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A Year Of Unprecedented Change: What’s On The Horizon For 2017?

A week may be a long time in politics, but a year is an eon in energy, if you’ll forgive the pun. In the past 12 months business energy users have been subject to even greater uncertainty, from the imminent increase in levies on the bill to concerns around future security of supply. Brexit is undoubtedly contributing to the delay in providing a future plan, impacting anything from investment to future cross-border trading (for example, via interconnectors). Future clarity is still undoubtedly high on the Christmas wish lists of energy managers across the country: in an open letter published by Inenco to BEIS Secretary of State Greg Clark last month, we highlighted the lack of long term certainty in energy and the need to publish a strategy that would give businesses the ability to forecast, invest and plan for the future with confidence.

But what were the main energy headlines in 2016 and what should business energy users be looking out for in 2017?

Costs update

The decision to scrap the Carbon Reduction Commitment in 2019 may have been welcome news to some looking to reduce their administrative burden, but recouping the £900million of revenue it brings into Treasury each year means the Climate Change Levy will have to rise for thousands of businesses to balance the budgets, negatively impacting those businesses who aren’t currently in the CRC threshold.

Changes to the Capacity Market will also impact the bill. In May, it was announced that the capacity market would commence a year early to allay security of supply fears for winter 2017/18. The auction for this capacity will take place in late January 2017 – its outcome will determine the cost of capacity market levy for businesses for the coming winter. With some forecasts predicting up to £7/MWh, understanding how your business is affected and what action you should be taking to revise forecasts and mitigate the impact is crucial. You can access our handy guide to the Capacity Market here.

Climate change: a mixed year

2016 began as a positive year for renewable energy and climate change. The signing of the Paris Climate Agreement, a subsequent announcement that the UK will close all coal-fired plants by 2025 and the fifth carbon budget ratification were all positive signals of long term commitment to low carbon energy. The merge of the Department of Climate Change into the Department for Business, Energy and Industrial Strategy led to questions that climate change was being de-prioritised by Government, followed by approval for controversial fracking sites in the North West and Yorkshire.

Globally, the victory of Donald Trump in the US Presidential Elections and the decision to bring climate change ‘deniers’ into his new cabinet could significantly impact international momentum, particularly if he follows through his threat to pull out of the Paris agreement and lurches back to coal generation. All eyes will be on the White House following the inauguration to see if its strategic direction matches the campaign rhetoric.

Back in the UK, the rapid reduction in the carbon intensity of power on the grid thanks to the closure of coal plants and increasing share of renewable generation means focus is shifting to heat and transport. In its Future Energy Scenarios, National Grid noted that whilst the UK is on track to meet renewable electricity targets in 2020, it was lagging behind in both heat and transport. Funding has been allocated to heat networks and landlords must meet Minimum Energy Efficiency Standards by April 2018.

Forecasting the future energy mix

Following long delays and a Government review into the commercial and security arrangements, an investment decision was finally made in 2016 to proceed with the new nuclear site at Hinkley C. Reactor designs for the new Horizon Nuclear Power site at Wylfa are also being consulted upon, and progress is being made by NuGen in Cumbria, signalling that a new generation of nuclear generation should be in operation by the 2030s.

As Inenco stressed at the time, new nuclear will play an important role in the future energy mix but it is just one piece of a wider puzzle and not the panacea for future supply. Renewable and low carbon technology combined with energy storage, as well as demand management from businesses, will also have a fundamental role in a smarter energy system.

Energy storage has been a hot topic throughout the year: the price of batteries has dropped by over 80% in the last five years alone and is predicted to fall again from today’s prices of £250/kWh per kWh of capacity to £110/kWh by the end of the decade, and the economics of batteries are also changing, as new charging structures during peak demand periods make exports more commercially attractive.

The opportunities available for businesses with the flexibility to shift or alter consumption to respond to demand on the energy system has been well documented this year, led by National Grid’s Power Responsive programme which brings together the various flexibility schemes. The withdrawal of Demand Side Balancing Reserve for this winter at short notice will undoubtedly have had a negative impact on business confidence in demand response, but mitigating rising non-commodity costs through unlocking new revenue schemes and avoiding peak charge windows through intelligent demand management will be crucial – particularly as the Capacity Market kicks in from winter 2017/18

Support for energy efficiency

Back in April, the Government promised a single reporting framework for business energy users from April 2019, expected to retain the energy audits of ESOS and elements of the Greenhouse Gas Reporting schemes. A consultation on the scheme is yet to be published, leaving businesses in limbo. At the same time, CCL-paying businesses were promised as-yet unconfirmed support for energy efficiency measures to help them invest in new technology or processes to reduce consumption and mitigate rising costs. In the Autumn Statement, the Chancellor also announced new funding for businesses looking to invest in electric vehicles.

2017: what’s on the horizon?

Triggering Article 50 to formally begin the Brexit process will undoubtedly impact the commodity markets, as any fluctuations in the financial and currency markets often result in market volatility. The outcome of Brexit – and whether or not the UK remains in the internal energy market – could also have a far-reaching impact of up to £500million, from cross-border trading to security of supply. Inenco’s analysis is available here.

BEIS has promised to lay out its long term strategy in 2017, potentially including wider consultations. The need for a long term policy framework in energy has been well documented and would be extremely welcome across the industry.

All eyes will be on the outcome of the Capacity Market T-1 auction at the end of January to confirm the cost of the Levy in the coming winter and adjust financial forecasts accordingly.

In April, P272 comes into force and all organisations in Profile Classes 05-08 will be switched to half hourly billing and settlement. P272 brings with it new charges for Meter Operators and Data Collectors – shopping around for these contracts could save businesses thousands of pounds. (Find out more about P272 and what steps to take to mitigate the impact here).

The business water market also opens up for competition in April 2017, enabling all organisations to switch suppliers to find a better price and consolidate a portfolio under one supplier. Inenco’s Water Hub is filled with information and resources to understand what Open Water means for your business and what action is

Government has also spent the latter half of 2016 finding ways to reduce the ability of embedded generators such as carbon intensive diesel generators to access embedded benefits. Consultations have taken place across the industry, with projects commissioned in the second half of 2017 expected to be the first impacted by the reduced revenues.

Inenco will continue to monitor the markets and share information on the latest energy news and how it impacts business energy markets, from our blogs, news pages and the weekly Y? Report market update.