Energy Bill – Regulatory And Institutional Reform

In this briefing note we provide an outline of major changes to the regulatory and institutional framework for the energy sector being introduced by the Energy Bill (as amended in Committee), as well as recent regulatory initiatives from Ofgem with respect to matters covered by the Bill.

The Bill was laid before Parliament on 29th November with a view to enactment in late 2013. Secondary legislation, which will be required for implementation of Electricity Market Reform (EMR), is being developed in conjunction with work on the Bill and is due to be laid before Parliament by the Secretary of State in Spring 2014.

Further briefing notes are available on other aspects of the Energy Bill and EMR, including Feed-in Tariff Contracts for Differences (CFDs) and the capacity market. A briefing note on the measures in the Bill for replacing the Renewables Obligation is currently in preparation.

Duties of the Secretary of State

EMR

When discharging his principal functions in relation to CFDs and capacity provision, such as making regulations, changing licence conditions, and establishing targets and spending caps, the Secretary of State must have regard to the following matters:

his duties under the Climate Change Act with respect to the 5 yearly carbon budgets and the 2050 emissions target; ensuring security of supply; the likely cost to electricity consumers; and the UK's target for renewables under the Renewable Energy Directive. The Bill does not make specific provision to that effect with respect to investment contracts.

Strategy and Policy Statements

The Bill gives the Secretary of State the power to designate a "strategy and policy statement" (subject to Parliamentary approval) setting out:

Government's strategic priorities and main considerations in formulating its energy policy; "policy outcomes" to be achieved as a result of that policy; and the roles and responsibilities of Government and others involved in or affected by policy implementation. The strategy and policy statement will replace the current mechanism whereby the Secretary of State issues social and environmental guidance to Ofgem, and will permit fine tuning of the obligations of the Secretary of State and Ofgem within the scope of their principal objective and general duties under the Gas and Electricity Acts, so they are better aligned with Government policy from time to time.

The Secretary of State will be required to carry out functions under the Gas and Electricity Acts and with respect to the new capacity market in the manner which he considers will best deliver of the policy outcomes.

Decarbonisation Target

As promised when the Bill was laid before Parliament, it has been amended in Committee so as to provide for the introduction of a decarbonisation target for electricity generation, although, as currently drafted, the new provisions provide little assurance that a meaningful target will actually be introduced. The Secretary of State may, but is not obliged to, establish such targets in relation to year 2030 onwards by making orders subject to approval by both Houses of Parliament. The earliest any such order may be made is once the Secretary of State has set the 5 yearly Climate Change Act carbon budget for the period including the year 2030 - due by June 2016.

Once a decarbonisation target has been set, it is the Secretary of State's duty to ensure that it is not exceeded. He must report to Parliament with proposals and policies for meeting the target and report annually on the carbon intensity of electricity generation providing an explanation if a target has been missed.

Decarbonisation targets may not be revoked unless a replacement target covers the relevant year. A target may only be amended if the Secretary of State is satisfied that it is appropriate to do so in light of significant changes in the factors taken into account in setting it.

Emission reduction targets under the Climate Change Act are just one of many factors which must be taken into account by the Secretary of State in setting decarbonisation targets, the others being:

scientific knowledge about climate change; technology relevant to electricity generation and storage and demand reduction; economic circumstances and especially the likely impact of the target on the economy and the c competitiveness of particular sectors; fiscal circumstances and, in particular, the likely impact on taxation; public spending and public borrowing; social circumstances, and in particular the likely impact on fuel poverty; the structure of the energy market in Great Britain; differences in circumstances between England, Wales and Scotland; and circumstances at European and international level. Although these factors are broadly the same as those which must be taken into account by the Secretary of State in setting carbon budgets under the Climate Change Act, in contrast to Climate Change Act budgets decarbonisation targets do not have to be set with a view to achieving the 2050 80% emissions reduction target. As a result, it is questionable whether the new provisions provide a stronger signal of Government's commitment to moving to low-carbon generation, or whether they actually undermine existing statutory commitments.

Energy Resilience Fees

A new provision inserted into the Bill at Committee stage enables the Secretary of State to charge for services provided through the exercise of "energy resilience powers". "Energy resilience powers" are any powers which are exercised by the Secretary of State for the purposes of, or in connection with, preventing or minimising disruption to the energy sector in Great Britain (including disruption to fuel supplies).

According to Energy Minster, John Hayes MP, the introduction of the new mechanism was prompted by the road haulage dispute, which highlighted the need for robust contingency plans to safeguard fuel supplies. Other examples given to the Committee as to issues that might be addressed by contingency plans funded through the new charges included extreme weather events, cyber-attacks, energy security and critical plant closures. It appears that the fees are intended to cover services or facilities provided by the Secretary of State in the event of an emergency or immediate threat of one, but the new powers could conceivably be used to fund major new facilities such as gas storage and standby generation. There is no indication in the Bill as to who will be liable to pay the charges, but energy suppliers and industrial consumers (including gas fired generators) appear to be likely targets as far as they relate to arrangements for electricity and gas supplies.

Ofgem

Strategy and Policy Statements

Ofgem will be under a duty to have regard to the strategic priorities in the Secretary of State's new strategy and policy statements (see above) when conducting functions governed by its principal duties under the Gas and Electricity Acts, including its functions under the Bill with respect to capacity provision. It must also conduct those functions in the manner which it considers is best calculated to further the delivery of the policy outcomes set out in the statement. These requirements do not extend to Ofgem's functions with respect to dispute determination and competition law enforcement.

Ofgem also has a duty to notify the Secretary of State if at any time it concludes that a policy outcome is not realistically achievable, setting out why it has come to this conclusion and what, if anything, it is doing or intends to do to further the delivery of that outcome as far as is reasonably practicable. Ofgem will also be obliged to report on the planned and actual performance of its duties with respect to the strategy and policy statements.

The strategy and policy statement will replace the current mechanism whereby the Secretary of State issues social and environmental guidance to Ofgem. By increasing the chances of Ofgem using its powers to amend licences in order to discharge its obligations to respond to Government policy, which in itself is responsive to the vagaries of the media, the new arrangements contribute to the significant increase to regulatory risk which can be attributed to the Bill.

EMR and Consumer Protection

Ofgem's new powers and responsibilities with respect to EMR and consumer protection are discussed below.

National Grid

EMR

Key delivery functions for EMR are to be given to be given to National Grid as operator of the national electricity transmission system (the SO). In addition to duties imposed on it by regulations, the SO's functions under EMR will be covered by licence conditions. The Bill gives the Secretary of State powers to modify the SO's transmission licence, as well as industry codes, in connection with CFDs, investment contracts and the new arrangements for capacity provision. A proposal in the draft Bill to create a new licensable activity of system operation has been dropped, although existing mechanisms under the Electricity Act could be used to that end if necessary.

PROPOSED EMR FUNCTIONS FOR NATIONAL GRID

Function

CFDs

Capacity Market

Planning and Analysis

Collection of evidence and conduct of analysis and modelling to inform Ministerial decisions on the level of support for individual technologies.

Provision of information or analysis to inform Ministerial decisions on the move to allocation windows (following the initial first come first served stage) as a result of increasing...