On 22 May 2012, the Secretary of State for Energy and Climate Change, Ed Davey, announced the publication of a draft Energy Bill for pre-legislative scrutiny by the Energy and Climate Change Committee. The Bill was announced in the Queen's Speech on 9 May 2012 and principally contains proposals to reform the electricity market, restrict the emissions of new coal plants and gives statutory footing to the Office for Nuclear Regulation.

In his press release, the Secretary of State states that the reforms are “designed to encourage a balanced portfolio of renewables, new nuclear and Carbon Capture and Storage (CCS), and to ensure that these technologies can compete fairly in the market-place”.

The Bill sets out powers to enable the various elements of Electricity Market Reform (EMR) to be put into place, with the detail to be dealt with in the implementation.  Together with the Bill, DECC has published a series of supporting documents, which are listed below, which go into further detail on the mechanisms and how it is currently anticipated that they will work.

The main elements contained in the draft Energy Bill are as follows:

Electricity Market Reform (Part 1 of the Energy Bill)

Contracts for Difference: The Bill gives the Secretary of State power to make regulations to give effect to the Feed-in Tariff with Contracts for Difference (CFD), aimed at providing a stable revenue stream and enabling investment in low carbon electricity generation. The price will be determined by administrative or competitive setting in the market.

The CFD scheme will be operated by the System Operator (National Grid). The Bill provides for licence changes and changes to documents maintained in accordance with licences, such as the industry codes.

Investment Instruments: The Bill also provides for “investment instruments”, which the Secretary of State may issue on terms and conditions he considers appropriate to enable final investment decisions to come forward which otherwise might be delayed. These are broadly similar to CFDs and would be able to be implemented before the CFD regime comes into effect, as a form of transitional approach.

Capacity Market: The Bill gives the Secretary of State powers to implement a capacity market in Great Britain that would be determined on a competitive basis by way of capacity auctions. It would be designed to mitigate future risks to the security of electricity systems.  In the foreword to the Energy Bill, the Government has set out that the design of the Capacity Market is expected to be completed by March 2013 and DECC will formally consult on the proposals in 2013. Like the CFDs, this will be administered by the System Operator.

Renewables Transitional: The Bill proposes to amend the Electricity Act to replace the Renewable Obligation Certificates with a “certificate purchase obligation”. This advances the position outlined in the EMR White Paper in 2011 which proposed that between April 2014 and March 2017 new renewable generating stations will be able to choose between support under the Renewable Obligation and the CFD regime.

Conflicts of Interest and Contingency Arrangements: The Secretary of State is to have powers to manage conflicts of interest to ensure that the CFD and Capacity Market functions are carried out effectively. The Bill allows the Secretary of State to take on the role itself or to confer the functions on a new delivery body where, for example, it appears that the System Operator is not carrying out its EMR functions in an efficient and effective manner.

The Government also expects its proposals for the EMR to be supported by two mechanisms: Emissions Performance Standard and the Carbon Price Floor.

  • Emissions Performance Standard: The Bill sets a statutory limit (450g/kWh until 2045 for a plant operating at baseload) on the amount of annual CO2 emissions from new fossil fuel generating stations. A new fossil fuel generating station that is (a) part of a CCS demonstration project, (b) benefits from European Union funding for commercial scale CCS, or (c) has CFD funding for commercial scale CCS is exempt from the requirements of the Emissions Performance Standard.
  • Carbon Price Floor: The carbon price floor was announced in Budget 2011 and is expected to be introduced in 2013. In the foreword to the Bill, the Government has provided that the carbon price floor will be set at around £15.70/tCO2 from 2013 and follow “a straight line to £30/tCO2 in 2020, rising to £70/tCO2 in 2030 (in real 2009 prices)”.
  • Strategy and Policy Statement: The Government plans to clarify the strategic roles of Ofgem and the Government by designating a Strategy and Policy Statement that will set out (a) the strategic priorities for energy policy in Great Britain, (b) the desired policy outcomes; and (c) the duties of the Secretary of State and Ofgem. This Strategy and Policy Statement will require Parliamentary approval and would be subject to regular (every 5 years) reviews.

Office of Nuclear Regulation (Part 2 of the Energy Bill)

The Bill gives statutory footing to the Office for Nuclear Regulation (ONR) as the regulator for nuclear power generators, and also allows the Secretary of State to make nuclear regulations. The ONR would have responsibility for five key areas:

  • nuclear safety;
  • health and safety on nuclear sites;
  • nuclear security;
  • nuclear safeguards; and
  • transport of radioactive material by road, rail and
  • inland waterway.

The Bill gives the ONR certain enforcement and investigatory powers.  

Government Pipeline and Storage System (Part 3 of the Energy Bill)

The Bill anticipates the sale of the Government Pipe-line and Storage System (GPSS). It would give the Secretary of State rights in relation to the GPSS and provides for the ability to transfer these rights to a third party owner. The Bill also provides for compensation to be payable where the creation of new rights or their exercise would lead to depreciation in value of the affected land. The Secretary of State may also give an order to dissolve the Oil and Pipelines Agency.

Offshore Transmission (Part 4 of the Energy Bill)

The Bill provides an exception to the requirement on developers constructing offshore transmission assets (before transferring these assets to an offshore transmission owner) to hold a transmission licence for transmission activity connected to offshore transmission during the commissioning period.

Next steps

The draft Energy Bill will be introduced to Parliament in autumn. According to DECC’s press release the Energy Bill is expected to achieve Royal Assent in 2013 “so that the first low-carbon projects can be supported in 2014”.

Further information

  • To view the Energy Bill page on DECC’s website please click here
  • For the written ministerial statement on DECC’s website please click here
  • To view the EMR page on DECC’s website please click here

Links to annexes on the EMR page on DECC’s website

  • Annex A, Institutional Framework sets out the responsibilities of Government, the System Operator and Ofgem please click here
  • Annex B setting out more details on the Contract for Difference please click here
  • Annex C describes the design of the Capacity Market please click here
  • Annex D gives more details on the  Emissions Performance Standard please click here
  • Annex E sets out the implementation roadmap for EMR please click here