London, 21 April 2010

On 8 April 2010, the UK Energy Bill received Royal Assent, becoming the Energy Act 2010 (the “Act”).  Although the Act focuses largely on the development of clean coal, it is expected to initiate a shift in UK energy markets, which will bring about improvements in carbon capture and storage techniques. The main components of the Act are:

Carbon Capture and Storage (CCS): a procedure by which carbon dioxide is captured from the burning of fossil fuels, may reduce carbon dioxide emissions from industrial processes by around 90 per cent.  The Act provides for the following:

- Financial support may be provided to projects that demonstrate and assess CCS technology.

- Regulations may be implemented to impose an electricity supply levy to be charged in connection with supplies of electricity.

- Commencing in 2012, the Secretary of State for Energy and Climate Change (the “Secretary of State”) must create reports every three years on progress made during the reporting period in decarbonising electricity generation in Great Britain and the development and utilisation of CCS technology.  Information on generation by coal-fired generating stations is to be provided separately.

Reducing Fuel Poverty: The Act will create a framework that requires licensed electricity and/or gas suppliers to provide support to the fuel poor under various schemes.  These schemes will identify eligible customers for future support and specify the type of benefits to be provided.  The framework will incorporate a reconciliation mechanism permitting the costs of the schemes to be distributed equitably between suppliers, thereby reducing the probability of any unforeseen distortions to the market.

Clarification of Ofgem’s Responsibilities: The Act provides clarification on the Office of Gas and Electricity Market’s (Ofgem’s) principal objective to protect the interests of existing consumers.  The Gas and Electricity Markets Authority must now include the reduction of carbon emissions and the delivery of secure energy supplies in its assessment of the interests of consumers, intervene proactively to protect consumers and take into consideration longer term actions to promote competition.

Tackling Market Power Exploitation: The Secretary of State has been given further powers to confront market exploitation.  Electricity licences and standard licence conditions will be modified in order to limit or eliminate situations where a licence holder may acquire an excessive benefit from electricity generation in a particular period.

A licence holder is deemed to have obtained an excessive benefit if the licence holder and the transmission system operator enter into an arrangement and one of the following conditions is met:

- The licence holder fails to notify electricity generation for the relevant period that would be economic to carry out and may, or is to be, paid an excessive amount by the transmission system operator in connection with an increase in electricity generation in the relevant period.

- The licence holder may, or is to, pay the transmission system operator an excessively low amount, or the transmission system operator may, or is to, pay the licence holder an excessively high amount, in connection with an increase in electricity generation in the relevant period.

- The transmission system operator may, or is to, pay the licence holder an excessively high amount in connection with the licence holder preparing for the possible cessation of generation of electricity by a particular plant in the relevant period.

- There is an increase or reduction in electricity generation in the relevant period and the licence holder obtains an excessive benefit.

Prior to any modifications to the standard licence conditions, the Secretary of State must consult licence holders, Ofgem and other appropriate persons.

Extension of Time Limit: The Act extends the time limit from 12 months to five years for Ofgem to impose financial penalties on energy suppliers for breaches of licence conditions, or any requirements or failures to attain a performance standard.

Notice of Changes to Domestic Supply Contracts: The Act provides that the Secretary of State may change the conditions of supply licences issued under the Gas Act or Electricity Act with the objective of ensuring that domestic consumers are notified of changes to their gas and electricity tariffs.

Comment

Criticism has thus far focussed on the length of time it has taken the Government to bring the CCS demonstration projects on board and the regulatory shortcomings in the UK energy sector.  The Act was prioritised by the Government as part of the parliamentary “wash-up” process in advance of the forthcoming general election.  On the whole, the Act appears to demonstrate a greater eagerness by the Government to intervene in the energy market.  Whilst it is no surprise that the Government has long been enthusiastic about its plans for more efficient energy production in the United Kingdom and achieving its ambitious plans to reduce emissions levels drastically by 2050, it will be interesting to observe the short to medium term implications of the Act on UK consumers and businesses with respect to tax increases and cost burdens.

Ends --