How to Transition to a Low Carbon Economy in Europe
The UK government is set to announce a number of tax incentives for the development of shale gas and a new department (the Office for Unconventional Gas) tomorrow in order to coordinate activities in the sector. The USA has already aggressively developed its shale gas production and is now enjoying a gas glut with prices around one-fifth of those in Europe – a continent where gas prices are still linked to global oil prices rather than any supply and demand fundamentals.
“As a result,” says Jonathan Lane, GlobalData's Head of Consulting for Power and Utilities, “the USA is seeing its carbon emissions fall as gas-fired generation displaces coal: a result that it is loudly trumpeting in Doha.
“Indeed, the USA, rather than Europe, seems well placed to transition to a low carbon economy if, and it’s a very big if, the fossil fuel lobby can be overcome. Gas-fired generation is the only serious technology that allows countries to reduce coal-fired generation whilst waiting for electricity storage technology to develop and be deployed with intermittent renewables, and the USA has low cost gas-fired power in abundance.”
Lane explains that it is easy to see the temptation for European governments to exploit available resources. He states it is also easy to see how gas-fired power generation could help to mitigate any looming energy gaps in Europe, as governments look to transition away from coal-fired generation in all cases and nuclear in many cases. But the economics of gas-fired power in Europe are not easy, and it seems that more market interventions will be required to attract investment. For example, Germany would like to build more gas-fired generation in order to ease its electricity challenges, but gas plants are out-of-the-money compared to coal plants in Germany and investors are worried about future gas prices and competition from renewables.
Indeed, low carbon prices in Europe have seen renewables, which almost always have priority dispatch, displace gas-fired generation rather than coal-fired generation across the continent. “Capacity mechanisms have been proposed across Europe to support the economics of gas-fired power,” states Lane, “but should governments really be subsidising almost everything except coal?”
Some will see shale gas as the answer to this difficult question, but this seems unlikely. Shale gas development will be much more controversial and costly in Europe owing to public opposition and geological challenges less pronounced in the USA. Indeed, it is hard to see how European shale gas, which would be produced in smaller volumes at a higher cost, having much of an impact on European gas prices. It seems, therefore, that capacity mechanisms are the only answer unless carbon taxation or reform of the European Emissions Trading Scheme (EU-ETS) is considered.
Lane claims that carbon pricing is at the heart of the problem. Whilst over its history the EU-ETS has produced little in terms of influencing the generation mix, individual governments have been ploughing ahead with their own policies for promoting low carbon generation based on the affordability for each. Lane asks: “Surely, an integrated mechanism across Europe based on an effective carbon price and taking affordability into account would have been a better approach? It’s too late for that now, as many countries are tied in to their own subsidy regimes, but carbon pricing surely has some role to play in solving the conundrum of supporting gas-fired power.”
Ofwat allows retailers to raise prices from April
Retailers can recover a portion of excess bad debt by temporarily increasing prices from April 2022, according to an Ofwat statement.
The regulator confirmed its view that levels of bad debt costs across the business retail market are exceeding 2% of non-household revenue, thereby allowing "a temporary increase" in the maximum prices. Adjustments to price caps will apply for a minimum of two years to reduce the step changes in price that customers might experience.
Measures introduced since March 2020 to contain the spread of Covid-19 could lead to retailers facing higher levels of customer bad debt. Retailers’ abilities to respond to this are expected to be constrained by Ofwat strengthening protections for non-household customers during Covid-19 and the presence of price caps.
In April last year, Ofwat committed to provide additional regulatory protection if bad debt costs across the market exceeded 2% of non-household revenue.
Georgina Mills, Business Retail Market Director at Ofwat said: “These decisions aim to protect the interests of non-household customers in the short and longer term, including from the risk of systemic Retailer failure as the business retail market continues to feel the impacts of COVID-19. By implementing market-wide adjustments to price caps, we aim to minimise any additional costs for customers in the shorter term by promoting efficiency and supporting competition.”
There are also three areas where Ofwat has not reached definitive conclusions and is seeking further evidence and views from stakeholders:
- Pooling excess bad debt costs – Ofwat proposes that the recovery of excess bad debt costs is pooled across all non-household customers, via a uniform uplift to price caps.
- Keeping open the option of not pursuing a true up – For example if outturn bad debt costs are not materially higher than the 2% threshold.
- Undertaking the true up – If a 'true up' is required, Ofwat has set out how it expects this to work in practice.
Further consultation on the proposed adjustments to REC price caps can be expected by December.
"While it’s great that regulators are helping the industry deal with bad debt in the wake of the pandemic, raising prices only treats the symptoms. Instead, water companies should head upstream, using customer data to identify and rectify the causes of bad debt, stop it at source and help prevent it from occurring in the first place," she said.
"While recouping costs is a must, water companies shouldn’t just rely on the regulator. Data can help companies segment customers, identify and assist customers that are struggling financially, avoiding penalising the entire customer in tackling the cause of the issue."
United Utilities picks up pipeline award
A race-against-time plumbing job to connect four huge water pipes into the large Haweswater Aqueduct in Cumbria saw United Utilities awarded Utility Project of the Year by Pipeline Industries Guild.
The Hallbank project, near Kendal, was completed within a tight eight-day deadline, in a storm and during the second COVID lockdown last November – and with three hours to spare. Principal construction manager John Dawson said the project helped boost the resilience of water supplies across the North West.
“I think what made us stand out was the scale, the use of future technology and the fact that we were really just one team, working collaboratively for a common goal," he said.
Camus Energy secures $16m funding
Camus Energy, which provides advanced grid management technology, has secured $16 million in a Series A round, led by Park West Asset Management and joined by Congruent Ventures, Wave Capital and other investors, including an investor-owned utility. Camus will leverage the operating capital to expand its grid management software platform to meet growing demand from utilities across North America.
As local utilities look to save money and increase their use of clean energy by tapping into low-cost and low-carbon local resources, Camus' grid management platform provides connectivity between the utility's operations team, its grid-connected equipment and customer devices.