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These notes refer to the Energy Bill as introduced in the House of Commons on 10th January 2008 [Bill 53]
ENERGY BILL
EXPLANATORY NOTES
INTRODUCTION
1. These explanatory notes relate to the Energy Bill as introduced in the House of Commons on 10th January 2008. They have been prepared by the Department for Business, Enterprise and Regulatory Reform in order to assist the reader of the Bill and to help inform debate. They do not form part of the Bill and have not been endorsed by Parliament.
2. These notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.
OVERVIEW
3. The Bill is implementing legislative aspects of: Meeting the Energy Challenge: A White Paper on Energy (May 2007) and Meeting the Energy Challenge: A White Paper on Nuclear Power (January 2008). It covers the following main areas: offshore gas infrastructure, carbon dioxide storage, Renewables Obligation, decommissioning of energy installations (nuclear, renewables, oil & gas) and offshore transmission as well as several other areas. A number of the policy areas covered have been preceded by full public consultations.
4. The principal objective of the Bill is to update the legislative framework to make it more appropriate for today's energy market.
5. The Bill is in six Parts with five Schedules:
Part 1: Gas Importation and Storage: This contains provisions designed to cover the offshore storage of natural gas and the offshore unloading of Liquefied Natural Gas (LNG), as well as the offshore storage of carbon dioxide for the purpose of its permanent disposal.
Bill 53—EN 54/3
Part 2: Electricity from Renewable Sources: This makes a number of changes to the Renewables Obligation to increase its efficiency and increase the deployment of renewables in the UK.
It will also amend the existing powers under the Electricity Act 1989 for the Gas and Electricity Markets Authority (Ofgem) to run tender exercises to select offshore transmission owners to manage the conveying at high voltage of electricity generated by offshore generating stations.
Part 3: Decommissioning of Energy Installations: This contains provisions to ensure the person with such an obligation meets the costs of decommissioning energy installations in three sectors: nuclear, offshore renewables and oil and gas.
Part 4: Provisions Relating to Oil and Gas: This makes some changes to the regime for petroleum licences under the Petroleum Act 1998. It also makes a number of changes to the existing third party access dispute resolution procedures under the Petroleum Act 1998, the Gas Act 1995 and the Pipelines Act 1962, by extending their scope to cover upstream oil and gas infrastructure.
Part 5: Miscellaneous: This contains various provisions covering reporting on energy requirements, giving effect in legislation to earlier administrative transfer of responsibilities for certain aspects of energy regulation, and relating to nuclear security.
Part 6: General
Annex A is a glossary of terms used in the Bill and the explanatory notes.
In the commentary on clauses below, explanatory notes to cover each Schedule are included with the clause which introduces the Schedule.
PART 1, CHAPTER 1: GAS IMPORTATION AND STORAGE ZONES
SUMMARY AND BACKGROUND
6. The United Nations Convention on the Law of the Sea 1982 (UNCLOS) is an international agreement which defines the rights and responsibilities of nations in their use of the world's oceans. Under Part V of UNCLOS, coastal states can claim rights within an area, known as the exclusive economic zone, which forms part of the area of the continental shelf and extends from the edge of the 12 nautical miles limit of the territorial sea for a further distance of 188 nautical miles. Within this area, the coastal state can claim exclusive sovereign rights over all natural resources, including storage space under the seabed. Under this Chapter, the UK will claim rights relating to the unloading and storage of gas, and to related exploration activities. This is a precursor to the regulatory regimes to be established under Chapters 2 and 3 of Part 1, relating to the importation and storage of combustible gas, and storage of carbon dioxide.
COMMENTARY ON CLAUSES
Clause 1: Exploitation of areas outside the territorial sea for gas importation and storage
7. Article 56(1) of UNCLOS provides that the rights of the coastal state in respect of the exclusive economic zone include, amongst other things, the exploration and exploitation of the seabed and its subsoil, and the waters above it. It also provides jurisdiction for the establishment and use of installations and structures in the area.
8. The United Kingdom has previously claimed a number of rights under Article 56(1), but has not yet claimed rights in relation to the unloading and storage of gas. The purpose of this clause is to claim those rights, by providing for their ownership to be vested in the Crown within areas designated as "Gas Importation and Storage Zones".
9. Subsection (1) vests in the Crown the rights defined by subsections (2) and (3). The rights are those relating to the following activities:
a) unloading gas to installations or pipelines;
b) storing gas, whether or not it is intended to be recovered; and
c) exploring for suitable sites for the purpose of "(a)" or "(b)".
10. Subsections (4) and (6) define what is meant by "gas" for these purposes. The definition covers, in particular, both combustible gases (for the purposes of activities within Chapter 2 of this Part - Importation and storage of combustible gas), and carbon dioxide (for the purposes of activities within Chapter 3 - Storage of carbon dioxide).
11. Subsection (5) provides for Her Majesty to make an Order in Council designating an area as a Gas Importation and Storage Zone. Such Orders will be subject to negative resolution procedure (see clause 89).
12. This approach reflects the one taken in section 84 of the Energy Act 2004 (c.20) (exploitation of areas outside the territorial sea for energy production) to establish Renewable Energy Zones for the purpose of offshore renewable electricity projects such as offshore wind farms.
CHAPTER 2: IMPORTATION AND STORAGE OF COMBUSTIBLE GAS
SUMMARY AND BACKGROUND
13. In 2004, the UK was virtually self-sufficient in the production of natural gas for heating, electricity and business processes. However, gas production from the UK Continental Shelf (UKCS) is declining and it is expected that the UK will be reliant on imported gas to meet well over half of demand by 2020. Without sufficient and timely new storage and import infrastructure, there will be increased risks of a tight gas supply demand balance in the UK in the future. This could result in high UK gas prices during periods of peak demand and a higher risk of involuntary interruptions.
14. Companies have already responded to declining UK gas production by investing in new gas storage and import infrastructure. However, as the UK's production declines, additional investment will be needed in gas infrastructure. Companies investing in the UK have sought a clear and stable regulatory framework to reduce the uncertainty, delays and costs associated with the UK's consenting processes.
15. The UK's current legislative regime offshore was chiefly designed for licensing oil and gas production. It therefore does not easily lend itself to the types of gas supply projects that the UK will need to come on-stream as indigenous production of natural gas declines.
16. As a result, there is no single piece of legislation that explicitly covers offshore gas supply activities. Consents have to be sought under a number of pieces of legislation, creating complexity and uncertainty for the investor. Developers may require consents under some or all of the following pieces of existing legislation (this list may not be exhaustive):
- The Food and Environment Protection Act 1985
- The Coast Protection Act 1949
- The Transport and Works Act 1992.
17. This Part of the Bill creates a new regulatory framework specifically designed for offshore gas storage and Liquefied Natural Gas unloading projects. The regime is intended to simplify the consenting process, reduce the administrative burdens on developers and create certainty over the legal operation and construction of new facilities. The aim is to encourage timely investment in offshore gas supply infrastructure and to contribute to security of supply in the longer term.
18. As part of simplifying the consenting processes for offshore gas storage and Liquefied Natural Gas unloading projects, the proposals in this Bill will disapply the requirement on developers to separately apply for a licence under the Food and Environment Protection Act 1985 (c.48) to inject gas into the seabed, except where functions under that Act are exercised by the devolved administrations in Scotland, Wales or Northern Ireland. Sections 21, 23 and 24 of the Petroleum Act 1987 provide for the automatic establishment of safety zones around oil and gas installations and set out offences and the applicable penalties in connection with such safety zones. Paragraph 4 of Schedule 1 to this Bill extends those provisions to installations used for offshore gas storage and Liquefied Natural Gas unloading projects.
19. The clauses in Chapter 2 potentially engage several of the Articles of the ECHR. Certain of the provisions involve what is likely to amount to a determination, by the Secretary of a State, of a person's civil rights and obligations, and consequently engage Article 6(1) of the ECHR (or, in some cases, affect property rights under Article 1 of the First Protocol). The Secretary of State considers that, in the present context, the availability of judicial review against such a decision will provide a sufficient safeguard of any rights that may arise under those Articles.
20. Furthermore, a number of clauses in Chapter 2 create offences which provide for a reverse burden defence of "due diligence" which must be established by the defendant on the balance of probabilities. Although such a defence engages Article 6(2) of the ECHR (presumption of innocence), since it places a legal burden of proof on the defendant, in the present case the Secretary of State is satisfied that the burden is fair and proportionate, so that the provisions are compatible with the ECHR.
COMMENTARY ON CLAUSES
Activities requiring a licence
Clause 2: Prohibition on unlicensed activities
21. This clause prohibits specified activities from being carried out, except in accordance with a licence granted under clause 3.
22. Subsection (2) specifies the activities for which such a licence is required. These include the use of a "controlled place" (as defined in subsection (3)) for gas storage or unloading; the recovery of the gas stored; the conversion of natural features (such as salt domes) for use as storage space; and related exploration activities. Such activities also include the establishment and subsequent maintenance of installations (which by clause 15 may be fixed or floating structures) for those purposes.
23. Subsection (3) defines "gas" and "controlled place" for those purposes. By contrast to the definition in Chapter 1, "gas" is limited to combustible substances, and must consist wholly or mainly of the substances listed or other substances which may be specified by order. An order specifying a substance for these purposes is subject to negative resolution procedure (see clause 89). A "controlled place" is any place within the limits of the territorial sea adjacent to the United Kingdom, (the territorial sea extends 12 nautical miles from baselines established under the Territorial Sea Act 1987 (c. 49)), or within a Gas Importation and Storage Zone designated under clause 1.
Licensing
Clause 3: Licences
24. This clause allows the Secretary of State to grant licences for the purposes of this Chapter. Such a licence will permit, under the terms and conditions laid down in the licence, the carrying on of one or more of the activities mentioned in clause 2. However, in order to make use of the sea, the seabed or spaces under the seabed for the purpose of these activities, an operator would in addition have to obtain a lease or (outside the territorial sea) authorisation from The Crown Estate, who administer the relevant rights to the offshore area vested under clause 1 (or, within the territorial sea, which vest in the Crown under common law). Subsection (2) accordingly allows the geographical coordinates covered by the licence to be linked to those covered by the lease or authorisation from The Crown Estate (see also clause 5(2)).
Clause 4: Applications
25. This clause gives the Secretary of State the power to make regulations about the making of applications for licences. The regulations will be subject to negative resolution procedure (see clause 89). In particular, the regulations may set out:
- who can apply for a licence;
- requirements that must be satisfied by or in relation to the licence applicant;
- how the application for a licence must be made;
- the information which an application must contain and any accompanying documents;
- an application fee (which would have to reflect the costs of considering the application).
Clause 5: Terms and conditions
26. This clause enables the Secretary of State to determine the terms and conditions of a licence. Subsection (2) allows the commencement and duration of the licence to be linked to that of the corresponding lease or authorisation from The Crown Estate.
27. Subsection (3) allows a licence to permit the licence holder to transfer the licence to another person or to include another person as a party to the licence, subject to any conditions set out in the licence.
28. The conditions of the licence may, under subsection (4), also include a requirement for the licence holder to obtain the prior consent of the Secretary of State or another person (such as the Health and Safety Executive) for acts specified in the licence. This could include, for example, a requirement for such consent for the drilling of a well. The licence may provide for the consent itself to be subject to conditions. Subsection (5) makes it clear that one of those conditions might be the modification of the licence in a specified respect.
Clause 6: Model clauses
29. This clause enables the Secretary of State to set out model clauses. Model clauses are standard sets of terms and conditions, which (subject to subsection (3)) will be incorporated in all licences. Such model clauses will be prescribed by regulations subject to negative resolution procedure (see clause 89). By virtue of clause 88 it will be possible to set out different model clauses for different cases. For instance, sets of model clauses made for gas storage may differ from those for unloading of Liquefied Natural Gas.
30. Subsection (3) enables the Secretary of State to omit or modify one or more of the model clauses in the case of any particular licence.
Enforcement
Clause 7: Offence to carry on unlicensed activities
31. Subsection (1) makes it an offence for a person to carry on any activity listed in clause 2 unless that person has a licence, or is a person (such as a contractor or sub-contractor) who carries on the relevant activity on behalf of a person with a licence. Subsection (2) makes it an offence to cause or permit another person to commit the offence (for instance, by getting a contractor to do so). Subsection (3) sets out the penalties for any person found guilty of an offence under this section. These are a fine of up to the statutory maximum (currently £5,000 in England, Wales and Northern Ireland and £10,000 in Scotland) on summary conviction or an unlimited fine for conviction on indictment.
Clause 8: Offences relating to licences
32. Once a licence has been granted, it will also be an offence to breach certain of its provisions. Subsection (1) specifies breaches which will give rise to an offence, and gives the Secretary of State a power to specify by order (subject to negative resolution procedure - see clause 89) further kinds of breaches that will amount to an offence. Other enforcement powers will be available in respect of breaches of licences which are not criminal offences: see in particular clause 9. The breaches attracting criminal penalties under the present clause include:
- the carrying on of an activity such as a drilling operation, without first obtaining the prior consent specified by the licence (whether from the Secretary of State or another person whose consent is required);
- the breach of any conditions attached to such a consent;
- the failure to keep records, give a notice, or make a return or report, as required by the licence.
33. The licence holder will be liable for offences under the licence, even where the act or omission in question results from the behaviour of, for example, a contractor. However, subsection (2) provides that the licence holder will have a valid defence if it can show that it exercised due diligence in trying to avoid committing the relevant offence. In the case where the contractor was responsible for a breach, the licence holder would have to show that it had exercised due diligence in choosing and supervising the behaviour of the contractor.
34. Subsections (3) and (4) make it an offence for a person knowingly or recklessly to make a false statement in order to obtain a licence, or any required consent, or to fail to disclose information which that person knows, or ought to know, to be relevant to a licence application or to that consent.
35. Subsection (5) sets out the penalties for the offences in subsections (1), (3) and (4): a fine of up to the statutory maximum (currently £5,000 in England, Wales and Northern Ireland and £10,000 in Scotland) on summary conviction, or an unlimited fine for conviction on indictment.
Clause 9: Secretary of State's power of direction
36. Where there has been a breach of a licence, this clause enables the Secretary of State to direct that the licence holder takes appropriate steps to remedy the breach. For example, if the licence requires equipment to be maintained to a good standard, a direction may require the equipment to be repaired or replaced. Subsection (3) requires the Secretary of State to consult the licence holder before a direction is given.
37. If the licence holder fails to comply with the direction, the Secretary of State may, under subsections (4) to (8), ensure that the necessary action is taken, at the expense of the licence holder and (if so directed) with the latter's assistance.
38. Subsection (9) ensures that this clause does not affect any provision made by the licence itself for its enforcement (for instance, the licence may itself give the Secretary of State powers of direction in certain circumstances).
Clause 10: Failure to comply with a direction under section 9
39. Subsection (1) of this clause provides that a failure to comply with a direction under clause 9 is a criminal offence, unless the accused proves due diligence was exercised in trying to avoid committing the offence. The penalties are set out in subsection (2): a fine of up to the statutory maximum (currently £5,000 in England, Wales and Northern Ireland and £10,000 in Scotland) on summary conviction, or an unlimited fine for conviction on indictment.
Clause 11: Injunctions restraining breaches of section 2(1)
40. This clause gives the Secretary of State the power to apply to the court for an injunction to prevent, or require the cessation of, activities prohibited by clause 2(1). For example, where there is evidence that a gas unloading activity is taking place without a licence, the Secretary of State may apply for an injunction requiring the operator to cease the activity until a licence is obtained. The power is in addition to any other powers the Secretary of State may have under this Chapter.
Clause 12: Inspectors
41. Subsections (1) and (2) of this clause allow the Secretary of State to appoint persons to act as inspectors to assist in carrying out the Secretary of State's functions under this Chapter, and enable the inspectors to be remunerated.
42. Subsection (3) gives the Secretary of State the power to make regulations (subject to negative resolution procedure - see clause 89) setting out the powers and duties of the inspectors and of any other person acting on the directions of the Secretary of State in connection with a function under this Chapter (such persons may include, for example, surveyors or other contractors instructed by the Secretary of State). These are likely to include, for example, powers of entry and investigation and the right to take samples. Subsection (5) enables such regulations to create criminal offences (for example it might be an offence to obstruct an inspector in the exercise of functions under the regulations). Such offences will attract the penalty of a fine of up to the statutory maximum (currently £5,000 in England, Wales and Northern Ireland and £10,000 in Scotland) or such lesser amount as is specified in the regulations, on summary conviction, or an unlimited fine on conviction on indictment.
Clause 13: Criminal proceedings
43. Subsection (1) ensures that an offence arising by virtue of the provisions of this Chapter may be prosecuted in any part of the United Kingdom, regardless of the offshore location at which the offence may have been committed.
44. Subsections (3) and (4) ensure that prosecutions for such offences alleged to have been committed in a controlled place (i.e. within the territorial sea or a Gas Importation and Storage Zone) may be brought only by the Secretary of State (or by a person authorised by the Secretary of State), or by or with the consent of the Director of Public Prosecutions (or the Director of Public Prosecutions for Northern Ireland). Such provision is unnecessary in relation to Scotland as there all prosecutions are brought by or on behalf of the Lord Advocate. Subsection (5) provides that the same restrictions will apply to any prosecution for an offence created by regulations under clause 12 except that references to a person authorised by the Secretary of State are to be read as references to an inspector.
Supplementary
Clause 14: Interaction with the petroleum licensing requirements
45. In some cases the storage of gas will require a petroleum licence, under section 3 of the Petroleum Act 1998, as well as a licence under clause 3 of the Bill. This is because the geological feature in which the gas is stored (for instance, a depleted hydrocarbon field) may itself contain indigenous petroleum. As a result, petroleum will be "produced" when it mixes with gas that is recovered from the store. In the case of other geological features, the amounts of hydrocarbons present may be negligible. This clause provides a means whereby the holder of a gas storage licence can be assured that a petroleum licence will not also be necessary. Thus, if the Secretary of State is satisfied that the amount of hydrocarbons present is insignificant (see subsection (4)), a direction may be given under subsection (2) which makes it clear that there is no requirement for a petroleum licence.
46. Subsection (5) requires such a direction to be revoked if circumstances change; but subsection (6) then ensures that the licence holder is allowed a period of grace before the revocation takes effect. A period will be allowed that is sufficient to enable the licence holder to apply for a petroleum licence, or to negotiate to obtain rights under an existing licence.
47. Subsection (7) requires the licence holder to be consulted before a direction is given or revoked.
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