On 1 November 2022, the Energy Bill Relief Scheme Regulations 2022 ("EBRS Regulations") were introduced pursuant to the Energy Prices Act 2022 to provide financial support for non-domestic energy customers in the UK under the Energy Bill Relief Scheme ("Scheme"). The Scheme introduces a discount to be applied to the price of gas and electricity supplied to non-domestic customers under supply contracts with licensed suppliers, for a period of 6 months (from 1 October 2022 until 31 March 2023) (the "Scheme Period"), and the EBRS Regulations and EBRS Guidance set out how the Scheme is to be applied.
This Scheme is the non-domestic scheme, with the scheme for households and domestic customers being the Energy Bills Support Scheme (EBSS) and the Energy Price Guarantee (EPG), which are not covered in this note.
Who is this briefing for?
If you are a landlord or a tenant, you might be wondering how the EBRS will apply to ensure that the relief is going to those who need it.
If you entered into a financial arrangement (for example a PPA or other hedging arrangements) for winter you might now be wondering how the Scheme might apply and whether your business can benefit from the Scheme.
In this briefing, we take a look at the Scheme, and how it applies to intermediaries (such as landlords) and those who have entered into arrangements that will have an impact on their financial exposure to the wholesale energy market. We also briefly touch on how the Scheme applies to more complicated scenarios such as combined heat and power ("CHP") and battery storage.
The Government has issued a Call for Evidence on 17 November 2022 to consider the application of the Scheme to non-standard supplies of energy, for instance from non-licensed suppliers or via a private wire network.
What customers and contracts does the Scheme apply to?
The Scheme applies to non-domestic customers who are (i) on existing fixed price contracts entered into on or after 1 December 2021, (ii) on deemed or out-of-contract or variable tariffs, (iii) on flexible purchase or similar contracts, or (iv) signing new fixed price contracts, in each case with a licensed supplier.
What discounts are available?
In summary, the Scheme provides non-domestic customers with support by applying a discount to their supply contracts, which suppliers must calculate with reference to the Government Supported Price. This has initially been set at 7.5p/kWh for gas and 21.1p/kWh for electricity, however, the actual level of support will vary across different contracts and tariffs. In relation to variable contracts, the discount is designed to reflect the difference between the Government Supported Price and relevant wholesale price, subject to a maximum discount of £91/MWh for gas and £345/MWh for electricity.
Suppliers are required to ensure that where discounts are being applied under the Scheme, the effective supply price after the discount has been applied does not fall below the minimum supply price (which has initially been set equal to the Government Supported Price) for gas and electricity – i.e. the discounted supply price is subject to a floor price.
Does the Scheme apply automatically?
Yes, suppliers are required to calculate and automatically apply the discount, unless the customer opts out. Suppliers calculate the discount on the basis of the difference between the wholesale reference price and the Government Support Price, but in doing so are required to adjust the discount to reflect the value of any arrangements the customer has entered into which alter its overall effective financial exposure to the wholesale price. This is provided for in the special rules set out in Chapter 1, Part 4 of the EBRS Regulations (Arrangements in respect of a customer's financial exposure to wholesale prices).
Can an organisation opt out of the Scheme?
Yes, you can opt out of the Scheme by giving notice to your supplier, in which case the discount will not be applied and you will have no declaration obligations. You can effectively opt back in, but not retrospectively. Intermediaries cannot opt out, as set out in more detail below.
What happens when the 6-month Scheme period ends?
The Scheme Period runs from 1 October 2022 to 31 March 2023. In its published guidance (which can be accessed here), the government has stated that it will review the Scheme after 3 months in order to inform decisions on future support beyond 31 March 2023. The review will focus, in particular, on identifying the most vulnerable non-domestic customers and how the government can continue to assist them with energy costs. These customers are likely to be those who are least able to adjust, for example by reducing energy usage or increase energy efficiency.
In particular, the review will consider:
- how effective the Scheme has been in giving support to vulnerable non-domestic customers;
- which groups of non-domestic customers (by sector, size or geography) remain particularly vulnerable to energy price rises, taking into account the latest price position and forward curves, alongside other costs pressures; and
- how to continue supporting these customers, either by extending the Scheme for some users, or replacing it with a different scheme.
Continuing support for those deemed eligible would begin at the end of the initial 6-month period, without a gap. The guidance strongly suggests that, after 31 March 2023, support will only be offered to the most vulnerable non-domestic customers under an extension of the Scheme or a replacement scheme. We anticipate that customers who have the financial means to enter into hedge arrangements, for example, may not be eligible for support after March 2023.
The guidance also expressly states that it is important that customers who are less vulnerable to energy price increases (particularly larger business that are not energy-intensive) use the 6 months support provided by the Scheme to identify measures they can take to protect themselves against the high prices.
Our team is well placed to assist you with any such measures, including for instance with PPAs or other energy hedging arrangements.
How do the EBRS Regulations deal with wider financial arrangements?
The "Chapter 1 provisions", as they're known, deal with arrangements entered into by non-domestic customers that are separate to their supply contracts, under which they have a greater or lesser overall effective financial exposure to wholesale energy prices than the Reference Wholesale Price reflected in their supply contracts ("Chapter 1 arrangements").
Under the Chapter 1 provisions, customers are required to calculate the value of such arrangements and disclose them to their suppliers to enable the supplier to determine the level of support they are entitled to receive under the Scheme. This is done by calculating the "arrangement benefit", further details on which are set out below.
When do the Chapter 1 provisions apply?
There are two tests to apply when determining whether the Chapter 1 provisions apply to a supply contract, which are set out in Regulation 37(1):
- Minimum volume requirement: it must be 'reasonably expected' that either:
- the quantity of the energy supplied to the customer at the premises under the supply contract will exceed 0.5 GWh between 1 October 2022 to 30 September 2023; or
- the maximum rate at which energy is supplied under the contract will exceed 0.5 GW at any time;
- Financial exposure differential requirement: the customer must have made arrangements outside that supply contract with the result that the customer's overall financial exposure to the wholesale energy price in any period during the Scheme Period is different from its financial exposure in the same period to the contracted wholesale price under the supply contract.
The EBRS Regulations include as "arrangements": (i) financial instruments in respect of the wholesale price of energy, (ii) arrangements under which the customer obtains a benefit from the provision of balancing services, and (iii) in connection with the electricity scheme, arrangements under which the customer obtains a benefit by exporting electricity to an electricity system. BEIS guidance makes clear that this includes financial hedges and corporate power purchase agreements (CPPAs).
The intention of these provisions is that you should be in no better net position (after factoring in your physical supply arrangements, the EBRS discount, and all hedges) as if you had received the discount during the relevant periods, unless of course the wholesale price falls back below the Government Supported Price.
Determining the extent of such arrangements for your business, and what you are required to disclose and for which periods of time, can be complex - for instance, in relation to closed swaps, balancing services, PPAs and the like.
When does an organisation make a Chapter 1 declaration?
Whilst it is each licensed supplier's responsibility to ask, it is ultimately the customer's responsibility to determine the extent to which the Chapter 1 provisions apply to it. If you decide they do apply to you, you must make a declaration to its supplier within 21 days of the "initial declaration date".
The initial declaration date is the later of:
- 1 November 2022 (being the "Scheme introduction date") if, on this date, you have already made a Chapter 1 arrangement and are party to the supply contract; or
- if this does not initially apply, such later date on which the customer first enters into either a supply contract or a Chapter 1 arrangement.
So, for any Chapter 1 arrangement already in place at the start of the Scheme, the declaration needs to be made by 22 November 2022.
What information must an organisation disclose?
The EBRS Regulations do not set out in detail exactly what type of, and how much, information must be disclosed. For example, it is not clear whether you would have to disclose the full details of hedges or whether it might suffice to provide a simple declaration that the Chapter 1 provisions apply, without providing any further details in respect of its hedges.
Customers should be alert to avoiding penalties for making "defective declarations" and conscious of the fact that ultimately the supplier will need to calculate the adjustments to the discounts so will require at least sufficient information to enable this. It may be a prudent first step to seek clarification from your supplier as to how much information they expect to receive, or err on the side of caution and over-disclose but relay your viewpoints if you think adjustments should not be made.
What are the declaration periods?
"Declaration periods" are a critical concept for the Scheme, as they determine the time periods over which your effective exposure is compared to actual exposure, and corresponding adjustments made. They are determined by your supplier, but cannot be longer than 31 days, so we expect they will commonly be aligned with billing cycles.
At least 14 days after each declaration period, you must determine the amount of the arrangement benefit for that declaration period and notify the supplier of such amount, unless it is less than £100 per day.
Arrangement benefits for one declaration period will not affect other declaration periods, so for instance a hedge for October 2022 will not affect the discount calculations for November 2022 or beyond.
How is the "arrangement benefit" calculated?
The arrangement benefit calculation is simply:
Contract Financial Exposure – Effective Financial Exposure
This is then converted to a unit rate, based on supply quantity in the relevant period, and the "unit arrangement benefit" is then deducted from (or potentially added to) the discount applied to your unit rate under the gas or electricity bill.
For variable price contracts, if this is a negative figure, the arrangement benefit will be zero. This would be relevant to the extent your hedged position was worse than the Government Supported Price.
What if a customer fails to comply with the EBRS Regulations?
Failure to make a relevant declaration by the required time, will result in a fine of £1,000, which increases to £2,000 if such failure continues after 28 days. If no declaration has been made within a further 30 days, the customer will be liable to pay £2,000 plus 10% of the "default amount" (which is essentially the amount of discount that should not have been claimed had the Chapter 1 provisions been properly applied).
A customer will also be liable to pay a fine where the information in a relevant declaration is defective (i.e. false, materially misleading or incomplete). The fine is 10% of the default amount.
Where do intermediaries fit in?
The Energy Bill Relief Scheme Pass-through Requirement (England and Wales and Scotland) Regulations 2022 (the "Pass-through Regulations") (with equivalent regulations for Northern Ireland) also came into force on 1 November 2022.
For the purposes of the Pass-through Regulations, an "intermediary" is a person to whom a Scheme benefit has been provided in circumstances in which there is one or more end user other than the intermediary (subject to limited circumstances). The intermediary will be a "customer" under the EBRS Regulations. The discount applied to a supply contract under the EBRS Regulations is considered as a "Scheme benefit" under the Pass-through Regulations.
An example of an intermediary would be a landlord who has entered into an energy supply contract with a licensed supplier and where that energy is passed onto the landlord's tenants (the tenants being the "end users"). EV charge point operators (CPOs) and CHP operators are also likely to be intermediaries subject to the pass-through requirements – for example, CHP operators may be obtaining discounted gas supplies and will be required to pass the lower cost of electricity or heat generation on through their charges.
What discounts are intermediaries required to pass through?
The Pass-through Regulations require intermediaries to pass-through a "just and reasonable pass-through amount" of the Scheme benefit to the relevant end user(s), and the Regulations requires the intermediary to take into account, amongst other things, the proportion of energy taken by each end user and the length of time a person is considered as an end user for the purposes of the Pass-through Regulations. It is also for the intermediary to prove that the pass-through amount is "just and reasonable". The regulations and guidance provide further detail, and there are special rules and considerations to take into account.
The guidance note for intermediaries gives some examples of what is considered "fair and reasonable", and specifically addresses non-domestic leases that are inclusive of energy costs, by giving the following useful example:
- A business tenant has a rental agreement with a landlord that is paid on a yearly basis and is inclusive of energy costs. The contract runs from 29 November 2021 to 28 November 2022, and as the contract was entered into before 1 December 2021 (when the forward wholesale energy prices were below the Government Supported Price), the business tenant's yearly bill does not reflect the increased energy costs incurred by the landlord as a result of the energy crisis.
- The landlord is entitled to the EBRS discount from its energy supplier for October to November 2022, and as the landlord has carried the burden of increased costs for this period, it is entitled to keep the entire discount for this period. From December 2022 to 2023, the rules concerning just and reasonable pass-through will apply again, dependent on how much of its energy cost the landlord passes on in the contract.
Importantly, intermediaries are not permitted to opt out of the Scheme and if an intermediary fails to effect a pass-through, the relevant end user(s) may recover the relevant pass-through amount from the intermediary as a civil debt plus interest.
The pass-through amount must be paid to the end user(s) as soon as reasonably practicable. This applies even where the contract between the end user(s) and the intermediary has expired or terminated before the pass-through is effected.
Intermediaries and hedging arrangements – are intermediaries required to disclose end users' hedging arrangements?
The Pass-through Regulations do not expressly require intermediaries to make enquiries with their end users in respect of hedging arrangements when determining the discount and the related pass-through amount. The intermediary will be the "customer" for the purposes of the EBRS Regulations, as they hold the energy supply contract, and it is the customer that is required to make a Chapter 1 declaration under the EBRS Regulations in respect of their own "effective financial exposure".
There may therefore be circumstances in which end users, who have made hedging arrangements in relation to the Scheme Period, obtain the full benefit of both (i) their hedging arrangements (provided that they are "in the money"), and (ii) the Scheme discount, as passed through by the intermediary (in accordance with its relevant proportion).
Whilst there is nothing to stop intermediaries from asking their end users about any hedging arrangements which they may have in place for all or some of the Scheme Period, the end users are not expressly required to provide such information, and licensed suppliers are not expressly required or entitled to adjust the discount to account for end user hedges (only for customer/intermediary hedges).
We expect this is something that will need clarifying as the Scheme is implemented and administered for intermediaries.
General rules for gas or electricity imported for electricity generation or storage
There are provisions in Chapter 2 of Part 4 (the "Chapter 2 provisions") which provide that, where the threshold requirements below are met, the EBRS discounts will not be available where a customer uses energy (gas or electricity) for the purposes of generating or storing electricity to be "grid-delivered", i.e. delivered to a licensed transmission or distribution system.
This would apply for instance to CCGT, gas peaker or CHP plants, where gas is supplied (which would otherwise be subject to the discount) and that gas is used for the purpose of generating electricity which is to be exported to the public grid. Or to battery storage projects which import electricity (which would otherwise be subject to the discount) where that electricity is then exported back to the public grid.
The thresholds are the same as those that apply to the Chapter 1 provisions (e.g. the project must either exceed 0.5GWh between 1 October 2022 to 30 September 2023 or exceed 0.5GW at any time during the Scheme period).
These ineligibility rules in the Chapter 2 provisions will not apply (i.e. the discount will apply) where (i) the capacity of the facility in which the electricity is supplied and stored is not "material", (ii) the quantities of grid-delivered electricity are not "material" or (iii) the application of the relevant Chapter 2 provisions would be disproportionate, taking into account the complexity of determining ineligible quantities or whether the volumes referred to are "material".
Where these Chapter 2 provisions apply, the customer must make a declaration that the relevant provisions apply with 21 days of the initial declaration date, in a similar way to the declaration that is made in relation to the Chapter 1 provisions.
The following sub-sections on CHP plants, battery storage and gas peakers, all fall under these Chapter 2 provisions and so the thresholds and exceptions above apply. The following are some specific examples of special rules, to give an overview, but is not a comprehensive list or analysis.
The Chapter 2 provisions only apply insofar as the thresholds set out above are satisfied, so if a gas peaker plant is operating at less than 0.5GWh over the 12 month period and less than 0.5GW at all relevant times, the gas input should be eligible for the EBRS discount.
Combined heat and power (CHP) plants
The position regarding CHP plants (i.e. where gas is being used for electricity generation) is more likely to be complicated, given that they will often have a mix on on-site use, private wire supply, and heat supply, and may have a degree of export to the public grid.
Essentially, under the Regulations, where a CHP plant takes gas to generate electricity for (i) on-site use, (ii) a private-wire arrangement or (iii) heat, that plant will be eligible for the gas discount (in respect of the gas used for that purpose) under the Scheme, and will be required to pass through benefits to consumers.
To the extent that a CHP plant over 5 MWe uses gas for grid-exported electricity (referred to in the Regulations as "grid-delivered"), that plant will be ineligible for the gas discount.
This requires assessing each CHP plant on a case-by-case basis.
A similar position applies in relation to battery-stored electricity, in that they will be ineligible for the electricity discount to the extent it stores and supplies such electricity back to the grid, but own-use and private wire consumption should be eligible for the discount.
It is not entirely clear how losses in storage would be treated, as the guidance states that storage plant that only sells to the grid will be ineligible for discounts, and the calculation for where there is a mixture of own use and grid exports relies on the proportion of electricity exported to grid compared to the total electricity output, both of which are net of losses. It appears therefore that these losses will follow the export electricity, so in the case of standalone "grid" projects, we expect they would be ineligible for any discount.
What should I do if I am not sure how the Regulations or the Pass-through Regulations will apply to me?
We would be happy to help you with your assessment as to whether the relevant regulations apply to your particular organisation, and advise you on the actions you should be taking.
We continue to review the subordinate legislation that is being made pursuant to the Energy Prices Act 2022, and will be following developments in relation to the Scheme once the 3-month review has taken place.
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.