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Smart export guarantee

Nigel Cornwall Nigel Cornwall Director
18th March 2019

This summary outlines Cornwall Insight’s response to BEIS’ January consultation on the Smart Export Guarantee (SEG). It expresses support for the broad thrust of the SEG proposals and identifies key issues for further consideration.

Overview

The proposals set out in the 8 January document The Future for Small-scale Low-carbon Generation are a step forward on the ideas set out in the July 2018 call for evidence. The proposed SEG will provide a guaranteed route to market for exported electricity, provided site owners below 5MW install an accredited half-hourly meter with an export register.

Further work is needed to finesse the details of the SEG, but the latest consultation contains the key elements of a workable solution that should permit a proportionate transitional regime following the withdrawal of current Feed-in Tariff (FiT) export arrangements. This should facilitate development of a more active offtake market for smaller parcels of power, which does not presently exist.

However, further work needs to be done urgently to ensure there is a minimum delay between the end of the FiT regime on 31 March 2019 and the start of SEG later this year. That said, we see no reason why the replacement regime should not be in place by 1 October 2019 at the latest.

The main issues requiring further consideration are summarised below.

Metering and communications issues

So far, some 400,000 SMETS2 meters have been installed, so this will require some targeting of smart meters at new micro-generation sites. Thought needs to be given to ensuring such sites are prioritised in the event of restricted availability of compliant meters with export capability.

There also remain communication issues around the new DCC systems to enable export registers to be separately reported, including by a different supplier to the registrant of the import register, which is an essential feature if proper competition is to develop for exports. We continue to hear of varying and in some instances excessive costs levied by some DNOs for registration of a separate MPAN for exports to enable appropriate allocation of network costs.

So, these issues need to be addressed and overcome if barriers to installation of new meters are to be properly addressed. BEIS now needs to mandate that these issues are looked at as a matter of urgency. However, if the metering and communication issues can be overcome and if costs of new meters are proportionate, then there should be no barrier to new exporting installations being half-hourly metered.

Tariff requirements

While we can see merit in a minimum price for certain types of development, notably grid connected community schemes, previous language used in the call for evidence around applying automatic discounts to market value has gone. This represents progress provided suppliers are enabled to reflect the value they attach to exports in their tariff or tariffs.

The mandatory tariff should be based on a simple variable tariff. This would allow suppliers to signal the time profile they attach most value to. The level of the tariff at different consumption times would be determined by the supplier, and we expect that most obligated suppliers would band their tariff to avoid undue complexity (in much the same way that emerging time of use import tariffs are usually split into three or four representative time bands). This option would offer the opportunity for suppliers to compete to provide tariff rates considering their other purchasing arrangements, including imbalance exposure. It would also allow exporters to quickly access competitive choices on a comparable basis.

Of course, the mandatory tariff requirements on obligated suppliers should not preclude more progressive suppliers offering additional tariffs. This could also include smarter options, including bundled or more dynamic offerings dependent upon their wider market strategies.

Other non-obligated suppliers could voluntarily offer export terms, though we believe they would need to comply with the same guidelines as obligated suppliers.

Compliance threshold

The 250,000-threshold based on electricity accounts only, proposed in the 8 January consultation, is appropriate as it aligns with the current obligation level under the FiT. Several suppliers in addition to the large traditional suppliers have now passed this, with a current market of around 15 suppliers. It should not, however, be aligned with Energy Company Obligation thresholds, thus falling to 150,000 customer accounts, as canvassed in the supplementary BEIS note in February. This is because newly obligated suppliers passing the threshold for the first time would see higher compliance costs as they will not have legacy FiT customers (with existing supporting business processes). The 250,000-threshold is also significantly lower than the threshold of 6% of supply market volumes used for the purposes of the Offtaker of Last Resort regime, and it seems to strike the right balance.

That said, most growing and established suppliers will not welcome these proposals owing to the additional compliance requirements in an already cluttered regulatory landscape. Yet, most new entrant suppliers welcomed the supplier market access rules under Secure and Promote, and this is a reverse image of the same problem.

The proposed approach will be welcomed by developers of community schemes. Such projects struggle to compete in a power purchase agreement market against larger players with the lack of a floor price. A potentially predictable price, which should emerge as a result of suppliers benchmarking themselves against each other, should provide some certainty of return for established technologies, especially if the initial transitional period is set as we propose at around seven years. 

We would also expect some suppliers to target this section of the market as technology costs continue to fall and as delivered electricity prices rise as unavoidable costs of policy increase.

Transitional window

Further thought is required over the length of the transitional window. The consultation implies that the smart meter roll-out would need to be concluded and the decisions arising from network charging reforms and from moving to market-wide half-hourly settlement (HHS) should have been implemented (implying end 2023 could be significant). But at possibly less than five years, this may not prove sufficient in a market where several years of revenue certainty is still seen as an important requirement, especially by community scheme developers. Furthermore, industry change programmes have a habit of coming in rather late, so a date no sooner than late 2026 looks sensible albeit subject to review in the light of events.

If SEG implementation were to occur in October 2019, this would provide a seven-year window if the sunset date was set at 30 September 2026.

Brown vs green electricity

On balance, we think the challenge from unbundling the export based on source is probably not worth tackling, as it is the value of the power to the system that is the critical factor, not its source. This is consistent with the fact that, save for CfD-sourced power, low-carbon power (rightly or wrongly) is no longer considered to be a premium product that should be incentivised.

Consequently, we would suggest that the SEG should apply to any exports from the site to avoid the need for complex sub-metering. It should also be robust to evolution of new technology solutions behind the meter such as battery from storage combinations and vehicle-to-grid solutions.

Legacy FiT sites

BEIS also needs to consider the >800,000 generators presently passively spilling onto the grid, with government taking necessary steps to initiate the further transition from “dumb” to “smart” meters. Until legacy exports are registered in BSC settlement, the increasing volumes of spilt power will continue to be simply smeared back to all suppliers based on their regional consumption. This removes all incentives to integrate this power – presently in excess of 1.5TWh of it - into consumer and balancing offerings, and is inefficient.

We will shortly have a new and replacement obligation on suppliers with regard to smart meters, and early thought is required as to whether and how this could be extended to FiT-registered exporting sites (as well as new SEG sites). Optional HHS is not presently a realistic choice for small sites and, unless the power is owned by the supplier administering the legacy subsidy, it will not be valued and used proactively.