The Energy Transition | Ofgem launches consultation on £15.7 billion grid funding to reach net zero

This week we look at Ofgem's consultation on proposed funding for substantial net zero grid upgrades, the signing of the UK's longest duration BESS tolling agreement, the first powering up of six new electricity transmission circuits in London, and the potential £8 billion saving for the UK by combining emissions trading markets with the EU.

Ofgem releases consultation on proposed funding for substantial net zero grid upgrades

Ofgem has detailed plans for "significant" investment in the electricity transmission network and outlined a framework for supporting delivery of the projects recommended by the Electricity System Operator (ESO) in the transitional Centralised Strategic Network Plan 2 (tCSNP2). Although the tCSNP2, which was published in March 2024, does not account for the government's new 2030 net zero deadline, Ofgem considers it "highly likely" that the 46 tCSNP2-recommended projects (worth an estimated £15.7 billion) will be needed regardless, and sees no reason to delay funding.

Ofgem's proposals seek to build on the existing Accelerated Strategic Transmission Investment framework (introduced to support the ESO's first network plan, the transitional Centralised Strategic Network Plan 1 (tCSNP1)), while recognising that 41 of the 46 recommended projects are currently at the ESO's lowest rating in terms of maturity and scoping. The regulator has identified this as a key difference from the tCSNP1 and has adopted a multi-track funding approach to meet the difficulties with assessing design, costs and delivery timing for these early-stage projects.

This approach will see projects categorised onto one of the following tracks:

• Delivery track – for more mature, higher value (>£100 million) tCSNP2 projects which will be eligible for a pre-construction funding allowance of 2.5% of forecast project cost.
• Development track – for less mature, higher value (>£100 million) tCSNP2 projects which will receive a funding allowance of 0.5% forecast project cost for transmission owners to develop further and provide for re-assessment onto to the Delivery track by the ESO in the second half of 2025.
• Small / Medium Sized Project Delivery track – for lower value (<£100m) tCSNP2 projects for which Ofgem are not proposing to provide any allowances. Instead, transmission owners will be required to submit full project funding requests through existing regulatory mechanisms.

Ofgem also confirmed plans to introduce competitive tendering for early-stage onshore transmission projects. Working with the ESO, the regulator will identify the first project for competition and start preliminary tender works by the end of 2024, as well as identifying a pipeline of projects that could be suitable for competition in the future.

Responses to the consultation must be submitted by 30 August 2024. Ofgem intends to publish its decision in autumn 2024.

New tolling agreement announced for UK's longest-duration BESS

Energy storage owner-operator BW ESS, alongside its partner, Penso Power, have signed a seven-year tolling agreement with Shell Energy Europe Limited for a single battery energy storage system (BESS) which is currently under construction in Bramley, England.

A tolling agreement is a long-term contract whereby the offtake provider guarantees a fixed payment in return for complete trading control of the battery, shifting trading risk away from the owner and guaranteeing revenue. The signing follows the announcement of a two-year, multi-project tolling agreement between Octopus Energy and Gresham House Energy Storage Fund in early June, and marks a significant development in BESS optimisation arrangements, with more tolling agreements expected to be signed in the future.

The Bramley BESS is expected to be the longest duration BESS in the UK due to its utilisation of Sungrow’s Power Titan 2.0 liquid cooled BESS. By combining a 2.5MW Power Conversion System using integrated string converters and a 5MWh battery, the system is able to deliver 330MWh of storage within a moderately small project footprint, driving high performance. This fixed-price agreement will allow Shell to trade the BESS into a range of ancillary services and wholesale markets.

Penso Power had previously worked with Shell in 2020 via a floor contract on their Minety battery storage project. According to Richard Thwaites, CEO at Penso Power, that project, "became a template for the industry and this tolling agreement for Bramley breaks new ground. It represents a coming of age for the battery energy storage sector.”

Rupen Tanna, Head of Power and Systematic Trading at Shell Energy Europe, said: “The Bramley battery system is one of the most sophisticated longer-duration assets under construction in the UK and will provide us with unmatched capabilities for portfolio optimisation.” In addition, as the second tolling agreement of its kind, "[t]he experience gained through these early tolling contracts will be invaluable to the wider market.”

National Grid powers up £1 billion London Power Tunnels 2 circuit for the first time

National Grid has reported that its engineers have energised a 2.5km circuit between Hurst and Crayford in London, providing a new high voltage 275kV network 35 metres underground. The circuit is one of six new electricity transmission circuits in London and replaces existing cables commissioned in 1967.

London Power Tunnels 2 (LPT2) network is a 32.5km route underneath London's road network which is being installed to upgrade London's energy supply system, and is due to complete in 2026. The LPT2 network consists of three metre-wide tunnels below the roads of London, with vertical shafts at key points on the circuit to provide ventilation and access for engineers. As part of this, National Grid are also constructing a UK first LPT2 route using SF₆-free gas insulated switchgear technology at a new substation at Bengeworth Road.

Alice Delahunty, President of National Grid Electricity Transmission, said that the first LPT2 energisation is "a milestone moment for London Power Tunnels, and demonstrate[s] the ongoing work to reinforce the city’s network".

Michael Shanks, Energy Minister, has congratulated the energisation and has said that “it is feats of incredible engineering, such as this, that will be the driving force behind our race to become a clean energy superpower and help to revive communities across the UK with new skilled jobs.”

Combined UK-EU emissions trading market could save the UK up to £8 billion

A recent report by Frontier Economics, an economic consultancy, concluded that combining the UK and EU emissions trading markets could save the UK government up to £8 billion over five years from 2025 to 2030.

The EU Emissions Trading System was set up in 2005 and is now the largest valued carbon market globally. Following Brexit, the UK established its own separate emissions trading scheme.

Initially, the UK Allowance (UKA) and EU ETS Allowance (EUA) prices remained close, but since early 2023 the prices began to diverge with UKA prices now trading at a significant discount. The report notes that ongoing UKA price discounts could have "significant implications for UK exchequer revenues". It is predicted that, even if the price trading gap remains stable, the UK could lose around £3.5 billion over the next five years. If the gap increases to £31/tCO2 (as seen in September 2023), the Treasury could suffer losses of up to £8 billion.

To avoid significant losses from the current price trading gap, the report recommends that the UK and EU combine emissions trading markets, similar to the pre-Brexit position.

Aside from mitigating lost revenue, the report notes other benefits of price convergence through a linked market, including:

• price stability and lower risk of carbon price volatility damaging decarbonisation goals;
• efficient financial risk management for both the UK and EU; and
• signalling intent of global climate leadership.

The report notes that "effective and credible carbon pricing is widely considered as a key part of the policy toolkit for reducing greenhouse gas emissions", and that a linked market would reduce costs to both parties in meeting their decarbonisation goals.

This article was written with the assistance of Khushal Thobhani, Jessica Sawford, Hannah Bradley, Charlotte D'Arcy and Luke Hopper, Trainee Solicitors.