On 6 July 2022, the Energy Security Bill (Bill) was published and introduced to the UK Parliament for its first reading. According to the government, the Bill “will deliver a cleaner, more affordable, and more secure energy system for the long term”. The Bill is set to become one of the most important pieces of legislation in the UK energy market since the Energy Act 2013.
The Bill seeks to deliver key commitments from the British Energy Security Strategy, the Prime Minister’s Ten Point Plan, and the Net Zero Strategy. The intention is to encourage £100 billion of private sector investment to help diversify Britain’s energy supply (including hydrogen and offshore wind).
This page contains our high-level briefings about the changes proposed by the Bill.
Carbon capture use and storage (CCUS) and hydrogen
You can access our general briefing note on the Energy Bill here. The UK Government is working to promote carbon capture usage and storage (CCUS), and the Bill makes provision for a regulatory framework designed to establish and scale-up carbon dioxide transport and storage networks. This will help provide projects such as the East Coast Cluster and HyNet (both selected last year to receive funding) with more clarity. It is also important for CCUS in Scotland, with the continued focus on the Acorn Project.
We address some of the key legal and commercial questions about CCUS in more depth here.
Government focus is also on supporting hydrogen projects. Some of the key aspects of that support are the New Zero Hydrogen Fund and the Hydrogen Business Model. The Bill provides a legislative framework for this support. We outline some of the key aspects of the proposed support contemplated by the Bill here.
Electricity and downstream gas
The Bill provides for some profound reforms of the electricity and gas sectors, targeted at achieving net zero. These include the following:
- The creation of a combined publicly owned electricity and gas “Future System Operator” which will take on critical system operating functions of National Grid. The Bill contemplates a potentially wide role for the Future System Operator across the British energy sector as a whole, and not just power and gas.
- Reforms to governance of energy sector codes such as the Connection and Use of System Code. We outline those reforms and explore some of their implications here. These reforms should lead to quicker processes for changing the codes and will lead to greater Ofgem oversight, with licensing for code managers and new Ofgem powers to regulate operators of key central IT systems. The importance of ensuring that code governance is fit for purpose is emphasised by the various code reforms identified by National Grid Electricity System Operator NGESO as part of its “Holistic Network Design” Pathway to 2030 work.
- Competition in electricity network provision. It is open to question how much competition will be introduced, bearing in mind that the government proposes to exempt many of the transmission upgrades identified by NGESO as essential to achieve its 2030 50 gigawatt of offshore wind target.
- A new regulatory regime for electricity smart appliances, such as heat pumps and electric vehicles. This contemplates the licensing of “load controllers”/ “aggregators”. It also provides for wider product regulation, which is critical given the cyber security risks created by smart appliances and the need for common standards. It also enables the Secretary of State to create a new licensing framework for load controllers.
The Bill also introduces changes to the merger control regime for energy networks, extends the tariff cap, widens the Energy Company Obligation (ECO) scheme and extends the Secretary of State’s powers for smart meter purposes.
Heat
The Bill contains measures to incentivise the installation of heat pumps, and regulate heat networks. This framework is essential to give investors and consumers confidence in heat networks. However, (as with much of the Bill), the detail is to be fleshed out in secondary legislation.
We address some of the key electricity, downstream gas and heat reforms in more depth here.
Missed opportunities?
The transition to net zero calls for greater flexibility and agility in the regulation of the energy sector. The Bill does not maximise opportunities to bring flexibility to the system. An example is that the Bill makes provision for “multi purpose interconnectors” (MPIs), i.e. connections between different electricity systems such as GB and Ireland, which also connect to offshore windfarms.
However, the provision does not appear to allow MPIs to convey electricity generated onshore to offshore premises, such as oil rigs. This is potentially important if the offshore oil and gas industry is to decarbonise operations. A question is whether the Department for Business, Energy and Industrial Strategy is missing an opportunity to make the offshore transmission licensing regime as flexible as possible.
Complexity
The regulation of the electricity and downstream gas sectors are highly complex, and has become progressively more complex since privatisation. Some of this complexity is justified, as the industry has become more complex “on the ground”, however this increases costs and raises barriers to entry. There is a clear risk that the approach to hydrogen, CCUS and heat networks, which are new businesses, falls into complexity.
Another Energy Bill?
On any view, this Energy Bill will likely be the first of several important pieces of energy legislation. One reason for this is that the Bill itself defers a significant amount of detail of the reforms to secondary legislation.
The fundamental reason is different. The UK energy markets have not been seriously reformed for many years and much regulation is out of date. As an example, market abuse-related legislation such as GB REMIT and the trading rules are written for a world run on coal and gas. The government has therefore launched its “review of electricity market arrangements” or “REMA”.
It will also need to reconsider how retail markets are regulated and as the government, Ofgem and the Future System Operator develop plans to achieve net zero, other requirements to change the law will be identified, to enable investment, protect consumers and remove barriers to progress.
