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2018: A year in review

As we come to the end of 2018, many working within the energy industry will be looking ahead to 2019 with some trepidation, as energy costs are set to rise further and uncertainty over Brexit continues to grow.

While businesses across the UK will undoubtedly face fresh challenges in 2019, we could also see some positive changes in the energy space. But many of us probably felt the same at the end of 2017 – and when you look back at the past year, we’ve already overcome some significant challenges, and we’ve also taken some positive steps forward.

So, let’s take a look at what’s happened so far in 2018:

Energy costs have risen

For the past few years, wholesale costs have remained relatively flat, but in 2018 we’ve seen volatility return to the markets. From broader trends to serious spikes caused by the Beast from the East, wholesale price rises have been driven by a number of factors, from depleted European gas storage levels to bullish oil markets, and they don’t look set to fall in the foreseeable future. Businesses that have had fixed energy procurement contracts come to an end in the past 12 months are likely to have been unpleasantly surprised by their renewal price, pushing energy reduction higher up the agenda.

And it’s not just wholesale costs that have risen – businesses have faced a ‘double whammy’ of energy cost price hikes, as the non-commodity part of their bill has also increased this year. That’s because the costs of the Contracts for Difference (CfD) levy, the Renewables Obligation (RO) levy and the Feed in Tariff (FiT) have all risen at rates well above inflation, even though the RO scheme closed to new entrants in 2017.

Businesses that operate 24/7 will also have seen significant cost increases from the changes to the Distribution Network Use of System (DUoS) charges, which reduced peak charges, but increased night and weekend charges to levels that are close to weekday charges.

Brexit uncertainty has grown

Another year of Brexit negotiations have not provided UK businesses with any level of certainty, and with the 29th March deadline only months away many are more confused about where we’re heading than ever before.

While we have been enlightened on how some areas of energy policy will be affected by Brexit – the Government has confirmed that a carbon tax will be introduced to replace the EU ETS in the event of a ‘no deal’ Brexit, for example – there are many areas that are yet to be clarified. Key details on issues such as our future relationship with the internal energy market (IEM) and how our regulatory frameworks and systems will need to be adapted still need to be decided.

The fact that our energy future is still hugely uncertain means that Brexit is one of the key concerns for energy professionals – in fact, it was named as the second biggest challenge facing the industry in the Energy Institute’s 2018 Energy Barometer.  With concerns around the availability of skilled workers once we leave the EU and the detrimental effect leaving could have on the investment attractiveness of UK energy, it seems that we’re ending 2018 with more questions around Brexit than we had at the start of the year.

Changing charges

Over the course of the year, we’ve seen some key changes to the way consumers are charged for their energy use, which will have benefited some, but pushed up costs even further for many.

Businesses that are eligible for the Energy Intensive Industries (EII) exemption will have seen reductions to their bill from April, as the scheme changed to provide them with exemption from the RO Levy (meaning they no longer need to pay upfront and apply for compensation). Those that aren’t exempt, however, are likely to have seen cost increases due to this change. We also saw changes to DCP 161, which means businesses on half-hourly (HH) meters that exceed their available capacity can now be hit with penalties of up to three times the standard rate.

This year, Ofgem has also made some important announcements about how charges could change in the future. On the conclusion of the Targeted Charging Review, they revealed that they would be ending the Triad system in order to level the playing field between those who can be flexible and those who can’t, which means businesses are likely to see Triads replaced with fixed charges by around 2021. They also announced plans to overhaul their networks incentives scheme, proposing an equity cap of between 3-5% on network operators, which they say could save consumers more than 5 billion over the 5-year period of RIIO-2 (2021-26).

Progress for new technology

In January, battery storage projects and demand-side response capacity secured more than 500MW of power in the T-1 Capacity Market (CM) auction, while two coal plants were forced to exit the auction without a contract. Eggborough power plant was closed earlier than planned because it wasn’t economically viable without a CM contract. The T-4 auction for 2021/22 wasn’t as successful for new generation methods, as a record low clearing price of £8,40/kW per year and the new de-rating factors made it difficult for smaller generators to compete. Battery storage projects only secured 153MW of capacity in the T-4 auctions.

When taking the T-4 results into account, it’s not difficult to understand Tempus Energy’s argument that the CM favours large generation over technologies like DSR. They brought a case against it to the European Court back in 2015, and in November 2018 the Court ruled that the European Commission failed to properly assess the role of DSR in the CM.

The CM has been suspended pending further investigation, which could be problematic for those that rely on CM payments until resolved, but it could be beneficial for new technologies in the long term; it’s hoped that the CM rules will need to change to either offer 15-year contracts to DSR projects, or only offer one year contracts to all types of generation.

A greener future

We’ve also seen some positive indications that our energy system is changing, and that we’ve reached some important milestones in our journey towards our green targets.

In July, the UK passed the threshold of more than 1,000 coal-free hours this year, which shows that the demise of coal power is speeding up, as we only achieved 624 coal-free hours in 2017. We reached another significant green milestone in September, when the UK’s wind power capacity reached 20GW. In June, solar PV was briefly the country’s number one source of electricity generation, overtaking gas to produce 28.7% of all the UK’s electricity needs.

The National Grid’s 2018 Future Energy Scenarios (FES) report was also encouraging, showing that we can meet our low carbon commitments if we adapt our energy system to accommodate new generation. In fact, the National Infrastructure Commission’s 2018 National Infrastructure Assessment found that we could reach a greener future more quickly if we act now, with key recommendations including investment in low cost renewable technologies and increasing the current 2030 target from 30% of our power generation coming from renewable sources to 50%.

Moving forward

Clearly, 2018 has brought challenges and opportunities for energy professionals, and 2019 is likely to bring more of the same. This means that it’s more important than ever for businesses to optimise their energy strategy.

If your business could benefit from the Inenco team’s expertise, give us a call today on 08451 46 36 26 or email