How the current lockdown is influencing government energy policy

The attention of government has obviously turned to the immediate consequences of the lockdown measures in response to the Covid-19 pandemic.

How the current lockdown is influencing government energy policy

The attention of government has obviously turned to the immediate consequences of the lockdown measures in response to the Covid-19 pandemic.

Departments have therefore re-assessed their short-term priorities and introduced regulatory easements to support essential companies operating under these exceptional circumstances, while the Chancellor has introduced a job-retention scheme and support loans to businesses.

Postpone and delay

As a result, the UK Government, in agreement with our Italian partners and the UN, has postponed the COP26 climate conference. It will now take place between 1 and 12 November 2021 in Glasgow.

The government has also postponed some consultations, including on the design of a green gas levy, as announced in Budget. Ofgem has also set out how it is reprioritising its work.

The Energy White Paper will probably now not be published before the summer recess. The economic slowdown, due to the measures taken to combat Covid-19, has placed more focus on the importance of an economic recovery that is clean and resilient.

The lockdown has seen significant drop in energy demand, in particular for monthly electricity, with prices down 45%.

While demand from industrial and commercial companies has reduced due to the scaling back of activities, domestic demand has increased slightly – but nowhere near enough to offset the drop in consumption from non-domestic consumers.

We are assessing what this means – as well as potentially more medium to long-term changes, like working from home and structural lower demand – for our modelling, appraisals and underlying assumptions.

Impact on policy costs

In particular, we have been assessing how this decrease in demand might impact the various policy costs that are recouped via energy bills, such as Contracts-for-Difference (CfD) and the Feed-in Tariff (FiT).

In case of CfD, because financial support is based on the difference between strike-prices and a reference price, the scheme’s total cost has gone up since lockdown. In addition, the total volume of electricity supplied has reduced, meaning an increase in the price impact of the supplier obligation.

In response, we proposed deferring part of the amount of the increase in suppliers’ obligations that would otherwise be collected by the Low Carbon Contracts Company (LCCC) for the current quarter of 2020 to the first quarter of 2021.

Following a recent consultation, we decided, among other measures, to protect suppliers from up to 80% of the increase in suppliers’ obligations (up to the maximum loan amount of £100m), in the current quarter. We will also defer the increase in suppliers’ obligations by an additional quarter to Q2 2021. The Department also provided a loan to LCCC.

In case of the FiT scheme, tariffs are fixed and the only externally administered part is the quarterly levelisation process. This means that the bulk of FiT costs has already been borne by some suppliers by the time other suppliers are required to contribute into the levelisation process. We therefore don’t consider that modifying this process at this stage would be practicable or desirable.

A similar assessment applies to the Capacity Market (CM) supplier charge. The price capacity providers are paid for their service and the cost is known well in advance of the delivery year. Therefore, the CM charge is fixed and not affected by the lower wholesale electricity prices because of Covid-19.

Future projects still on track

Despite the Covid-19 crisis, we have continued with some key projects.

Earlier this month, we published the government’s response to the consultation on carbon pricing. This sets out the design of a UK ETS.

Furthermore, in light of the UK’s commitment to reaching net-zero emissions by 2050, the scheme’s cap will initially be set 5% below the UK’s notional share of the EU ETS cap.

We’ve also published a consultation on an extension to the climate change agreements (CCA) scheme, and potential reforms were there to be a future CCA scheme.

Most of our funding schemes have continued as well.

The Industrial Heat Recovery Support Programme is still open for applications who seek support for investments in heat recovery technologies.

Various elements of the Industrial Strategy Challenge Fund – Transforming Foundation Industries are open for application as well.

And we are due to publish more details on the design and of the Industrial Energy Transformation Fund. This fund aims to help businesses with high energy use to cut their energy bills and carbon emissions through investing in energy efficiency and low-carbon technologies.

Focus on economic recovery

For the medium term, we are also starting to look at how to recover the economy.

In his closing remarks at the Petersberg Climate Dialogue, my Secretary of State Alok Sharma said that “The Paris Agreement and Sustainable Development Goals, are a very strong framework to guide our recovery”.

He has now launched five new business-focused groups to recover the economy from Covid-19, with one of them focusing on how we can capture economic growth opportunities from the shift to net-zero carbon emissions.

As he has stated, “As we start to rebuild our economy, we owe it to future generations to build back better”.

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