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What to look out for in 2021

21st December 2020

2020 has been a challenging year to say the least and one which nobody could have predicted. As we wave goodbye to 2020 (gladly) and welcome 2021, what new challenges await us and what should we look out for in the energy industry?

COVID-19

This year, the COVID-19 outbreak quickly affected businesses in different ways: many organisations reduced operations or faced temporary closure, while others faced increased— and sometimes new demand alongside greater utilities consumption. The pandemic altered the shape of the workplace for many and raised existential challenges for some.

Trying to forecast energy trends for the year ahead is never black and white and next year is certainly no exception. At the start of the pandemic some organisations were facing the challenge of having to reforecast procurement volumes and having to understand what this means in terms of any volume tolerance clauses that may be in their contract. If it’s likely that your energy volumes will fluctuate into the new year, it is important that you look at all your options and get support on how to best avoid volume penalties.

Environmental Sustainability

As businesses plan their recoveries in 2021, establishing clear links between sustainability and competitive advantage is more important than ever. With the 2050 Net Zero ambition on the horizon and with Prime Minister Boris Johnson committing £12 billion to a “green industrial revolution” this November, it’s clear that for many organisations, sustainability will be key to their survival. The ability to gather and act upon transparent, consistent and granular data on environmental sustainability will determine the “winners” and “losers” of these unprecedented times.

How do businesses make themselves more sustainable and flourish in 2021? Download our recent environmental sustainability white paper to see where environmental sustainability fits in “the new normal” and how you can embed it within your organisation.

COP26 Summit

Next year will see the UK host the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow on 1 – 12 November 2021. The COP26 summit will bring parties together to accelerate action towards the goals of the Paris Agreement and the UN Framework Convention on Climate Change. Ahead of the conference, the UK Government has committed to publish a road map for the UK to achieve our Net Zero Carbon goal and this is likely to send strong signals on the impacts that sustainability will have on business.

Sizewell C

The UK Government believes that Nuclear also has a role to play in tackling the climate emergency. EDF are currently in negotiations to build ‘Sizewell C’, a proposed new nuclear power station in Suffolk which has the potential to generate the reliable low carbon electricity the country needs for decades to come. It will also make a lasting positive difference to the economy in the east of England. The Sizewell C site could generate 3.2 gigawatts of electricity, enough to provide 7% of the UK’s needs. But it comes with a large price tag: £20bn. A decision is expected to be made next year.

Brexit

With the COVID-19 pandemic taking centre stage in 2020, the ‘B’ word has been pushed aside. However, time runs out on 31 December as the 11 month transition period comes to an end, but things are far from settled. Talks to reach a ‘deal’ were supposed to end on Sunday (13 December), but the UK government is still working to agree a Free Trade Agreement with the European Union to come into effect from 1 January 2021.

The lack of clarity surrounding Brexit makes it one of the biggest challenges facing the energy industry. We know it will ultimately directly impact the industry in terms of energy trading, legislation and overseas investment, but how exactly is still yet to be determined.

The perceived price impact of Brexit is already factored into forward prices – currency and carbon being primary drivers. It will also be these two price drivers that are likely to drive price (Brexit related), post-Brexit. Prices are already in an upwards trend, but this isn’t Brexit related, but instead reflects the start of the Covid recovery and beginning of a new market cycle. We will continue to manage price risk through our normal trading activity.

The vast majority of our European energy imports come from Norway, who are outside of the EU. We do have inter-connectively with a number of EU nations, but these imports/exports are on the margins. The system balancing benefit they bring supporting both the UK and EU nations. There are some technical trading details that need to be agreed, but the industry does not feel there is a risk in this. However, critically, there is no industry expectation that there will be any disruption in supply related to Brexit.

Fortunately, the energy industry is not expecting any major disruption and it will be business as usual.

Targeted Charging Review

Both Transmission and Distribution residual charges are due to be replaced by fixed charges. Earlier in the year, Ofgem delayed the introduction of changes to Transmission residuals for a year and now both charges will come into effect from 1 April 2022. The biggest impact will likely be on those businesses that are already employing Triad-avoidance measures, such as switching to back-up generation or reducing demand during Triad periods, as this will no longer provide the cost reduction impact it did under the previous scheme. Although, there is still time to benefit from Triad reduction up to and including Winter 2021/22.

The precise impact on each consumer will not be clear until National Grid produce their first tariff forecasts for 2021/22, which will hopefully be early next year and DNOs finalise their costs before the January deadline. The new charging methodology will create winners and losers with the potential of using creative ideas to reduce these costs.

Further changes to distribution design and access charges are expected in 2023 and it is likely that Balancing Use of System (BSUoS) charges will also change in 2023 with all costs being placed on the end-users.

Capacity Market Auctions

Earlier in the year, The Department for Business, Energy and Industrial Strategy (BEIS) set out the parameters for the next Capacity Market auctions to guarantee the UK continues to have sufficient electricity capacity to meet demand. The T-4 auction is used to line up capacity four years in advance, while the T-1 auction is used to top up capacity to account for changes in forecast peak demand.

The next Capacity Market T-1 auction is planned for January 2021 with a target capacity of 0.4GW set and the T-4 auction (which will be the last auction where coal plants can participate) planned for February 2021 has a total target capacity of 41.2GW. In a letter from Business, Energy and Clean Growth Minister Kwasi Kwarteng to National Grid ESO, Kwasi said the target is justified because of the “uncertainty and potential risks from the ongoing COVID-19 pandemic”.

ESOS Phase 3

Let’s recap: the ESOS Scheme (Energy Savings Opportunity Scheme) is a compulsory assessment of a large UK business’ energy consumption and savings. Businesses who meet the ESOS assessment criteria will have to measure their total energy consumption across their entire business, including transport, buildings and industrial activities.

Organisations that qualify for ESOS must carry out ESOS assessments every four years. We are now in phase 3 of the scheme with the next deadline being 5 December 2023. With the next ESOS compliance deadline not for some time, ensuring that you have an effective energy management strategy in place might not be at the top of your to-do list. But, if you’re one of the organisations that will need to have completed the whole process again by the Phase 3 deadline, it’s a good idea to get ahead of the game in 2021. Whilst ESOS is derived from EU regulations, it is likely that the UK Government will retain the scheme in some form, but will be able to make some changes if it feels that this is needed.

How to prepare

With ongoing uncertainty around the COVID-19 pandemic and Brexit, it won’t all be plain sailing for businesses in 2021 and carrying on ‘business as usual’ isn’t really an option. With that said, there are priorities that can’t be ignored. Support is available. At Inenco, we’re keen to ensure that businesses have everything they need to reduce the impact of the pandemic and to embrace the opportunities to “change for the better” in 2021.

To speak to one of our experts, click here or call 01253 785294