The Energy Bill

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24 November 2009

The Energy Bill introduced into the House of Commons on 19 November 2009, if enacted, will see a number of important changes, notably with the introduction of the Carbon Capture and Storage (CCS) Incentive, mandatory social price support, changes to Ofgem's overall general duties and new powers to tackle market exploitation and to strengthen financial penalties and controls on some types of cross subsidy between gas and electricity customers.

All of this must now be set against the context of the forthcoming general election – if the Bill is not enacted before then it will fall - but the Bill and the debates which it generates between the main parties will provide very important pointers to future energy policy of significance to all electricity generators and investors. Together with the outcome of the Copenhagen climate change summit in December, debates about energy policy, greenhouse gas emissions, climate change policy and security of supply will be taken forward in the party election manifestos as well as both houses of Parliament

CARBON CAPTURE AND STORAGE  INCENTIVE

The Bill introduces  a new framework for a Carbon Capture and Storage (CCS) Incentive. This is intended to support up to four commercial scale CCS projects, a mixture of pre- and post-combustion technologies, which could include oxyfuel combustion.

The CCS Incentive would include a levy on electricity supplies, paid by supplies to the scheme administrator Ofgem, based on the supplier's share of the electricity market in Great Britain. Detailed regulations are proposed for summer 2010, although all of that must now be measured against the prospect of the next election. The other part of the CCS Incentive will be Assistance Schemes to deliver funds to specific CCS demonstration projects, set out in contracts and backed by further regulations. CCS Incentive payments will be linked to carbon dioxide abated by the project.

Project selection will take place through a revised competitive process, but again the proposal is to launch the further competition at the end of 2010 and to complete it by 2011, so much of this is dependent on the outcome of the next election and the intentions of the next government, of whichever party.

MANDATORY SOCIAL PRICE SUPPORT

The Bill proposes a framework for schemes allowing the Secretary of State to require energy suppliers to support vulnerable customers. More secondary legislation is proposed for the summer of 2010.

Different levels and frameworks for support are proposed for the "kernel group" of vulnerable households with entitlement to support, the "broader group" of vulnerable customers to be given more flexible support, and "legacy spending" on continued support to existing recipients.

New Regulations will be proposed in early 2010 on data sharing provisions to facilitate the provision of this kind of support, possibly based on the legal gateway allowed in the Pensions Act 2008.

OFGEM DUTIES

The Bill will amend the Gas Act 1986 and Electricity Act 1989 to amend Ofgem's general duties as regulation of these markets. Ofgem will be obliged when carrying out its functions to consider the interests of consumers as a whole, including their interest in such topics as reduction of greenhouse gas emissions and security of energy supplies. Ofgem will also have to consider options for immediate action to protect consumer interests as well as the longer term promotion of competition.

It is anticipated that amendments to these duties will be particularly relevant to the terms of connection for new generation to the grid, proposals to modernise the electricity network and tackling consumer detriment.

TACKLING MARKET POWER EXPLOITATION

The Bill includes power for the Government to introduce a licence condition to be applied in all electricity generation licences. This aims to provide powers to address two particular kinds of potential market manipulation, namely generation of electricity to gain profit from 'offers' to generate electricity or 'bids' to reduce electricity, for example where National Grid will be obliged to accept an offer or bid in a particular location; and making exploitative bids where a company is behind a constraint and is the only candidate for balancing actions with National Grid.

TIME LIMIT FOR FINANCIAL PENALTIES EXTENDED

The Bill will extend from 12 months to 5 years the time limit within which Ofgem can impose financial penalties for breaches of a licence condition, a considerable strengthening of Ofgem's powers and the intended deterrent effect.

ACTION AGAINST GAS AND ELECTRICITY CROSS SUBSIDIES

The Bill would repeal unused provisions in the Electricity Act 1989 and the Gas Act 1986 allowing Government to adjust energy charges in these markets,  and would replace them with new and amended reserve powers to enable the Government to act where electricity suppliers treat customers less favourably depending upon the type of energy supplied.

FURTHER INFORMATION

We will be following this legislation closely, and are able to provide detailed analysis of the implications of the debates for energy companies and investors. For further information please contact Ross Fairley on +44 (0)117 902 6351 or ross.fairley@burges-salmon.com or William Wilson on +44 (0)117 939 2289 or william.wilson@burges-salmon.com.

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