The Energy Bill is set to be introduced to parliament today (6 July) by business and energy secretary Kwasi Kwarteng.
First announced within the Queens Speech in May, the Bill is designed to boost the UK’s energy security in light of the volatility seen over the last winter and the impact of the Russian invasion of Ukraine.
“To ensure we are no longer held hostage by rogue states and volatile markets, we must accelerate plans to build a truly clean, affordable, home-grown energy system in Britain,” Kwarteng said.
“This is the biggest reform of our energy system in a decade. We’re going to slash red tape, get investment into the UK, and grab as much global market share as possible in new technologies to make this plan a reality.”
The Bill includes 26 measures across three main areas; reforming the energy system to protect customers, leveraging private investment in clean technologies to develop domestic generation, and ensuring the safety, security and resilience of the UK’s energy system.
They cover the extension of the price cap, the establishment of the Future Systems Operator, development of emerging sectors like heat networks and hydrogen, providing protection for consumers from network merger costs and boosting nuclear power amongst numerous other elements.
“The measures in the Energy Security Bill will allow us to stand on our own two feet again, reindustrialise our economy and protect the British people from eye-watering fossil fuel prices into the future,” finished Kwarteng.
Reforming the energy system: protecting consumers whilst driving growth
The Energy Bill includes 13 new measures designed to reform the sector, focused on protecting consumers as surging bills have led to 6.3 million households facing fuel stress as well as more than four million seeing their supplier collapse.
First of these is the extension of the price cap beyond 2023, in order to protect the 22 million households it covers. As gas and wholesale power prices surged over the winter of 2021/22, customer bills remained the same due to the Default Tariff Price Cap.
Currently this is set twice a year by Ofgem, it went up 54% to £1,971 in April and is predicted to rise to around £3,000 in October. The regulator announced earlier this year that it was considering changing the system to set it every three months, arguing this would make the price cap more reflective of market prices – whilst the cap protected customers, it meant suppliers were unable to cover the cost of increased power prices last winter by increasing bills, which was a contributing factor in the collapse of 28 suppliers since September 2021.
The sector measure set out in the Energy Bill is the establishment of a new, independent Future System Operator (FSO). This would take a whole-system approach, working across electricity, gas and emerging markets like hydrogen and carbon capture, utilisation and storage (CCUS).
In April, the government first announced that an FSO would be created, following calls from Ofgem for an independent system as part of a review of Britain’s energy system’s operation in January 2021.
This suggested that there was a potential conflict of interest given National Grid’s ownership of the transmission network and how that is linked to National Grid ESO’s development of the system and its services, which could lead to bias in its role.
Third, the Bill will “unleash competition in onshore electricity networks” it said, in order to save consumers up to £1 billion in costs of projects tendered over the next decade. It will do this by finding innovative ways to build and deliver network solutions by inviting new parties to participate in the market.
Next, the Competition and Markets Authority will be given the power to review any relevant energy network company mergers through the Energy Network Special Merger Regime. The government estimates this move could save consumers up to £420 million over the next 10 years by protecting them from increasing network prices following mergers.
“As the first dedicated energy legislation in nearly a decade, today’s Energy Security Bill is a welcome opportunity to enable a cleaner, more affordable and more secure energy system,” said director of external affairs at Energy Networks Association, Ross Easton.
“With record levels of electric vehicles, renewable energy capacity and heat pumps being introduced, alongside new technologies such as low carbon hydrogen, the role of our energy networks in integrating these technologies into the energy system has never been more important.”
Fifth, work will be undertaken to protect consumers from cyber threats by bringing in new protections for smart appliances. The requirement of these protections will be placed on the energy smart appliances and the organisations who control them.
This follows research released in February that suggested the UK’s energy sector was the target of 24% of all cybersecurity incidents in the country in 2021, according to IBM Security.
For smart devices, the Bill will also continue to drive the smart meter rollout, which is expected to deliver £6 billion net benefit to society, the government said. There are currently 18.25 million smart meters installed across Britain, according to Electralink.
Seventh, the Energy Bill will create a new government framework for energy codes in an effort to allow the technical and commercial rules of the electricity and gas markets to adapt to the evolving energy system.
Eighth, the number of cabling, landing points and substations will be reduced through the introduction of multi-purpose interconnectors as a licensable activity. This will give investors and developers the certainty to make decisions regarding future projects.
Britain has seven operational interconnectors currently, which have a collective capacity of 7.4GW. These link the country to Ireland, France, Belgium, the Netherlands and Norway. Throughout June, the country was overall an exporter of power to Europe, a rare event driven by increased winds and steady prices in Britain, whilst France experienced high levels of nuclear power outages.
“The Energy Security Bill builds on the positive steps the Government outlined in its British Energy Security Strategy,” said CEO of National Grid, John Pettigrew in response to the Bill.
“National Grid plays a vital role at the heart of the energy transition and we look forward to continuing to work together with Government to realise its bold net zero goals, including delivering 50 GW of offshore wind power by 2030 and establishing an independent system operator and planner.”
Ninth, the Energy Bill is looking to remove obstacles to battery energy storage and pumped hydro storage, by clarifying it as a distinct subset of electricity generation.
Given energy storage’s role as both a consumer and generator of electricity, regulation of it ran into head winds initially. In 2020, Ofgem made the decision to classify energy storage as a subset of generation, but at the time industry bodies argued that this must be a “stopgap measure” until parliamentary time was found to enshrine this role. The introduction of the definition within the new Bill will now cement its role as generation.
Despite the obstacle presented by the lack of clarity on storage’s role in the energy sector, it has grown substantially in recent years as the expansion of the balancing markets have led to surging demand. As of August 2021, the pipeline of utility-scale battery storage projects stood at over 20GW across 800 projects, with many more announced in the year since.
The next measure unveiled in the Bill is the creation of a more equal energy market by allowing Government to establish a buy-out mechanism under the Energy Company Obligation (ECO) scheme for suppliers, as first announced in the Energy White Paper in 2020.
ECO is a domestic energy efficiency scheme designed to support fuel poor, low income and vulnerable households by placing the requirement on larger energy suppliers to install energy efficiency and heating measures in their homes. The current phase of the scheme – ECO4 – came into force in June 2022 and is set to run until March 2026.
New legislation brought in by the Energy Bill will remove obligation thresholds under the scheme.
In recent months there have been calls for the expansion of the scheme, as energy efficiency measures have repeatedly been flagged as an area of concern for Britain’s decarbonisation as well as significantly contributing to impact of high power prices.
The 11th and 12th measures centre around the emerging heat networks sector in Britain. The Bill will protect families by appointing Ofgem as the regulator for heat networks, it states, and kickstart the development of the systems, enabling heat network zoning in England and helping to overcome deployment barriers by identifying areas where it can provide the lowest cost solution.
Finally, the Energy Bill will “take back control of powers given to the EU on the energy performance of buildings,” it states. It will provide replacement power to allow the UK Government to amend the EU-derived Energy Performance of Buildings regime going forwards.
Leveraging private investment: boosting emerging markets in Britain
The second set of measures unveiled in the Energy Bill focus on leveraging private investment in Britain to help expand clean and domestic generation. The country has a target of a net zero electricity system by 2035, supported by significant renewable energy targets such as 50GW of offshore wind by 2030.
Accelerating the growth of low carbon technologies including CCUS and hydrogen through the introduction of state-of-the-art business models forms the first measure within this set. This will work together with plans around CO2 transport and storage, to attract private investment by providing long-term revenue certainty, allowing the country to seize market share and grow the economy.
The second measure is the establishment of economic regulation and a licensing framework to enable the set-up and scale-up of the aforementioned CO2 transport and storage networks.
“Carbon Capture, Utilisation and Storage has a critical role to play in reducing the UK’s emissions and in the development of our industrial regions, where investment in new infrastructure can put us at the forefront of the global net zero transition,” said chief executive of the Carbon Capture and Storage Association, Ruth Herbert.
“The CCSA has worked with the UK Government on a credible investment framework for CCUS deployment and we are pleased to see the Energy Security Bill laid in Parliament today to implement it. We look forward to confirmation of the first wave of carbon capture projects and a clear plan for subsequent projects to move ahead as soon as possible, given their vital role in our future low carbon economy, driving inward investment and maintaining and creating green jobs for the future.”
Next, the Bill includes plans to enable the delivery of a large village hydrogen heating trial by 2025. This could provide crucial evidence to inform strategic decisions in 2026 on the role of hydrogen in heat decarbonisation.
The debate as to hydrogen’s role in the energy system of the future has been ongoing for some time, with the fuel having potential in home heating, transport, decarbonising large-industry, energy storage and more. In August 2021, the government released its hydrogen strategy, which outlined a target of 5GW of low carbon hydrogen production capacity by 2030.
Since then, the growth of the sector – and in particular green hydrogen that makes use of excess renewable energy that would otherwise have been curtailed – has picked up pace. This includes a number of companies announcing significant projects, including Octopus Hydrogen and BayWa r.e. signing a Memorandum of Understanding for the development of sites, bp announcing a 500MWe green hydrogen project in Teeside and Macquarie’s GIG announcing a plan to develop green hydrogen on Orkney.
The 17th measure set out in the Energy Bill is the establishment of a market-based mechanism for the low-carbon heat industry to step up investment and lower the cost of electric heat pumps, while scaling domestic manufacturing and installation.
Heat pumps typically have a starting price of £4,000, with the standard price around £6,000. The launch of the Boiler Upgrade Scheme grant earlier this year means households can now access £5,000 to help with the cost of a heat pump, bringing it in line with that of new gas boilers.
Beyond this though, the government is already working with industry to bring down the cost of a heat pump by 50% by 2025, and down to parity with boilers by 2030, which the new measure in the Bill will build on.
With surging gas costs it is now £220 cheaper per year to run a heat pump rather than a gas boiler.
However concerns remain around ensuring supply can meet demand, skills shortages for installers and making sure lower-income households don’t get left behind in the transition to the decarbonised heating system.
The final measure within the leveraging private investment segment of the Bill, states that the UK will be the first country in the world to legislate for fusion energy. A clear regulatory regime for fusion energy facilities and the removal of uncertainty for the industry will be provided by Government to support this.
In October 2021, the government launched a consultation into regulatory proposals for nuclear fusion, the responses to which will help form the new regime.
Energy security and resilience: Oil and gas and nuclear see boosted protections
The final segment of the Energy Bill focuses on ensuring the safety, security and resilience of the UK’s energy system.
This will include bringing forward measures for downstream oil security, which will cover sites like oil terminals and filling stations to prevent supply disruption from things such as industrial action, malicious protest and for reasons of national security.
With regards oil and gas within the Energy Bill, this segment also includes measures designed to ensure the sector is fit for the future by allowing legislation to be updated to ensure the environmental regulatory regime is of a high standard, both in respect to habitat protection and pollution response.
It also looks to ensure that oil and gas and CCUS infrastructure are in the hands of companies with “the best ability to operate it.” It highlighted that the North Sea Transition Authority cannot currently prevent undesirable changes of ownership or licenses before they happen, this will be rectified giving the Authority the ability to identify and prevent changes to control before they happen.
Taxpayers will be protected by maximising cost recovery in line with the polluter pays principle, the Bill continues, with the government looking to fully recover the costs associated with regulating decommissioning activities from the industry.
Beyond oil and gas, the bulk of this segment of the Energy Bill focuses on nuclear power. The 20th measure looks to enhance nuclear third party liability to provide greater compensation to potential victims if a nuclear incident were to have and remove barriers to investment.
The Bill looks to facilitate the cost-effective clean-up of nuclear sites, as well as providing communities with clarity that should a Geological Disposal Facility be located beneath the seabed, it will be safe and appropriately regulated.
It will bring forward the final delicensing and re-use of nuclear sites, which will result in an estimated saving of around £490 million over the first 20 years through allowing more proportionate clean-up works, with similar savings seen up to 2080.
The final measure unveiled in today’s Bill, is the strengthening of the Civil Nuclear Police’s powers, bringing in legislation that will allow the Civil Nuclear Constabulary to support the security of the critical infrastructure.
Beyond the Bill
The government highlighted that developing new energy infrastructure and enacting market reform will take time, today pointing to efforts made for shorter-term support of consumers amid the ongoing energy crisis.
This includes £1,200 in support for vulnerable households, including a new one-off £650 cost of living payment according to the government, as well as a boost to £400 for Universal Support and a £15 billion support package targeted towards millions of low-income households.
Additionally, the energy bills discount originally announced in February alongside the increase in the energy cap, has been doubled from £200 to £400 and the requirement to pay it back scrapped, with a windfall tax of oil and gas producers set to help cover the cost of this support.
Alongside this, the Review of the Electricity Market Arrangements (REMA), announced initially in the British Energy Security Strategy, has been launched. This will look to decouple the electricity prices consumers pay from the global gas prices with “urgency”. This is now considered key to the UK’s ability to hit net zero and protect consumers going forwards from further international volatility.
Ministers will set out options for reform this summer, following the consultation coming to a close.
Finally, the government has said the Bill comes on top of action to increase home energy efficiency, including £6.6 billion of total investment across this parliament, expected to deliver savings of £300 a year on average.
As mentioned earlier in this article, the lack of action on energy efficiency in the UK has become a sticking point for decarbonisation, as well as leaving households more exposed to volatile gas prices in particular.
The Climate Change Committee’s recent progress report found that given the soaring bills due to record high gas prices which have been further exacerbated by the Russian invasion of Ukraine, “there is a shocking gap in policy for better insulated homes”.
The government promised significant public spending on energy efficiency in 2019, and committed to new policies to support it in 2021, but neither has occurred, the report continued. Over the past decade, installation of insulation has hit rock bottom, with the average annual energy bill now around £40 higher than if rates of installation were at pre-2012 levels.
Schemes such as the Green Homes Grant – which was abruptly closed in February 2021 – have been labelled as failures, with only about 47,500 homes were upgraded, a fraction of the original 600,000 envisaged.
The powers introduced within the Energy Bill will extend and apply mainly to Britain, with some provisions applicable across the UK.