A new era for energy: introduction of the Energy Act 2023
The largest piece of energy legislation in the UK, the Energy Bill 2022-23, received Royal Assent on 26 October 2023, making the Energy Act 2023 law in Great Britain.
The Act aims to deliver on the commitments made by the government in the British Energy Security Strategy and the Ten Point Plan for a Green Industrial Revolution, which includes development of the following areas:
- Transformation of energy security;
- Supporting the delivery of net-zero; and
- Ensuring affordability of household bills.
The Act is also a long-awaited implementation of the Powering up Britain: Net Zero Growth Plan (the NZG Plan), published by the Department for Energy Security and Net Zero in March 2023.
Following publication of the NZG Plan, Penny Rinta-Suski, Partner in Blake Morgan’s Commercial team, wrote an article about the NZG Plan and the Energy Security Plan, describing what it will focus on and how the government intended to implement their plans. Penny’s summary of the NZG Plan was:
“The NZG Plan, together with the Energy Security Plan, set out how the government aims to enhance the UK’s energy security, seize the economic opportunities of the low carbon transition, and deliver on the government’s 2050 net zero commitment.”
The full article can be found here.
So, how does the Energy Act 2023 help to deliver on those commitments?
Energy security
One of the priorities of the UK government was to ensure that the UK has a secure, reliable and uninterrupted energy supply during the transition to net zero. To help deliver on this priority, the Act provides three new key powers to the Secretary of State, including:
- Direction-making powers to address areas that have the potential to escalate;
- Information powers to enable the government to obtain a better understanding of the energy supply; and
- Financial assistance powers, which will enable the government to support the industry with improvement measures.
In addition to the Secretary of State holding these powers, the Act will also create the position of the Future System Operator (known in the Act as the Independent System Operator and Planner (ISOP)). The ISOP will be a crucial role that can design and co-ordinate the whole energy system, setting various objectives including ensuring the security of energy and electricity supply. The Secretary of State’s powers, in this instance, can be used for enforcement purposes against the ISOP and their objectives.
The low carbon transition
The government has historically committed funding to carbon capture, utilisation and storage projects (“CCUS”, which, as described by the London School of Economics, is a range of technologies to enable the mitigation of carbon dioxide emissions from large sources and removal of such from the atmosphere), but such projects are unable to properly take off without private investment. The Energy Act now contains various provisions to allow low carbon and hydrogen business models to be developed and implemented. This is, again, done by way of affording more powers to the Secretary of State, including the power to:
- Provide long-term financial assistance to support CCUS and other low carbon projects (including the establishment of a hydrogen production levy, enabling producers to overcome the operating cost gap between low carbon hydrogen and fossil fuels, with a view to incentivise producers to engage with hydrogen projects);
- Designate a party to be responsible for the management of these contracts and to act as a conduit for funding; and
- Appoint a separate allocation body and set out the allocation process in regulations for these models.
The Act also legislates to enable the introduction of a low carbon heat scheme. Manufacturers of fossil fuel heating appliances must meet a rising standard for low-carbon heat pump sales as a proportion of their total appliance sales. Manufacturers will be able to meet the new standard either through sales of their own heat pumps, purchasing credits from other heat pump manufacturers, or a mix of both.
2050 net-zero commitments
The government’s summary of the Act promises that it will ‘help the government deliver net zero by 2050 in a pragmatic, proportionate and realistic way.’ There are various provisions scattered in the Act to help achieve this. In practice, this will look like:
- Measures implemented to invest in the development of offshore wind, a sound alternative to the use of fossil fuels and high carbon output models;
- Imposing a duty on Ofgem to consider net zero targets when making its decisions as a regulator; and
- The ISOP must carry out its functions with a view to achieving various objectives, including driving net zero outcomes by identifying and creating opportunities to facilitate the transition to net zero.
Other updates
Energy prices and Ofgem
Notable provisions in the Act of interest to consumers across the UK include the control of energy prices, with a view to extending the remit of Ofgem, to make them the regulator for heat networks. Ofgem will now be able to set rules on excessive pricing whilst being able to take enforcement action against heat networks where the minimum standards are not being met, thus improving the quality of services users receive. Jonathan Brearley, Ofgem CEO, said on the Ofgem website: “We welcome the Energy Act getting Royal Assent. It is the most significant energy legislation for a decade and a world-first in giving us a legal mandate targeting net zero. It gives Ofgem the powers to drive through the energy transition – unlocking investment, accelerating planning and building the infrastructure the economy needs. This will give us security from volatile world gas markets and end our dependency on fossil fuels. Consumers have faced a huge number of challenges in recent years, with high energy prices and cost-of-living pressures. The Act will give extra protection for existing and future customers, while powering the journey to net zero at the lowest possible cost to households and businesses. We’re now working closely with government, consumers and sector to implement the legislation in full.”
Energy Intensive Industries
Also covered by Penny in the April 2023 article was the Energy Intensive Industries Exemption Scheme (EII Scheme). This scheme was implemented to explore measures to assist energy intensive industries with their electricity bills, as Energy Intensive Industries (EII’s) in Great Britain pay higher network charges compared to other similar industries throughout Europe. In May 2023, it was announced that the Network Charging Compensation (NCC) Scheme was going to compensate EII’s for some of their network costs, hoping to avoid dips in profitability caused by soaring electricity bills. The Energy Act has cemented this promise, with allowances being made for the government to fund the NCC Scheme by charging an EII support levy on all licensed electricity suppliers.
What didn’t make the cut?
Whilst the Act has proved to be a comprehensive piece of legislation, covering a lot of bases required for such a significant change, there are some areas that, although talked about prior to implementation, look as though they have not made it into the Act.
One of the biggest areas to be dropped, much to the expected disappointment of consumers, was the energy price cap. The original draft of the Energy Bill would have enabled the default tariff cap that applies in Great Britain’s retail energy market to be extended beyond 2023 if certain conditions were met. The government has now announced that this is being withdrawn as the proposals for extension have been superseded by the Energy Prices Act 2022.
Somewhat surprisingly, the government also dropped a section from the Act that would have prohibited future licensing of all new coal extraction, including a restriction on the opening of new coal mines and extension to coal mining areas in Great Britain. Whilst this may be welcomed by those in the industry, we have to ask whether this omission is in line with the Act’s green approach?
Reaction from the Industry
For the most part, the Act has been welcomed, with positive feedback emerging from the industry. As well as Ofgem’s positive reaction to the increase of their powers, many other industry key players are also pleased to see this long-awaited piece of legislation become law. The National Grid, the UK’s largest electricity distribution network, have highlighted the importance of the establishment of the ISOP, which will be “critical in delivering strategic, whole-system energy planning and oversight.”
In particular, there has been support from the industry for the law carbon and hydrogen technology initiatives. The Association for Renewable Energy and Clean Technology (REA) expressed their appreciation for the introduction of the Act. Frank Gordon, Director of Policy at REA acknowledged that “whilst there is still more to do done, the Energy Act is a major piece of legislation, and the REA warmly welcomes the confirmation as law.” Showing similar support is Hydrogen UK, who have said that the Act will “lay the foundations for the UK’s future hydrogen economy,” also remarking how the Act demonstrates that “the UK is serious about its net zero future, and the role hydrogen can play in it.” The Energy Networks Association (ENA) have also been keen to express their approval of the Act, calling the Act “the biggest piece of energy legislation in the UK’s history” which “progresses the creation of the FSO and development of the UK’s hydrogen economy.”
Whilst this legislation is pivotal in the establishment of a more sustainable future of the UK, it will be interesting to see how well received these provisions are received once implemented, and how they will work in practice. Due to the volume of change promised, we should expect to see this legislation come into effect gradually rather than all at once, so watch this space for more feedback from the industry as that happens.
The Energy Act 2023 summary
The Energy Act 2023 is a huge piece of legislation, covering a wide range of areas which look to overhaul the UK’s approach to energy use and efficiency and deliver on a number of commitments made by the government in recent years. The Act relies in large part on secondary legislation which would need to be passed in the future to articulate how the Act’s provisions will operate in practice. So, we will need to wait and see how the Act will be implemented to fulfil the Powering up Britain: Net Zero Growth Plan and Powering Up Britain: Energy Security Plan as enshrined by the Act. For further support on getting ready for implementation of the measures in the Energy Act 2023, please contact our specialist commercial team.
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