The Energy Transition | Ofgem decides on a quarterly price cap and consults on electricity transmission investment

Ofgem confirms implementation of quarterly price cap

Ofgem has confirmed that the energy price cap will be updated every three months instead of every six months from 1 October 2022. This is in line with Ofgem's previous statements of its intention to move to a quarterly price cap, as set out in its minded-to consultation on changes to the wholesale methodology published in May (read more on this here). Ofgem hopes this will reduce the risk of supplier failures and ensure cost reductions are quickly passed on to consumers.

Ofgem will also implement its plans to shorten the notice period for changes to the cap level from two months to 25 working days, as originally set out in the May consultation. It is also pressing ahead with changes which will allow suppliers to recover backwardation costs, which arise a result of the difference between the index used to set the cap level and the way suppliers are able to purchase energy for their cap customers. Ofgem has decided to move forward with its proposals to include backwardation costs into the wholesale methodology, however, the period for recovering these costs will be six months, rather than 12 months as originally suggested in the consultation. Following analysis on market stability and supplier financial resilience, Ofgem believes that shortening the recovery period will significantly reduce the risk of supplier exit over the coming winter in the context of high wholesale prices and market volatility.

The regulator has also confirmed that the upcoming change to the price cap (which will come into effect in October) will include an additional £41 uplift per customer to reflect wholesale costs incurred by suppliers as a result of the number of customers shifting onto capped Standard Variable Tariffs (SVT). The rise in energy prices has meant that SVTs have become the cheapest tariffs, resulting in an unexpected increase in the number of customers on those tariffs. In order to cover SVT demand, suppliers have had to purchase additional energy at prices above the wholesale cost allowance, hence the additional £41 per customer adjustment.

Jonathan Brearley, CEO of Ofgem’s, said: “As a result of Russia’s actions, the volatility in the energy markets we experienced last winter has lasted much longer, with much higher prices than ever before. And that means the cost of supplying electricity and gas to homes has increased considerably. The trade-offs we need to make on behalf of consumers are extremely difficult and there are simply no easy answers right now. Today’s changes ensure the price cap does its job, making sure customers are only paying the real cost of their energy, but also, that it can adapt to the current volatile market."

Ofgem publishes consultation on accelerating investment in onshore electricity transmission networks

Ofgem has published a consultation seeking views on how to best support the accelerated and strategic delivery of transmission network upgrades. Transmission networks are currently regulated by the RIIO-T2 price control mechanism which runs from 2021 to 2026.

In April 2022, the government published the British Energy Security Strategy, which set out ambitions for a long term, secure, clean and affordable British energy system. As part of the Strategy, the government set a target of connecting up to 50GW of offshore wind capacity by 2030. However, without significant upgrades to the current onshore transmission network, Britain will not be able to accommodate the substantial growth targeted for the offshore network. The consequences of this are potentially significant; some of the expected offshore renewable generation capacity may not be able to connect safely to the onshore network, whilst the capacity that is able to connect may not be able to export the electricity due to system constraints. 

In order to facilitate delivery of, and upgrades to, onshore transmission projects, Ofgem is consulting on a package of potential changes to the RIIO-T2 framework. The changes are intended to streamline the regulatory approval process for large electricity transmission projects, and include:

•  Providing early certainty on regulatory funding to enable transmission operators to speed up construction. 
• Reducing the number of regulatory approval gates to reduce the time taken to secure regulatory approvals and funding. 
• Providing targeted exemptions from onshore network competition.

 Ofgem also intends to hold the transmission operators to account and protect consumers by using strong financial incentives, including penalties for delays in delivery, and licence obligations. The consultation opened on 8 August and responses are due by 6 September 2022.

Government launches call for evidence on land rights and consents processes for electricity network infrastructure

The government has published a call for evidence on the adequacy of the current land rights and consents processes for electricity network infrastructure in the context of the transition to net zero. The government is hoping to understand whether the established processes are fit for purpose or whether they act as a barrier to the continued and accelerated development of infrastructure within the electricity network.

The British Energy Security Strategy sets out the government's commitments to dramatically reduce timelines for delivery of transmission (high-voltage) network infrastructure and to speed up the connections process for the distribution (low-voltage) network. These commitments are supported by various targets, including: the decarbonisation of the electricity system by 2035; the installation of 600,000 heat pumps per year by 2028; the phasing out of all new non-zero emission road vehicles by 2040; and the delivery of 50GW of offshore wind capacity by 2030.

The fulfilment of these targets will bring with it a significant increase in peak electricity demand. New sources of supply and demand will need to be developed, such as solar farms and electric vehicle chargepoints. At the same time, existing infrastructure will need to be upgraded to ensure that electricity cables are able to cope with significant increases in power flow. The land rights and consents processes are a critical factor in enabling the development of electricity network infrastructure at the rate required to meet government targets. In some cases, the costs and delays as a result of land rights and consents processes can hinder, or even prevent, electricity network infrastructure projects from going ahead.

The call for evidence is therefore seeking views on whether the existing consents framework is adequate in the context of delivering the major transformation of electricity network infrastructure that is required over the coming decades. The paper focusses on determining the efficiency and efficacy of the following existing land rights:

• Voluntary wayleaves and easements.
• Necessary wayleaves.
• Voluntary purchase and leasing of land.
• Compulsory purchase of land.
• Permitted development rights for substations.
• Section 37 consents for overhead lines.

However, this list is not exhaustive and the government is also seeking views on whether any other rights or consents processes should be included in the review. The call for evidence opened on 4 August 2022 and responses must be submitted by 15 September 2022.

Government responds to call for evidence on proposed changes to CfD Supply Chain Plans

The government has released its response to the call for evidence on proposed amendments to the Contracts for Difference (CfD) Supply Chain Plans (SCPs) published in February 2022. The CfD scheme, which supports new low carbon electricity generation, is key to achieving the government's goal of a fully decarbonised electricity system by 2035. The government sought views on changes to SCPs to make the CfD scheme more forward looking in order to deliver the scale of change needed to achieve net zero commitments.

In the call for evidence, the government proposed implementing a more graduated financial penalty system which would apply to all projects that fail to implement their SCP, but where terminating the CfD contract would be unjustifiable. However, this did not receive much support from respondents due to the increased investment risk this would create. Similarly, the government's idea to introduce a system which enables CfD applicants to negotiate SCPs with the Department for Business, Energy and Industrial Strategy (BEIS) was also rejected by many respondents. Respondents felt this would create issues around transparency and consistency, as well as lengthen an already constrained process. Lastly, the government sought views on altering the 300MV SCP threshold to prevent projects changing their size simply to avoid the SCP requirement. The majority of respondents felt that the current threshold is appropriate as smaller developers do not have a significant impact on the supply chain. 

Following the responses received, the government has confirmed that it will not be taking any immediate action to amend SCPs. The proposal to allow negotiation of SCPs between applicants and BEIS has been abandoned but the government will continue to review whether a change in the 330MV SCP threshold and introducing a graduated penalty system are required in the long-term, looking forward to CfD allocation round seven and onwards.