Energy policy and regulation – what you need to know and how incoming change will shape your business strategy and bottom line
The continued rate change to the energy industry looks set to continue in 2019. While the policy for decarbonising heat and transport continues to edge forwards the focus is still on the power and retail sector. There are some immediate challenges which need to be addressed as a priority as well as the promise of some strategic direction being set out by the Government in its much anticipated white paper.
It won’t come as a surprise that the biggest issue facing the power sector today is getting the Capacity Market (CM) reinstated. Since Tempus won its appeal in November 2018 there has been a significant amount of resource dedicated to reinstating the scheme as soon as possible.
Any resource that was earmarked for improving the mechanism under the EMR five year review will have been reduced as the priority has shifted away from refining the scheme to simply getting it back up and running.
Whether or not Tempus’s appeal will have any significant impact on the fossil fuel generators targeted is yet to be seen, however, what is certain is that this impacts all technologies that won CM agreements (including low carbon plant, battery storage and, ironically, Demand Side Response (DSR) as well as investor confidence.
The Government’s energy white paper, due to be published in the summer, looks set to cover a wide range of topics across the energy sector as well as addressing a number of ideas put forward by Helm’s Cost of Energy review. Here’s my pick of what can be expected for the power sector:
- Government is expected to reemphasise its support for markets which translates to Contracts for Difference (CfD) and CM auctions continuing well into the 2020’s – but expect more work to address what the term ‘subsidy free’ means and how the mechanisms evolve as the market changes.
- Where there are market failures we can expect the Government to step in. The introduction of a Regulated Asset Base (RAB) model looks set to be brought forward to support large, high risk infrastructure such as new nuclear and Carbon Capture Use and Storage.
- There will be a big push on smart systems including data availability as well as streamlining the code governance framework to facilitate innovation and remove barriers to new entrants.
- Finally, networks will be in the spotlight with considerations as to how network changes (as well as other levies) are recovered fairly to initial views on what the future Distribution System Operators framework may look like.
Although the issues highlighted are power specific we shouldn’t forget that increasingly, heat and transport policy, is overlapping with power policy making things ever more interesting and expanding the need for whole system thinking.
Kyle Martin is the Head of Market Insight at LCP. For more information visit www.lcp.uk.com/energy-analytics<https://www.lcp.uk.com/energy-analytics> or email kyle.martin@lcp.uk.com
