UK government publishes ground-breaking Energy Bill

On 6 July, the UK government introduced an Energy Bill into Parliament. Also known as the Energy Security Bill (see the government press release and related webpage), it is packed with provisions on an unprecedentedly wide variety of subjects. Some of these have featured in consultations or statements of legislative intent over a number of years; some may come as more of a surprise to many readers; some appear as the subject of legislation here for the first time.

Given the intense policy, political and public interest in the energy sector at present, it is not surprising that the first multi-topic piece of primary legislation on the energy sector since 2016 is more than 300 pages long. The Bill’s 243 clauses and 19 Schedules include measures that will significantly affect almost all aspects of energy sector activity, including upstream oil and gas, electricity networks, nuclear power, carbon capture and storage, heat networks, hydrogen, energy efficiency, fuel sector resilience and energy system governance. Moreover, in a sense the Bill does more than its length alone might suggest, as it contains substantial powers to make new, often sector-shaping regulations.

This is, of course, only the starting point: no doubt much of the Bill will be subject to vigorous debate, and at least some amendment, in Parliament over the coming months. In future posts, we will report on its progress and look in more detail at some of its provisions; here we present a brief and broad overview of the Bill as a whole, summarising at a high level the contents of each of its 13 Parts.

CO2 transport and storage

Part 1 sets up a new system of licensing for, and economic regulation of, the transport and storage of carbon dioxide (CCUS T&S). The provisions draw on precedents in the Electricity Act 1989 (EA89) and Gas Act 1986 (GA86), but the new licences will be granted under the new Act, rather than under amended provisions of EA89 or GA86.

  • Readers of the earlier Acts will be familiar with the structure of the provisions, even if some of the content is less familiar. For example, like the EA89 and GA86, Part 1 begins by setting out the “principal objectives and general duties” of the Secretary of State and Ofgem, which are to act as their guiding lights as they carry out their functions under the new legislation. Ofgem is referred to in Part 1 as the “economic regulator” of CCUS T&S. (Elsewhere in the Bill it appears as GEMA, an acronym of its official title, the Gas and Electricity Markets Authority.)
  • Similarly, there are rules about licensing of CCUS T&S operators (initially by the Secretary of State, and later by the economic regulator), including the usual provision for exemptions, modifications, appeals about modifications, provision of information to the economic regulator and the Secretary of State, enforcement of regulatory provisions, competition, reporting obligations and inter-regulator cooperation. There is also provision for a special administration regime to deal with licence holder insolvency situations, and a transfer scheme mechanism to deal with situations where a termination event arises in relation to a CCUS T&S licence.

The principles of the new regime have been discussed in previous government consultations (see, for example, here). The economic regulator’s work is not to be confused with the regulation of the physical aspects of offshore CCUS by the Oil and Gas Authority (OGA, now rebranded as the North Sea Transition Authority, but still known in legislation by its original name), which the OGA will retain.

Supporting CCUS and low-carbon hydrogen production

Part 2 is mostly concerned with revenue support contracts for carbon capture, CCUS T&S and low-carbon hydrogen production. It envisages structures that will be recognisable to those familiar with the GB renewables Contracts for Difference (CfD) regime.

  • It makes provision for a “revenue support counterparty” to be “designated” in relation to each of these three sectors. The counterparties would have functions similar to those of the Low Carbon Contracts Company under the CfD regime.
  • There is also a broad power for Ministers to grant financial assistance (which could include capital grants) for CCUS or low-carbon hydrogen production / transportation / storage.
  • There will also be a “hydrogen levy administrator” and “allocation bodies”, which would be responsible for allocating the revenue support contracts (a function perhaps similar to that of National Grid ESO as delivery body in the CfD context).
  • As with the Energy Act 2013 provisions that laid the foundations for CfDs, a large proportion of the provisions about revenue support contracts is devoted to saying what details of the new regimes can be spelt out in secondary legislation (answer: most of them).
  • Part 2 also deals with the decommissioning of CO2 storage installations, through a combination of further powers to make regulations about the arrangements for financing decommissioning and some amendments to existing legislation such as the Petroleum Act 1998 and (on change of use relief) the Energy Act 2008.
  • There is provision for Ministers to designate a Strategy and Policy Statement (SPS) about strategic priorities in CCUS policy, to which Ofgem, as economic regulator, must have regard (mirroring the energy SPS provided for in the 2013 Act, but which has yet to be designated).
  • Other provisions amend existing legislation, or enable the making of new regulations, relating to CO2 storage licences and access to CCUS infrastructure. Ministers are also given power to spend taxpayers’ money on supporting CCUS and hydrogen production facilities.  

The Bill here puts in place a legislative framework for a number of policies on CCUS and hydrogen that have been consulted on in recent years (see, for example, here, here and here).

“New technology”

Part 3 covers a number of different areas.

  • Building on a consultation in 2021 about “a market-based mechanism for low-carbon heat”, it enables Ministers to set up schemes to encourage the supply or installation of low-carbon heating equipment (such as heat pumps) by setting targets for “scheme participants” in terms of, for example, the energy efficiency or carbon intensity of the equipment they supply.
  • It fills some legislative gaps identified in relation to the proposed “hydrogen for heat” trials in a domestic context as regards powers of entry, safety and consumer protection.
  • Consistent with other recent policy announcements, it exempts nuclear fusion facilities from the requirement to apply for a nuclear site licence – a liberalising move that recognises the radical differences in safety implications of nuclear reactor (fission) technology and fusion.
  • It amends the Climate Change Act 2008 to enable a range of technologies, possibly including direct air carbon capture and storage (i.e. not just those relating to land use, land-use change or forestry) to count as removals of greenhouse gases from the atmosphere for the purposes of calculating UK greenhouse gas emissions under the 2008 Act. (See, in this connection, the 5 July 2022 consultation on a business model for “engineered” removals.)

A new entity at the heart of the energy system

Part 4 is about the Independent System Operator and Planner (ISOP).

  • This is the entity referred to in previous government consultation documents as the Future System Operator (FSO). It will take on a range of functions, beginning with those of the current electricity system operator, and longer-term gas network and market planning. It will hold new “electricity system operation” and “gas system planning” licences (issued, or treated as issued, under amended provisions of EA89 and GA86 respectively).
  • Its role is likely to expand over time, but it will have a focus, from the outset, on certain strategic objectives (such as net zero) and a mandate to look across the whole energy value chain, not just at the parts of the energy sector regulated by EA89 and GA86.
  • The establishment of the ISOP will involve both corporate (via a transfer scheme) and regulatory elements (granting of new licences and consequential modification of existing licences and industry code provisions).

Reforming industry governance

Part 5 reforms the governance arrangements for the voluminous industry codes that regulate so many aspects of the day-to-day running of the electricity and gas systems. As with the ISOP provisions, the principles underlying this Part were the subject of consultation in 2021.

  • It establishes “code management” as a licensed activity under EA89 and GA86, and allows regulations to be made under which code managers for particular codes would be selected on a competitive basis.
  • The overall aim is to make it easier to set strategic directions for the development of codes, with a view to ensuring that changes that are necessary to facilitate key policy priorities are pursued in a more streamlined and coordinated way. Ofgem, advised by the ISOP, would be required to publish an annual strategic direction statement to facilitate this.
  • Ofgem would also be given more power to modify codes, more easily, on its own initiative (in a variety of circumstances) than it has previously had.

“Market reform and consumer protection”

Part 6 reforms existing regulatory provisions relating to a number of aspects of the energy sector.

  • In the middle of the last decade, government and Ofgem published a series of documents about opening onshore electricity network provision up to competition. Although there was consultation on some draft legislation in 2016 and the notion of breaking down network monopolies received some support from Dieter Helm’s 2017 Cost of Energy Review, the proposals did not make it into legislation at that time. However, in the meantime, the notion that, for example, storage technology can sometimes provide a more effective solution to network constraints than the construction of “more wires” has gained currency.
  • Last year, a government consultation formally indicated that competition in onshore networks was back on the agenda. At the same time, BEIS and Ofgem have been reviewing the arrangements for offshore transmission in the light of the government’s plans for massive expansion of UK offshore wind generation (the Offshore Transmission Network Review, or OTNR process). They have been looking to a future where offshore generators connect, like those onshore, to a coordinated network, rather than each being served by a dedicated link (typically built by itself) to the onshore transmission network (see here, here and here).
  • In this context, the Bill substantially amends the provisions of EA89 that currently provide for Ofgem to hold tenders for offshore transmission owner (OFTO) licences and to make “property schemes” for transferring transmission infrastructure that has been developed by offshore generation project developers to the winning OFTO.
  • The amended EA89 provisions allow for tenders to take place in relation to the award of a “relevant contract” or the granting of a “relevant licence”. Relevant contracts are contracts entered into with a licensed transmission owner or system operator, or a distribution licence holder, to carry out a project that “relates to” the GB electricity network as a whole (or an interconnector or multi-purpose interconnector – on which, see below). A relevant licence could be a licence for transmission, generation, distribution or interconnection (regular or “multi-purpose”; see below). These tenders will be organised by one or more “delivery bodies” (designated by Ministers). Regulations made by Ministers will further specify what types of project can be tendered for; Ofgem (after approval by Ministers) would make regulations about the procedures to be followed.
  • For more than 20 years (see, for example, here), concerns have been raised about transactions that result in the holders of two or more network gas or electricity network licences being in common ownership – primarily on the grounds that this could result in Ofgem having fewer comparators for price control and other regulatory purposes. The Bill amends the Enterprise Act 2002 to apply to such transactions rules similar to those that have long applied to mergers between water companies. The Competition and Markets Authority (CMA) will be obliged to refer for further investigation – and may ultimately block – a merger between two energy network licence holders of the same kind if (having consulted Ofgem) it believes that it may be expected to cause substantial prejudice to Ofgem’s ability to make comparisons between such energy companies for regulatory purposes.
  • Multi-purpose interconnectors (MPIs) would combine the interconnection of GB’s and another country’s electricity systems with the export of power generated offshore. Consistent with a recent government response to consultation on MPIs and wider OTNR policy, the Bill provides for a new EA89 licensable activity of operating an MPI.
  • At present, the domestic gas and electricity tariff cap regime will expire at the end of 2023. The Bill permits it to be extended to carry on as far as the end of 2025 if the Secretary of State determines, after considering a report from Ofgem in 2023, that conditions for effective competition for domestic supply contracts have yet to be achieved.
  • Also due to expire in 2023 are certain powers of the Secretary of State in relation to EA89 licences relating to smart meters. These are to be extended to 2028.
  • A small amendment to EA89 gives primary legislative backing to the assumption on which industry has been working for years now, that – within the statutory typology of electricity sector activities set out in EA89 – electricity storage counts as generation.
  • A very long clause amends legislation relating to the energy company obligation (ECO) regime by making provision for a buy-out mechanism. This is one of the outcomes of a recent government consultation on the ECO regime.

Heat networks

Part 7 establishes a UK regulatory framework for heat networks (both single-building “communal” networks and multi-building “district” networks). The use of networks can make the heating of buildings more efficient and reduce the greenhouse gas emissions associated with it, but as a technology, it remains under-exploited in the UK. This Part of the Bill has its roots in a 2020 government consultation on heat networks and, before that, a 2017 CMA market study on the same subject. The CMA’s key conclusion (following industry and other feedback) was that subjecting heat networks to the kind of regulation that applies to the supply of gas and electricity should cause the industry to grow. (This insight has already prompted the passing of the Heat Networks (Scotland) Act 2021 – aspects of heat policy, unlike gas and electricity, being a devolved matter.)

  • Ofgem is appointed as the Regulator for GB, and its counterpart NIAUR for Northern Ireland, but with the proviso that either body can be replaced in its role by secondary legislation.
  • Schedule 15 to the Bill essentially provides a blueprint for economic regulation of the heat networks sector along the lines of how the electricity and downstream gas sectors are regulated under EA89 and GA86 respectively, but all done through secondary legislation.
  • Regulations can provide for the Regulator’s objectives and duties and general organisation, and for defining what activities in relation to heat networks it will, after a prescribed “initial period”, only be lawful for those who hold a heat network authorisation (authorisation) to carry on.
  • Authorisations will in many ways resemble EA89 or GA86 licences. They may contain conditions about a range of topics, including consumer protection (e.g. pricing, customer communications, service and technical standards) and limitations on greenhouse gas emissions associated with heat networks (in England and Northern Ireland).
  • It is envisaged that industry codes will sit alongside the authorisations, just as they supplement the provisions of GA86 and EA89 licences. Schedule 15 follows Part 5 in introducing a governance framework for codes with licensed code managers and so on.
  • There will also be “installation and maintenance licences”, whose holders will be entitled to exercise the rights specified in the licence for purposes relating to the installation or maintenance of relevant heat networks in England, Wales or Northern Ireland.
  • These licences will be a vehicle for conferring the kinds of statutory rights that are enjoyed by many utility operators in relation to the physical aspects of their businesses, such as compulsory acquisition of rights over land.
  • In relation to both authorisations and licences, there will be the usual mechanisms for revocation, modification of conditions, enforcing compliance with conditions (including by the making of consumer redress orders) and application of competition law by the Regulator.
  • Provision is also made for regulations to empower the Regulator to conduct pricing investigations; to replace a heat network operator (with associated powers to make a transfer scheme in respect of property, rights and liabilities); and for a special administration regime. It is also envisaged that some areas, such as metering, will continue to be regulated simply by regulations, rather than through authorisations or licences.
  • Separately, there is a series of provisions about areas designated as appropriate for heat networks (heat network zones) and the regulations that can be made about them.
  • At a national level, there is to be a Heat Network Zones Authority (which may or may not be the Secretary of State). At a more local level, one or more local authorities will be able to appoint a “zone coordinator” for their area(s) (or part(s) of it / them). The Authority and zone coordinators will between them identify areas appropriate for the construction and operation of district heat networks, using a specified methodology.
  • Once a heat network zone has been designated, regulations may require buildings of specified types in the zone to be connected to district heat networks or installed with communal heat networks within a specified timetable (with some provision for exemptions). Zone coordinators may be given powers to grant exclusive rights to design, construct, operate or maintain district heat networks within a given zone or part of a zone.
  • The regulation-making powers in Part 7 are designed to enable heat networks to be required to meet specific technical and environmental performance criteria.

Energy smart appliances and load control

It has long been apparent that a combination of smart metering, other new technologies and market-wide half hourly settlement could enable electricity to be used in ways that are more efficient at a system level and more cost-effective for consumers. This – along with the associated cyber-security concerns – is the background to Part 8 of the Bill.

  • A familiar example of a “smart” appliance is the home electric vehicle charging point that waits until wholesale electricity prices are cheapest (or somebody in the market will even pay it to consume) before drawing power from the grid to charge the vehicle. Another is the fridge that may accept an offer to turn off for a few minutes in order to facilitate grid operation.
  • The Bill provides statutory definitions of “energy smart appliances” and the “load control” signals (whether from the appliance’s owner or a third party) to which they are designed to respond. It then enables Ministers to make regulations about energy smart appliances that are either EV charging points or are capable of being used for refrigeration, cleaning, battery storage, electrical heating, air conditioning or ventilation.
  • The aim appears to be to use product-specific regulations about functionality, performance, protection of the electricity system and a range of technical standards to build confidence in these new technologies and enable them to contribute to outcomes that are positive from decarbonisation, security of supply and affordability points of view.
  • Provision is also made to create, by secondary legislation, one or more new categories of activities licensable under EA89, comprising activities relating to load control. Ministers would have powers to make consequential modifications to existing licences if this is done.
  • Alongside the Bill, the government has published a consultation on this area.

Energy efficiency of buildings

One of the themes of the British Energy Security Strategy published in April 2022 was the need for more action on energy efficiency, particularly in relation to buildings. In this context, Part 9 gives Ministers a power to make energy performance regulations.

  • The regulations could enable or require assessment, certification or publicising of the energy usage or efficiency of premises; or improvements to their energy usage or efficiency.
  • The regulations could also restrict or prohibit the marketing of premises whose energy usage or efficiency is not assessed, certified or publicised as required, and include provision for both civil penalties and the creation of criminal offences to enforce compliance with them.

“Core fuel sector resilience”

In 2021, the government published a draft Bill on Downstream Oil Resilience. The House of Commons Committee that gave it pre-legislative scrutiny expressed some reservations about the draft Bill in its report, and the government accepted at least some of these in its response.

Against this background, Part 10 makes provision about the supply of “core fuels” (i.e. crude oil based fuels and renewable transport fuels).

  • Ministers are given functions that they must exercise with a view to ensuring that UK economic activity does not suffer as a result of disruptions in the core fuel supply chain and to reduce the risk of emergencies affecting fuel supplies.
  • Ministers may, in various specified circumstances, issue directions, or make regulations that apply, to “core fuel sector participants” – that is, owners of core fuel infrastructure and those carrying on activities in relation to core fuels. The common thread between the distinct but linked powers conferred on Ministers is the objectives of maintaining or improving core fuel sector resilience and mitigating or counteracting actual / potential disruption to, or failure of continuity of, core fuel supply.
  • The direction-making powers would apply in relation to infrastructure owners with a capacity of more than 20,000 tonnes, and those carrying on core fuel activities with a capacity in excess of 500,000 tonnes. The regulation-making powers, and a related power to require information, apply at much lower thresholds (with a threshold of 1,000 tonnes in each case). There are powers to adjust these thresholds by secondary legislation.
  • Finally, Ministers are given a power to grant financial assistance to core fuel sector participants for the purpose of maintaining or improving core fuel sector resilience or securing or maintaining continuity of core fuel supply.

Oil and gas

Part 11 makes some changes to regulation of the oil and gas sector.

  • There is a change to the standard conditions (“model clauses”) of UK upstream oil and gas licences. For many years, these have included a provision allowing the OGA (and, before it was created, Ministers) to revoke (or partially revoke) the licence on a change of control of the licence holder (or one of them). However, there was no requirement to seek consent to such a change in control: instead, the common practice was to seek a “comfort letter” from the OGA to the effect that it is “not minded” to exercise its power of revocation in response to a particular transaction (a process on which the OGA has issued guidance).
  • That is all set to change, with the relevant licence conditions being amended to require licensees to seek OGA consent for any change in control “at least three months” before it is proposed to occur. Such consent, if given, may come with conditions attached (applicable to the licensee or the acquirer). These changes will apply to both new and existing licences. They are supported by an amendment to the Petroleum Act 1998 requiring licence holders to provide information required by the OGA in relation to potential changes in control. Revocation remains a potential sanction for failure to comply with conditions of consent to a change in control or to provide “full and accurate” information in response to such an OGA request – or, indeed, for carrying through a change of control without consent.
  • This increases the OGA’s powers over the UK upstream industry. At the same time, the consent process offers a more certain result than an (effectively) non-binding comfort letter. It also means that the OGA now exercises much the same degree of control, in much the same way, over share-based upstream acquisitions as it has previously had in respect of asset-based upstream transactions (for which its consent was already required) where an interest in a licence, rather than shares in the interest-holding companies, is acquired.
  • The other provisions in this Part all have an environmental flavour, relating as they do to emergency planning for dealing with oil pollution, reducing oil and gas activities’ impacts on protected habitats and new charges for government functions in relation to decommissioning (see here and here for the consultation relating to this last provision.)

Civil nuclear sector

Part 12 makes regulatory and administrative changes in relation to the civil nuclear sector.

Some pointers on implementation

Part 13 contains the “general” provisions commonly found at the end of Bills.

  • As usual, there is a power for Ministers to reflect the impact of provisions in the Bill by amending other legislative provisions using regulations. The Bill itself makes a number of such “consequential” amendments, and others may be added to it (e.g. in Schedules 8 and 11), but more will follow in regulations. The consequential amendments power is widely drafted. It includes the ability to amend primary legislation passed before or in the same session as the Bill (subject to following the “affirmative” procedure, where regulations require Parliamentary approval before they are made) and retained direct EU legislation.
  • Commencement: Much of the Bill will be commenced by regulations, but the Bill provides for most of the CCUS and hydrogen provisions and the onshore electricity network competition reforms (amongst others) to come into force automatically two months after the final stage in the passing of a Bill (Royal Assent). A few high-priority provisions (including those on network mergers and heat networks) are flagged to commence immediately on Royal Assent.
  • Extent: The clause setting out which provisions extend to which parts of the UK is a little more complex than is often the case in energy legislation. Westminster does not typically legislate for energy matters in Northern Ireland, but there are a number of exceptions to that here (again, including much of the CCUS and hydrogen provision). Most of the rest of the Bill extends to England, Wales and Scotland, but with carve-outs for Scotland in relation to the provisions on heat network zones and energy performance of buildings.

Further information on the Bill, including topic-by-topic factsheets, is accessible from this webpage.

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