Navigant Research Blog

Ofgem Grants Supplier Switching Power to UK Retail Customers

— July 5, 2018

Electricity prices have been on a surge across the Big Six of UK’s energy suppliers due to steady increases in the cost of wholesale energy and government policy. Switching service providers is a common practice among domestic consumers—it saves hundreds of pounds in annual bills. However, recent increases in the number of errors has restricted customers from choosing new suppliers. Customers are hesitant to switch suppliers, as they become increasingly concerned about administrative hassles and financial errors.

In the last year, 5.1 million UK electricity consumers and 4.1 million UK gas consumers switched suppliers—the highest numbers in almost a decade. This is arguably only a small percentage of consumers who would have switched suppliers had Ofgem unveiled its new switching proposals earlier.

Why Did Ofgem Make This Change?

The National Audit Office highlights the following priorities for Ofgem to strengthen UK’s domestic energy supply:

  • Give more power to consumers by increasing awareness and supporting service comparisons
  • Penalize suppliers for any delay and switching error
  • Facilitate the adoption of prepayment meters
  • Support free and fair level playing field across suppliers

According to Ofgem’s new proposal, electricity suppliers will now have to automatically transfer £30 ($39.22) in compensation for each erroneous switching. This will be applicable on switching delays of more than 21 days, erroneous transfers, incorrect switching, delay in processing refunds, and final settlements. While some believe that this will eventually reduce the number of switches that could go wrong, Ofgem hopes to overhaul industry systems and help customers to switch within a day. The rule will come into effect by the end of 2018 and is likely to boost consumer confidence while sending out clear mandates that customer service should be at the heart of domestic energy supply.

UK Electricity Supplier Market Is Saturated

The number of electricity suppliers in the UK has increased by a factor of three—from 27 to 66—between 2014 and 2016. This sudden rise in the number of suppliers has led to price wars and poor customer service as suppliers rush to cut operational costs. Despite increased competition, which should drive better customer service, the sudden rise in suppliers has led to price wars. Dramatic price decreases are eventually leading suppliers to go out of business. These closures are leaving 160,000 customers stranded with high gas and electricity bills, and customers are eventually being transferred to deemed contracts or are having to take up new contracts with unattractive service packages. In one instance, a supplier was banned from taking on new customers because of its poor customer service.

Ofgem has initiated actions to protect customer interest and improve financial stability across electricity suppliers. Along with making switching easier, the policy aims to restrict market entry for new suppliers by tightening checks and reviewing its supplier licensing regime. This strategy is aimed to not only include supply side requirements but also streamline operations and monitor activities across electricity suppliers.


Hybrid Energy Systems Will Unlock Baseload Solution Opportunities for Renewables

— July 3, 2018

At the Intersolar Europe exhibition in Munich during June, Wärtsilä announced the launch of its integrated solar PV and storage hybrid renewable energy system (HRES). The company believes this solution could offer greater resilience to grid infrastructures and become a baseload energy generator, as well as provide easier integration with the grid. The Greensmith Energy Management System (GEMS) technology needed to optimize the performance of these systems is being developed by Greensmith Energy, which was recently acquired by Wärtsilä. GEMS is essentially an operations and monitoring application that optimizes storage and generation assets to ensure they are best suited to perform to market conditions.

Wärtsilä’s HRES require a robust application management solution at their core. The need for an integrated technology architecture has created exciting opportunities for two new types of market participants: technology providers and renewables aggregators. An HRES with solar PV or wind power backed up by a battery electric storage system enables the synchronization of renewable energy technologies with conventional generators. Due to their modularity, integrated hybrid systems offer greater flexibility to adapt to growth in energy demand because they can be easily scaled up.

Not a New Concept, but New Opportunity

The hybridization of energy systems is not a new concept. It likely originates from traditional combined heat and power (CHP) systems, where power can be generated more efficiently with minimum loss by simultaneously generating electricity and heat. While CHP (or cogeneration) refers to a more efficient use of fuels and recovery of waste heat, hybridization explores the issue of reliability and the integration of renewables on the grid. In its latest report, the International Energy Agency forecasts renewable energy will contribute to more than 45% of global electricity generation by 2040. As the costs of renewable energy technologies spiral downwards, uptake across the globe will increase.

According to International Finance Corp., about 1.3 billion people do not have access to reliable, affordable, and clean energy. Integrated HRES could be an opportunity to offer respite to customer segments with poor and unreliable grid access. A large proportion of diesel-based isolated grids could be retrofitted with renewable energy technologies, especially across remote rural villages and isolated islands in energy access markets in Africa and South Asia.

Earlier this year, the Indian government announced that approval had been granted for a 2.5 GW auction for wind and solar hybrid projects to be implemented by Solar Energy Corp. of India (SECI). This project will provide a framework for the promotion of large grid-connected wind-solar PV hybrid systems for optimal and efficient utilization of transmission infrastructure. Such systems will reduce the variability in renewable power generation and assist in achieving better grid stability. The program also aims to encourage new technologies, methods, and hybridization involving the combined operation of wind and solar PV projects.

Exciting Prospects

The resilience of renewables has been an interesting topic of discussion across many energy forums, and the solar industry is a front-runner in these debates. Hybrid systems could play a crucial role in unlocking opportunity through new business models in the energy access market segments via mini/microgrids. Wärtsilä’s hybrid renewable solution can therefore offer a fully integrated solution in a cost-effective model. It offers easier deployment in energy access markets and unlocks exciting prospects for grid integration and island electrification.


China Cuts Solar Subsidy: Investors in Crisis

— June 14, 2018

Subsidy cuts in China have caught global solar investors by surprise this June.

The National Development and Reform Commission, the Ministry of Finance, and the National Energy Administration announced a cut in the national feed-in tariff by ¥0.05 ($0.008) per kilowatt-hour and a reduction of the same amount in subsidies for power generated by large-scale distributed PV projects. Subsidy reductions will not affect power prices for smaller-scale, community-based solar power projects. The Chinese government justified the move, explaining that solar PV has long been commoditized because of reduction in equipment prices and that scaling back on subsidies will reduce overheating in the sector. The joint announcement indicated that the measures are aimed at “promoting the solar energy sector’s sustainable development, enhancing its development quality, and speeding up reduction of subsidies.”

Many agree that the move is the result of recent trade wars with the US administration. January 2018, President Trump announced a 30% tariff on imported solar equipment that will last for at least the next 4 years. This is believed to be in response to anti-dumping measures and to prevent undercuts by Chinese solar manufacturers in the US market.

Can Subsidy Cuts Lead to Grid Parity?

Financial incentives and subsidies have long been the cornerstone of solar investments. On one hand, it provides much-needed economies of scale. On the other hand, it encourages investments by ensuring that PV electricity cost achieves grid parity. As the energy sector was settling down into , technology investments and grid flexibility meant that solar energy could reach grid parity even without financial incentives.

The Chinese renewable industry is one of the front-runners of clean energy projects across EVs, wind turbines, solar panels, and energy efficient appliances. During the last decade, the Chinese government introduced the Solar Roofs Plan for promoting the application of solar PV building, and reintroduced the Golden Sun Project to give 50% of the total investment subsidies to the grid-connected PV power generation project. Increasing domestic and industrial demand, the adoption of EVs, and rising pollution have created an ever-increasing need for solar projects in China.

Thus, subsidy scale-backs have created an uproar in the Chinese market. On June 4, there was a sell-off in Chinese solar equipment stocks. Shares dropped the 10% daily limit for several firms, including Shanghai-listed LONGi Green Energy Technology, Jiangsu Linyang Energy, and Tongwei, and Shenzhen-listed Sungrow Power Supply.

China Will Remain a Renewables Leader, despite Scale Back

Resilience of renewables has been a topic of discussion across many energy forums, and the solar industry is a front-runner in this. Chinese solar power will continue to strengthen its position as a mainstream energy source across both utility-scale and distributed energy generation. Navigant Research’s recent report, Preparing for New DER-Driven Opportunities in the Chinese C&I Energy Market, explores the changes in the Chinese commercial and industrial electricity market and the opportunities this creates for distributed energy resources stakeholders.

The Chinese solar industry is likely to witness a larger number of mergers and acquisitions over the next year, especially among the smaller market participants. While long-term prospects continue to remain positive, the short-term impact will cause a contraction in the overall positive growth trajectory.


Wind PPAs Offer Exciting Prospects for Scandinavian Data Centers

— May 31, 2018

Social media conglomerate Facebook signed a 15-year power purchase agreement (PPA) with Norwegian wind farms to power its data centers in Denmark and Sweden. The $470 million Bjerkreim cluster of wind farms is located in southwest Norway (at Gravdal, Skinansfjellet, and Eikeland-Steinsland).

Details on the Wind-Powered Data Centers Deal

As per the agreement, 1,000 GWh per year of wind-powered electricity will be delivered to Facebook’s data centers from wind farms that will start commercial operations in 2019. Powering the project are 70 units of Siemens Gamesa turbines—each with 4.2 MW capacity—which will be developed by Norsk Vind Energi. The operational plants will be owned by German renewables investor and asset manager Luxcara GmbH. Facebook has partnered with Vattenfall to manage its grid integration and deliver its 100% renewable power requirement in the region.

Momentum Growing for Renewable PPAs

Sustainability strategies and clean energy targets have led to new utility business models, with corporations queueing up to sign long-term PPAs. Long-term agreements provide financial stability and resilience to clean energy projects. These are exciting developments for the Scandinavian wind power market, and they will encourage more project developers to flock to the region.

Key market dynamics driving corporate PPAs in the region include:

  • Low energy prices: Electricity prices are on an upward trend in Europe. According to Eurostat, average values of non-household energy varied significantly across the European Union in 2017. They ranged as high as €0.19 ($0.22) per kWh in Germany and €0.25 ($0.29) per kWh in Denmark. Non-household electricity prices across Norway and Sweden have remained low, at €0.08 ($0.09) per kWh, compared to the rest of continental Europe. Norway is also one of the largest generators of clean energy.
  • Data center market growth: Unprecedented growth in power requirements across data centers has given a boost to investments in Scandinavia. Since data centers are an energy-intensive application segment, the availability of large open spaces and a cool climate make the region attractive for investors. Norway is now receiving new interests from project developers in China as part of its One Belt One Road initiative. Cisco forecasts around 30 data centers across Europe by 2020.
  • Nuclear capacity closures: Sweden’s 2020 plans to divest its nuclear capacity have created an opening for new capacity investments. Two nuclear reactors, Ringhals-1 and Ringhals-2, will stop operations by 2020. A third, Forsmark-1, will reach the end of its designed lifetime by 2040, reducing Sweden’s power generation capacity by a combined 2.7 GW. This creates an acute need for new capacity investments in the country.
  • RE100 pledge encourages corporate PPAs: Facebook’s announcement has not come as a surprise, considering other investments in corporate PPAs. Google and Apple, for example, have invested in energy procurement models to keep their data centers running. This activity resulted from the recent sustainability initiative where over 130 companies signed the RE100 pledge to run their operations on 100% renewable energy.
  • Supportive legislation: Reductions in energy tax and the introduction of license awards for renewable energy development are key policy drivers across Sweden and Norway. Authorities have awarded a high number of licenses to developers in recent years, and the trend is likely to continue.

Wind Power Has a Future in Corporate PPAs

Wind power will continue to strengthen its position as a mainstream energy source across utility-scale and distributed energy generation. While mature markets will remain attractive for new wind capacity installations, investments across emerging markets are on the rise. Digital innovations, long-term operations and maintenance contractual agreements, and investments in predictive analytics will contribute to the operational efficiency of corporate PPAs for renewable power capacity.


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