Yesterday, the long awaited Energy Bill was published.
The full Bill can be accessed here on DECC’s website:
Ed Davey’s speech can be accessed here:
The Bill outlines a number of reforms to the electricity market. We have highlighted some of the changes below with associated commentary.
It is probably fair to say that the Bill represents one of the most significant steps forward in energy policy for a long time. In general, it has been well received. Some key questions remain such as whether the capacity mechanism will result in the much needed new conventional build or whether it will simply serve to protect what already exists, what kind of long term impact the failure to introduce a carbon reduction target now will have on the sector beyond 2020 and how the Government will tackle other key components for a successful and sustainable energy sector such as planning and PPA liquidity. There now needs to be alignment between what is in the Energy Bill and the other key challenges to implementing and delivering the positives from the Energy Bill. In particular, it is going to be key that the Government maintains the current sense of momentum – from now until Autumn 2013 is a long time to preserve investor confidence and a more harmonious approach between the key Government departments will be appreciated and vital in securing this.
Contracts for Difference (CfDs)
CfDs will be 15 year contracts and will be broadly generic (with some variation for different technologies). They will be allocated initially on a first come first served basis. Overall, DECC appear to have taken on board a number of the comments that we and the industry have raised. Helpfully, DECC has also issued Heads of Terms setting out the key terms of the proposed CfD. DECC is also introducing transitional frameworks to make the process a smoother path which we thoroughly approve of.
There are still a number of areas where further clarity is required or where DECC is reviewing, for example, the determination of the reference price and PPA liquidity. Read full article.
Independent statutory nuclear regulator “the Office for Nuclear Regulation” to be created
The Energy Bill (the “Bill”) includes three issues of specific relevance to those involved in the nuclear power industry:
- ONR established as independent statutory body
- Further clarification on FiT with CfD
- ONR entitled to recover further costs for FDPs
The Office of Nuclear Regulation (“ONR”), established on 1 April 2011 as a non-statutory agency of the Health & Safety Executive (“HSE”), will now be established as an independent statutory body to regulate the nuclear power industry (specifically: nuclear safety, nuclear security, nuclear safeguards, the transport of radioactive material by road, rail and inland waterway, and health and safety on nuclear sites). Read full article.
The Bill sets out the role of Ofgem as better aligned with Government priorities. As part of this, energy companies will be required to pay compensation to consumers as well as to the regulator Ofgem.
Ofgem is currently able to impose substantial fines on energy businesses that breach their regulatory obligations, and whilst Ofgem often negotiates with businesses to obtain redress for consumers who are alleged to have suffered, businesses are not obliged to provide this. This proposed new power would strengthen Ofgem’s hand in such negotiations and energy companies should be aware that in future they may need to not only provide for a possible penalty but also for associated consumer redress, should they be accused of an infringement. How any new powers will be implemented by Ofgem, and how they relate to existing rights to impose a penalty remains to be seen, but it sends a message to the market that companies should, as a matter of course, consider compensating customers in the event of a breach.
The Bill announces that the Government is taking powers to introduce a Capacity Market, allowing for capacity auctions from 2014 for delivery of capacity in the winter of 2018/19. A Capacity Market is intended to provide an insurance policy against future supply shortages, helping to ensure that consumers continue to receive reliable electricity supplies at an affordable cost.
Whether or not what is planned will be sufficient remains to be seen at this point. There is real concern in the sector that what is developed will not be enough to deliver the economics for gas. Rather it may only be successful in protecting what already exists. This must be resolved.
Greater competition and liquidity in the wholesale market
Government will grant additional powers so that if necessary, they can promote greater competition and liquidity in the wholesale market.
The key is to understand what is going to be done and to ensure that the Government is fully up to speed with what the issues are. Many proposals currently being considered have failed to take into account the very real risks presented by a lack of liquidity.