This guide covers the first draft of the Energy Bill, published in May 2012. You can find out more about later revisions in our other guides:
In May 2012 the Government published the draft Energy Bill, which the Department for Energy and Climate Change (DECC) said will deliver secure, affordable and low carbon energy.
The package of reforms in the BIll is probably the most significant development in the UK's energy market since privatisation in 1989.
However, there are still several areas where investors will need further reassurance in order to unlock the billions of pounds required for upgrading the UK's energy infrastructure.
The Bill covers five areas. These are:
- Electricity Market Reform (EMR)
- Strategy and policy statement
- Nuclear regulation
- Government pipe-line and storage system
- Offshore electricity transmission
1. Electricity Market Reform
The Government believes that £110 billion in investment is needed to replace current generating capacity and to upgrade the electricity grid by 2020, and to cope with a rising demand for electricity.
The changes that make up its EMR package are designed to attract that investment.
- Contracts for Difference (CfDs) – long-term instruments to provide stable and predictable incentives for companies to invest in low-carbon generation;
- Investment Instruments – long-term instruments to enable early investment in advance of the CfD regime coming into force;
- Capacity Market – to ensure the security of electricity supply;
- Conflicts of Interest and Contingency Arrangements – to ensure the institution which will deliver these schemes is fit for purpose;
- Renewables Transitional – transition arrangements for investments under the renewables obligation scheme, and
- Emissions Performance Standard – to limit carbon dioxide emissions from new fossil fuel power stations.
Feed in Tariff (FiT) CfDs: The draft Energy Bill sets out the overarching framework for the CfDs. However much of the detail is to be contained in secondary legislation and changes to codes and licences which have not been published. Much of the detail is still under development.
The industry has expressed concerns to Government about Fit CfDs, which guarantee a fixed price for generators supplying energy, called a 'strike price'. Sales of energy below that price will trigger top up payments, while sales at a higher price will result in generators paying back the difference.
The Government says that it will take industry concerns about the model into account and will publish a final decision on the framework and payment model in the autumn.
Investment instruments: To avoid delays in significant energy investments because of uncertainty about EMR the Government has included powers in the Energy Bill for the Secretary of State to issue what is being referred to as an investment instrument to a generator ahead of the introduction of FiT CfDs.
Some uncertainties around investment instruments remain, particularly concerning the CfD term; state aid implications; issues of redress; dispute resolution mechanisms, and the financial/covenant strength of the proposed single counterparty within System Operator (National Grid) as well as capacity for dealing with invoice credit risk and capacity for margining/netting.
The Government said that it will make decisions in autumn 2012 in order to inform the price discovery process and the work that will allow companies to make final investment decisions. These decisions will be subject to Parliamentary approval through the final Energy Bill or associated secondary legislation.
The Capacity Mechanism: The Government refers to the capacity mechanism as its insurance policy against the possibility of future blackouts. It marks a significant departure from current practice and is a significant intervention in the market.
The draft proposals confer powers on the Secretary of State to make regulations (subject to affirmative resolution), amend legislation and modify electricity licences to enable the implementation of the capacity mechanism.
Whilst the high-level design of the capacity mechanism is understood, the Energy Bill does notprovide substantially more answers on the detailed design of the capacity mechanism. The Government has stated that it will publish a further document on its thinking towards the end of this year and will consult on detailed design in 2013. Finalising the open issues in time to enable a first capacity auction in 2014 - should it prove necessary - is likely to be a challenge.
Conflicts of interest: The National Grid will effectively be used as System Operator in delivering both the Feed-in-Tariff Contracts for Differences and Capacity Mechanism. However, in conferring the EMR functions on the System Operator, a private company, there is a potential risk of conflicts of interest arising between the new EMR functions it will take on and its existing role and interests in the energy market, including its ownership of transmission infrastructure. Chapters 4 and 5 of the draft Energy Bill contain the framework for mechanisms to manage these conflicts interest should they materialise, and to justify action.
In effect, the Secretary of State will be given the ability to choose from a menu of options from minor licence modifications to implement EMR and facilitate its administration to more major interventions and modifications to overcome conflicts of interest or other failings in the administration to the radical step of requiring full business separation between National Grid's system operation business and its network ownership business.
Renewables obligations transition arrangements: The proposal of a FIT CfD regime in the market reform White Paper gave rise to immediate concerns about how the existing Renewables Obligation (RO) system will interact with the new payment regimes.
The Government and industry have both said that uncertainty should not be created when the RO is phased out in the period after 2017 when FIT CfD becomes the only choice for renewable generation. The Energy Bill (at Clause 35) sets out some of the arrangements to enact the White Paper and the Technical Update issued in December 2011 for the RO Transition regime.
The Energy Bill itself has done little to advance the knowledge of the Transitional Arrangements. The lack of certainty created by a reliance on technical proposals rather than legislative provisions may deter investors and funders from bringing forward proposals, yet this is precisely what Government is seeking to avoid. There also remains the risk that the proposals trigger change–in-law mechanics in existing power purchase arrangements.
Emissions Performance Standard: In July last year, DECC published a White Paper setting out its proposed reforms to the electricity market to achieve decarbonisation, secure supply and ensure affordability in the electricity market. This White paper has now been superseded by draft Energy Bill and associated documentation.
A key measure within the Bill is the Emissions Performance Standard (EPS), which provides a regulatory backstop on the amount of CO2 that new fossil fuel power stations with a capacity over 50MW are allowed to emit. This applies to fossil fuel power stations only, meaning those operating on natural gas, coal or oil. Biomass and energy from waste plants are not affected.
The proposal would place on CO2 emissions similar restriction to those that already apply under EU law to sulphur dioxide, oxides of nitrogen and particulate emissions. This complements the UK Government's attempts to decarbonise power generation via the promotion of carbon capture and storage, the EU Emissions Trading Scheme and through its support for non-fossil fuel generation.
2. Strategy and Policy Statement
The draft Energy Bill proposes that the Government and regulator Ofgem jointly publish a Strategy and Policy Statement (SPS) outlining energy strategy to ensure that they are acting together. This was recommended in Ofgem's 2011 Review and will result in the repeal of existing social and environmental guidance.
The SPS is intended to provide greater clarity and certainty to the roles of Ofgem and the Government. The Strategy and Policy Statement will:
- set out the Government’s strategic priorities for the energy sector in the UK;
- describe the roles and responsibilities of various bodies which implement or are affected by energy policy in the UK; and
- describe policy outcomes that are to be achieved by Ofgem and the Secretary of State when regulating the energy sector.
3. Nuclear regulation
The Bill places the interim Office for Nuclear Regulation (ONR) on a statutory footing as the body to regulate the safety and security of the next generation of nuclear power plants. This includes setting out the ONR’s purposes, regulations and functions.
The ONR will have responsibility for five key areas: nuclear safety; nuclear security; nuclear safeguards; the transport of radioactive material by road, rail and inland waterway, and health and safety on nuclear sites.
4. Government pipeline and storage system
The Bill includes provisions to enable the sale of the Government Pipe-line and Storage System (GPSS). This includes providing for the rights of the Secretary of State in relation to the GPSS; registration of those rights; compensation in respect of the creation of new rights or their exercise, and for transferral of ownership, as well as powers to dissolve the Oil and Pipelines Agency by order.
It remains to be seen how quickly the Government will move to invite private sector involvement in the GPSS. The level of private sector interest is likely to be dependent on the robustness of the contractual arrangements for transportation and storage on offer from the Government, as these arrangements will be a key part of the investment case.
5. Offshore electricity transmission
The Bill includes a small but significant measure which provides an exception to the prohibition of participating in the transmission of electricity during testing in the commissioning period of offshore transmission connections constructed by or on behalf of developers also constructing an offshore generating station.
Clause 105 of the Bill provides welcome reassurance to developers who opt for the generator-build option that the conveyance of electricity through offshore transmission assets prior to their transfer to an OFTO will not be in contravention of the prohibition on unlicensed participation in the transmission of electricity in the 1989 Act.
It is important to note, however, that the exemption in Clause 105 is time-limited (expiring one year after the date of the completion notice) and therefore strikes a balance between the need, on the one hand, for generators to be able to undertake whatever testing and commissioning activities are required to bring the assets into commercial operation and, on the other, the need to ensure that the assets are transferred into the ownership of an OFTO without undue delay.