Regulatory Report - May 2022
The Chancellor of the Exchequer Rishi Sunak delivered a cost-of-living support package to Parliament – outlining £15bn of new measures and an Energy Profits Levy.
Standing in for the Queen, the Prince of Wales delivered the Queen’s Speech, confirming the introduction of an Energy Bill.
Ofgem’s Chief Executive Officer warned the typical household energy bill is expected to increase to £2,800 a year, due to continued volatility in gas prices.
Ofgem issued two consultations on its minded-to decisions as part of the Offshore Transmission Network Review.
Ofgem published two consultations in relation to the price cap methodology in response to the recent increase in wholesale prices and volatility.
BEIS and the Department for Environment, Food & Rural Affairs opened a consultation on the development of an update for the UK’s Green Finance Strategy.
Ofgem published its decision on the scoring methodology for the fourth phase of the Energy Company Obligation (ECO4).
Also covered in this Regulatory Report:
- BEIS publishes responses to Contracts for Difference consultation
- BEIS launches inquiry into power supply decarbonisation plans
- EII compensation scheme to be doubled and extended for three years
- Government to consider domestic actions to reduce carbon leakage
- Government launches Future Nuclear Enabling Fund
- Scottish Government to streamline EV charging planning processes
- Consultation launched on expansion of WHD in Scotland
New windfall tax and cost-of-living measures unveiled
On 26 May, the Chancellor of the Exchequer Rishi Sunak delivered a cost-of-living support package to Parliament – outlining £15bn of new measures and an Energy Profits Levy.
The support package is to compliment the £22bn package announced previously, taking total funding to £37bn. Key commitments include the plan to double the Energy Bills Support Scheme that will see households receive £400 of support with their energy bills in the form of a one-off grant, which will no longer be recovered through higher bills in following years.
The government set out additional support measures for low-income and vulnerable households. This includes a one-off £650 cost-of-living payment to those on means tested benefits; a one-off £350 pensioner cost-of-living payment; a one-off £150 payment to around 6mn people across the UK who receive certain disability benefits; and an extra £500mn of local support, through the Household Support Fund which helps those most in need with payments towards the rising cost of food, energy and water bills.
In addition, the government outlined its new Energy Profits Levy, a surcharge on the profits of oil and gas companies operating in the UK and the UK Continental Shelf that will be used to fund the cost-of-living package. The levy will be applied to profits arising on or after 26 May 2022, with companies who have an accounting period that straddles that date to be required to apportion their profits. It will be charged at 25%, taking the headline rate of tax on those companies’ profits from 40% to 65%. The government noted that the levy is a temporary measure and will be phased out when oil and gas prices return to historically more normal levels.
The government will also introduce new 80% Investment Allowance to encourage firms to invest in oil and gas extraction in the UK, meaning that businesses will overall get a 91p tax saving for every £1 they invest. It said this will nearly double the tax relief available to these companies.
Queen’s Speech confirms Energy Bill
Standing in for the Queen, the Prince of Wales delivered the Queen’s Speech on 10 May. In the address, he said: “My Ministers will bring forward an Energy Bill to deliver the transition to cheaper, cleaner, and more secure energy. This will build on the success of the COP26 Summit in Glasgow last year. Draft legislation to promote competition, strengthen consumer rights and protect households and businesses will be published”.
Further measures mentioned included the establishment of the UK Infrastructure Bank in legislation, with aims to support economic growth and the delivery of net zero, and commitments to improve transport across the UK through cleaner services under the Transport Bill.
The following day, BEIS stated that the “Energy Security Bill delivers on the commitment to build a sustainable homegrown energy system that is more secure, clean, and affordable, as well as enabling the extension of the energy price cap beyond 2023”.
It added that the legislation will also establish the new Future System Operator, which will look at the GB energy system as a whole, integrating existing networks with emerging technologies such as hydrogen. Furthermore, the bill will introduce competition in Britain’s onshore electricity networks to encourage investment and innovation.
BEIS publishes responses to Contracts for Difference consultation
On 3 May, BEIS published its response to its consultation on proposed amendments to supply chain plans (SCPs) and Contracts for Difference (CfD) delivery. This aimed to make the CfD scheme and SCPs more adaptable and forward looking to keep pace with the scale of change needed to meet the government’s target of a fully decarbonised electricity system by 2035.
The response confirms the government’s decision to implement a series of amendments to the scheme ahead of Allocation Round 5, including: requiring SCPs from all Floating Offshore Wind projects, shortening the validity period of a SCP Statement of Approval from 12 months to nine months, introducing an ‘Interview with applicants’ stage into the SCP process, raising the standard of SCPs, creating a more precise question template, strengthening the Non-Delivery Disincentive mechanism and amending the CfD Allocation regulations to align to a change introduced for Allocation Round.
As part of its announcement, the government added that it has published a new consultation on Updating the Allocation Round 5 Supply Chain Plan questionnaire which closes on 14 June.
BEIS launches inquiry into power supply decarbonisation plans
On 20 May, the BEIS Committee opened an inquiry into the government’s plans to decarbonise the UK’s power supply sector.
The inquiry will examine proposals in the Energy Security Strategy, and the emphasis it placed on scaling up the supply of electricity from nuclear power and hydrogen technology. It will consider how these proposals were reached, and whether the strategy has hit the right balance between investing in these new technologies and existing forms of renewable energy supply. The committee will also deliberate on whether these proposals suitably tie into the government’s wider net zero policy objectives.
In addition, the inquiry will ask whether there any further policy details and/or legislation required by the end of this Parliament and whether energy demand can be reduced and how much of an impact will this make on reaching power supply targets.
EII compensation scheme to be doubled and extended for three years
On 29 April, the government announced that high energy usage businesses, such as steel and paper manufacturers, are set to receive further support for electricity costs as part of the Energy Intensive Industries (EII) compensation scheme.
The EII scheme, which provides businesses with relief for the costs of the UK Emissions Trading Scheme (ETS) and Carbon Price Support mechanism in their electricity bills, will be extended for a further three years and its budget will be more than doubled. It will now also provide support for companies that manufacture batteries for electric vehicles.
The government also highlighted that it will be looking at further measures to support business. These could include increasing the renewables obligation exemption to 100%, with further details to be announced in the coming weeks. It noted that this is in addition to existing support through the £315mn Industrial Energy Transformation Fund to help heavy industry cut bills and reduce emissions.
The support package was announced as part of a review of schemes to compensate energy intensive industries for indirect emission costs in electricity prices.
Ofgem tells MPs price cap is expected to rise to £2,800
Speaking as a witness during a BEIS Committee, Ofgem’s Chief Executive Officer Jonathan Brearley warned the typical household energy bill is expected to increase to £2,800 a year, due to continued volatility in gas prices.
This was reaffirmed in a letter published by Ofgem on 24 May and sent to the Chancellor and the BEIS Secretary of State. The letter said that the increase has been primarily driven by the rise in global gas prices, adding that conditions have worsened considerably in the international gas market since Russia’s invasion of Ukraine.
Views sought on minded-to decisions for MPI interim regime
On 14 April, Ofgem issued two consultations on its minded-to decisions as part of the Offshore Transmission Network Review (OTNR), both of which close on 9 June.
Following its July 2021 consultation, one covered the multi-purpose interconnectors (MPI) interim framework. The minded-to positions include: not limiting the framework to one MPI model; requiring licence applications to demonstrate primary use of multi-use assets; including a calculation to show expected availability for cross-border flow; introducing a reporting mechanism to monitor asset use over time; interconnector licence conditions changes to bind interconnectors that are part of an MPI to the appropriate obligations; and not inviting licence applications for pre-existing assets to evolve into MPIs.
The other outlined positions on anticipatory investment (AI) and implementation of policy changes. Ofgem considers that the current framework disincentivises developers from making AI, and therefore seeks to increase coordination and establish that AI risk should be shared between consumers and developers. As such, Ofgem is minded-to allow consumers to underwrite the risk of the AI cost gap until the later user starts paying transmission network use of system (TNUoS) charges. It is also proposing to introduce an assessment process to allow developers to come forward with proposals at an early stage.
Ofgem consults on price cap changes
On 16 May, Ofgem published two consultations on the price cap methodology in response to the recent increase in wholesale prices and volatility, both of which close on 14 June.
The first consultation is proposing to move to quarterly price cap updates with a shorter notice period of 25 working days between setting the cap level and it taking effect. Ofgem is also proposing to include ex ante modelled backwardation costs in the cap methodology. Suppliers would be able to recover backwardation costs over a 12-month period, although the methodology would include a deadband so recovery is only triggered when the market is more volatile than that observed in the first six cap periods. These proposals are all intended to reduce volume risk and costs to consumers.
Ofgem also issued a consultation seeking views on whether suppliers are incurring additional efficient wholesale costs, beyond existing allowances in the cap.
Updated guidance on the treatment of wholesale prices observed during the transition to a new cap mechanism in October 2022 has also been issued, to align with the consultation proposals.
Views sought on update of UK’s Green Finance Strategy
On 12 May, BEIS and the Department for Environment, Food & Rural Affairs opened a consultation on the development of an update for the UK’s Green Finance Strategy. The consultation closes on 22 June 2022, with the update planned for publication in late 2022.
Since its publication in July 2019, the Green Finance Strategy has aimed to support the transition of the financial sector to net zero, mobilise investment to support green projects, and allow financial services to capture the opportunity presented by net zero and cement the UK’s leadership in green finance. Several key financial initiatives have been launched off the back of it, including placing finance at the centre of COP26 in Glasgow, with a Finance Day aimed at mobilising large scale finance for global net zero targets.
The consultation aims to take stock of progress so far and set out how the UK can better ensure the financial services industry is supporting the nation’s energy security, environmental, and climate objectives, such as those outlined in the recent Energy Security Strategy.
The consultation seeks to obtain evidence and stakeholder views through 39 questions on four key areas: capturing the opportunity of green finance, greening the financial system, leading internationally, and mobilising finance for the UK’s climate, energy security, and environmental objectives.
Ofgem confirms approach to ECO4 scoring methodology
On 13 April Ofgem published its decision on the scoring methodology for the fourth phase of the Energy Company Obligation (ECO4). This follows its August 2021 part 1 scoring methodology consultation which covered full project scores and the overall approach to scoring, and the December 2021 part 2 scoring methodology consultation which covered measure-specific partial project scores, including notification of measures, changes to existing measures, and new measures.
Having considered the consultation responses, Ofgem has decided to proceed with the majority of its proposals. This will see a move away from the measure-specific ‘deemed scoring’ approach to calculate lifetime bill savings used for ECO3, and towards a whole-house approach based on annual savings. This involves a dual scoring system approach consisting of full project scores (based on the starting and finishing intermediate Standard Assessment Procedure (SAP) bands) and partial project scores. This is intended to balance the whole-house approach to manage risks raised by the supply chain around payment timeframes, and the impact of single measure failing on the remainder of a project.
Ofgem also plans to implement two application routes for new scores under ECO4 - the standard alternative methodology route for technologies that do not fit within an existing ECO measure type, and the new ‘data light’ (DL) route for technologies not recognised under SAP which do not fit within an existing ECO measure. The latter will allow for the creation of scores in instances where there is less extensive evidence on a technology that demonstrates space heating saving. The regulator considers that providing new technologies with two available routes to enter the scheme could help overcome existing barriers to wider SAP inclusion and support developments in the energy efficiency market. Ofgem plans to publish new measure guidance to provide further details.
Government to consider domestic actions to reduce carbon leakage
On 16 May, the Financial Secretary to the Treasury issued a statement detailing that the government is considering domestic action to ensure the integrity of UK action to reduce its carbon emissions against carbon leakage.
Carbon leakage is defined as the displacement of production, and associated emissions, from one jurisdiction to another, due to different levels of carbon pricing and climate regulation across those jurisdictions.
The government states it is exploring a range of policies that could potentially mitigate future carbon leakage risk, including policies to grow the market for low emissions industrial products. The government expects to consult later in the year on various carbon leakage mitigation options, including on whether measures such as product standards and a carbon border adjustment mechanism (CBAM) could be appropriate.
Government launches Future Nuclear Enabling Fund
On 13 May, the UK Government launched its £120mn Future Nuclear Enabling Fund (FNEF) to help it achieve its goals to approve eight new reactors by 2030.
Funding will be used to help mature potential nuclear projects ahead of any government process to select the next nuclear projects. The announcement states that the fund will provide targeted, competitively-allocated government grants which will help nuclear construction projects, including small modular reactors, to attract the private investment.
BEIS said that businesses can register their interest for funding, with grant awards expected to start later this year. It also invited nuclear stakeholders who are not planning on bidding for the fund to provide information from their experience that will help to improve the design of the fund ahead of opening the bid window in summer 2022.
Scottish Government to streamline EV charging planning processes
The Scottish Government announced on 11 May that it is consulting on several measures that would streamline the planning permission process for some types of development. Consultation proposals include: relaxing the need to seek planning permission for electric vehicle (EV) charging infrastructure in car parks or at filling stations; allowing a wider variety of changes of use for premises in city, town, and local centres to promote more rapid adaption to changing circumstances; and permitting conversion of buildings to small workspaces to support local innovation and entrepreneurship as part of the national strategy to transform the economy.
Consultation launched on expansion of WHD in Scotland
On 9 May, BEIS announced that it has launched a consultation on a proposed expansion of the Warm Home Discount (WHD) scheme for support in Scotland, expanding the scheme to cover an additional 50,000 Scottish households per year.
Proposals are for support in Scotland to grow by around £13mn, to £49mn per year. The uplift would mean rebates are provided to an additional 50,000 families in Scotland and boost cash paid out to help meet energy costs from £140 to £150. The consultation would also see the scheme extended to 2025 to 2026. In addition, supplier participation thresholds will be lowered, which would allow more energy suppliers to participate, particularly from 2023 to 2024 onwards. This will also bring the scheme in line with England and Wales.