The voice of the energy industry

Supporting our key energy workers and the power sector

Over the past few weeks (I think it’s been a few weeks, at least) we’ve all had to adapt to a new way of working, but also living. We’ve all had to help deal with the effect COVID-19 has had on society and our economy. Energy UK has been playing an active role, advising Government on behalf of members and ensuring that vital issues affecting our critical sector are tackled.

As soon as the likely extent of the COVID-19 outbreak in the United Kingdom became clear, Energy UK and individual energy companies have led the push for testing for its workers to be rolled out as soon as possible. These efforts came to fruition last week.

Testing will be a crucial aspect to identify both those workers who do have to isolate and, importantly, those that do not, thus avoiding unnecessary absences of critical workers. Our thanks go to all those companies involved with Energy UK and also to the Department of Business, Energy and Industrial Strategy (BEIS) who have diligently remained in contact with stakeholders and represented the industry to wider government departments.

As Energy UK, we have co-ordinated a sector wide response to the COVID-19 pandemic, collaborating with other trade associations and stakeholders, encompassing both members and non-members alike. We have highlighted the importance of recognising energy workers, and the critical role they play in everyone’s day-to-day lives and keeping the economy working, to both UK Government and the Devolved Administrations.

As such, we understand that the Welsh Administration plans to roll the testing regime out to energy workers as soon as possible, and the Scottish Government has made allowances for various construction permitting before commissioning to be allowed a blanket extension. This will crucially avoid any further unnecessary delays to construction.

Demand for power continues to be low, or in ‘hibernation’, so we do see impacts on wholesale prices and charges that are passed on to demand and/or generation as a MWh cost. We continue to monitor the wholesale market and charges such as Balancing Services Use of System (BSUoS), Capacity Market Supplier Charge, and the Contracts for Difference (CfD) supplier levy (to name a few), as the situation develops to understand any future concerns.

Balancing costs generally creep up in the summer months as the Electricity System Operator (ESO) takes more actions to manage the system.  This will likely be higher than usual in the current situation as more corrective actions are likely to be required. With demand up to 20% lower, the ESO has started to look to negative reserve markets to provide the foot room required to utilise flexible plant in order to manage system stability with a high penetration of non-synchronous generation. This all feeds into the BSUoS calculations.

Energy UK has been working closely with the Low Carbon Contracts Company (LCCC) to understand the impact on the cost of the CfD scheme. Last week, the LCCC announced an under-collection, caused by the reduction in demand, but also influenced by the drop in wholesale price and a slightly higher than forecast renewables output. BEIS has committed to cover this under-collection through extending a working capital loan to the LCCC. This will act to cover the excess required - only up to an unspecified amount - but it will require repaying.

Under current regulations, this loan would have to be paid back by suppliers at the end of Q2 2020 as a lump sum. However, we understand that BEIS will be consulting shortly to extend this repayment into Q1 2021. Whether this is the preferred way for the industry to cover the under- collection is yet to be seen - however it should provide reassurance to all investors and operators of CfD generation projects that all payments will be accounted for and paid. This will act to maintain confidence in a support mechanism that has underpinned billions of pounds of investment in the decarbonisation of the GB electricity system.

We’ve witnessed the GB wholesale market price significantly fall in the past weeks. This has been caused by a number of factors, including a drop in demand and high renewable output. Another cause for this drop has been falling gas prices and there have been suggestions by ICIS that European Union Allowances in the EU ETS could drop by an average of €3.00/tonne over the four quarters of 2020.  

Liquidity of the wholesale market is obviously a key aspect for generators to sell their power and give them access to the market and therefore revenue. It’s premature to come to wider conclusions of what is happening on the market, but clearly this will need to be carefully monitored to ensure that a healthy market is maintained.

The day-ahead and intraday markets remain relatively active, although the current low demand (very different from “normal” demand for this time of the year) creates downward pressure on the price.

Domestic only suppliers most likely find themselves ‘short’ currently, requiring them to buy more power. However, these purchases will be largely from non-domestic suppliers who – in contrast - most likely find themselves ‘long’ during the lockdown.

Although there isn’t too much insight to be gained by looking at the volumes bought and sold on the exchanges, it is interesting that nothing too out of the ordinary seems to be happening with them. March 2020 remains comparable to March 2019. In comparison to the monthly year-on-year, volumes exchanged in April to decreased. This of course, could be due to factors other than COVID-19, for example import/exports and weather, but you obviously have to consider this a result of current lockdown and the aforementioned market it affects.

The COVID-19 situation is definitely unprecedented, and we are having to react quickly on numerous fronts. Particularly when it comes to obligations, it is extremely positive to see both BEIS and Ofgem being pro-active and pragmatic when it comes to enforcement - so long as it is not to the detriment of customers and security of supply. This pragmatism will help maintain confidence in the GB energy market, meaning that the investment remains ready and willing to back large energy projects in the UK helping get the economy flowing again once we emerge from lockdown.

Finally, on behalf of all at Energy UK, and the whole energy industry, we would like to send our thanks to all of those working tirelessly on the front line fighting the virus and pay tribute to those that have lost their lives doing so. Whilst you are working to save lives, the energy industry is right behind you, working hard to ensure that the power keeps flowing and enables you to do your job.

Matthew Deitz, Policy Manager, Energy UK
 

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