The Energy Act 2008 received Royal Assent on 26 November 2008.

The new Act affects most parts of the UK's energy industry and includes important provisions relating to nuclear decommissioning, renewable electricity and heat, metering ("smart" meters), gas and CO2 storage, and oil and gas licensing and decommissioning. The Act received Royal Assent at the same time as the Climate Change Act and the new Planning Act, which both also contain significant changes that will impact on the UK energy industry, in terms of infrastructure planning and the extent of compulsory climate change measures including energy efficiency requirements.

We reported on the initial draft of the Energy Bill in our bulletin of 21 January 2008. While much of the legislation has been enacted in the form that it was presented in the Bill, some significant changes have been made during the passage through Parliament. Our Energy Bill bulletin dated 21 January 2008 can be found here.

Feed-In Tariffs

Five months after the publication of the draft Energy Bill, the Government published a consultation on its Renewable Energy Strategy which included the possibility of a feed-in tariff as a support mechanism for micro-generation. A feed-in tariff system usually guarantees the payment of a long term fixed price for electricity generated from a particular technology. Last minute alterations to the Energy Bill have resulted in the introduction of a wide power to implement a feed-in tariff regime for "small scale" generation. The powers can be used for a scheme of up to 5MW, going well beyond the initial "micro-generation" proposals.

The amendments give the Secretary of State the power to modify electricity supply and distribution licences (or any documents or arrangements maintained under the licences such as the Distribution Code) to establish the feed-in tariff system with suppliers being required to make a tariff payment directly to an eligible generator or via Ofgem. A levy may be imposed by Ofgem on supply or distribution licence holders in order to fund the scheme.

An additional procedural safeguard has been inserted for the benefit of industry participants by requiring the licence modifications that are necessary to implement the feed-in tariff regime to be considered by both Houses of Parliament.

The levy powers are similar to those used to impose the Fossil Fuel Levy on suppliers in order to support the Non-Fossil Fuel Obligation Orders that were made during the 1990s. It remains to be seen whether, as with the Fossil Fuel Levy, the new levy will be passed on to consumers as part of the variable charges that are added to electricity bills.

If the scheme follows the Fossil Fuel Levy model, the Levy Fund would then be used to compensate those suppliers that have paid the feed-in tariff to generators to the extent that the tariff is greater than the cost of buying electricity in the market.

The technologies and energy sources eligible to participate in the scheme are: biomass, biofuels, fuel cells, water (including wave and tidal), wind, solar power (including photovoltaics), geothermal sources and combined heat and power systems with an electrical capacity of 50kW or less. The list of eligible energy sources and technologies can be modified by the Secretary of State.

While it remains to be seen whether the powers in the Act will be used to their maximum extent (as a 3MW maximum limit was also under consideration) there will inevitably be a substantial overlap with the Renewables Obligation, an issue that will need to be resolved to avoid generators receiving support under both schemes.

The new Department for Energy and Climate Change (DECC) has proposed that eligible technologies installed after the start of the feed-in tariff scheme, and all schemes currently producing 50kW or less, will not be eligible for support under the Renewables Obligation. Schemes generating between 50kW and 5MW, which are installed between now and the introduction of the new regime will have the option to select which of the two systems will apply to them going forward. Generators with over 5MW of capacity will continue to be eligible for support under the Renewables Obligation. DECC has said that it intends that the new feed-in tariff regime will be operational by 2010.

The Renewables Obligation

The Act replaces the existing enabling powers for the Renewables Obligation contained in sections 32 to 32C of the Electricity Act with new, more detailed provisions which include the power to band the obligation. The new sections have been brought into force on the passing of the Act, enabling the Secretary of State to use the wider powers alongside the current regime. In addition to changes provided for the separate role of the Scottish Ministers in relation to the obligation, the grandfathering provisions have been altered to allow the Government to confirm the detail of the arrangements in secondary legislation.

Natural Gas importation and storage: activities carried on partly on land

In an attempt to reduce the administrative burden and legal uncertainty arising from the current consenting requirements for offshore natural gas storage, the Act creates a specific regulatory regime and permits the creation of Gas Importation and Storage Zones.

Once the relevant provisions of the new Act come into force, a licence will be required for natural gas storage and recovery or unloading within the territorial sea (including Scotland) or a Gas Importation and Storage Zone. A licence will also be required for activities relating to exploration for a storage site or the conversion of an existing feature into a storage site.

Amendments to the Bill remove the need for a licence for activities that are already likely to be subject to existing controls, such as planning control under the Town and Country Planning Act 1990 where the storage infrastructure is permanently connected to land, or operations to convert a storage facility take place wholly or mainly on, over or under land. The requirement for a licence for the storage and recovery of gas is also excluded where the gas is introduced by a well on land and the storage facility is partly under land.

Decommissioning Oil & Gas Installations

Additional changes will be made to the Petroleum Act 1998 provisions relating to abandonment programmes to exclude a category of licence holder or a party to a joint operating agreement who is not entitled to derive a financial or other benefit from specified activities (Section 72(7) of the Act).

Decommissioning of nuclear installations: Disposal of hazardous material

The Act addresses the planning and funding of decommissioning and clean-up for new nuclear installations, including the requirement for a funded decommissioning programme. Further provision has been made, with the inclusion of a new section 66 in the Act, to allow the Government to be paid directly for providing a waste repository under the terms of an agreement for hazardous waste disposal.

Sustainability and protecting the interests of future consumers

The new Act expressly provides that the principle objective of Ofgem and the Secretary of State under the relevant provisions of the Gas Act 1986 and the Electricity Act 1989 to protect the interests of consumers, relates both to existing and future consumers. The "need to contribute to the achievement of sustainable development" is also given equal weighting to the requirement to secure that reasonable demands for electricity are met, and the need to secure that licence holders are able to finance their functions.

Access to transmission systems

The Government will have additional powers to modify licences granted under the Electricity Act, together with any industry codes derived from these licences, to facilitate access to onshore or offshore transmission systems. The power must be exercised within 2 years from the date on which the section comes into force.

Smart Meters

The introduction of smart metering was hotly debated during the passage of the Bill, leading to the late introduction of wide powers that encompass not only the use of smart meters to assist with energy consumption monitoring, but also the use of metering technology to collect pre-payments and to disconnect customers remotely.

The new powers enable the Secretary of State to amend gas supply, shipper and transporter licences and electricity supply and distribution licences (or any documents or agreements maintained under the terms of those licences) to prohibit the use of meters that do not meet certain technical specifications. The Secretary of State can also exercise powers to require anyone involved in meter provision, installation or operation and data collection or handling to be licensed in relation to certain meter types or activities.

The Secretary of State will be able to set a time limit for the roll out of the new meters using this power of modification. These provisions came into force on the passing of the Act, and may only be exercised within 5 years of that date. It will be possible for different provisions to be made for different classes of customer, for example domestic and business customers in order to reflect different implementation strategies and timings.

Electricity Distribution Connection Costs

Section 16A of the Electricity Act 1989 (Procedure for Requiring a Connection) will be amended to allow the Secretary of State (after consultation with Ofgem) to make regulations that relate to the payment of connection offer expenses. The amendment follows a challenge to the legality of the standard network operator connection charging methodology under which connection expenses are required to be paid in advance of works being carried out. It is expected that the regulations made under the new provision will permit this form of up-front charging.

Renewable Heat Incentive

The Government has accepted that renewable heat will play an important part in achieving the UK's renewable energy target and powers have been introduced to allow the Secretary of State to make regulations to establish a new financial support mechanism.

The regulations may require the Secretary of State, Ofgem or fossil fuel suppliers to make payments to owners of plant used, or intended to be used, for the generation of renewable heat (i.e. heat produced from the specified sources or technologies: biomass, biofuels, fuel cells, water (including waves and tidal), solar power, geothermal sources, heat from air, water or the ground and renewable combined heat and power (CHP) schemes) as well as to producers of biogas (including biomethane) intended for heat generation. The rate of payment may be banded according to the technology used for generating the heat. Monies for the scheme can be raised from fossil fuel suppliers by means of a levy.

Any regulations made to introduce the Renewable Heat Incentive will be subject to the approval of both Houses of Parliament (the affirmative resolution procedure). DECC has said that the Renewable Heat Incentive should be introduced by 2010.

Offshore transmission

Some changes have been made to the definitions in the Energy Act 2004 to facilitate offshore transmission, including an amendment which provides that any line built for the purpose of transmitting electricity from an offshore generating station is a 'relevant offshore line', even if only a small proportion of it is offshore (the definition in section 180(2) EA 2004 will be repealed).

Without this amendment, the definition of 'high voltage line' in section 64 of the Electricity Act 1989 (once amended by the Energy Act 2004) would not cover a line of 132 kV connecting an offshore generating station to the onshore grid if the majority of the line was onshore and therefore would not be regulated as transmission.