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These notes refer to the Energy Bill as introduced in the House of Commons on 19 November 2009 [Bill 7]
ENERGY BILL
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EXPLANATORY NOTES
INTRODUCTION
1. These explanatory notes relate to the Energy Bill as introduced in the House of Commons on 19 November 2009. They have been prepared by the Department of Energy and Climate Change 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.
3. The term Ofgem is used throughout this document to refer to both the Office for Gas and Electricity Markets (Ofgem) (the regulator of the downstream gas and electricity markets) and the Gas and Electricity Markets Authority (GEMA), a group of executive and non-executive members who govern Ofgem, determining strategy, setting priorities and taking decisions on a range of issues.
SUMMARY AND BACKGROUND
4. The Bill implements elements of: The UK Low Carbon Transition Plan - a national strategy for climate and energy (published in July 2009: www.decc.gov.uk/en/content/cms/publications/lc_trans_plan/lc_trans_plan.aspx). This Plan will deliver emission cuts of 18% on 2008 levels by 2020 (and over a one-third reduction on 1990 levels) on the way to achieving a reduction of at least 80% by 2050. The Plan makes it clear that we need to cut emissions in a way that helps the sustainable development of our economy, society and environment. This means keeping energy supplies safe and secure, maximising economic opportunities and protecting the most vulnerable consumers.
Bill 7-EN 54/5
5. The Bill has three principal objectives: the introduction of a framework for a financial incentive to support commercial-scale demonstration of carbon capture and storage (CCS) on coal fired power stations and funding for the fitting of additional CCS capacity to those projects at a later stage, should it be required; the introduction of schemes for the reduction of fuel poverty (which will introduce mandated social price support); and the strengthening of the powers of Government and the regulator to ensure that the energy markets are working fairly for consumers and delivering secure and sustainable energy supplies.
OVERVIEW OF THE STRUCTURE OF THE BILL
6. The Bill is in four Parts:
Part 1: Carbon Capture and Storage
These provisions create the framework for a financial mechanism to support CCS demonstration projects. It is currently expected that the mechanism will be used to support up to four CCS demonstration projects, including the winner of the original competition for a CCS demonstration project launched in 2007. The mechanism will, should it be needed, be able to provide support for additional CCS capacity to be fitted to these initial demonstration projects. There will be a levy imposed on electricity suppliers and funds will be disbursed through assistance schemes or via contractual means to projects selected by a competitive process.
Part 2: Schemes for Reducing Fuel Poverty
These provisions create the framework for schemes that will oblige energy suppliers to provide benefits to vulnerable consumers, for the purposes of reducing fuel poverty, when the current Voluntary Agreement 1 with energy suppliers comes to an end in March 2011. An integral part of these schemes will be social price support which, subject to consultation, will be in the form of an electricity bill rebate to a specified group of households.
Part 3: Regulation of Gas and Electricity Markets
This Part contains a number of provisions relating to the energy market framework -
- General duties of the Gas and Electricity Markets Authority and the Secretary of State - clarification of Ofgem’s principal objective in relation to tackling climate change, ensuring secure energy supplies and the role of measures other than competition in protecting the interests of consumers.
- Exploitation of electricity trading and transmission arrangements - powers for the Secretary of State to introduce a Market Power Licence Condition for electricity generators that will make it easier for Ofgem to address certain issues arising from the exploitation of market power where there are constraints on the amount of electricity that can be transmitted.
- Time limit for the imposition of financial penalties by the Gas and Electricity Markets Authority - extension of the time limit within which Ofgem can impose financial penalties for breaches of licence conditions from twelve months to five years.
- Adjustment of energy charges - introduction of a power for the Secretary of State to address situations where cross-subsidies between gas and electricity businesses lead to groups of consumers being disadvantaged.
Part 4: Final Provisions
This Part contains provisions concerning statutory instruments, interpretation, financial provisions and the extent, commencement and short title of the Bill
7. Annex A to these notes contains a glossary of terms used in the Bill and the explanatory notes.
8. Annex B contains versions of section 4AA of the Gas Act 1986 and section 3A of the Electricity Act 1989 that illustrate the proposed amendments to the general duties of Ofgem and the Secretary of State to be made by clauses 16 and 17.
TERRITORIAL EXTENT AND APPLICATION
9. The Bill extends to England and Wales and Scotland. Where the Bill makes amendments to existing legislation, the amendments will have the same extent as that legislation. With regard to Wales, all matters contained within the Bill are non-devolved.
10. At Introduction this Bill contains provisions that trigger the Sewel Convention. The Sewel Convention provides that Westminster will not normally legislate with regard to devolved matters in Scotland, or alter the executive competence of Scottish Ministers, without the consent of the Scottish Parliament. The Scottish Executive has agreed to table a Legislative Consent Motion covering the relevant provisions (those in clauses 1 to 3, which relate to the disbursal of funds under the CCS financial support mechanism) for consideration by the Scottish Parliament. If there are amendments to the Bill which separately trigger the Convention, the consent of the Scottish Parliament will then be sought for them.
PART 1: CARBON CAPTURE AND STORAGE
SUMMARY AND BACKGROUND
11. Carbon Capture and Storage (CCS) is a process involving the capture of carbon dioxide from the burning of fossil (or other combustible) fuels, its transportation, and permanent storage in underground geological formations, for example in old oil and gas fields, or in saline aquifers. CCS could reduce the carbon dioxide emissions from a range of industrial processes, including coal-fired and gas-fired electricity generation, by around 90%.
12. The Stern Review 2 highlighted the potential role that CCS could play in tackling climate change and analysis by the International Energy Agency (IEA) 3 shows that CCS will need to deliver almost 20% of the total greenhouse gas emissions reductions we need to achieve by 2050 if we are to stabilise carbon dioxide concentrations in the atmosphere at an acceptable level cost-effectively. The same analysis by the IEA concluded that the global costs of tackling climate change would increase by 70% without CCS available as a proven technology. While pilot CCS projects for power generation (up to about 30MW) have been taken forward and will provide valuable lessons, CCS has never been applied at commercial-scale on a power station - and this transition to commercial-scale use is the critical next step.
2 The Stern Review - The Economics of Climate Change. Nicholas Stern, 2006
3 Energy Technology Perspectives 2008 - International Energy Agency (IEA)
13. The Government launched a competition in November 2007 to build one of the world’s first commercial-scale CCS demonstration projects in the UK. In June 2009 the Government published a consultation document: “A Framework for the Development of Clean Coal” 4. Amongst other things, this consultation set out proposals for a financial incentive mechanism to support up to four commercial-scale CCS demonstrations, including the winner of the competition launched in 2007. In the response to this consultation 5 (published in November 2009) the Government announced that this financial support mechanism would also provide funding, if required, for the retrofit of CCS to the full capacity of power stations hosting demonstration projects funded by the Government.
14. This Part of the Bill sets the statutory framework for establishing a mechanism to provide financial assistance to commercial-scale CCS demonstration projects and, should it be needed at a future date, support for additional CCS capacity limited to those initial demonstration projects already receiving funding. The framework limits the financial assistance to CCS on coal-fired power stations. The mechanism will be funded through a levy paid by electricity suppliers in Great Britain which will be collected by an administrator (which will be Ofgem unless regulations under clause 5 provide for it to be another public body). The administrator will also be responsible for disbursing financial assistance to CCS projects (for demonstration and the subsequent installation of additional CCS capacity) either in the form of payments made directly to projects, or to the Government to fund payments to such projects made by the Secretary of State. The Government intends to select the projects that will receive financial assistance through one or more competitive processes.
15. Where the administrator is providing financial assistance direct to CCS projects, arrangements for this will be set out in assistance schemes established specifically for this purpose. These schemes will be made by the Secretary of State and may include provisions such as the requirements to be met in order for CCS projects to receive financial assistance, the level of that assistance, and any requirements about the provision of information. CCS project developers must comply with the terms of the scheme to which they have consented as failure to do so may leave the developer subject to the imposition of civil penalties or, depending on the provisions of the scheme, to its termination.
COMMENTARY ON CLAUSES
Financial Assistance
Clause 1: Financial Assistance
16. This clause gives the Secretary of State the power to provide financial assistance for CCS demonstration projects, and for the installation of additional CCS capacity (referred to below as additional CCS use) at a future date (subsections (1) and (2)). The Government intends that the additional CCS use will be the retrofit of further CCS capacity limited to the power stations that already have a CCS demonstration project receiving financial support. The clause also provides an alternative mechanism for disbursing financial assistance for CCS demonstration projects and additional CCS use, by enabling the Secretary of State to make “assistance schemes” through which the administrator provides the financial assistance (subsections (3) and (4)).
Clause 2: Assistance schemes: further provision
17. This clause makes provision about assistance schemes made by the Secretary of State under clause 1(3) and clause 1(4). Subsection (1) provides that an assistance scheme may impose obligations or confer functions on a person. This would include the imposition of obligations or functions on the participants (those carrying out the CCS demonstration projects and additional CCS use) and the administrator, but might also be used, for example, to confer monitoring functions on persons such as the Environment Agency.
18. Subsection (2) provides a non-exhaustive list of matters which may be covered by schemes, including:
- activities to be carried out as part of the CCS demonstration project or installation of additional CCS capacity;
- level of financial assistance to be provided and how that amount may be calculated;
- arrangements for the postponement, reduction or withdrawal of financial assistance;
- administration of the scheme;
- monitoring and assessment of CCS demonstration projects and additional CCS use;
- arrangements for the publication of knowledge generated by the project;
- changes to activities or the participants in the scheme (e.g. as result of changes in ownership);
- termination of the scheme;
- compliance with the scheme; and
- establishment of a review and/or appeal process for resolving disputes.
19. Subsection (3) gives the Secretary of State power to amend or revoke assistance schemes. Before making, amending or revoking an assistance scheme, subsection (4) places a requirement on the Secretary of State to consult the administrator of the scheme, the Scottish Ministers (if the assisted activities are in Scotland) and any other person that the Secretary of State thinks appropriate. There is also a requirement for the Secretary of State to lay before Parliament any assistance scheme that has been made or amended (subsection (5)) and a requirement that where an assistance scheme is revoked the Secretary of State lay a memorandum of revocation before Parliament (subsection (6)).
20. Subsections (7) and (8) require that an assistance scheme can only be made with the consent of all those who would be participants in it (those carrying out the CCS demonstration project or additional CCS use). These subsections also set out that a scheme can be amended with the consent of the participants (or those who would be participants) and can be revoked with the consent of the participants. The Secretary of State may also amend or revoke a scheme, without the consent of participants, where the conditions set out under the scheme, or regulations relating to the scheme, allow it.
Clause 3: Regulations relating to assistance schemes
21. This clause gives the Secretary of State the power to make regulations regarding assistance schemes. These regulations may make provision about any of the matters specified in clause 2(2) (see paragraph 18 above), including provision to impose civil penalties for non-compliance with assistance schemes (which can only be made in regulations). Regulations may not apply to an existing assistance scheme without the consent of all participants (subsection (3)). Before making regulations, subsection (4) places a requirement on the Secretary of State to consult the administrator of the scheme, the Scottish Ministers and any other person that the Secretary of State thinks appropriate. This consultation may occur before or after commencement of this power.
Electricity supply levy
Clause 4: Electricity supply levy
22. This clause gives the Secretary of State the power to make regulations that place a levy on electricity supplies, to be paid by electricity suppliers, based on the provision of financial assistance for CCS demonstration projects and for additional CCS use at those projects (subsections (1) and (2)).
23. Subsections (3) and (4) provide flexibility in the charging of the levy. Under subsection (3), the Secretary of State can make regulations so that the levy varies in different cases; this might be used, for example, to set different rates for different classes of energy suppliers. Subsection (4) allows provision to be made to exempt certain types of electricity supplies from the levy (for example, based on who the consumer of the electricity will be).
24. Subsection (5) provides a non-exhaustive list of matters about which the regulations may make provision, including:
- what constitutes, for the purposes of the levy, an electricity supply and an electricity supplier;
- the payment of the levy, including the payment of interest in respect of late payments;
- enforcement of payment of the levy, including through the imposition of civil penalties;
- the general arrangements for the administration of the levy;
- requirements for the provision, and audit, of information by suppliers;
- insolvency of persons liable to pay the levy (which would enable provision to be made to ensure that there is no shortfall in the funds raised in the event a supplier becomes insolvent); and
- the establishment of a review and/or appeals process for resolving disputes.
25. Before making regulations regarding the levy, subsection (6) places a requirement on the Secretary of State to consult the administrator of the levy mechanism and any other person that the Secretary of State thinks appropriate. This consultation may occur before or after commencement of this power.
General
Clause 5: The administrator
26. This clause provides (subsection (1)) for Ofgem to be the body that administers both the collection of the levy and the provision, through assistance schemes, of financial assistance for CCS demonstration projects and for additional CCS use. It also gives the Secretary of State power, through regulations, to transfer the function of administrator to another public body, including to himself (subsection (2)). Before making regulations, subsection (3) places a requirement on the Secretary of State to consult the administrator and any other person that the Secretary of State thinks appropriate.
Clauses 6 & 7: CCS demonstration projects and additional CCS use & Interpretation of Part
27. These clauses set out the definitions for a number of terms used in this Part. In particular, subsection 6(1) defines “CCS demonstration project” to mean the demonstration and assessment of CCS technology through its use in commercial coal-fired electricity generation, and work required to prepare for or assess the feasibility of this (for example, a Front-End Engineering and Design study).
28. Subsection 6(2) defines “additional CCS use” as the use of CCS technology in commercial coal-fired electricity generation outside the confines of a CCS demonstration project as well as work required to prepare for or assess the feasibility of such use. This means the retrofit of additional CCS capacity to power stations that already have a CCS demonstration project.
29. A number of the terms used in these definitions (“carbon capture and storage”, “carbon dioxide” and “commercial coal-fired electricity generation”) are also defined.
PART 2: SCHEMES FOR REDUCING FUEL POVERTY
SUMMARY AND BACKGROUND
30. The Warm Homes and Energy Conservation Act 2000 set the framework for the definition of fuel poverty in England and Wales such that a person is regarded as living “in fuel poverty” if the person is a member of a household living on a lower income in a home which cannot be kept warm at reasonable cost. This Act committed Government to publishing and implementing a strategy to tackle fuel poverty.
31. The UK Fuel Poverty Strategy was published on 21 November 2001 and explained that Government policy to tackle fuel poverty would be based on the widely accepted definition that a fuel poor household is one which would need to spend more than 10% of its income on all fuel use and to heat its home to an adequate standard of warmth. This definition encompasses the three drivers of fuel poverty: the energy efficiency level of the home; the level of household income; and energy prices. The impact of rising fuel prices in recent years has been to increase the number of fuel poor households as quantified by the UK Fuel Poverty Strategy: 7th annual progress report 2009 6.
32. As part of the Fuel Poverty Strategy, the Government negotiated an agreement with UK gas and electricity suppliers in 2008 under which they agreed to offer assistance with energy costs to vulnerable customers. The combined spending by suppliers will be at least £150m in the final year of the agreement (April 2010 to March 2011). Suppliers are free to chose the level and type of assistance offered to vulnerable customers within a broad framework monitored by Ofgem. Support measures provided include social tariffs 7, debt relief, the installation of energy efficiency measures and trust funds (which fund measures such as direct assistance to customers in debt, third party projects or organisations aimed at helping customers in fuel poverty).
33. This Part sets the statutory framework for schemes to replace and extend the support mechanisms available under the Voluntary Agreement when it comes to an end in March 2011. It will also set the framework for the provision of mandatory social price support (direct assistance with energy bills) to more of the most vulnerable consumers by energy suppliers. The details of the schemes, such as the nature of the benefit and eligibility criteria, will be set out in secondary legislation after consultation during Summer 2010.
34. In order to avoid any unforeseen distortions to the market, the framework will include a reconciliation mechanism to allow the costs of the schemes to be shared equitably between suppliers.
COMMENTARY ON CLAUSES
Clause 8: schemes for reducing fuel poverty
35. This clause gives the Secretary of State the power to make regulations to create schemes that will require energy suppliers to give benefits to defined groups of customers for the purpose of reducing fuel poverty (subsections (1) and (2)). Subsection (3) provides that such schemes can apply to suppliers of electricity and/or gas.
36. Subsections (4) and (5) give the Secretary of State the power to specify in a scheme which types of customers would be eligible to receive support through the scheme. A scheme may provide for eligible customers to be identified through membership of a fuel poverty risk group (as defined by the Secretary of State), by energy suppliers or by the Secretary of State directly determining eligibility (for example through a data-matching scheme 8 or by issuing vouchers or letters which confirm that a person is eligible to receive benefits through the scheme). Subsection (5) provides that where eligibility is determined by scheme suppliers, provision may be included setting out requirements about criteria to be applied in determining which customers are eligible.
37. Subsections (6)(a) and (7) give the Secretary of State the power to set the form of benefits and the ways in which benefits are to be given to customers. This could, for example, include a rebate on customers’ electricity bills.
38. Subsections (6)(b) and (8) give the Secretary of State power to make provision in a scheme about the amounts of benefits to be provided under the scheme. Subsections (8)(a) and (b) enable this to include provision to set the total value of benefits to be provided by all energy suppliers or the aggregate value of benefits that each individual supplier is required to make available in a specified time period, and the value of the benefit that energy suppliers are required to provide to individual customers.
39. Subsection (8)(c) enables a scheme to make provision as to how any amount is to be determined for the purposes of the scheme: that is to say, either an aggregate amount of benefits provided or to be provided by a scheme supplier, or an amount provided or to be provided to an individual customer. These provisions may in particular be for:
- determining the amount of any benefit provided under the scheme (paragraph (c)(i))
- any determination to be made by a scheme supplier (paragraph (c)(ii))
- allowing benefits required to be provided under one scheme to be calculated by reference to benefits provided under another scheme (paragraph (c)(iii));
- treating payments by a supplier (for example, in respect of the costs of identifying which customers are entitled to benefits, or in continuing existing support mechanisms which are being provided under the Voluntary Agreement) as benefits provided to customers under the scheme (paragraph (c)(iv));
- adjustment of amounts of benefits provided by a supplier by reference to payments made or received by the supplier under a reconciliation mechanism (see clause 10) (paragraph (c)(v));
- making arrangements for allowing energy suppliers certain flexibilities in the time profile of expenditure (paragraph (c)(vi)).
Clause 9: Schemes for reducing fuel poverty: supplementary
40. This clause makes further provision about how the schemes for reducing fuel poverty may work.
41. Subsection (1) allows a scheme to make provision about arrangements to ensure that customers receive any benefits they may be entitled to. This can include making:
- arrangements to help suppliers identify eligible customers;
- arrangements for scheme customers to be made aware that the benefits exist and how to apply for them; and
- arrangements for how the benefits should be paid or otherwise provided.
42. Subsection (2) allows schemes to make provision for prohibiting discrimination against customers who are within a scheme, or would be within a scheme if they were customers of a scheme supplier. An example of such discrimination would be where a scheme supplier refused to take on, as customers, people who would be eligible for benefits under a scheme.
43. Subsection (3) allows a scheme to provide for the Secretary of State or Ofgem to recover costs related to providing evidence of customer eligibility. This could, for example, include vouchers or letters of eligibility.
44. Clause 32(5) will allow a scheme to make different provision for different cases. Clause 9 (4) explains that, in particular, this would allow a scheme to require different suppliers to use different criteria to identify customers or to give different customers different benefits. Paragraph (c) allows requirements under a scheme to be framed as requirements to continue spending commitments under the Voluntary Agreement.
45. Subsection (5) also allows a scheme to make provision for requiring suppliers to provide information to Ofgem that Ofgem requires in order to carry out its functions in relation to the scheme, including its functions of keeping the scheme under review and monitoring compliance (see clause 12(3)).
46. Subsection (6) allows the Secretary of State to decide that scheme requirements either do not apply to a certain supplier, or apply subject to modifications.
Clause 10: Reconciliation mechanism: regulations
47. It is possible that some suppliers could have a disproportionate number of eligible people in their customer base. Depending on the design of the scheme, this could lead to an inequitable distribution amongst suppliers of the obligations to provide benefits. If that happens, it is the Government’s intention to put in place a mechanism to redistribute some of the costs of the scheme.
48. Subsections (1) and (2) allow the Secretary of State to establish a reconciliation mechanism for the purposes of ensuring the amounts of benefits provided by a scheme for reducing fuel poverty are distributed equitably, as far as reasonably practicable, amongst suppliers. It would be possible for Ofgem to be the operator of the mechanism (see subsection (5)).
49. Subsection (3) provides for the mechanism for balancing payments to be made, by enabling the Secretary of State to require suppliers to make payments to the operator of the reconciliation mechanism or other suppliers and to confer on scheme suppliers entitlements to receive payments from the scheme operator or other suppliers.
50. Subsection (3)(c) allows regulations to provide that the reconciliation mechanism operator can determine the payments required. If such a provision is included, subsection (4) requires the regulations to also to include provision for appeals where Ofgem is not the mechanism operator. Where Ofgem is the operator, provision for appeals is not needed because judicial review will be available as a means of challenging its decisions.
51. The regulations may require suppliers to provide such information to the operator of the scheme as the operator might require in order to carry out its functions in relation to the reconciliation mechanism (subsection (6)).
Clause 11: Reconciliation mechanism: licence modifications
52. This clause provides that the Secretary of State may, for the purposes of creation or operation of a reconciliation mechanism, modify the conditions of transmission licences or supply licences issued under the Electricity Act 1989 or documents or agreements related to such licences, such as codes of practice (subsection (1)). This provides the Government with two possibilities in relation to the implementation of the reconciliation mechanism. The first would allow Government to amend the Balancing and Settlement Code (BSC) to allow the operator of the balancing and settlement mechanism to be the operator of the reconciliation mechanism. To do this it may be necessary to make an initial amendment to National Grid’s transmission licence. The second possibility would be to create a new industry code specifically to govern the operation of the reconciliation mechanism.
53. Subsection (2) allows the Secretary of State to exercise the power to introduce a modification either generally, in relation solely to specified cases or subject to exceptions. Subsection (3) provides that modifications to the licence need not relate to the activities authorised by the licence. This means, for example, that if a reconciliation mechanism were to be operated by the current operator of the balancing and settlement mechanism, the Secretary of State may modify the BSC to include detail about the operation of the mechanism (even though that does not relate to the activity of electricity transmission). The Secretary of State would also be able to apply the modifications only to parties to the BSC which are to participate in the reconciliation mechanism.
54. Before making modifications, the Secretary of State is required to consult the holders of any licence being modified, Ofgem and any other persons the Secretary of State considers appropriate (subsection (4)). This consultation may occur before or after commencement of this power. There is also a requirement to publish any modifications made (subsection (5)).
55. Subsection (7) provides that where the Secretary of State modifies a standard licence condition, Ofgem must incorporate the same modification in standard conditions of transmission licences subsequently granted.
56. Clause 15(5) ensures that where standard conditions of all existing licences of a particular type are modified under this clause, they continue to be treated as standard conditions under the Electricity Act 1989.
Clause 12: Functions of Authority and the Secretary of State
57. This clause provides that in exercising any functions conferred by or under this Part of the Bill, the Secretary of State and Ofgem are bound by the general duties set out in Part 1 of the Electricity Act 1989 and Gas Act 1986. It thus ensures consistency with the existing statutory framework for the electricity and gas sectors. It also, under subsection (3), requires Ofgem to keep schemes made under the powers in this Part, and suppliers’ compliance with them, under review.
Clause 13: Regulations under Part 2: procedure etc
58. This clause sets out further details about any regulations establishing either a scheme to reduce fuel poverty or a reconciliation mechanism under this Part of the Bill.
59. Before making regulations under clause 8 or 10, the Secretary of State must, under subsection (1), consult Ofgem, licensed gas and electricity suppliers (where schemes or reconciliation mechanisms apply to them), and any other person that the Secretary of State thinks appropriate. This consultation may occur before or after commencement of this power (subsection (2)). The Secretary of State must also obtain Treasury approval for regulations under clause 8 (subsection (3)).
60. Subsection (4) requires that when a scheme under clause 8 is established it must contain provision stating how long the scheme will run (subsection (4)(a)). It may also, under subsection (4)(b), include provision about when, or under what circumstances the scheme should be reviewed (for example, the Secretary of State may wish to include a power to trigger a review of the scheme if energy prices rise above a certain level). Once the scheme has effect it cannot, according to subsection (5), be amended or revoked except following a review in accordance with provision made under subsection (4)(b). Under subsection (6) a scheme can, however, be renewed through regulations under clause 8 at the end of the period specified.
Clause 14: Schemes for reducing fuel poverty: interpretation
61. This clause sets out the key definitions used in this Part of the Bill. Subsection (1) defines a reduction in fuel poverty for the purposes of this Part of the Bill. Fuel poverty is reduced if the number of people living in fuel poverty is reduced or the extent to which any person living in fuel poverty is reduced.
62. Subsection (2)(a) defines what it means for a person to be living in fuel poverty by reference to section 1 of the Warm Homes and Energy Conservation Act 2000. Although that Act extends only to England and Wales, subsection (2)(a) applies the test in that section to Scotland, as well as to England and Wales, for the purposes of Part 2 of the Bill. Subsection (2)(b) defines what is a reduction in the extent to which a person is in fuel poverty.
63. Subsection (4) gives the Secretary of State the power to specify in regulations a new definition of what should be regarded as a reduction in the extent to which a person in living in fuel poverty in the event that the definition of fuel poverty is amended using the power set out under Section 1(2)(b) of the Warm Homes and Energy Conservation Act 2000.
Clause 15: Schemes for reducing fuel poverty: consequential amendments
64. This clause ensures that Ofgem has the necessary powers to report on, monitor and enforce any regulations or licence conditions made under this Part of the Bill.
65. Subsections (1) and (2) make regulations under this Part of the Bill a ‘relevant requirement’ for the purposes of the relevant provisions of the Gas Act 1986 and the Electricity Act 1989. This means that Ofgem may use their existing enforcement powers under those Acts if suppliers fail to comply with any regulations made under this Part.
66. Subsection (3) ensures that the existence of those methods of enforcement will not prevent a scheme from making provision so that if a supplier was required by a scheme to give a benefit to a customer, and they failed to do so, the eligible customer could take legal action against the supplier.
67. In amending section 105 of the Utilities Act 2000, subsection (6) ensures that information about individuals that is obtained under this Part of the Bill is protected generally from onward disclosure, but also ensures suppliers can share information about their activities under this Part of the Bill for the purpose of facilitating the performance of Ofgem’s functions to monitor compliance with the schemes.
PART 3: REGULATION OF GAS AND ELECTRICITY MARKETS
SUMMARY AND BACKGROUND
68. The regulation of the gas and electricity markets in Great Britain is carried out by Ofgem, the unified regulator established by the Utilities Act 2000. The Secretary of State has some limited functions relating to the regulation of the gas and electricity markets, but the vast majority of functions are exercised by Ofgem. Separate arrangements are in place in Northern Ireland.
69. Ofgem’s key functions are to license activity in the gas and electricity markets; control the charges for and access to the monopoly networks; supervise the numerous industry codes that govern the complex contractual and operational relationships between industry players and act concurrently with the Office of Fair Trading in applying general competition law in the gas and electricity markets.
70. This Part contains a number of provisions relating to the market framework with the intention of ensuring the framework promotes the delivery of secure and low carbon energy supplies whilst continuing to protect consumers.
General duties of the Gas and Electricity Markets Authority and the Secretary of State
71. In carrying out its duties, Ofgem must act according to its objectives as set out in statute. Ofgem has a principal objective to protect the interests of existing and future consumers. Wherever it is appropriate to do so, it must fulfil that principal objective by promoting effective competition. The interests of consumers are not currently defined. Ofgem must also take into account a range of secondary objectives.
72. It is the Government’s view that reducing greenhouse gas emissions (in order to mitigate climate change) and ensuring secure energy supplies are both in the interests of future and existing consumers and should be considered as such by Ofgem when carrying out its functions. The Government does not intend to change Ofgem’s principal objective nor to create multiple principal duties through these provisions, but to ensure that in its interpretation of its existing principal objective of protecting consumers, Ofgem gives due weight to the need to reduce greenhouse gas emissions and ensure security of supply.
73. Competitive solutions may take time to deliver, and the market may create barriers for some groups of consumers so that the promotion of competition may not be the most effective means of protecting their interests. These provisions clarify that Ofgem should consider using alternative types of solution to address the consumer detriment instead of, or alongside, measures to promote competition. Such solutions could include strengthened licence conditions and enforcement action, or other means that would prevent certain types of market behaviours.
74. Annex B contains mocked-up versions of section 4AA of the Gas Act 1986 and section 3A of the Electricity Act 1989 to illustrate the proposed amendments to the general duties of Ofgem and the Secretary of State. These clarifications will also apply to those limited functions carried out by Scottish Ministers under the Acts.
COMMENTARY ON CLAUSES
Clause 16: Amendments of section 4AA of the Gas Act 1986 (c. 44)
75. This clause amends the principal objective and general duties of the Secretary of State and Ofgem as set out in section 4AA of the Gas Act 1986.
76. The amendments clarify the relationship between the principal objective and the obligation to further this objective through the promotion of competition wherever appropriate. Subsection (2) amends section 4AA(1) of the Gas Act 1986 to remove the reference to ‘promoting effective competition’. The reference to promoting competition is re-inserted in the new subsection (1B) (see subsection (3) of clause 16) in which it is combined with the general duties in section 4AA(2) as to how the Secretary of State and Ofgem are to carry out their functions (see paragraph 79 below).
77. Subsection (3) adds three additional subsections (1A, 1B and 1C), between subsections (1) and (2) of section 4AA of the Gas Act 1986, to clarify the interests of consumers and how the Secretary of State and Ofgem are to carry out their functions.
78. The new subsection (1A) of section 4AA makes it clear that the interests of consumers include their interests in the reduction of greenhouse gas emissions caused by the shipping, transportation or supply of gas, and their interests in a secure supply of gas. Subsection (7) inserts a new subsection 4AA(5B) which inserts definitions for the purposes of new subsection (1A), and adopts the meanings of some words used in the Climate Change Act 2008.
79. The new subsection (1B) closely follows the phrase that was removed from section 4AA(1) by subsection (2) of clause 16. It requires the Secretary of State or Ofgem to carry out their functions (in relation to the supply of gas) in a way best calculated to protect the interests of consumers, using the promotion of competition to do so where that is appropriate.
80. The new subsection (1C) provides that when carrying out their functions the Secretary of State or Ofgem must consider:
- to what extent the interests of consumers are protected by actions focused on the promotion of competition, and
- if there are any other actions (whether or not they would promote competition) that might better protect the interests of consumers.
81. Subsections (4), (5), (6) and (8) make minor amendments to take account of the new subsections 4AA(1A), 4AA(1B) and 4AA(1C). Subsection (4) also makes a minor amendment to ensure that any financial obligations which may be imposed under this bill are taken into account when the Secretary of State or the Authority are having regard to the need for licence holders to finance their activities.
Clause 17: Amendments of section 3A of the Electricity Act 1989 (c. 29)
82. This clause amends the principal objective and general duties of the Secretary of State and Ofgem in section 3A of the Electricity Act 1989 in a similar manner to the amendment of section 4AA of the Gas Act 1986 by clause 16.
83. The amendments clarify the relationship between the principal objective and the obligation to further this objective through the promotion of competition wherever appropriate. Subsection (2) separates the two by amending subsection 3A(1) of the Electricity Act 1989 to remove the reference to ‘promoting effective competition’. The reference to promoting competition is re-inserted in the new subsection (1B) (see subsection (3) of clause 17) in which it is combined with the general duties in section 3A(2) as to how the Secretary of State and Ofgem are to carry out their functions) by subsection (3) (see paragraph 86 below).
84. Subsection (3) adds three additional subsections (1A, 1B and 1C) between subsections (1) and (2) of section 3A of the Electricity Act 1989 to clarify the interests of consumers and how the Secretary of State and Ofgem are to carry out their functions.
85. The new subsection (1A) of section 3A makes it clear that the interests of consumers include their interests in the reduction of greenhouse gas emissions caused by the transmission, distribution, generation or supply of electricity, and their interests in a secure supply of electricity. Subsection (7) inserts a new subsection 3A(5B) which inserts definitions for the purposes of new subsection (1A), and adopts the meanings of some words used in the Climate Change Act 2008.
86. The new subsection (1B) closely follows the phrase that was removed from subsection 3A(1) by subsection (2) of clause 17. It requires the Secretary of State or Ofgem to carry out their functions (in relation to the supply of electricity) in a way best calculated to protect the interests of consumers, using the promotion of competition to do so where that is appropriate.
87. The new subsection (1C) provides that when carrying out their functions the Secretary of State or Ofgem must consider:
- to what extent the interests of consumers are protected by actions focused on the promotion of competition, and
- if there are any other actions (whether or not they would promote competition) that might better protect the interests of consumers.
88. Subsections (4), (5), (6) and (8) make minor amendments to take account of the new subsections 3A(1A), 3A(1B) and 3A(1C). Subsection (4) also makes a minor amendment to ensure that any financial obligations which may be imposed under this bill are taken into account when the Secretary of State or the Authority are having regard to the need for licence holders to finance their activities.
Exploitation of electricity trading and transmission arrangements
SUMMARY & BACKGROUND
89. On 30 March 2009 Ofgem launched a consultation on Addressing Market Power Concerns in the Electricity Wholesale Sector - Initial Policy Proposals 9. This initiative reflected the regulator’s observation that the current market structure, coupled with limitations in physical transmission capacity in some areas, allows companies to exploit unduly the market in a way that results in higher bills for the consumer. During a recent investigation Ofgem also found that their existing competition law powers were unlikely to be effective due to difficulties in identifying the market in which a company could be perceived as dominant 10 and the possibility of companies having substantial market power without being dominant as understood in competition law. Their consultation considered a number of ways in which this regulatory loophole could be addressed, including the introduction of a Market Power Licence Condition (MPLC).
90. Under the electricity market arrangements in Great Britain (the British Electricity Transmission and Trading Arrangements) generation companies are entitled to operate power stations without taking into account network limitations. This would not be an issue if the existing transmission network had sufficient capacity to send the required electricity to and from all parts of Great Britain but, in some areas, the existing capacity of the wires does not always allow this. Such scenarios are called transmission-related ‘constraints’ and require action to be taken by the system operator 11, National Grid, to ensure that supply and demand is balanced on both sides of this constraint.
91. Currently, the most significant constraint boundary is that between Scotland and England (known as the “Cheviot Boundary”) and the most common scenario is one known as an ‘export constraint’, where there is too much generation ‘behind’ a constraint (in the smaller region - Scotland) and it cannot be transmitted to the larger region (England). The reverse scenario, where there is too much generation in the larger region, is known as an ‘import constraint’.
92. To balance supply and demand, National Grid can accept, as part of the ‘balancing mechanism’ 12, both ‘offers’ to increase generation and ‘bids’ 13 to reduce generation at specific plants. They may also have long term bilateral contracts in place with companies, including a category called inter-trip contracts. These involve National Grid paying the company an ‘arming fee’ that, via an automated trip-switch, means a particular plant could be taken off the system if the network becomes overloaded. This ‘tripping’ happens very rarely, nationally less than once a year, but the existence of inter-trip contracts allows National Grid to increase safely the electricity flow on the system and, therefore, is an effective way of expanding the available capacity of the network.
93. Ways in which companies could unduly exploit the above arrangements are by:
- manipulation of where electricity is generated in order to achieve excess profit from either ‘offers’ or ‘bids’ in the balancing mechanism. This hinges on whether, because of the limited number of generation plants in particular locations, the company can predict when National Grid would have no choice but to accept an offer or bid from them to be able to balance electricity supply and demand. In this case the consumer may meet costs over and above those expected if power stations operate in economic merit order;
- making exploitative ‘bids’ to take advantage of both being behind an ‘export constraint’ and being the only company with which National Grid can arrange balancing actions. For example, they may be the only generator available to reduce output in a particular location and so can name their ‘bid’ price and/or they might use such a locational advantage to extract unduly high ‘arming fees’ for inter-trip contracts with National Grid.
94. These clauses will allow the Secretary of State to introduce a licence modification that will enable Ofgem to use its existing licensing powers to monitor and act on any examples of the actions described in paragraph 90 above. The objective is to provide a targeted and proportionate provision that will address the exploitation of market power whilst avoiding unnecessary uncertainty in the electricity wholesale market in Great Britain which could undermine investment in generation and, hence, security of energy supply.
95. The clauses will not provide the long-term solution to the problem of ‘constraints’ - this will be resolved by the increased transmission capacity that will be delivered between now and approximately 2015 with additional capacity expected to be delivered by 2018. Reinforcement work on the Cheviot Boundary is already underway. The Energy Network Strategy Group (chaired by DECC and Ofgem) set out a vision for the network for 2020 needed to support a low carbon energy system 14. The clauses will, however, give protection to the consumer during a time when the required upgrading of the transmission system may create more potential for exploitation to occur. Using primary legislation to introduce the MPLC will also allow the introduction of a tailored appeals process, which provides the generation companies the right to appeal directly to the Competition Appeal Tribunal (CAT) against enforcement orders or penalties imposed by Ofgem.
COMMENTARY ON CLAUSES
Clause 18: Power to make modifications
96. Subsection (1) provides the Secretary of State with the power to introduce a modification to electricity generation licences (including standard conditions incorporated in licences and documents maintained in accordance with the conditions of licences (such as industry codes) or agreements that give effect to those documents). When exercising powers under this clause, the Secretary of State (and Ofgem) must carry out functions in accordance with the principal objective and general duties set out in sections 3A to 3D of the Electricity Act 1989 (subsection (9)).
97. Subsection (2) limits the power in subsection (1) so that it may only be exercised for the purpose of limiting or eliminating the circumstances in which a generation licence holder may obtain excessive benefits from electricity generation in a particular period. Subsection (3) provides that a licence holder will be taken to obtain an excessive benefit if they have entered into arrangements regarding the generation of electricity with the transmission system operator and one or more of the conditions set out in subsections (4)-(7) is met. These conditions are:
- the licence holder does not notify electricity generation that would have been economic to carry out and may receive excessive payments in connection with an increase in electricity generation in the relevant period;
- the licence holder may pay an excessively low amount, or may receive an excessively high amount, in connection with a reduction in electricity generation in the relevant period;
- the licence holder is paid an excessively high amount for an inter-trip arrangement; or
- there is an increase or reduction in the licence holder’s electricity generation in a specific period, compared to their notified generation, as a result of which the licence holder may obtain an excessive benefit
98. Subsection (8) provides that modifications may include provisions relating to operation of power stations, amounts payable to generation licence holders or offers by the licence holder to pay amounts.
99. Subsections (10), (11), (12) and (13) contain definitions and interpretation provisions for the purposes of this clause. In particular, subsection (10) specifies the meaning of “notified electricity generation” for a period, and subsection (11) defines references to an increase or reduction in electricity generation in a period.
Clause 19: Modifications: procedure
100. This clause provides for the procedure that the Secretary of State must comply with in order to exercise the modification powers conferred by clause 18.
101. Subsection (1) requires the Secretary of State to consult on the detail of any modification made under clause 18 before it is implemented. Those consulted must include any generation licence holders, Ofgem and such other persons as the Secretary of State considers appropriate. Subsection (2) specifies that this requirement may be satisfied by consultation either before or after the passing of the Act.
102. Subsections (3) and (4) provide that before making modifications, the Secretary of State must lay a draft before Parliament and allow a period of 40 days for either House of Parliament to reject the draft. Subsections (8) and (9) specify how the 40 day period is to be calculated.
103. Subsection (4) means that if either House of Parliament resolves not to approve the draft then the Secretary of State cannot introduce the licence modification as drafted. In this situation, subsection (6) allows the Secretary of State to lay a new draft of the licence modifications before Parliament.
104. Subsection (5) means that if no action is taken by Parliament the Secretary of State will be free to make the modifications as drafted. Subsection (7) requires the Secretary of State to publish details of any modifications as soon as reasonably practicable after they are made.
Clause 20: Modifications: supplementary
105. This clause makes provision about the exercise of the power to make licence modifications. Subsection (1) allows the Secretary of State to exercise the power to introduce a modification either generally, in relation solely to specified cases or subject to exceptions.
106. Under subsection (2) provision included in a licence by virtue of the modification power may make different provision for different cases. Once the Secretary of State has introduced the modifications, subsection (4) provides that Ofgem must incorporate the same modification in standard conditions of generation licences subsequently granted and make public the resulting modification.
Clause 21: The Authority’s interpretation and enforcement of modifications
107. This clause requires Ofgem to publish a document that will set out how they will approach the interpretation and enforcement of the MPLC. Before publishing the document, subsection (2) requires Ofgem to consult generation licence holders, the Secretary of State and any other persons they consider appropriate. This consultation may occur before or after commencement of this power.
Clause 22: Final and provisional orders: appeals
108. This clause sets out a special process for appealing against any order which Ofgem makes under section 25 of the Electricity Act 1989 (“Orders for securing compliance”) for the enforcement of the MPLC. Subsection (2) allows licence holders who are the subject of an order to appeal to the Competition Appeal Tribunal (“the CAT”) against the order. Under subsection (3), the CAT can decide whether it wishes to decide on all or part of the matter, or whether it wishes to remit all or part of the matter back to Ofgem (or, indeed, do both). Subsection (4) provides for what the CAT may do in the event it re-determines an appealed matter: permitting it to uphold, set aside or substitute its own final or provisional order.
109. Appeals to the CAT will be subject to the Tribunal’s rules, and subsection (6) provides that subsections (2) to(5) will be subject to those rules.
110. Subsection (7) prevents an order for securing compliance from being challenged by any form of legal proceedings other than an appeal to the CAT under this clause. Subsection (8) provides that any decision by the CAT will have the same effect, and will be enforced in the same manner, as a decision of Ofgem.
111. Subsection (10) makes appropriate changes to section 27 of the Electricity Act 1989 (“Validity and effect of orders”) to remove the possibility of using the court based appeals process that is available in respect of orders enforcing other licence conditions. This appeal process is not required in this context because of the provision which is made for appeals to the CAT.
Clause 23: Penalties: appeals
112. This clause allows generation licence holders to appeal to the CAT regarding a penalty imposed by Ofgem under section 27A of the Electricity Act 1989 in relation to the MPLC. Subsection (2) provides that an appeal can be made against the imposition of a penalty, the size of that penalty and the date on which they have been directed to pay the whole, or part, of that penalty. Subsection (3) enables the CAT to uphold, set aside or substitute another amount for the penalty.
113. This clause has a number of provisions that are identical to those in clause 22. Any decision by the CAT will have the same effect, and will be enforced in the same manner, as a decision by Ofgem (subsection (8)). Furthermore, appeals to the CAT will be subject to the Tribunal’s rules, and subsections (2) to (5) are subject to those rules (subsection (6)). Subsection (7) ensures that it will not be possible to challenge penalties imposed by Ofgem except by an appeal to the CAT under this clause.
114. This clause also makes appropriate changes (subsection (10)) to section 27E (“Appeals”) of the Electricity Act 1989 to remove the possibility of using the court based appeals process that is available in respect of orders enforcing other licence conditions. This appeal process is not required in this context because of the provision which is made for appeals to the CAT.
Clause 24: Further appeals
115. This clause provides for further appeals from specified decisions of the CAT to appropriate courts (the Court of Appeal or, in Scotland, Court of Session).
Clause 25: Expiry of power
116. Subsection (1) ensures that there is a limited time period within which an MPLC can be in force. This period is initially 5 years, but subsection (2) allows the Secretary of State to make an order to extend this period by up to 2 years. Before making any such order, subsection (4) requires the Secretary of State to consult generation licence holders, Ofgem and any other appropriate person.
117. Subsection (5) provides that any licence modifications made under this Part will cease to have effect after the expiry date set by subsections (1) and (2). Under subsection (6), however, any actions (including the imposition of penalties or other enforcement actions) that have previously been taken by Ofgem, or any other party, would not be affected.
118. Subsection (7) allows the Secretary of State to modify a regulatory instrument (which includes a licence) as a consequence of the powers to make licence modifications expiring. Subsection (8) provides that the Secretary of State must consult the holder of any generation licence, Ofgem and any other such persons considered appropriate before making any such modification and must publish the modification as soon as reasonably practicable after it is made.
Time limit for the imposition of financial penalties by the Gas and Electricity Markets Authority
SUMMARY AND BACKGROUND
119. Ofgem has powers under the Gas Act 1986 and the Electricity Act 1989 to grant licences for gas and electricity distribution and supply, and to set the conditions of those licences. Ofgem also has the power (s30A-30C of the Gas Act 1986 and s27A-27C of the Electricity Act 1989) to impose financial penalties for the breach of licence conditions. Any such financial penalty cannot be more than 10% of a licence holder’s applicable turnover (in its business year preceding the issue of the penalty notice) and the penalty must be imposed within twelve months of the breach of the relevant licence condition occurring.
120. There are a number of circumstances where the twelve month time period can restrict Ofgem’s use of its enforcement powers. For example, if a potential breach relates to a requirement to notify consumers of a price change, a consumer will not be aware of the change until they receive their bill. The consumer is then likely to take the issue up with their supplier before approaching Ofgem or the relevant consumer body (Consumer Focus). It may, therefore, take time to identify a pattern of consumer complaints. This lengthy process can mean that although Ofgem have been able to investigate and establish a breach of a licence condition, they may be unable to impose a financial penalty that reflects the full extent of any licence breach.
121. This clause extends the time limit within which a financial penalty can be imposed to five years from the breach of the licence condition. The aim is to allow Ofgem to protect the consumer interest by ensuring there is sufficient time for them to make effective use of their existing powers.
COMMENTARY ON CLAUSES
Clause 26: Time limit for the imposition of financial penalties
122. Subsections (1) and (2) amend section 30C(1) of the Gas Act 1986 and section 27C(1) of the Electricity Act 1989, respectively. In both cases, the time limit for Ofgem to impose a penalty for contravention of a licence condition/requirement or failure to achieve a performance standard is increased from twelve months to five years. Subsection (3) ensures that these amendments do not apply to breaches of licence conditions occurring before this section comes into force.
Adjustment of energy charges
SUMMARY AND BACKGROUND
123. Last year, a market probe by Ofgem 15 into the energy supply markets for domestic and small business customers found that, in general, the ‘big six’ suppliers 16 were acting competitively. The probe did identify, amongst other concerns, that energy suppliers have consistently earned significantly higher margins for electricity supply than for gas supply in the period 2005-07 and that this difference in margins was not justified by cost differentials. Ofgem noted that in effect this represents a large difference in prices offered to ‘dual fuel’ customers (those who buy electricity and gas from the same supplier) compared to those who source their electricity and gas from separate suppliers, or do not have access to the gas grid.
124. Ofgem has introduced (with effect from 1 September 2009) a modification to the standard conditions of the gas and electricity supply licences held by suppliers with over 50,000 household customers to deal with these concerns by prohibiting undue discrimination in terms and conditions offered to customers 17, 18, 19. This licence condition will expire on 31 July 2012 - a reflection of Ofgem’s expectation that the full package of measures proposed 20 to deal with concerns raised by the probe will have improved competition in the energy market to the extent that the licence condition is no longer necessary. Ofgem will, however, keep the situation under review.
125. Sections 41A and 41B of the Gas Act 1986 and sections 43A and 43B of the Electricity Act 1989 contain powers (not used to date) to allow the Secretary of State to adjust charges for gas or charges for electricity to help customers who are treated less favourably than others by their supplier. These powers do not currently allow the Secretary of State to intervene in cases where suppliers appear to be cross-subsidising their gas businesses from their electricity businesses and where, consequently, electricity-only customers are being treated less favourably, facing excessive prices not justified by cost differentials. This means that if Ofgem had not taken the action described above, the Secretary of State would have been unable to step in and the situation would not have been addressed.
126. These clauses repeal and replace the powers in sections 41A and 41B of the Gas Act 1986 and sections 43A and 43B of the Electricity Act 1989. These new powers are derived from the pre-existing powers, but are amended to enable the Secretary of State to deal with situations where energy suppliers treat customers less favourably according to the type of energy supplied.
COMMENTARY ON CLAUSES
Clause 27: Adjustment of charges to help disadvantaged groups of customers
127. Subsection (1) gives the Secretary of State the power to make a scheme that will adjust charges for gas and/or electricity if the Secretary of State considers one set of customers of a particular energy supplier are treated less favourably than another set of customers. Subsections (3) to (5) provide that these sets of customers can consist of any combination of the following: the electricity customers of that supplier, the gas customers of that supplier, customers that are supplied with both gas and electricity, or any sub-division of these groups. For example, electricity customers could be sub-divided into those who have access to the gas network and those who do not.
128. Subsection (6) specifies which energy charges (gas and/or electricity) the Secretary of State may consider. Subsection (7) allows the Secretary of State to make any appropriate calculations or assumptions to establish whether a particular set of customers is being treated less favourably when comparing different charges for the same type of energy, or charges for different types of energy.
129. Subsections (8) and (9) apply the principal objective and general duties of the Secretary of State and the Authority under Part 1 of the Electricity Act 1989 and Part 1 of the Gas Act 1986 to this provision.
Clause 28: Schemes: supplementary
130. This clause makes provision about energy charge adjustment schemes made under the powers in clause 27. Subsection (1)(b) allows for the scheme to adjust the charges of the customers that the Secretary of State considers have been treated more favourably as well as those that have been treated less favourably. Subsections (2) and (3) require the scheme to describe the less favourably treated customers, specify the energy companies whose charges will be adjusted by the scheme and the geographical area to which the scheme applies (unless it covers Great Britain). Subsection (2) also requires the scheme to set out the basis for the adjustment of charges.
131. Subsection (4) enables the scheme to require energy companies to provide information to each other and provides for any necessary modification of licence conditions. This clause closely follows subsections (2) to (5) of section 41A of the Gas Act 1986 and section 43A of the Electricity Act 1989.
Clause 29: Regulations adjusting energy charges: supplementary
132. Subsection (2) requires the Secretary of State to give notice that it is proposed to make regulations to establish a scheme. Any such notice must be given before the regulations are made, and must set out the effect of the scheme and the reasons for making the scheme. The Secretary of State must give not less than 28 days for representations to be made in relation to the scheme. Subsection (3) provides that a copy of this notice must be given to the company whose energy charges will be covered by the proposed order and provides that the notice must be publicised sufficiently widely so that it will be seen by all those likely to be affected by it.
133. Subsection (4) provides that regulations will remain in force for the period specified in the regulations, and that the maximum period is three years, although further regulations may be made at the end of that period. Subsection (5) allows the Secretary of State to make regulations to require energy companies to provide information to each other for the purpose of enabling the making of regulations to establish a scheme.
134. Subsection (6) provides for Ofgem to monitor the effect of all regulations made under clause 27 and report its findings to the Secretary of State. It also enables Ofgem to require energy suppliers to provide any information necessary for this purpose. Subsections (2) to (6) of this clause closely follow subsections (1) to (5) of section 41B of the Gas Act 1986 and section 43B of the Electricity Act 1989.
Clause 30: Adjustment of energy charges: interpretation
135. Subsection (2) allows regulations made by the Secretary of State to exclude certain sets of customers from being considered in relation to an energy charge adjustment scheme. Subsection (5) provides that the definition of ‘energy supplier’ includes electricity suppliers, gas suppliers, and suppliers of both gas and electricity.
Clause 31: Amendments and repeals
136. This clause repeals sections 41A and 41B of the Gas Act 1986 and sections 43A and 43B of the Electricity Act 1989 as these are replaced by clauses 27-29. This clause also makes a number of consequential amendments to reflect this replacement.
PART 4: FINAL PROVISIONS
COMMENTARY ON CLAUSES
Clause 32 Orders and regulations
137. This clause sets out the procedure for the Secretary of State to make orders and regulations under this Bill. Regulations made under Part 1 (carbon capture and storage provisions), regulations made under clause 8 (schemes for reducing fuel poverty) and clause 27 (adjustment of charges to help disadvantaged groups of customers) must be approved by both Houses of Parliament (subsection (2)).
138. Regulations made solely under clause 5 (carbon capture and storage provisions: the administrator) and which do not contain provisions to amend an Act, regulations made under clause 10 (reconciliation mechanism: regulations) or clause 14(4) (schemes for reducing fuel poverty: interpretation) and orders made under clause 25 (expiry of power), clause 29(5) (regulations adjusting energy charges: supplementary) or clause 30(2) (adjustment of energy charges: interpretation) may be annulled by a resolution of either House of Parliament (subsections (3) and (4)).
139. Orders or regulations made under the provisions in this Bill may include incidental, supplementary, consequential, transitory or transitional provision or savings (subsection (5)).
140. Regulations made under Part 1 (carbon capture and storage) or 2 (schemes for reducing fuel poverty) may impose obligations or confer functions on a person including the Secretary of State (subsection (6)). Regulations under Part 1 may amend primary and secondary legislation (subsection (7)).
141. The Secretary of State must obtain the consent of Scottish Ministers before making regulations under Part 1 which amend provisions that are within the legislative competence of the Scottish Parliament.
Clause 34: Financial provisions
142. This clause provides legislative authority for expenditure incurred by either the Secretary of State or Ofgem, or increases in the expenditure provided for by other Acts, as a result of this Bill.
Clause 36: Commencement
143. This clause sets out the commencement dates for the provisions in the Bill. Under subsection (3) all provisions will come into force two months after the Bill receives Royal Assent, with the exception of provisions relating to the exploitation of electricity trading and transmission arrangements which will be commenced by order (subsection (2)) and Part 4 (Final provisions) which will come into force on the day the Bill receives Royal Assent (subsection (1)).
FINANCIAL EFFECTS
144. The provisions in the Bill will not have a direct impact on public expenditure - those provisions with financial ramifications (the financial support mechanism for CCS and schemes for reducing fuel poverty) give the Secretary of State enabling powers; the financial impact will not occur until the mechanisms are implemented through secondary legislation. The impact of the implementation of these powers will be assessed fully before secondary legislation is brought forward.
145. The “Impact Assessment of Coal and CCS requirements in A Framework for the Development of Clean Coal” 21 provides detailed estimates of the costs and benefits of the UK’s proposed CCS demonstration programme.
146. Although the schemes for reducing fuel poverty do not involve direct public expenditure, they will provide for the subsidy of reductions in the electricity bills of, and a limited amount of other social measures for, certain groups of vulnerable consumers. Following implementation, energy companies will be required to spend a minimum amount providing reductions in electricity bills to specific groups of consumers. This minimum amount to be spent by energy suppliers is yet to be determined but will be greater than the final year of the current Voluntary Agreement with energy suppliers (£150 million). The details of this will be subject to consultation before implementing secondary legislation is tabled.
PUBLIC SECTOR MANPOWER
147. The Bill is not expected to have any significant implications for public sector manpower. As a result of being the administrator for the CCS financial support mechanism and of schemes for reducing fuel poverty, Ofgem may need to recruit small numbers of personnel. The Department of Energy and Climate Change may need to recruit a small number of additional staff to run the selection process for the CCS demonstration projects and a small number of additional staff may be required by the Department of Energy and Climate Change and the Department of Work and Pensions to establish and run the longer term data sharing project required to support schemes for reducing fuel poverty. There is no impact on public sector manpower from the provisions relating to the regulation of gas and electricity markets.
SUMMARY OF THE IMPACT ASSESSMENT
148. The Bill is working towards the multiple policy objectives of financing CCS demonstration projects, helping to alleviate fuel poverty, ensuring competitive energy markets, and therefore brings forward a number of different measures. All of the policy proposals in the Bill have an individual impact assessment which discusses the options, rationale and costs and benefits in detail.
149. The Impact Assessment accompanying the Bill has been signed by Lord Hunt signifying that he has read the Impact Assessment and is satisfied that it represents a fair and reasonable view of the expected costs, benefits and impact of the policies, and that the benefits justify the costs.
150. The diverse nature of the provisions included in the Bill and the complexities and challenges of meaningfully monetising the different costs and benefits associated with the multiple objectives of energy policy, mean that it is not possible to present a single cost-benefit figure for the Bill. In relation to the provisions for the CCS financial support mechanism, schemes for reducing fuel poverty and the market power licence condition the costs and benefits will not materialise until the necessary secondary legislation comes into force but are included here for completeness. The following paragraphs summarise the costs and benefits for each set of provisions.
Carbon capture and storage
151. The implementation of the financial support mechanism will lead to administrative costs being incurred by Ofgem (who will be the initial administrators of the support mechanism). The one-off set-up and ongoing administration costs for the initial demonstration projects and any additional CCS capacity supported on those projects have been estimated at a total of £7.8 - 15.6 million.
152. Details of the costs and benefits of the demonstration projects themselves can be found in the “Impact Assessment of Coal and CCS requirements in A Framework for the Development of Clean Coal” 22
153. In general, the benefits of the demonstration projects will include the value of the EU Emissions Trading Scheme allowances for emissions that the power stations no longer require, the value to the UK economy through the growth of CCS-related industries both in the UK and globally, the reduction in the cost of carbon mitigation in the future, ensuring diverse and secure energy supplies (by allowing the continued use of coal-fired power stations in a carbon-constrained economy) and maintaining international leadership in the development and deployment of CCS technology.
154. The UK is in a strong position to lead the development of CCS and to gain a commercial benefit from its deployment as we have a strong industrial base to develop the necessary technology and significant offshore storage capacity as a result of the geology of the North Sea. A recent AEA report found that the value to the UK from global markets for new advanced coal-fired power generation plant, including plant fitted, or retro-fitted, with CCS, is estimated at £1-2 billion p.a. by 2020 and £2-4 billion p.a. by 2030 which equates to £20-40 billion in total between 2010 and 2030. This level of activity will sustain a total of about 30,000-60,000 jobs in the UK by 2030.
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