Owners of private electricity and gas networks in commercial buildings and estates will soon be required to give energy suppliers access to their systems at the tenant's request.
The changes will impact on landlords, managing agents and create opportunities for tenants. They are being introduced by the UK Government to satisfy requirements imposed by EU legislation, as applied in the Citiworks case.
The Citiworks case
The effect of the Citiworks case is that the UK Government is now obliged to make provision for third party access to private unlicensed electricity and gas transmission and distribution networks. The difficult task of superimposing the competitive energy supply market on private networks is being dealt with by the Department of Energy and Climate Change (DECC). The Third Electricity and Gas Directives should have been transposed into national law by 3 March 2011. However, DECC expects to lay the regulations before Parliament this month, some three months after the deadline.
Citiworks concerned a complaint brought by an electricity supplier seeking access to a private electricity network at Leipzig airport to allow it to compete with a monopoly supplier. Access had been denied on the basis that the network was a small private, unlicensed network serving only certain customers (commercial users of electricity at the airport, such as airlines and retail units). Therefore, under German law the network was exempt from the obligation to provide third party access. The European Court of Justice (ECJ) ruled that this exemption was incompatible with the Second Electricity Directive (which has been replaced by the Third Electricity Directive).
The Third Electricity and Gas Directives form part of the EU Third Energy Package. They require Member States to implement a system of third party access to electricity and gas transmission and distribution networks "based on published tariffs, applicable to all eligible customers and applied objectively and without discrimination". Essentially these measures give customers a choice of supplier, which should encourage competition and drive down costs. For more information on the EU Third Energy Package, see Herbert Smith's European Energy Handbook 2011, available here.
The Government proposes to take a light touch approach, which will not involve an overhaul of the existing distribution and/or supply licence exemptions. However, the changes will mean that landlords of multi-let buildings and managing agents will need to consider whether their electricity and gas supply infrastructure constitutes a "distribution network". This definition is key. Only networks considered to be distribution networks will need to provide third party access and follow the new procedure prescribed by the regulations. Network owners may need to seek legal advice to determine the status of their networks.
Additionally, being obliged to grant access to other energy suppliers will impact on landlords' and managing agents' existing bulk supply contracts as well as those currently being negotiated. Bulk supply contracts are frequently negotiated on the basis of a certain volume of energy being taken and may include minimum tolerance provisions which enable penalty fees to be imposed if the agreed amount of energy is not taken. Where tenants wish to change supplier, usage is likely to decrease and these penalty provisions may be triggered.
Distribution networks: DECC guidance
A distribution network could encompass a wide variety of different set-ups, for example the wiring within a single multi-let office building, or the wiring and electrical plant for a larger commercial or industrial estate.
To help landlords and managing agents DECC is developing guidance which is expected to address issues such as:
- the circumstances in which a network will not be classed as a "distribution network", eg, where the end user is not an energy customer. DECC envisages this may be the case where a network is used to supply electricity as part of a package of services, provided over a short term and for which a global price has been agreed; the end user of the energy is not billed separately and individual consumption is not measured. Examples of such networks could include hotel rooms, serviced apartments or serviced office accommodation;
- classification as a "closed distribution system". A closed distribution system is a network used to distribute electricity or gas in a geographically confined industrial, commercial or shared services site where either: (i) the operations or production processes of the users must be integrated for technical or safety reasons; or (ii) the system distributes electricity primarily to the owner of the system or their related undertakings. Classification as a closed distribution system will reduce the administrative burden for landlords and managing agents because energy regulator Ofgem's approval of proposed charges for use of the network is not required;
- how the customer and network owner may voluntarily agree to vary the right to switch supplier. This will be critical where a landlord has already negotiated a bulk supply contract for the benefit of all tenants;
- administrative arrangements, including the setting and approval of network tariffs; and
- arrangements that may be used to provide third party access, including commercial agreements, metering and settlement.
A landlord's obligations as network owner
DECC has been keen to stress that connection costs will be paid by the tenant. However, the changes are likely to impose a significant administrative and cost burden on landlords and managing agents. A landlord's obligations are triggered when a tenant gives written notice of its wish to consider offers from named third party suppliers. The landlord will be required to respond in writing within 10 working days, informing the tenant that:
- third party access will be provided, subject to terms being agreed; or
- the landlord is not obliged to provide third party access due to a lack of network capacity (and increasing capacity is not technically feasible or is uneconomic).
Where there is an obligation to provide third party access, within 20 working days of receipt of the expression of interest the landlord will have to:
- prepare and maintain separate accounts for the operation of the network (Ofgem may request copies to support tariffs or methodologies submitted to it for approval);
- calculate "use of system charges" and submit a charging statement to Ofgem for approval (unless a successful application has been made for the network to be classified as a closed distribution network, in which case Ofgem's approval is not required). Use of system charges are fees levied by the network owner for allowing electricity to be supplied through the electrical lines and plant comprising its network. The charges will include the cost to the landlord of providing, operating and maintaining the network. Charges may only be recovered when they have been approved (but may be back-dated to the date the charging statement was submitted). Once approval has been granted prospective suppliers must be given details of the use of system charge;
- provide prospective suppliers with all relevant technical and commercial information reasonably required to enable them to make an offer of supply to the tenant; and
- agree arrangements relating to the establishment of a network connection, such as the installation of a meter, with prospective suppliers.
After receiving a quote from a third party supplier, if the tenant confirms in writing that it wishes to switch supplier, the landlord will have to:
- act in a way that does not prevent third party access from being granted within three weeks of the tenant entering into a contract with a new supplier, eg, by granting access to carry out works; and
- agree a switching date and reconciliation of energy charges.
After a tenant has switched to a new supplier, the landlord must:
- only introduce or amend a use of system charge with the approval of Ofgem (unless the network has been classified as a closed distribution network);
- provide reasonable access and assistance to the third party supplier, eg, for meter reading; and
- maintain separate accounts for network charges.
The new regulations are expected to be laid before Parliament this month. It is anticipated that DECC's guidance will be published in June or early July. Importantly, the guidance will be non-statutory. DECC may seek informal stakeholder feedback on the guidance but has not committed to consult on it formally. Parliamentary debate will follow in the autumn. DECC has not given any indication of when the regulations are expected to come into force.
When the guidance is published, landlords and managing agents should give it their detailed consideration. Critically, the guidance needs to clarify whether or not different infrastructure arrangements constitute distribution networks and provide clear practical advice to landlords and managing agents.