As we take our first steps into 2021, we take our final look back at the biggest developments in the UK energy markets in 2020, setting us up for the significant year ahead.
Ofgem issued its decarbonisation Action Plan on 3 February as Jonathan Brearley became Ofgem CEO, setting out the actions that it will take over the next 18 months to “help make low-cost decarbonisation a reality”. This was in the form of a plan that set the framework for the approach it will adopt across its responsibilities, from regulating the network companies to supporting government and industry to developing affordable low carbon heating options.
The regulator also undertook a Supplier Licencing Review, with this project seeking to ensure that appropriate protections are in place against poor customer service and financial instability. In 2020, Ofgem consulted on and made a decision on ongoing requirements for suppliers and exit arrangements, which are due to take effect early next year. They include measures designed to promote more responsible risk management, improved governance and increased accountability and enhance Ofgem’s market oversight.
Ofgem finalises RIIO-2
Ofgem issued its draft and final determinations for RIIO-2 (for the electricity and gas transmission and gas distribution companies) due to take effect in April 2021. It also consulted and delivered its decision on the approach (sector specific methodology) for electricity distribution. The price controls are major set pieces of regulation that enable Ofgem to periodically re-set what the networks are required to deliver, to ensure they are efficiently sized and that customers do not pay more than they need. Key themes for this round are the approach to supporting net zero, including what the companies should build and when, and the returns that the networks should earn on their investments.
Work continued on implementing Ofgem’s Targeted Charging Review (TCR) Significant Code Review (SCR) decision of November 2019 that considered how residual network charges should be set and recovered. This includes implementing a fixed charge per final demand site for distribution and transmission use of system charges, where the distribution changes have been approved and transmission is pending. These are due to be implemented in April 2022.
There were also key decisions on removing the generator transmission residual (CMP317/327) and charging BSUoS on gross demand (CMP333) (thereby removing one element of embedded benefits). Ofgem set out its position in December on the second BSUoS taskforce that considered who should be liable for balancing services charges and how those charges should be recovered. It expects industry to develop refined solutions in line with the taskforce recommendations, which included that final demand should be liable for all balancing services charges and that it should be levied on a volumetric fixed charge basis.
Ofgem’s Network Access and Forward Looking Charges SCR is the second major project on the forward-looking element of electricity network charges, and on access arrangements, principally to the distribution networks, it is making slow progress. In March, Ofgem issued its shortlist of options and in July requested information on the costs to industry of implementing these.
Ofgem approved major changes to the gas transmission arrangements under UNC678A that aimed to produce stable and predictable transmission charges and ensure compliance with the EU tariff network code. The change implements a “postage stamp” methodology that Ofgem considered was appropriate in a meshed network operating below capacity with expected declining demand. Since the implementation, National Grid Gas has already decided to implement changes from February to address an under-recovery of expected charges, while work continues on a replacement to the short-haul arrangements to discourage inefficient bypass of the system.
The COVID-19 crisis forced many bodies and companies to change their priorities and caused major wholesale price changes. With another national lockdown announced this week, the pandemic is certain to remain a significant factor this year. Outside of the pandemic, the government has put an awful lot on its plate for this year, with a raft of consultations and calls for evidence to take place soon, all of which we will cover in the Daily Bulletin and Energy Spectrum.
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