless of the customer’s activity, as opposed to a forward-looking charging system when costs incurred by the system correlate with customer behaviours.
The proposed changes would see a fixed charge imposed for customers who incur residual TNUoS charges which are levied on demand. This differs from the current triad system which calculates costs based on the three highest periods of peak demand between November and February each year.
Had the proposed changes been implemented last year, for example, they would have removed 80-90% of the current value of triad reduction for demand customers.
The initial implementation date was April 2021; however, the proposed timescales were deemed unviable and Ofgem approved a request by the National Grid for postponement.
A lack of clarity in regard to the non-domestic market was cited as one of the main reasons for the delay, while the timeline was deemed unrealistic as accurate charges for April 2021 would not have been available until late 2020.
Customers will still be able to benefit from Triad reduction up to and including Winter 2021/22, while current draft tariffs for April 2021 only propose a minor decrease in Triad rates to around £45/kW. This means taking part in Triad Management can still be financially beneficial.
The amended charging structure is expected to be fully implemented in April 2022.
A number of charges under the existing Targeted Charging Scheme will remain unchanged, including:
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Balancing Services Use of System will remain the same until April 2021. From then, BSUoS will move from net to gross charging, removing the existing embedded benefits for distribution connected generation.
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The TNUoS residual will be set to zero for transmission connected generation assets in April 2021.
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Equivalent demand residual changes for DUoS will be implemented in April 2022.
*The planned revision of transmission costs has now been delayed until April 2022. Read more.
Renewable Power
In April 2020, the UK moved from 7th to 6th on the Renewable Energy Country Attractiveness Index and the sector is expected to remain resilient despite the pandemic.
The main factor behind the UK’s improved position is the decision to include onshore wind and solar projects in the next Contracts for Difference auctions, with round 4 set to open in 2021.
The International Energy Agency confirmed that the pandemic has halted growth in the renewable energy sector but it expects a strong recovery.
The IEA’s Renewable Market Update Report showed that 167GW of renewable power capacity was added in 2020, down from 13% in 2019.
Government lockdowns are the main reason for this drop as they resulted in delays in construction, disruptions to supply chains and financial difficulties. Despite this, an improvement is expected in 2021 providing support is offered in the way of policy frameworks to help tackle climate change.
Future of Coal and Nuclear….
Nuclear power is expected to play a key role in the global low carbon energy mix which was emphasised in a recent report by the International Atomic Energy Agency (IAEA).
The IAEA claim that the somewhat controversial energy source can match electricity consumption growth, while helping to improve air quality and network security. Unlike fossil fuels and renewable power, nuclear energy can also guard against price volatility.
As the UK and the rest of the world look to decarbonise their energy systems, the need to diversify energy sources becomes more necessary.
The report claims that in a high case scenario, nuclear power generation across the world could increase by 82%, to 715GW, while overall electricity generation is expected to double in the same period.
In a low-case scenario, nuclear power could fall by 7% and the Agency have reiterated the need to add more nuclear capacity to offset any ageing facilities which are taken offline. To achieve this, a change in energy policy and market designs must occur to encourage investment.
Last year, nuclear power generated 10.4% of global electricity demand.
The UK nuclear sector suffered a blow in September 2020 as Japanese firm, Hitachi pulled out of two new projects, citing the Covid-19 pandemic as the cause.
Meanwhile, unabated coal generation in Great Britain is expected to end by 2025 due to its harmful effects on the environment.
Unabated coal generation includes facilities which have not invested in technologies such as carbon capture & storage to reduce their environmental impact.
In 2020, the UK saw its longest period since 1882 without the presence of coal in the energy mix – standing at 67 days, 22 hours and 55 minutes. A clear sign that the UK is taking significant steps towards a low carbon energy network.
How to prepare….
Businesses can reduce the impact of the pandemic with thorough energy data analysis, making direct comparisons between usage levels before and after lockdown.
Intelligent forecasting is one of the best safeguarding measures a business can take during times of uncertainty, as it enables effective planning for a number of different scenarios.
Markets have recovered from the record lows displayed in March but still represent great value and businesses are encouraged to think about their current energy contracts to avoid being caught out by extreme market volatility.
Apollo Energy provide a range of services to help businesses secure best value energy rates and gain insight into usage patterns and behaviours. A strong understanding of the way your business uses energy can help create better safeguarding measures should further government restrictions come into effect.
Get in touch with one of our consultants today by calling us on 01257 239500, or emailing us at [email protected].