UK: The UK Government´s Drive Towards Sustainable Energy – Recent Developments

Last Updated: 30 June 2009

Article by Michael Rudd, Justyna Bremen and Andrew Thornton

In recent months the UK Government has issued a large number of consultations dealing with various aspects of renewable and sustainable energy initiatives. The Renewable Energy Strategy Consultation, issued in September 2008, outlined the Government's vision of a diverse low-carbon energy mix and promotion of energy efficiency and demand reduction. This has been followed by various consultations on specific initiatives, a snapshot of which is set out at the end of this article, along with various sustainability initiatives in the Budget 2009.

The impetus for this drive to develop a cohesive policy is wide-ranging and is founded upon domestic, EU and international requirements.

EU policy initiatives

In recent years the European Commission has been developing policies relating to energy and climate change through two extensive packages of legislation – the so-called climate change package and the third energy liberalisation package.

The climate change package

The climate change package was endorsed by the European Parliament in December last year. It requires Member States to reduce their CO2 emissions by 20 per cent by 2020, and boost energy efficiency with a target to save 20 per cent of the EU's total primary energy consumption by 2020.

The third energy liberalisation package

The third energy liberalisation package aims to finalise the liberalisation process commenced more than a decade ago. One of the most controversial components of that package has been the proposed complete ownership unbundling of energy companies, to ensure that networks are completely independent. A compromise deal has been struck after extensive negotiations, and Member States will be able to choose one of three options. The first option involves strict ownership separation of energy production, supply and transmission activities. The second and third options involve the so-called "independent system operator" (ISO) and "independent transmission operator" (ITO) models respectively. The ISO model will oblige companies to hand over the operation of their transmission network to a designated ISO. The ITO model, on the other hand, will allow vertically integrated companies to retain ownership and control, but will require them to put in place arrangements to ensure that any network operation activities are carried out independently, subject to the oversight of a supervisory body made up of relevant stakeholders. The key difference between the ITO and ISO models is that the ITO model does not require a complete handover of the network operator function. The compromise agreement was endorsed by the European Parliament on 22 April 2009.

The object of the liberalisation package is further competition and market opening. Some may say this is slightly at odds with the promotion of low carbon projects, such as onsite combined heat and power (CHP) plants which, in the UK, often operate as vertically integrated enterprises with long-term customer onsite supply agreements. How these competing desired outcomes are reconciled is a challenge that has already become apparent, most notably in the Citiworks case, which is discussed below.

The second strategic energy review and networks

In addition, in November 2008 the European Commission launched its second strategic energy review. The first Strategic Review led to the European Council agreement in March 2007 on energy policy targets for Europe. This led to various measures, including the third energy liberalisation package and the climate change package. The second strategic energy review focuses on energy security and sustainability.

Associated with that review is a green paper on issues relating to energy networks (Green Paper - Towards a secure, sustainable and competitive European energy network). The green paper discusses the importance of networks as a prerequisite to fulfilling energy security and climate change goals. The paper notes that the lack of suitable network links is a barrier to investment in renewable energy and decentralised generation. It seeks views on issues such as the main barriers to the development of a European grid and gas network.

The Covenant of Mayors

In February this year the European Commission launched its new Covenant of Mayors initiative. Signatories to the Covenant of Mayors are local governments of major cities in Member States.1 The signatories have agreed to contribute to the EU's emission reduction targets by a formal commitment to go beyond the official target through the implementation of their Sustainable Energy Action Plan (SEAP). An SEAP will include commitments in relation to various actions, such as the use of decentralised renewable energy sources.

The wider international context

Under its new Presidency, the US is likely to become more involved in driving international climate change policy. President Obama has said that he wants to bring in an economy-wide, market-based cap-and-trade system. The President has called on Congress to draft a carbon trade bill. Congress has promised to deliver draft cap and trade legislation before the UN Climate Change Conference to be held in Copenhagen in December. The European Commission indicated in January this year that it intends to propose that the US should join Europe in a joint carbon trading scheme modelled on the EU system. Stavros Dimas, the Environment Commissioner, has suggested that if the new US administration joins the system by 2015, it could be extended to other industrialised countries. Later it could be further extended to developing countries, transforming it into a global carbon market by 2020. President Obama has also announced significant investment in wind, solar, geothermal and other renewable power, and energy efficiency measures.

UK policy drivers

Climate Change Act 2008 and beyond

The UK Government now has statutory obligations which require it to promote and develop climate change initiatives. The Climate Change Act 2008 sets a legally binding target for reducing UK carbon dioxide emissions by at least 26 per cent by 2020 and at least 80 per cent by 2050, compared to 1990 levels. Importantly, it has also established the Committee on Climate Change as an independent body to advise the UK Government on setting carbon budgets. On the recommendation of the Committee, the Government has now set a more ambitious carbon budget, with a commitment to reduce emissions in the UK by at least 34 per cent in 2020 relative to 1990 levels. The Committee will report to Parliament on the progress made in reducing greenhouse gas emissions.

There are also other political pressures at play. Last year, at the peak of high oil and gas prices, the Government announced various measures to assist consumers affected by high energy prices, including the new Community Energy Saving Programme and an increased Carbon Emissions Reduction Target obligation (as set out below).

The Citiworks case

The new Department of Energy and Climate Change (DECC) has made it clear in its recent consultations that CHP projects will play an important role in reducing all buildings emissions to nearly zero by 2050. However, it has also been recognised that there are potential barriers to overcome. Last year the European Court of Justice (ECJ) ruled on a specific point in the Citiworks case2 which had been referred to it from the German courts. The case related to a local energy supply system, operated by the Leipzig/Halle Airport operator. The ECJ ruled that European law precluded a German law which granted a local on-site electricity supply system an exemption from third party access rules.3 This year, a higher court in Germany made a ruling in the Citiworks case on the basis of the ECJ decision. This ruling provided that going forward the airport would have to allow free network access to all electricity suppliers.

The ruling raised concern in the UK about the legal viability of vertically integrated exempt distributed generation schemes which involve generation, distribution and supply of electricity to local customers. The reason why the Citiworks case is relevant to such schemes is that they rely on an exemption under the Electricity (Class Exemptions from the Requirement for a Licence) Order 2001 from the general prohibition under section 4 of the Electricity Act to undertake the activities of generation, distribution and supply unless authorised to do so by licence. For example, an exempt distribution network operator is not obliged to give third party electricity suppliers access to its network. In addition to the question about the validity of the exemption currently enjoyed by these schemes, the other source of concern is that the viability of such schemes is dependent on the ability to lock customers into supply contracts (although now customers can be "locked in" simply through a long-term contract, rather than by denying other suppliers access to the distribution network).

In this context it is relevant that the EU energy liberalisation package (discussed above) includes an obligation on Member States to ensure that customers can switch suppliers within three weeks. No detail is available at this stage as to how this requirement will apply when implemented, and how it may affect contractual arrangements which may lock in a customer for a set period of time (e.g. in exchange for a discount or some other benefit).

DECC has said that it intends to consult in Spring 2009 on the practical implications of the Citiworks case. This consultation also intends to cover the potential amendments to the exemption regime contained in the Electricity (Class Exemptions from the Requirement for a Licence) Order 2001 that may be necessary in order to take account of this judgment.

Energy Act 2008

It is also worth noting that the Energy Act 2008 empowers the Secretary of State to introduce a "feed-in tariff" system to support low carbon generation of electricity in projects up to 5MW, and to establish a renewable heat incentive to support renewable heat from large industrial sites down to the household level. The Secretary of State can introduce a "feed-in tariff" system by modifying: (a) a condition of a particular supply or distribution licence (a standard condition of such licences); (b) any document maintained in accordance with such licences; or (c) any agreement which gives effect to such document.

The Energy Act 2008 also provided for the Renewables Obligation to be amended, introducing a new system of banding to allow for different renewable energy technologies to attract different levels of support. This has now been implemented by the Renewables Obligations Order 2009, which came into force on 1 April 2009.

Budget 2009

In April 2009, the UK Government unveiled a Budget designed to boost renewables.

UK carbon budgets

It was announced in the Budget 2009 that the UK will set the first three five-year carbon budgets, covering the period 2008-2022. The target is to cut greenhouse gas emissions by 34 per cent by 2020. This target is higher than originally mentioned in the Climate Change Act 2008, which set the target at a 26 per cent reduction in UK carbon dioxide emissions.

Low-carbon energy

The Government also used the new budget to announce £1.4 billion of targeted support in the low-carbon and energy sectors. This funding comprises:

  • £525 million in support for offshore wind investments that reach financial close between now and 2010 through the Renewables Obligation;
  • £375 million to support energy and resource efficiency in businesses, public buildings and households over the next two years (which includes £10 million for waste infrastructure);
  • £405 million to promote low-carbon industries and the advanced green manufacturing sector;
  • £60 million to fund engineering and design studies for carbon capture and storage. The intention is that four carbon capture and storage demonstration projects will be funded to develop the necessary technology;
  • £70 million for decentralised small-scale and community low carbon needs; and
  • £1 billion in support for combined heat and power through climate change levy exemptions.

Combined heat and power (CHP)

As mentioned above, the Government announced in the Budget that it will extend the climate change levy exemption for indirect sales of electricity from CHP beyond 2013 to 2023, subject to State Aid approval. This is expected to bring forward investments of around £2.5 billion, which will increase CHP capacity by 3GW by 2015.

The CHP announcement will be welcomed by the renewables sector, and there is nothing to suggest that State Aid approval should not be forthcoming. This will hopefully kick-start the much needed investment in existing and future CHP projects, which had been put on hold pending a decision.

However, the Government has yet to offer any further detailed guidance in relation to climate change levy and exemption certificates issued to overseas generators. Further, the position regarding the availability of climate change levy exemptions for power delivered to the UK over the Interconnector is still unclear and needs urgent clarification.

Renewable gas

National Grid has released a paper on the potential for renewable gas in the UK. Renewable gas is gas produced mainly via a process of anaerobic digestion or thermal gasification of biodegradable waste. According to National Grid, up to 50 per cent of the UK's residential gas requirements could potentially be met by renewable gas. It notes that the main prerequisites to the development of renewable gas are Government policy and the necessary regulatory regime, in each case to support it.

Smart meters

The provision of energy consumption information to both domestic and business customers has been a key part of the Government's energy efficiency and sustainability policy. The Government recently put in place new rules for metering at larger non-domestic gas and electricity sites. New licence modifications taking effect from 6 April 2009 will require the installation of advanced metering at such sites by April 2014. The Government announced in October 2008 that it intends to mandate electricity and gas smart meters for all households. It is currently consulting on proposals relating to the roll-out of smart meters to domestic households and at small and medium non-domestic sites. This consultation closes on 3 August 2009.


Delays in connections to the grid have been identified as a substantial barrier to the successful deployment of low-carbon energy. Ofgem (the gas and electricity markets regulator) is working on new enduring access arrangements through the Transmission Access Review (TAR) process. In early May Ofgem announced that as a temporary measure it has granted a derogation from the minimum standards in the GB Security and Quality of Supply Standards to allow 450 megawatts of small and large wind farms in Scotland to get connected as soon as they are ready. Ofgem has indicated that it is likely to follow the same approach for other generators that come forward (including other renewable generators and thermal generators).

The need for Government incentives and regulatory certainty is a theme common to all sustainable and renewable energy projects. Whether the current consultations being carried out by the UK Government deliver on this will remain to be seen.


A Snapshot Of Recent Consultations Regarding Environment and Sustainable Energy

Department for Communities and Local Government (CLG) consultation on definition of zero carbon homes and non-domestic buildings

Find it on the CLG website at:

What is it all about? In December 2006, the CLG consulted on proposals to make progressive changes to the energy efficiency and carbon requirements of building regulations in 2010, 2013 and 2016, so that new homes would be zero carbon from 2016. "Zero carbon" is defined to mean that taking into account emissions (e.g. from heating and hot water), energy use from appliances, and export and imports of energy from the development, the building will have net zero carbon emissions over the course of a year. A hierarchy of measures for meeting the zero carbon standard is recommended. This hierarchy would prioritise, in turn: energy efficiency measures; carbon mitigation onsite or near-site; offsite low and zero carbon energy; and a buy-out fund whose proceeds would be used to fund investment in low and zero carbon energy. The consultation also considers whether similar considerations apply to non-domestic buildings.

Who is potentially affected by this consultation? A wide range of energy users and suppliers, as well as local authorities, developers, ESCOs, MUSCOs, contractors and consultants.

Current status: Consultation closed on 18 March 2009. A summary of responses is to be published in June 2009.


DECC and Communities and Local Government (CLG) Heat and Energy Saving Strategy (HESS) consultation

Find it on the DECC website at:

What is it all about? The Government's objective is that all existing buildings, both business and residential, should reduce emissions to nearly zero by 2050. This consultation considers measures designed to make buildings more energy efficient, as well as district heating and the use of CHP. In particular, the consultation seeks industry views on whether measures such as the Carbon Reduction Commitment and support for renewable combined heat and power through the Renewables Obligation are sufficient to encourage the development of CHP schemes. While the zero carbon homes consultation (discussed above) considers the concept of zero carbon and how it will be measured and defined, the HESS consultation focuses on the policy initiatives that are needed to reach the zero carbon goal.

Who is most affected by this consultation? A wide range of energy users and suppliers, as well as local authorities, developers, ESCOs, MUSCOs, contractors and consultants.

Current status: Consultation closed on 8 May 2009. It has not been indicated when a summary of the responses will be published.


DECC consultation on the draft Order to implement the Carbon Reduction Commitment

Find it on the DECC website at:

What is it all about? This is the third consultation on the development of the Carbon Reduction Commitment (CRC) scheme. The CRC is a cap and trade scheme which seeks to reduce carbon dioxide emissions from large non-energy intensive organisations in both the public and the private sector. The first phase of the CRC is scheduled to begin in April 2010. Climate Change Agreements and the EU ETS already provide incentives for carbon emission reductions within energy intensive industries. The CRC will plug the currently existing gap.

Who is most affected by this consultation? Any organisation with electricity consumption of over 6000 megawatts per hour. This could include banks, retailers, technology companies, schools, hospitals, local authorities, landlord and tenants.

Current status: Consultation opened on 12 March 2009. Responses must be submitted by 4 June 2009.


DECC consultation on the Form and Content of New Climate Change Agreements

Find it on the DECC website at:

What is it all about? Climate Change Agreements were introduced in 2001. Under Climate Change Agreements, eligible energy intensive industries benefit from an 80 per cent reduction in the Climate Change Levy, if they meet certain energy efficiency targets. Current Climate Change Agreements expire in March 2013. In this consultation, the Government makes proposals and asks for views on the form and content of the new Climate Change Agreements.

Who is most affected by this consultation? Energy intensive users in sectors covered by current Climate Change Agreements.

Current status: Consultation opened on 12 March 2009. Responses must be submitted by 4 June 2009.


DECC and CLG Community Energy Saving Programme (CESP) consultation

Find it on the DECC website at:

What is it all about? On 11 September 2008 the Prime Minister announced a package of initiatives designed to help people to reduce their fuel bills whilst also ensuring that the most vulnerable receive help during the winter. One element of this package was the Community Energy Saving Programme. This target will be split equally between the supplier companies and the generating companies, with each individual company then receiving an individual target according to its share of the supply and/or generation market. The companies will discharge their obligation by delivering carbon abatement measures in homes.

Who is most affected by this consultation? Electricity and gas suppliers, and electricity generators.

Current status: Consultation closed on 8 May 2009. A summary of the responses will be published in August 2009.


DECC consultation on proposed amendments to the Carbon Emissions Reduction Target (CERT) 2008-2011

Find it on the DECC website at:

What is it all about? The Government has announced that it will raise the existing CERT target by 20 per cent. CERT is established under the Electricity and Gas (Carbon Emissions Reduction) Order 2008 (the Order). The Order sets out the overall carbon emissions reduction target to be collectively achieved by suppliers between 1 April 2008 and 31 March 2011. The current target is 154 million "lifetime" tonnes of carbon dioxide. The Order requires licensed gas and electricity suppliers that have at least 50,000 domestic customers (either individually or as part of a group of companies) to meet a carbon emissions reduction obligation, referred to as a "carbon obligation". This is set by Ofgem, who apportion the overall target in relation to each obligated supplier's domestic customer numbers. Suppliers meet the carbon obligation by so-called "qualifying actions". An action is a qualifying action only if it is promoted for the purpose of:

  • achieving improvements in energy efficiency;
  • increasing the amount of electricity generated or heat produced by microgeneration;
  • increasing the amount of heat produced by any plant which relies wholly or mainly on wood; or
  • reducing energy consumption.

Who is most affected by this consultation? Gas and electricity suppliers.

Current status: Consultation closed on 14 April 2009. After considering the responses to this consultation, the Government will lay before Parliament a draft order amending the existing CERT Order with a view to it coming into force in Summer 2009. The Order will be subject to debate in and approval by both Houses of Parliament.


1 In the UK, a large number of cities, including London, have become signatories. For a complete list go to:

2 Case C-439/06 Citiworks AG v Sächsisches Staatsministerium für Wirtschaft und Arbeit als Landesregulierungsbehörde

3 A more detailed discussion of the Citiworks case is set out in a bulletin we published last year. For a copy please go to:

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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