UK: Energy Bill – Regulatory And Institutional Reform

Last Updated: 12 March 2013
Article by Paul Brennan

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 demand for contract awards.

Collecting evidence and conducting analysis and modelling to inform Ministerial decisions on whether and how the Capacity Market will run and how much capacity to contract.

Prequalification and contract award

Where CFD prices are set administratively, assessment of projects against budgetary limits and eligibility criteria set in both cases by Government.

Where the prices of CFDs are to be set competitively, running the competitive process designed and established by Government.

Conducting a pre-qualification process to determine eligibility for participation in capacity auction.

Running the capacity auction.

At present there is little clarity as to the extent to which the SO, Government and Ofgem will respectively be responsible for establishing market rules and the terms of capacity agreements.

Contract Performance

N/A (The CFD Counterparty will determine whether contract milestones and conditions precedent have been met.)

Monitoring progress of capacity providers against milestones to assess if the agreed capacity will be provided in the target year.

Monitoring delivery of plant during the delivery year e.g. providing information on whether plant is available at times of system stress.

Possible role in imposing penalties for non-delivery of capacity pursuant to rules established by Government or Ofgem.

Change Control

Providing analysis which may result in CFD rule changes by Government

Making technical rule changes. Other changes, for example those relating to auction or penalty regime rules, may be subject to approval by either Government or Ofgem.

Providing analysis which may result in rule changes by Government or Ofgem.

Secondary trading and/or secondary auctions

N/A

Carrying out a pre-qualification process to determine eligible transferees of capacity agreements. Receipt of information on traded agreements.

Running secondary capacity auctions if additional capacity is required.

Regulations may grant the SO and its staff and agents immunity from liability in connection with its EMR functions unless the liability arises from an act or omission in bad faith or which is in breach of the Human Rights Act or an Electricity Act enforcement order made by Ofgem.

Conflicts of Interest

The Secretary of State may modify the terms of the SO's transmission licence, as well as other Electricity Act licences for the purpose of securing such unbundling of the SO's activities as is necessary or desirable as a consequence of the EMR functions bestowed upon it. DECC has indicated that any such action will be proportionate having regard to the recent joint DECC-Ofgem consultation on SO conflicts of interest.

Alternatives to the SO

The Bill makes provision for the appointment of an alternative delivery body (with its consent) to take over conduct of SO's EMR functions, either on request from the SO, or if the SO becomes insolvent or underperforms and does not rectify such underperformance, within 6 months notice from the Secretary of State. Ofgem appears to be the prime candidate for the role of alternative delivery body. Explicit provision is made for the payment of fees to such a body. The mechanism for remunerating National Grid for performance of its new EMR roles is less than clear. DECC's policy overview suggests that National Grid's costs could be covered from the generators and suppliers who use the transmission system – presumably through changes to the Balancing and Settlement Code.

CFDs

Secretary of State

Regulations may be made giving the Secretary of State powers to direct the CFD Counterparty to enter into CFDs with low carbon generators. Regulations may also give the Secretary of State further powers to give directions to the CFD counterparty, for instance regarding the exercise and enforcement of rights under CFDs.

As well as giving the Secretary of State wide powers to make regulations in connection with CFDs, the Bill gives the Secretary of State powers to modify generation, transmission and distribution licences and documents, such as codes or agreements which are maintained pursuant to the terms of any such licence, for the purposes of:

  • conferring functions on the system operator in connection with CFDs;
  • allowing or requiring services to be provided to a CFD counterparty; or
  • enforcing obligations under a CFD.

Ofgem

Regulations may confer obligations on Ofgem for the purposes of "offering advice to, or making determinations on behalf of" a party to a CFD.

Regulations may provide for requirements with respect to CFDs to be enforceable by Ofgem through enforcement orders under the Electricity Act. Subject to Ofgem's duty to have regard to its own statement of policy on penalties, a failure to comply with regulations relating to CFDs could result in the offender having to pay compensation under a Consumer Redress Order (for which see below) and/or fines for breach of an enforcement order of up to 10% of the offender's turnover in total.

National Grid

Regulations may provide for the SO to direct the CFD counterparty to offer CFDs to generators, subject to any order made by the Secretary of State with regard to the maximum cost or other target to be met by CFDs.

CFD Counterparty

A CFD counterparty will be obliged to offer CFDs to generators where directed to do so by the Secretary of State or the SO pursuant to regulations. Its relationship with a generator which accepts the offer of a CFD will be contractual. Its rights to require payments and collateral from suppliers, and its obligations to make payments to them, will be established by regulations. Regulations may also require a CFD Counterparty to enter into contracts for purposes connected to a CFD, and to do, or refrain from doing, things in given circumstances (including at the direction of the Secretary of State) such as enforcing obligations under CFDs, terminating CFDs or agreeing to variations and prosecuting disputes.

Elexon

In its Operational Framework released with the Bill, DECC indicates that it is minded to use Elexon, the Balancing and Settlement Code settlement agent, as settlement agent on behalf of the CFD counterparty, both with respect to payments under contract to and from generators and payments under regulations to and from suppliers.

Investment Contracts

Secretary of State

The Secretary of State, and only the Secretary of State, may enter into investment contracts.

Generators entering investment contracts will initially owe their obligations to the Secretary of State under contract. Regulations may provide for associated payments to be made between the Secretary of State and electricity suppliers, though according to DECC he is likely to be replaced for such purposes by the CFD counterparty once the CFD Framework is established.

The Secretary of State may designate, with its consent, an "investment contract counterparty" or CFD counterparty as counterparty to investment contracts and, having done so, make a transfer scheme transferring his rights, obligations and liabilities under investment contracts to it. Regulations must make provision for electricity suppliers to make payments to the CFD/ investment contract counterparty to enable it to make payments under the contracts. Where a transfer scheme provides for a CFD counterparty to be the transferee, regulations may provide for the investment contract to be regarded as a CFD.

Investment contracts must be laid before Parliament after introduction of the Bill. Variations to investment contracts, whether agreed by the Secretary of State or CFD/investment contract counterparty, must be laid before Parliament together with an explanation from the Secretary of State, where he considers the change is likely to materially increase the costs to electricity consumers. Although confidential information may be redacted from copies of the contract or variations laid before Parliament, this does not apply to the contract's strike price or market reference price.

The Bill gives the Secretary of State powers to modify generation, transmission and distribution licences and documents, such as codes or agreements which are maintained pursuant to the terms of any such licence, for the purposes of:

  • allowing or requiring services to be provided to the Secretary of State or a CFD/investment contract counterparty; or
  • enforcing obligations under an investment contract.

Ofgem

Regulations may confer obligations on Ofgem for the purposes of "offering advice to, or making determinations on behalf of" a party to an investment contract.

Regulations may provide for their requirements with respect to investment contracts to be enforceable by Ofgem through enforcement orders under the Electricity Act. A failure to comply with regulations relating to CFDs could result in the offender having to pay compensation under a Consumer Redress Order (for which see below) and/or fines for breach of an enforcement order of up to 10% of the offender's turnover in total.

CFD/Investment Contract Counterparty

Where a CFD/Investment Contract Counterparty is designated by the Secretary of State as the counterparty to investment contracts, regulations must provide for suppliers to make payments to the CFD/investment contract counterparty to enable it to make payments to the generator, and may make provision for payments to be made by it to suppliers. As with CFDs, a CFD/investment contract counterparty's relationship with a generator which is party to an investment contract is contractual and its rights to require payments and collateral from, and obligations to make payments to, suppliers with respect to investment contracts will be established by regulations. Regulations may require a CFD/investment contract counterparty to do, or not do, things in given circumstances (including at the direction of the Secretary of State) such as entering into contracts relating to investment contracts, enforcing obligations under investment contracts, terminating them or agreeing to variations and prosecuting disputes.

Elexon

DECC has indicted that it is minded that Elexon should be used as settlement agent for payments with respect to investment contracts.

Capacity Provision

Regulations may confer functions on the Secretary of State in connection with arrangements for capacity provision, including, specifically, to decide how much capacity should be contracted. DECC anticipates the decisions will be made by reference to a reliability standard. There is no indication that prices to be paid under capacity agreements will be subject to a cap, but that possibility cannot be ruled out.

Regulations will make provision as to the obligations of capacity providers (generators or demand reducers) who are awarded capacity agreements, as well as the payment obligations of suppliers. These provisions could include obligations to make payments to cover losses in the case of the insolvency or default of an electricity supplier or capacity provider. Regulations may also impose obligations on suppliers and capacity providers to provide collateral to the settlement body.

The Secretary of State's powers to make regulations in connection with capacity provision include powers to repeal or revoke such primary legislation as he considers appropriate in connection with relevant provisions of the Bill.

The Secretary of State may, in connection with arrangements for securing capacity provision, modify the conditions of generation, transmission, distribution, supply and interconnector licences and documents such as codes or agreements which are maintained pursuant to the terms of any such licence. Specific provision is made for licence conditions which require a new framework agreement and code to be put in place – such a code could be used as a contractual framework for capacity auctions and make provision for the remuneration of the SO for the discharge of its functions with respect to capacity procurement.

Ofgem

Ofgem will be under a duty to discharge its functions in connection with arrangements for capacity provision in accordance with its principal duty and general objectives under sections 3A to 3D of the Electricity Act 1989 but, curiously, not section 3E, which requires it to carry out its functions in the manner it considers is best calculated to implement, or to ensure compliance with, any binding decision of ACER or the European Commission under the Third Legislative Package for electricity.

Regulations may confer functions on Ofgem in connection with arrangements for capacity provision, including, specifically, to decide how much capacity should be contracted.

DECC's technical update indicates that whereas a settlement agent will be responsible for processing day to day cash flows and collateral provision, regulations will make Ofgem responsible for enforcing not only suppliers' obligations to pay for capacity agreements but also the obligations of capacity providers under the agreements, and the Bill makes provision for regulations giving Ofgem the power to do so through enforcement orders under the Electricity Act (and may make amendments to the Electricity Act for such purposes).

A failure to comply with regulations relating to capacity agreements could result in the offender having to pay compensation under a Consumer Redress Order and/or fines for breach of an enforcement order of up to 10% of the offender's turnover in total.

National Grid

Regulations may confer functions on the SO in connection with arrangements for capacity provision, but excluding decisions as to how much capacity should be contracted. In particular, regulations may make provision for the SO to run a competitive process (a "capacity auction") to determine which generators or demand reducers are to be awarded capacity agreements.

Elexon

Regulations may make provision for payments to and from suppliers and capacity providers to be administered by a settlement body, including for the purposes of meeting the settlement body's costs, holding sums in reserve and covering shortfalls in payments from suppliers.

DECC indicates that the settlement arrangements for capacity mechanism are likely to mirror those for the Balancing and Settlement Code.

Renewables Obligation

The Secretary of State will be empowered to make regulations requiring Ofgem or the CFD counterparty to purchase certificates, which, for plant accredited under the Renewables Obligation (RO), will take the place of ROCs once the RO is no longer in force and the plant no longer eligible for ROCs. The Secretary of State may also dictate by reference to technology type different purchase prices and limits on the number of certificates to be issued or bought. The payments will be funded through a "certificate purchase levy", also to be introduced through regulations and payable (by suppliers) on electricity supplies. Regulations may confer additional functions on the certificate purchasing body and provide for Ofgem or the CFD counterparty to collect and administer the certificate purchase levy.

The new powers are intended to enable introduction of the transitional regime for the Renewables Obligation (RO) proposed in the EMR White Paper, with the obligation on electricity suppliers to submit ROCs being replaced in 2027 by an obligation on a central body to purchase certificates at a fixed price. However, neither the 2027 date nor the 2017 date for the closure of the RO to new plant is enshrined in the Bill.

Market Liquidity and Participation

Licence Modifications

The Bill enables the Secretary of State to modify the conditions of electricity generation and supply licences to facilitate participation in the wholesale electricity market and to improve market liquidity. Examples of potential new licence conditions include provisions regarding:

  • the terms on which and the circumstances and manner in which it is to be sold or purchased;
  • restrictions on the intra-group sale or purchase of electricity; and
  • disclosure or publication of information.

In addition, the Secretary of State may modify the conditions of supply in order to facilitate investment in electricity generation by promoting the availability of electricity sales arrangements to generators. Examples of potential new licence conditions include provisions regarding the terms on which, and the circumstances or manner in which, electricity is to be purchased.

Specific provision is made for licence conditions which require a new framework agreement and code to be put in place. The new powers could thus be used to introduce a mandatory industry code for wholesale electricity sale and purchase, for instance through auctions, possibly even an electricity pool - an approach which appears to be favoured by the Opposition though not Government.

There is no time limit on the Secretary of State's powers under the Bill to modify licence conditions and related documents.

"Secure and Promote" Licence Condition

Ofgem has already been consulting on possible amendments to generation licence conditions with a view to forcing greater liquidity and transparency into the wholesale electricity market. It has consulted on a "secure and promote" licence condition which it says will secure recent improvements in the market place and promote further change. Ofgem distinguishes the secure and promote approach from proposals to introduce mandatory auctions of generation output which it consulted on early last year, although that still remains an option - including as a possible component of the "secure and promote" approach.

Ofgem's latest proposal is for a licence condition which requires the licence holder to comply, and secure that its affiliates comply, with Trading Requirements and to report to Ofgem on compliance levels. These Trading Requirements would be set out in a document maintained and revised from time to time by Ofgem – a veritable regulatory movable feast.

Trading Requirements are requirements relating to trading of electricity products, including derivatives, by the licensee and its affiliates, including with respect to:

  • the types of products to be traded;
  • minimum trading volumes;
  • use of trading platforms;
  • the basis on which bids and offers are to be priced;
  • the terms (including as to credit cover and collateral) on which such products should be traded; and
  • practices to be followed in offering and entering into agreements to trade such products.

Specific measures being contemplated by Ofgem include an obligation to buy and sell substantial volumes of electricity in day-ahead auctions and, more tentatively, the imposition of a duty to market make – to place a spread of bids and offers on trading platforms.

Although the initial proposals are for the new licence condition to apply to the six largest, vertically integrated energy companies (Centrica, EDF Energy, E.ON, RWE Npower, Scottish Power and SSE), Ofgem is considering applying the licence condition to other large energy companies.

Ofgem indicates that it will aim to make requisite modifications to licence conditions by the end of 2013.

Ofgem and Future Electricity Trading Design

The Secretary of State's new powers would be additional to Ofgem's existing powers to modify licences (subject to the Secretary of State's veto, and affected parties' right of appeal to the Competition Commission). With those powers in mind no doubt, Ofgem is consulting on whether to launch a Future Electricity Trading Design project, with the aim of complimenting Electricity Market Reform and implementation of the Third Package of European legislation on the internal electricity market.

Although Ofgem is keen to emphasise that it does not intend the proposed project to lead to a radical change to the existing NETA/BETA framework, the project could ultimately lead to significant changes in the marketplace. Ofgem has indicated that the project could address the following areas:

  • compliance with European legislation governing the electricity market and, within that context, maximisation of the benefits of EMR to GB consumers;
  • better integration of renewable energy production, particularly wind farms, into the market, through:
    • a cross border within day trading market; and
    • a "balancing energy market" to provide increase liquidity for renewable plant trading close to gate closure;
  • better integration of demand side response and electricity storage into the market;
  • incentives for investment in capacity and ongoing maintenance of existing capacity (in addition to any capacity market introduced under the Bill), for instance:
    • Reserve/STOR – reviewing the nature and timeline for services currently procured by National Grid, interactions with the capacity market including the incentive and penalty regimes, the methodology for determining Capacity Market and Reserve volumes, and the co-ordination of dispatch decisions between SO and generators;
    • locational price signals to stimulate investment in transmission and distribution infrastructure;
  • improvements in balancing and system operation, with possible areas to be addressed including:
    • increased procurement of Reserve (including demand side response);
    • day-ahead Reserve procurement;
    • management of transmission system congestion; and
    • increased granularity of balancing incentives (to periods less than the half-hourly settlement periods) to reduce instantaneous system imbalance levels;
  • interactions with the gas market; and
  • requisite changes to the institutional and regulatory framework for the energy market.

The consultation on the proposed Future Electricity Trading Design project and its scope closes on 14th April.

Consumer Protection

Consumer Redress Orders

The Bill introduces Consumer Redress Orders - a significant new mechanism for compensating consumers as a result of breaches by holders of Gas and Electricity Act licences and certain specified statutory obligations, including (where regulations are made to that effect under the Bill) obligations with respect to CFDs, investment contracts and capacity arrangements. Consumer Redress Orders may also be made by Ofgem with respect to breaches of certain consumer protection measures by suppliers or distributors of gas and electricity who benefit from an exemption from the requirement to hold a licence.

A Consumer Redress Order may be made where a licence holder (or person benefiting from an exemption) contravenes a licence condition (in the case of a licence holder) or relevant statutory provision and, as a result, one or more consumers have suffered loss or inconvenience. The order may require the offender to do such things as appear necessary to Ofgem to remedy the consequences of the contravention and prevent repetitions of the same, including payment of compensation by the offender in an amount, subject to Ofgem's duty to have regard to its own statement of policy with respect to Consumer Redress Orders, of up to 10% of its turnover less the amount of any penalty imposed for the same contravention under an enforcement order. There is no requirement for Ofgem to issue an initial or final enforcement order under the Gas or Electricity Acts before making a Consumer Redress Order. Consumer Redress Orders may not be made where Ofgem determines it would be more appropriate to address the contravention under the Competition Act.

Appeals against Customer Redress Orders may be made to the High Court which can quash or vary an Order or any provision in it if it is satisfied that it is unreasonable or if there has been a material irregularity in the process of issuing the Order.

Regulation of Tariffs

The Committee stage also saw the introduction of a framework enabling more active regulation of the supply of electricity and gas supply to domestic consumers following the Prime Minister's surprise commitment to legislate so that energy companies "have to give the lowest tariff to their customers".

The new provisions will enable the Secretary of State to modify suppliers' licenses for the purposes of promoting competition in domestic supplies, or to change tariffs or other terms of domestic supply contracts so as to reduce the cost to consumers. Specific examples of possible new measures include provisions:

  • requiring the adoption of one or more standard tariffs;
  • limiting the number of tariffs that may be adopted;
  • requiring provision of information to consumers, including so as to facilitate price comparison;
  • requiring the use of standardised contract terms;
  • requiring changes to tariffs or contracts to be offered to consumers; and
  • providing for the exercise of functions by Ofgem or the Secretary of State.

Any such licence changes must be made no later than the end of 2018.

In making any such licence modifications, the Secretary of State must act in the manner he believes is best calculated to protect consumers' interests, having regard, amongst other things, to the need to secure that suppliers can finance their licensed activities. Speaking at the Committee stage, Energy Minister, Greg Barker MP, made the questionable assertion that the new power would not enable the Secretary of State to intervene to regulate energy prices or introduce price controls.

Ofgem's Supply Licence Modifications

Ofgem has announced that it will shortly be commencing the process for modifying gas and electricity suppliers' licences in order to make the domestic supply market more transparent and to simplify the tariffs that are offered to consumers. Although not as radical as the Prime Minister's proposed intervention in the market, the proposals may render otiose the Secretary of State's new powers under the Bill to modify supply licences.

The licence changes will introduce limits on the number of tariffs that suppliers may offer, and introduce standards of conduct requiring suppliers to consider consumers' needs and treat them fairly.

In contrast to the Secretary of State's new powers under the Bill to modify supply licences, Ofgem's powers to make licence modifications are subject to appeal to the Competition Commission.

Ofgem's statutory consultation will be published around the end of March.

Ofgem has also indicated that it will be releasing revised proposals for licence changes relating to energy suppliers' terms of business with business consumers, following an initial consultation on that issue in October last year.

New Licensable Activities

The Bill enables the Secretary of State (on request from Ofgem and subject to Parliamentary approval) to make an order requiring the provision of advice or other services to consumers in relation to gas or electricity supply contracts to be conducted under licence. The purpose of the provision is to enable Ofgem to regulate third party intermediaries in the energy market, such as brokers and price comparison websites, should that be necessary.

Business Protection from Misleading Marketing Regulations

In a separate initiative Ofgem is seeking powers under the Business Protection from Misleading Marketing Regulations 2008.

The Regulations prohibit misleading advertising to traders (any person acting for purposes relating to his trade, craft, business or profession) and set the conditions under which comparative advertising is permitted. "Advertising" covers any sort of representation made in the course of business in order to promote the supply of a product or service and will cover activities of energy brokers and other third party intermediaries such as price comparison websites.

At present, powers to enforce compliance with the Regulations in England and Wales rests with the OFT and Local Authority Trading Standards Departments. Ofgem is seeking amendments to the Regulations so that it has powers:

  • to bring proceedings for an injunction against breaches of the Regulations;
  • to require the provision of information for the purpose of determining whether to bring injunction proceedings; and
  • to accept undertakings to comply with the Regulations.

The powers mirror those that Ofgem already has with respect to the enforcement of the Consumer Protection from Unfair Trading Regulations 2008 which deal with misleading advertising to domestic consumers.

Ofgem's consultation on its proposed new powers closes on 4th April.

Emissions Performance Standard

Operators of new fossil fuel generating plant with a capacity of 50 MW or more are placed under a duty not to exceed a carbon dioxide emissions limit, calculated by reference to the plant's installed capacity and a statutory rate of emissions of 450g/kWh. The limit equates to 3350.7 tonnes/MW, assuming plant availability of 85%. The limit covers generating plant run on fossil fuel or fuel produced by gasification plant which itself uses fossil fuel and any associated gasification plant or carbon capture and storage plant (CCS).

The Secretary of State may make regulations making more detailed provision with respect to the emissions performance standard (EPS) through regulations. In particular regulations may provide for:

  • application of the EPS to existing plant where a main boiler is replaced or an additional main boiler added;
  • disapplication of the EPS to plant which is used for self–supplies of electricity;
  • emissions to be disregarded where they are associated with the use of fossil fuel in an emergency;
  • emissions to be disregarded to the extent they are attributable to heat supplies; and
  • modifications of the duty to comply with the EPS.

Although the White Paper indicated that exemptions from the EPS would be available to CCS demonstration plant, the Bill does not make explicit provision for such exemptions.

The Secretary of State may issue directions suspending or modifying the EPS for periods where he considers that there is a significant risk of there being insufficient electricity to meet demand. In issuing any such directions he must have regard to the statement of policy that he will be obliged to publish with respect to the EPS.

Responsibility for enforcement of the EPS will rest with the devolved administrations which will also have powers to make regulations regarding enforcement of the EPS in their territory through enforcement notices and financial penalties. The enforcement body for Wales is expected to be the new Natural Resources Body, and for England, Scotland and Northern Ireland, their respective Environment Agencies.

Human Rights Act

In the recent case of Gas and Electricity Market Authority v Infinis, the Court of Appeal upheld a substantial damages award against Ofgem on the grounds that, as a result of Ofgem's erroneous refusal to give Renewables Obligation accreditation to certain sites formerly contracted under NFFO, there had been a breach of Infinis' right to property under the Human Rights Act. Given the extensive powers provided for in the Bill and some of the regulatory interventions currently being contemplated by Ofgem, the Human Rights Act looks set to become an increasingly important consideration in the development and implementation of, and potential challenges to, regulatory decisions in the energy sector.

Nuclear Regulation

The Bill provides for the establishment of a new statutory body, the Office for Nuclear Regulation (ONR), to regulate the nuclear power industry. The Bill sets out the ONR's purposes (nuclear safety, including with respect to the design and construction of nuclear generation, decommissioning and nuclear waste storage; nuclear security; nuclear safeguards; the transport of radioactive materials; and health and safety on nuclear sites) and places it under a duty to do whatever it considers appropriate for those purposes. The Bill includes wide powers for the Secretary of State to make regulations relating to such matters.

More specifically, the ONR will be under a duty to make adequate arrangements to enforce statutory provisions – for example by employing suitably qualified inspectors and ensuring they are adequately resourced. Inspectors are to be appointed by a "warrant" which details the specific powers that individual inspectors are able to exercise and the purpose for which they may be exercised. Such powers may include a power to issue prohibition or improvement notices requiring the cessation or rectification of activities which threaten safety or which are in breach of statutory provisions. It will be a criminal offence to fail to comply with such a notice, although there will be a right to appeal (to an employment tribunal) against their issue. Other powers that may be exercised by suitably authorised inspectors include powers of entry, powers to seize or otherwise deal with dangerous items and powers to take samples and documents and require the provision of information.

ONR employees will not be classified as civil servants and its precursor (currently within the HSE) has announced its intention to use its flexibility regarding pay and conditions to become an "employer of choice" for the increasingly limited pool of specialists.

The Bill also creates a variety of criminal offences relating to the conduct of employers and employees in connection with nuclear matters, for instance removing safety equipment or making false statements in connection with nuclear regulatory functions. In most cases the offences are analogous to offences under the Health and Safety and Work Act.

The Bill also introduces changes to the Energy Act 2008 enabling the Secretary of State to charge for costs incurred in considering proposals with respect to funded decommissioning programmes and related nuclear waste disposal agreements.

Offshore Transmission

The Electricity Act prohibition on electricity transmission without a licence is amended so that (if relevant conditions are met) developers of offshore generating stations do not need to hold a licence for the purposes of commissioning connected offshore transmission lines.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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